通用動力 (GD) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Q3 2013 General Dynamics earnings conference call.

My name is Glen and I will be your Operator for today.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Ms. Erin Linnihan.

Please proceed.

Thank you, Glen, and good morning, everyone.

Welcome to the General Dynamics third-quarter conference call.

As always, 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 and 10-Q filings.

With that I would like to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Thank you, Erin, and good morning.

I am pleased to report that we had a very good third quarter with revenues of $7.8 billion and net income of $651 million.

We reported EPS of $1.84 per diluted share, $0.14 ahead of the year-ago quarter and $0.03 better than the second quarter this year.

This was also $0.16 per share better than consensus.

So how did we get there?

Revenue was 1.7% less than the third quarter 2012.

Once again, however, revenues for each of our operating groups was higher than the year-ago quarter except for combat systems.

The same is true for the first nine months of the year.

Revenue for the first nine months is up over 2012 in our aerospace, marine systems and information systems and technology groups, but offset by a significant decline in combat systems revenue, leading the Company down 1.4% for the first nine months.

The real story in the quarter, however, is the positive operating leverage achieved in the period.

While revenue was down 1.7%, operating earnings were up 5.7% in the quarter, a clear reflection of positive operating leverage.

This resulted in 12.3% overall operating margins.

Net earnings and earnings per share were ahead of Q3 2012 by $51 million and 8.2%, respectively.

The ratio of net earnings to revenue of return on sales was 8.4%.

With respect to cash, we had $364 million of free cash flow from operations in the quarter, about 56% of net income.

We had $1.3 billion for the first three quarters, about 69% of net income.

In Q3, we repurchased slightly under 1.6 million shares for $134 million.

Year to date, we have purchased over 9 million shares for $718 million.

In addition, if we add that to -- if we add to that number the two dividends paid this year, recall that there was no dividend in Q1 because it was paid in the fourth quarter of last year, we have returned $1.1 billion of the $1.3 billion, or 87% of the free cash flow year to date to our shareholders.

Let's turn to segment reporting for the quarter.

First, aerospace.

Aerospace had a better than expected quarter with its highest quarterly revenue to date.

Compared to third quarter 2012, operating earnings and margins were up $108 million and 290 basis points, respectively.

Pretty strong.

On a sequential basis, operating earnings and margins were both somewhat lower, as had been forecasted.

Gulfstream margins were good and better than expected but lower than last quarter for the reasons I provided during the second-quarter conference call.

Once again, we had good contribution from Jet Aviation where they were operating at a loss a year ago.

Our expectation in the fourth quarter is that revenues will be approximately the same as this quarter, but margins will not be as good.

We will deliver two fewer large cabin aircraft and will experience higher research and development costs with less scheduled launch assistance payment.

We also have some program timing impacts of Jet -- at Jet on completions, all of which will compress margins.

For the year, revenues will be consistent with prior outlook, and margins for the group should improve slightly over prior guidance to the low 17% range.

Combat systems.

Combat, once again, demonstrated a disciplined performance of a good cyclical, reporting 16.4% margins on revenue approximately 30% lower than the year-ago quarter.

Land systems and OTS had particularly strong margins on continuing cost reduction initiatives and strong program performance.

ELS helped by returning to profitability in the quarter, despite weak revenues.

All in all, a really outstanding performance from an operating perspective.

Compared to the year-ago quarter, margins were up 240 basis points.

Sequentially, revenue was somewhat lower but operating margins were up 230 basis points.

We do expect significantly higher revenue in the fourth quarter but a drop in margins in our domestic business.

For the full year, revenue should be 20% lower than last year and margin should be mid-14%, 10% higher than 2012 on a pro forma before charges basis.

Marine group.

Marine group revenues were higher than Q3 2012 but operating earnings and operating margins were down $16 million and 110 basis points, respectively, entirely as result of the completion on the T-AKE program in Q4 2012.

Nevertheless, operating earnings were good and operating margins of 10% were solid with good performance across each of our businesses.

These are industry-leading margins.

In Q4, we expect lower revenue and some very modest margin compression.

For the year, marine group revenue should be flat compared to the prior year and margins should be in the high 9% range.

IS&T.

IS&T remains a good news story from a revenue perspective.

Revenues were higher this quarter than in Q3 2012 as well as the prior quarter this year in a very tough market.

Operating earnings and margins are up against Q3 2012 by $15 million and 30 basis points, respectively, and up $18 million and 60 basis points, sequentially.

This operating result was driven by improved performance at C4 Systems and AIS.

For the fourth quarter, IS&T should see a bit less revenue than we had in the third quarter with a modest decrease in operating margins.

There's still work to be done here, but we are seeing steady improvement from an operating perspective.

For the full year, IS&T revenues could be slightly lower than the prior year and margins should be in the high 7% range, consistent with prior guidance.

Let me turn to our EPS guidance for the remainder of 2013.

Last quarter, we increased our guidance to $6.85 to $6.95 of earnings per diluted share.

We are, again, increasing our guidance somewhat to $6.90 to $7 assuming that there is no residual impact from the shutdown.

We acknowledge that this quarter was better than anticipated and we are further along year to date than expected.

However, I think our guidance, which is modestly increased is not overly cautious and consistent with the current environment.

In short, we had a great quarter and is hard at work trying to ensure that the full year will be beneficial for our shareholders, our customers and our employees.

Erin?

Now we will hear from our Chief Financial Officer, Hugh Redd.

Hugh?

Thank you, Erin, thank you, Phebe, and good morning.

I'd like to cover the usual miscellaneous financial items before the question-and-answer period.

First, net interest expense was $22 million for the quarter versus $39 million in the third quarter of 2012.

For 2013, we expect net interest expense of approximately $85 million.

At the end of the quarter, our balance sheet reflects $129 million of net cash.

And by that I mean cash in excess of debt.

This represents an improvement of $1 billion over the net debt position of a year ago.

The effective tax rate was 31.2% for the nine months of 2013, consistent with that experienced in the same period of 2012.

For 2013, we expect an effective tax rate of approximately 31.5%.

During the quarter, we contributed approximately $370 million to our pension plans.

And through the end of the third quarter, we funded over $500 million to our plans with less than $100 million left to contribute in 2013.

Erin, that concludes my remarks and I'll turn it back over to you for question and answers.

Thank you.

As a quick reminder, we ask participants to ask only one question so that everyone has a chance to participate.

If you have additional questions, please get back into the queue.

Glen, could you please remind participants how to enter the queue?

(Operator Instructions)

Robert Spingarn, Credit Suisse.

I'm out at NBAA and I wanted to focus on Gulfstream this morning.

The aerospace book-to-bill I think --

By the way, you and everyone else, I think.

Possibly, it actually looks a little quieter this year.

But I think some of that's the timing in the quarter.

I wanted to ask you, though, about the order environment.

And I think we've been hearing that for your platforms, order of demand is fairly even across the different areas, across the different markets but at a lower level.

And this is reflected, I think in the 0.6 book-to-bill.

And we really haven't seen a 1.0 book-to-bill for a while here.

So I was going to ask you if you could talk about the different markets?

And we sense that maybe large cabin is softening a little bit on the order side but at the same time mid-cabin may be getting a little stronger.

How would you comment on that?

Look, I am pleased with our book-to-bill.

And I think year to date we have -- important to understand that we've got 10% more airplane orders in units than we did last year.

But let me give you a little bit of background here.

That said, we are a few orders shy of planes in the quarter as against our plan.

And I think this is interesting, the quarter started out very strongly but closed slower with getting to contract taking longer.

And I think, certainly, the domestic order activity has been impacted by the uncertainty caused by the government shutdown and debt ceiling deliberations in Congress.

But at the same time, we've seen a year-over-year growth in emerging markets in the rest of the world.

So that's providing us some stability in our order book.

And by the way, on the domestic side, we've got a very strong funnel.

It's just taking, I think longer to get to contract in the environment of considerable amount of uncertainty.

We've talked about in the previous quarters that when thinking about Gulfstream orders we need to consider the mix, right?

So again, this quarter Gulfstream booked orders for each of our aircraft and the 450 and 550 constituted about 70% of those orders.

So I always look at the order in terms of mix because I think that that tells a pretty good story.

So all in all, we've seen some pretty consistent increase in our mid-cabin 280 and across our large cabin.

And I don't see anything that materially changes that in the horizon that we can see.

So, Phebe, just to close, on the 650 is it fair that because you're so sold out that the order environment is a little quieter there?

And then the last part of the question is, could you update us on the software development on that platform?

Sounds like that is still progressing but not quite where it needs to be.

650 continues to take orders.

So I consider that quite positive.

And the software development, I think largely what we've had is superb operating performance of that airplane and it's meeting and exceeding the users' expectations.

We still got some back end in terms of cabin software issues.

And that's as much as user interface training and we need to make some changes, and really, modest and moderate.

So nothing that has been -- things are a little bit of annoyance, I think, and quite rightly so to our customers, but nothing material.

We're not concerned about that.

These are normal and, frankly, far less squawks that we've had in any of our other airplanes.

So I think that said, that 650 is really a game changer.

Okay.

Thank you very much.

Doug Harned, Sanford Bernstein.

I wanted to continue on aero, and when I think back a little ways, you all had commented that ultimately you could produce the G650, given the operation -- basically a much better operational design for costs that would be even less than the 550.

And what I'm interested in is, when you look at how this is going in terms of cost performance and production, how do you see that trajectory today?

In other words, are you on the path that you had hoped?

Is it more challenging than you thought?

Where does it stand?

All right, let's talk about that in two parts.

First, green, green manufacturing.

We have, as you know, a purpose built facility along with the fact that we designed for producibility.

So both of those have improved our learning curves as we have continued to move green aircraft through our facility and through the line.

So we're not at our optimal, you wouldn't expect that.

In fact, I don't know where optimal is and we won't know until we hit it.

And our experience is that no matter where we are in the maturity of our platforms, we seem to get -- we do get better and better and better.

So with respect to green, we are in line with and even a touch ahead of where we anticipated we might be.

But I think we talked about early on this year that we had yet to -- we had a disconnect between green and completions.

So we have largely taken care of what I would term the disequilibrium between the two, but we haven't gotten to a steady running rate on green, or on completions and margins on completions.

So that's going to take some time and have -- provide some upside.

But it's going to take some time for us to work through that.

But all in all, we're very, very pleased with the manufacturing process on the 650.

And then when you look at completions, what is making that so challenging?

Is this more challenging than perhaps you've seen on earlier programs, say the 550?

Absolutely not, in this stage of the development, right now.

Now going back two quarters, yeah, it was far more challenging because we had built up this backlog of green in anticipation for the flight certification.

And then we had an awful lot of fairly expensive rework.

But we're past that.

We're through that and so our experience now is, frankly, there's -- it's the completion challenges aren't as great as they were in the early days of the 450s and 550s or the 5s and 4s.

But nonetheless, we haven't hit full stride there and we probably have a little bit ways to go before that happens.

That's just normal learning as we come down various learning curves.

Okay, very good.

Thank you.

George Shapiro, Research.

I want to push a little bit on your Gulfstream margin.

I mean, that would imply the fourth quarter has got to be about 16% substantially below this quarter on similar revenues, which would tell me there's maybe $25 million of these added expenses that you were talking about.

So could you break out how much of that you think is R&D and some of the other issues you mentioned?

Look, I think some of that's going to be available in our Q to the extent you can parse it.

And I don't want to really give you the [eaches], but let me give you some general magnitude.

We have pushed R&D to the right as a normal part of -- as we've gotten into our development program.

That will hit us in the fourth quarter.

At the same time, launch assistance is an important part of our overall product development.

And the launch assistance comes in lumpiness.

So it's a little less in this quarter.

So that's a fairly significant part of what's driving the margins down.

In addition, we've got some timing issues at Jet.

Really fourth quarter, first quarter 2014 kinds of issues that are also having some margin compression.

So in general, we're looking for margins in the close to 16%, 15.7% range in aerospace for the fourth quarter, as I've articulated.

And we're going to have few -- fewer large cabin deliveries, which is often what happens in the fourth quarter as we move around airplane deliveries to suit the needs of our customers.

So it is a combination.

You can imagine with the big business like this of a lot of moving parts.

It's a combination of those items that I've already articulated.

Glen, let's take the next question.

Sam Pearlstein, Wells Fargo.

I was wondering if you could talk a little bit more about cash flow.

It looks like you contributed a little bit more to the pension plan than I think you had planned.

But in the past, you talked about being able to get to 90% of net income in free cash and then use more than 100% of that towards buyback and dividend.

That would imply an awfully steep fourth quarter.

And is that still on track and what's going to change between now and the year end?

Yeah, so before I get into that let me argue a little bit with the predicate.

I don't recall ever saying that we would contribute more than 100%.

That would require going into the balance sheet and I actually was very careful not to say that.

But I don't want to quarrel on a nit-noid.

But I do want to talk a little bit about, and thanks for asking the question about cash and cash deployment in several respects.

So first, I think you can see from our schedules in the press release that we have an increase in inventory and work in process.

We are hard working this because I don't like increases in working capital.

And frankly, we're having trouble getting paid in a few instances.

So we'll work through that, but it's affecting our free cash flow conversion.

Second, we have higher pension contributions that we -- and we had planned those at about the $600 million level.

Free cash -- we had expected free cash flow to be below 100% and anticipated around 90%.

That was before the government shutdown and the latest crisis.

And third, cash has been coming in late this year.

We've been meeting our plan but it is coming in far later, usually the last day or two of the quarter.

And something we had anticipated or experienced in the first couple of quarters.

But I think that this brings me to something that I'd like to share with you.

I'd like to talk to you about the import of the brinkmanship on the debt ceiling and the shutdown, at least from my perspective.

I think we should think about the shutdown in two phases for us.

Phase one is DFAS and DCMA civilians were furloughed.

Execution on in-process invoice stopped.

Phase two, DoD calls DFAS and DCMA back to work, payment resumed, right?

And extended phase one, ultimately challenges liquidity.

Simultaneously, this is no news to anybody, the government took the nation to the edge on the debt ceiling extension.

And in my mind, we were forced to gaze into the abyss where we saw the full face and credit of our principal customer at risk.

That was sobering and suggests that we need to be cautious with cash as we finish the year and move into next.

And frankly, as I think about it, I think it is premature to assume that the conditions [expand] in October cannot repeat in January.

It's entirely possible that we find ourselves an extended period of time trapped in Dante's first circle of hell.

So I think all of that suggests that we need prudence and caution as we move into the rest of the year and the beginning of next year until we can get a more stable plan from the government with respect to both the debt ceiling and funding for our principal customer.

But most of that --

That's kind of how I'm thinking about cash.

Is that a timing issue though so that if something flips out of this year it's just next year because of the timing of that cycle, or is there actually a change in the actual collections?

No, we're pretty much meeting our plan.

But I'm mindful that we have seen some timing issues, they've all cleared largely and within the quarter.

But I think we're seeing slow down in payments, certainly by our government customers and some of the customers for whom we are suppliers.

So that brings some caution.

And there is nothing intrinsically, other than those things I've mentioned, that will ultimately affect our cash generation capabilities.

But it's largely a question of timing.

Not something that I'm alarmed at but something I'm watching very carefully.

Cai von Rumohr, Cowen and Company.

Phebe, the Gulfstream margin was very significantly better even though you have this adverse mix shift more toward the 650 and away from the 450 and 550.

Can you give us a little bit more color on some of the issues you laid out?

For example, was launch aide was higher, how big about and how big for the year?

Was there sequential improvement in the productivity and the profitability of the 650 as well as the 450, 550 X a supplier price hikes?

Was there sequential improvement in Jet versus the second quarter?

Thank you.

All right, let me give you a little bit of more detail here.

We had higher performance across all of our lines.

At all of our new plane production lines at Gulfstream with the exception of the 450 and a little bit the 550 because of some of those supplier costs.

But X that, clearly productivity increases.

Second, we had one of our best service quarters ever in revenue and margins.

So it was a very -- at Gulfstream, very strong service and margin performance there.

And let me talk to you a little bit about Jet because that's a very -- that's a good new story compared to where we've been.

Think about Jet in three respects.

First, in three lines of business.

First is their FBO and service business.

Those have continued since we've owned them to perform very well and exceeding our expectations.

Second is their maintenance business.

And if you recall in the fourth quarter of last year, we sold or closed a number of our facilities in Europe, maintenance facilities.

So our revenue is lower on maintenance as we anticipated but margins are up.

So I'm very pleased with that.

And then the big muscle movement has been all along with Jet completions.

And I've been reporting to you steady improvement on our operations at Jet.

That team has done an excellent job turning around what was a very troubled mind of business.

And we are at profitability.

Our order book has increased.

Our funnel has increased and I -- but I'm very cautious about sales in the completion side because they're big and they're lumpy.

And we need to approach that as we do with a fair amount of realism about the orders are possible, good terms and conditions, fairness and ability to meet schedule for our customers.

But Jet is a good new story and that team out there is to be commended.

So all of those things, and Jet, by the way has been profitable every quarter this year, all of those elements combined to drive up margins a little bit above where I had anticipated.

But don't get out ahead of me in the fourth quarter because we do have higher R&D.

And by the way we did -- you asked a question about launch assistance in this quarter and third quarter, not material.

But in the fourth quarter, it's going to be less and that's just a question of timing, nothing unspecific.

So when you say launch assistance, is this a payment that you make or a payment that is made to you?

In the aerospace business, suppliers tend to contribute to the development of new products or refresh.

We certainly do, when we're supplying to aerospace [prime] and on the commercial aerospace side and our suppliers do as well.

That's nothing new.

That's something that we've seen for the last 10 years, 15 years since we've been in development.

Joe Nadol, JPMorgan.

Over on the combat business, sales have been, obviously really trailing off and we're down 30%.

There was a slight uptick in backlog which was a very good sign.

Wondering if you could revisit your expectations on bookings both domestic and international, what you're looking for there and the timing?

Or the visibility or lack thereof.

And even to the extent you're willing to do so, looking into next year or the next couple of years, where you think we're going to start to bottom out?

Okay, thanks, I appreciate this.

So, because I think this is an important question.

As I go back and think about it, I explained to you all in January that we're going to work hard to make our order book.

But I was uncomfortable giving you guys guidance around revenue other than the most general, particularly in combat.

Because while we were going to work hard at revenue, we can't control it.

And I also, you may recall that the guidance I gave you was without regard to sequestration, let alone furloughs and a shutdown, all three of which has happened.

So in a way it's, and frankly, it's no wonder that our revenue was lower.

But I think this question deserves a little bit more clarity and detail, so let me give you that.

Our sales are lower in combat for three primary reasons, and I'll walk through each.

First, most of the international orders we anticipated in the first quarter have not yet materialized and have consistently slipped to the right.

And clearly without those, our sales estimates are going to be off.

Second, we did not foresee the sharp decline in the military axle market as a result of the budget uncertainties in the Army and Marine Corps that have impacted both their forestructure and equipment.

And while MRAPs are remaining at some level within both of those services, they have been prioritized at a much lower priority as those services wrestle with the current environment.

So we think that as we can look forward, MRAP reset modernization will occur in the future but not anywhere close to the level we anticipated.

In my perfect world in a sequestration-free environment, I suspect the outcome might have been otherwise, but that's not what we're facing.

Finally, and third, our US Army customers' contracting activity is far slower than anything we had experienced to date or anything we had anticipated.

I think that's because as they're winding down two wars, rebalancing their budget while unable to bring down personnel cost because of sequester rules, on top of which they were whipsawed by the furloughs and shutdown.

Their ability to contract has been pressured.

So if you combine all of those, it put a fair amount of compression on our sales estimate.

That said, as you quite aptly point out, backlog for the quarter was up and our order activity was at about the 2012 running rate of $1.4 billion and orders were twice the prior quarter.

I don't want to get too far into the future because we are fairly early on in our planning horizon.

But I will tell you that for the fourth quarter, we have included some of the large international orders, which should make up some of the difference reflected in this quarter's volume.

But we're too late in the year to book enough sales to be in the range of our original plan.

So sales for 2013 are likely to be about 20% lower, at least under our current assumptions.

I hope that helps give you a little bit of detail and color as I parse through what are the major muscle movements driving our sales impact.

That is helpful.

If I might just follow up, briefly.

Do you expect bookings -- or where do you expect bookings to come in, in Q4?

And where do you expect to end the year in terms of combat backlog, if you're willing to give that?

I'm not comfortable giving the backlog.

But I -- we anticipate several of those international orders which have, I think, have been pretty clear and it's been obvious to have slipped to the right quarter by quarter.

But the circumstances that we had -- the marketing circumstances and the environment that existed in the first quarter are still here.

It's just a question of patience, which is something I'm not particularly good at.

But I am nonetheless required to be patient here.

But we continue to see several of those orders coming in, in the fourth quarter.

Myles Walton, Deutsche Bank.

Could we go back to Gulfstream for a second?

Phebe, I think you mentioned in the quarter, you were maybe a couple light or few light of your plan from an order perspective.

And you also mentioned 70% of the orders I think in the quarter were 450, 550.

The question really is, is can you give us some color on the 450, 550 book-to-bill as you've seen it year to date?

And would you actually have to see better than planned closure of orders in the rest of the year to keep that production flat?

I really don't want to get into, no surprise to you but nice try asking, into the book-to-bill by unit because then I'll spend the rest of my time here on an exegesis on the various lines of airplanes we've got.

But we've -- the order book and the funnel on the 450 and 550 have continued and we see an uptick also in the 280.

So everything that we see in our funnel and where we are in that funnel suggests that we just we really need on the domestic side some stability coming from our government with respect to the debt ceiling, primarily, and the shutdown.

But primarily the debt ceiling as we looked at a lot of our domestic customers and they're a little wary.

They're very interested.

Interest is up across all of our lines, airplane lines, including the 450.

And service revenue is up and continuing to look good so far into this quarter.

So absence exogenous force like a real contraction in the US economy, we're good to go on aerospace.

One quick one if I could squeeze it in.

The employees that you're carrying, the 95,700 that you disclosed in the quarter.

You're one of the few, if only defense Company that actually has grown the employment certainly in the last couple of years.

Is that completely isolated to Gulfstream?

And what does that picture look like just in the defense businesses?

Well, this is actually one of my favorite questions because it's something this management team and I look at frequently.

If you parse this down, it's a tale of two cities.

Gulfstream has increased its sale -- or its employees, as you would expect.

Marine group, somewhat as we've begun to gear up and particularly on our research and development side that are cost plus engineers.

IT has continued to increase, and based on their order book and their sales, but it is -- so that's the tale of one city.

And then everywhere else, in some instances we're down 50% of our sales force.

So this has been extremely painful across some of our businesses.

They've done what they needed to do to respond to the environment.

But I'm very mindful of the human impact of all of this and it's camouflaged by that gross number.

But you can imagine that we work this very, very hard as I see this as a level of our overall productivity.

But there's a lot of specifics embedded there that tell two very different stories.

Carter Copeland, Barclays.

Wanted to go back quickly to the aerospace margin dynamics you outlined for Q4.

And I wondered if you could help us think about what in that is temporary?

You -- I think I heard you say that Q4 and into Q1 you expect the impact of the timing issue at Jet.

But when you look beyond Q4 and into next year, is the R&D or launch assistance dynamic, does that play a material role in how we should think about the longer term profitability?

Or is there anything else that we should think isn't temporary from what we're seeing in Q4, I guess the supply renegotiation on 450, 550, anything like that?

Yeah so it's temporary on R&D and launch assistance, which tends to be lumpy.

And that we will smooth as we plan for 2014, and I don't want to get too much into 2014.

I suspect that the timing issues at -- on completions at Jet will resolve right away, quick.

So that's nothing systemic.

So when I think about the margin compression, absent what we talked about last quarter on higher supplier costs, there is nothing structural here going into 2014.

But as we go through our plating process I'll have -- and on the fourth quarter call, I'll give you an awful lot more clarity about 2014 and Gulfstream and margins and aerospace, in general.

It's pretty typical of our planning process.

So it really comes down to margin performance differential between the legacy large cabins and the improvement you make on the 650 at this point once you look out there?

That's right.

And that's going to be mix and we'll get, as we plan through next year and we'll take a look at what our really incremental learning is down each one of those lines, we'll begin to estimate, but that's not where we are yet.

Going back to there's nothing really structural here.

Howard Rubel, Jefferies.

Well the other surprise was IS&T and in some ways, Phebe -- well could you -- you talked a little bit about the environment, but the business seemed to outperform the environment.

Could you provide a little more granularity and where some of your successes are and where some of your challenges are?

Yeah so look, IS&T has done very, very well and frankly exceeded I think everybody's expectations, including mine.

This team has worked hard.

Without chasing revenues, they've held their own in a tough environment.

That's across the board with AIS and GDIT on the revenue side.

GDIT has performed very well on revenue and they're fighting their margins.

As you know, that's a very tightly fought environment, but they're doing quite well.

C4 has had an outstanding quarter with respect to margin.

So let me give you a little bit of color on this.

If you recall, as we entered the year, at the end of last year, we had four separate business units.

We've now contracted to three in IS&T because we for reporting purposes included GD UK within C4.

And C4's margins have been very, very good, particularly in light of the drag out of GD UK.

And I think in the quarter we have $11 million in charges out of GD UK and headwinds for and charges for the entire year to date at about $20 million.

So very disappointing out of GD UK, very disappointing.

That said, we've got the A team in place there.

Each one of those programs that we are participating in are strongly supported by our customer and by the team that we've got in place.

So we're meeting the needs of our British customers, to which we're highly attuned and dedicated and have been for many, many years.

This was just a prior management team that took its eye off the ball.

And so we've got some cleanups.

I spent a little time on that so you can understand the headwinds that that entire group has faced in a difficult market on margins.

So I'm very, very pleased with where they are.

They've got a pretty good book-to-bill.

We've had a steady order intake, and we're really on the mend here.

GDIT is quite a powerhouse.

Disciplined, mature management team and I'm very confident where they're all headed.

Does that help you?

Well just as a follow up.

This business in some ways probably has the most sensitivity to some of the turmoil you described with your major customer.

Yes.

How is it you've been able to do a little bit better other than discipline?

Is it -- the Army, clearly with combat -- with its radios and so on, on one hand you have that market, on the other there's elements of a withdrawal that clearly should be hurting.

So maybe a little more granularity?

Yeah, sure.

Let me help you try to parse that a little bit for you.

C4 is the business with the largest exposure to the Army, not exclusive but the largest.

The IT business has some exposure but we have reorganized in all three of those business units.

By the way, don't think that I think reorganization is a panacea to performance, but it's a predicate to improved performance in a down environment.

So in IT, we've consolidated a number of the businesses to take -- lines of business to take advantage of growth in some businesses in [mass].

So they are accommodating their somewhat small and offsetting their somewhat small exposure to the Army.

AIS has almost no exposure, in fact none to the Army.

So that leaves C4.

And I think in that context, let me give you a little bit of color on C4s and maybe this will help you.

On C4s programs of record, we've got WIN-T.

And that network clearly remains a priority.

If you think about the Army historically, they balanced out forestructure with capability and that network allows them to do more with less.

So we're fortunate to be the incumbent on this program of record.

And we've been adjusting our business to deliver the capabilities in whatever deployment schedule the Army is on.

So we've had a number of LRIPs approved year to date and we're continuing to perform on that network.

And again, we size our business to the demand of the Army.

On the rifle -- or on the radios, I think it might help you to get a little bit a program color there.

As you probably know, we're the incumbent for both HMS Manpack and the Rifleman Radios which take our network capabilities from the WIN-T backbone and down to the individual dismounted soldier.

And we are currently delivering on both products in the thousands of units.

So I think that that's important in understanding what's driving the underlying demand at C4.

That said, C4 is completely restructuring its business in order to meet the current environment, and which will, I believe, going forward give it significant opportunity to further right size itself and adjust to the demands of its principal customer.

And by the way, not exclusive customer as you get outside of the United States.

So I'm very pleased with the agility of that particular, all of our businesses, but that business to recognize the environment they are in and take appropriate actions.

So I hope that helps you understand.

David Strauss, UBS.

Jason Gursky, Citi.

Phebe, I wanted to ask about the portfolio and whether you feel like this is the right portfolio, whether there's still some portfolio shaping to do either through divestitures or acquisitions.

Just update us on your view of the portfolio at this point.

Well, let me talk about acquisitions.

I think I've been pretty clear in the year that we are and will be focused on operations.

I haven't had any acquisitions on my horizon.

I don't now and I'm not looking, so let's take that off the table.

But with respect to the portfolio, my vision hasn't changed.

And I've talked to you all about that balance in our portfolio.

With respect to positioning, let's talk about that in a little bit more detail.

In the platform businesses, it's pretty easy to see that we're the clear market leader with critical mass, right?

But in the IS&T portfolio it's a bit harder to discern who does what to whom when, simply because our businesses are each comprised of thousands of programs.

So positioning in IS&T tends to be by line of business rather than by major programs.

So what the IS&T Management team and I look at to balance our portfolio pretty much continually, is that line of business positioning.

And no real shaping is required now, not of any material issue.

We may take some paring here and there as we walk through and see what's core and what's not.

But so far, steady as she goes.

Robert Stallard, Royal Bank of Canada.

Phebe, a quick question for you.

In the past you've given us some idea of what the lead time is on your aerospace models in terms of when the next slot becomes available.

I was wondering if you could give us an update maybe on the 650, the G450, 550 and the G280 on that basis?

Well each one of those -- well, two of those aircraft are legacy mature programs, right?

And you would expect us to have some significant changes to -- in that environment as we go forward.

650 and 280 are brand spanking new so we would think about in the normal course of business, refreshes, but I'm in a several year time horizon.

But I'm not going to get any more specific about that since it seems to be high sport to what we're going to do and when we're going to do it.

But I can tell you that our planning is very deliberative, it's not reactive.

And when we announce an airplane, it's a real airplane and not a PowerPoint.

So we're on track to do what we have always anticipated we would do and we'll announce when we're ready.

So if the 450, 550 lead time has come down from 18 months which it used to be.

We shouldn't be too concerned about that then?

No.

We've got, I think, some availabilities about 1 year out and we'll continue to work that.

Those are very efficient and highly scalable lines.

So we've got enough in our backlog that we're comfortable.

So I'm not particularly concerned about that.

If that changes, we'll let you know.

But we're looking at the late, late end of 2014, early 2015.

So I'm still comfortable that that's a pretty good margin.

And as I said, particularly [bear our hedge], as I said particularly in this quarter where we saw a little bit of softening in the domestic environment.

And I think that's wholly attributable to the machinations in our government.

Peter Arment, Sterne, Agee.

Question back on IS&T, I wanted to dig a little farther.

You've consolidating the GD UK and I appreciate color there.

When you think about the business lines, still 50% portfolio is on the IT services side, are there opportunities to restructure or scale that if needed?

I know you've looked at it by the lines of business, but maybe some additional color there.

That management team has in fact reorganized to meet the current demand.

And so we have taken our units down from four -- or the lines of reporting at the macro level from -- within IT from four to three, better streamline our reduced costs.

And there it's a daily fight across thousands of programs in multiple portfolios from [IMPEL] to each one of the services and beyond DoD into non-DoD agencies.

So they are doing very well.

I think because of their reputation and their cost structure and winning more than their fair share of new contract awards.

So I'm very proud of that management team.

They're tough, they're mature, they're great businessman.

And Glen, I think we have time for one more question.

Ron Epstein, Bank of America Merrill Lynch.

Maybe more of a fuzzy question.

We've walked through a lot of details in a lot of the businesses units, so thank you for all the detail on that.

Now that you've been sitting in the role that you have been for a while, what really has been, from your perspective, maybe some of the biggest challenges that you've had to deal with in the role of CEO over the last couple of quarters?

When you were preparing for the role and now that you had it, what has been the biggest challenges?

Well, I think it's interesting, I don't face these challenges alone, I face them with a management team.

We spend an awful lot of time communicating among each other as you would expect and we have complete goal congruence.

We are challenged in some of our markets by an environment.

But I see that as an opportunity, frankly.

In tough times, that's where you see human beings' character and their mettle and the strength of an organization.

And GD is doing quite well in my mind, managing what we can control.

We're not going to lose a lot of sleep over those things that we can't control.

But to the extent we can control our operations, we're getting at it and getting at it hard.

So I don't know that there have been any unique challenges.

I think we've had a few curve balls as a country, frankly.

I think we got a little bit further down the shutdown and brinkmanship path than I think any of us as Americans would be comfortable for.

But that was idiosyncratic to General Dynamics, that's just in I think writ large.

So I think that the challenges have been those that I expected that we were going to see a little tougher environment.

And that's the time when you differentiate yourself.

So I've been very pleased with the management team and it's about hanging tough and good leadership across the board, and that I mean all of us, not just me.

Yeah, yeah.

And then if I may, one follow on, just a quick -- one quick detail, I don't think you discussed to much about.

In the quarter, the margins in land systems were outstanding, right?

They were just about what 100 basis points behind --

Combat.

Well yeah, Combat, excuse me, yeah behind Gulfstream.

Was there --

By the way, they're well aware of that.

I'm certain they are, right?

Was that [cume] catch-ups?

Or how should we think about it, that was really like --

Yeah, recall that we are not on cume catch-up.

Okay.

Okay.

So look, this was the result of superb operating performance in that group.

And as they continue to perform on each one of their programs, they retired risk.

And so this was really, a really strong line-by-line focus on cost reductions.

And I think that you've seen -- we anticipated this down cycle.

We're in a cyclical business and we anticipated this down cycle and got out ahead of it with a fair amount of restructuring.

So that's coming to fruition.

The fourth quarter we'll see a little bit of margin compression.

You haven't asked this, but I'll give you a little bit of color.

We've got the remainder of the ATPOTF consolidation costs, which we will cover.

It's the right thing to do and will put us in good position going forward.

It's clear I think from some of the press announcements, we've got a bit of a mix shift at Land Systems as we move from mature programs into the double-V hull.

And we're going to pick up some headwinds on that axle market.

But in general, this is solid performance of a very good management team.

And by the way, a lot of these guys lived through the last downturn post the end of the Cold War, they know what to do.

And that culture has at both there and Electric Boat have permeated all of GD.

So enough of my proselytizing, but that's what happened.

Thank you all for joining our call today.

If you have additional questions, I can be reached at 703-876-3583.

Have a great day.

Ladies and gentlemen, that concludes today's conference, thank you for your participation.

You may now disconnect and have a great day.