通用動力 (GD) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 General Dynamics earnings conference call.

My name is Tahitia, and I will be your operator for today.

At this time, all participants are in listen-only mode.

Later, we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Erin Linnihan, Director of IR -- Investor Relations.

Please proceed.

Thank you, Tahitia.

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 risk 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.

Good morning.

As you can observe from our earnings report, we enjoyed a particularly compelling quarter.

We reported EPS from continuing operations of $2.05 per fully diluted share on revenues of $7.75 billion and income from continuing operations of $694 million.

This is $0.21 per share better than the year ago quarter and $0.14 per share better than consensus.

Revenue was up $16 million against the year ago quarter.

Operating earnings were up $38 million, or 4%, and income from continued operations was $42 million higher.

Operating earnings of $999 million reflect 12.9% operating margins, a 50-basis point improvement over the third quarter of 2013.

Sequentially, the news is much the same.

Revenue was up $277 million -- 3.7%.

Operating earnings were up $50 million on a 20-basis point improvement in operating margins, and earnings from continuing operations were up $48 million.

Finally, EPS was $0.17 better than last quarter.

In short, we experienced the highest revenue so far this year, had the highest operating earnings in four years, the highest margins in six years and the highest earnings from continuing operations on my watch.

This led, quite naturally, to the strongest quarterly EPS we have ever had: all pretty powerful, and a strong indication that our focus on operations is paying dividends.

With respect to cash, we had $2.33 billion of free cash flow from operations in the quarter.

That is 336% of net income from continuing operations.

We have $3.46 billion year-to-date -- 179% of net income from continuing operations.

However, a word of caution here -- some of this cash is from advance payments on international orders and will be deployed in future quarters for programmatic purposes and leave the balance sheet.

That having been said, it was still a very powerful quarter from a cash perspective.

With respect to share repurchases in the quarter, we repurchased slightly less than 3.8 million shares for approximately $468.5 million.

We have purchased somewhat in excess of 28.8 million shares year-to-date for about $3.2 billion.

We plan for modest share repurchase activity in the final quarter of the year, with the resumption of increased activity early next year.

As you can see from the backlog charts that we attached to the press release, this quarter is also a story of continuing growth in the backlog.

Once again, there was a substantial intake of orders, resulting in significant increases to backlog.

We ended the quarter with the total backlog at an all-time apex of $74.4 billion, up from $71.1 billion at the end of the last quarter.

All of this growth occurred in Combat Systems group, largely the result of international orders.

You may recall that at the end of the third quarter of 2013, Combat Systems had a backlog of almost $7.8 billion.

It now stands at $21.6 billion: more than a threefold increase.

If we look back over the last year for the entire Company, you will see a similar story.

Our backlog has grown from $47.8 billion a year ago to $74.4 billion today.

From my perspective, pretty impressive.

Looking forward toward the fourth quarter, we would expect the Aerospace group to enjoy very strong order intake as a result of the introduction of the two new aircraft announced this month, along with a growing interest in existing products in part precipitated by the new product announcements.

In other words, customers can now choose between the near-term availability of G450 and G550 and the longer wait for new products with different speeds, ranges, and price points.

The clarity of these options for customers is helping drive decision-making.

Before I turn this call over to Jason Aiken to give you some segment details, I will note that I was particularly pleased by the revenue and earnings growth of the Aerospace group, the continued excellent margin performance of Combat Systems, the revenue growth in the Marine group, and the steadily improving margins at IS&T.

We are not where we want to be at IS&T, but we are improving.

Jason?

Thank you, Phebe.

As Phebe indicated, the quarter was marked by very strong operating results from each of our business groups.

I'll start with Aerospace.

Aerospace had another very good quarter.

Revenues, earnings, and margins were all up from the year ago quarter, as well as for the first nine months of the year.

The group reported sales just shy of $2.3 billion, up from the third quarter of 2013 by 6.4%.

Operating earnings increased 11.4% over 2013 to $411 million, the highest level of quarterly earnings the Aerospace group has ever seen.

Operating margins were up 90 basis points to 18% on improved performance in G650 and G280 manufacturing and outfitting, as well as another good contribution from jet aviation.

On a sequential basis, the group experienced some margin compression from the first half, consistent with our expectations.

This is attributable to a variety of factors, but primarily to the mix of aircraft deliveries and an increase in pre-owned aircraft activity.

Of course, the aircraft mix is more than just large versus mid-cabin.

Keep in mind it includes the variety of models within those categories.

Next, Combat Systems: Combat Systems revenues and operating earnings were also up, compared with third-quarter 2013.

In the quarter, sales were up 6.8% to $1.4 billion, while earnings were up 1.8% to $232 million.

Taken with a second quarter that was essentially flat year-over-year, it would appear that we have found the bottom with respect to sales for the group.

As expected, the group's margin rate, while exceptionally strong, was down from a year ago when the group posted its highest margins in its history.

In fact, barring the third quarter of last year, the group's margins this quarter where the highest they've ever been.

So far this year, the Combat Systems group has experienced very strong performance, with an operating margin rate of 14.4% year-to-date.

When we look sequentially, revenues were down $70 million from the second-quarter, but operating earnings and operating margins were both up -- $12 million and 160 basis points, respectively.

This reflects the impact of the various restructuring actions taken in the past 18 months across the group's businesses, including a significant reduction in our European cost base and last year's combination of two of our US-based businesses.

With the last of the European restructuring charges taken in the first quarter of this year, the group's margins have expanded significantly from the first quarter, to the second, to the third.

The cost reduction efforts position the group well to execute on their strong backlog.

Moving onto Marine Systems, the Marine group's revenues where the -- higher than 2013, both in the third quarter end the first nine months.

Revenues in the quarter were up by 7.2% to over $1.8 billion, while year-to-date revenues increased by 3.7% to nearly $5.3 billion.

The growth in both periods of its attributable to the group's submarine programs and commercial ship construction activities.

The group has started construction on the fourth block of Virginia-class submarines, which was awarded in the second quarter.

And it's continuing development activities on the Ohio-class submarine replacement program.

Construction is also underway on the first 3 of 10 Jones Act ships under contract at our NASSCO shipyard.

Operating earnings were steady compared with this point last year at $170 million, and the group's operating margins were down 70 basis points in the quarter and 30 basis points year-to-date as a result of mix shift.

The group is transitioning from Block III to Block IV of the Virginia-class program and from the mature mobile landing platform program to the new commercial ship contracts at NASSCO.

However, margins for the first nine months of the year remain a very respectable 9.7%.

And finally, IS&T: You may recall that we had expected a 20% decline in revenue this year for IS&T, but based on the strength of the first half of the year, we adjusted that expectation on last quarter's call to a 15% decline.

The group continues to outperform our top-line expectations through nine months, with operating earnings following suit.

Revenue of $2.25 billion in the quarter was off by about 13% compared to the prior year's third quarter.

And on the other hand, operating earnings declined just 6.5%, roughly half the decline in sales, to $202 million.

As a result, operating margins increased by 60 basis points to 9% in the quarter.

This is the group's highest margin rate in the last three years and marks the third consecutive quarter of margin expansion.

All three of the groups' businesses contributed to this improved performance in the quarter.

The story for the first nine months is similar.

Revenues were approximately $6.7 billion, down only 11.7% versus the expected 15%.

However, operating earnings were down only 4.3%, resulting in 70 basis points of margin improvement.

When we look sequentially, revenues and earnings were both up: $84 million and $14 million, respectively.

And as I noted earlier, the group has expanded margins sequentially since the fourth quarter of last year, demonstrating good operating leverage and the group's ongoing efforts to take cost out of the business.

On that front, during the quarter, we announced the decision to combine Advanced Information Systems and C-4 Systems, effective January 1, 2015.

We expect this combination and resulting restructuring efforts to make the combined organization, General Dynamics Mission Systems, more efficient, profitable, and responsive to our customers.

I'd like to cover just a few miscellaneous financial items before I turn it back over to Phebe to wrap it up and begin the question and answer period.

The net interest expense in the quarter was $21 million, versus $22 million in the third quarter of 2013.

For the full year, we continue to expect interest expense to be approximately $90 million.

At the end of the quarter, our balance sheet reflects a cash balance of $5.1 billion and a net cash position that's cash and equivalents and excess of debt of $1.7 billion.

In this regard, you should reflect on the cautionary notes Phebe introduced on the subject in earlier comments.

Our effective tax rate was 29.1% for the quarter, slightly lower than expected, due to the resolution of some open matters related to our 2013 tax returns.

For the full year now, reflecting on our experience to date and a tax rate of 29.8% for the first nine months, we now expect an effective tax rate around 30%.

We funded our pension plans in the quarter as anticipated, bringing our contributions through the first nine months to just over $500 million.

And I'll turn it back over now to Phebe to give you some wrap-up thoughts.

All right.

As we turn to guidance, I will be brief.

Someone higher revenue, higher than anticipated operating earnings, and a modestly lower tax rate combine to permit us to increase our guidance for EPS from continuing operations to $7.60 to $7.70, approximately $0.25 up from our last discussion with you.

Now let's get onto your questions.

Erin?

Thanks, Phebe.

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.

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

(Operator Instructions)

Jason Gursky, Citi.

Good morning, everyone.

Phebe, I was wondering if you could talk little bit about this backlog at Combat Systems and what it portends for margins out in the future?

Just offer up your view on how profitable that increased book of business might be and the sustainability of margins in Combat Systems?

If we look into next year, margins ought to look about the same as they do this year.

Because we really expect the ramp ups in 2016 and 2017 and beyond.

As we go through -- come down our learning curves, we're going to improve our operating earnings and margins.

These will be very profitable programs because they're in our core.

We know how to produce them, and so we have strong expectations for Combat Systems' margin performance.

Okay, great.

And then at IS&T, can you talk a little bit about the contracting environment that's going on there today and whether you feel like things are getting markedly better, staying the same on the margin, getting a little worse?

Just contract terms as well as the cadence of bookings and the size of bookings.

Yes.

We're not seeing much of a change in our contract terms and conditions.

And so as a result for us, margin expansion is all about performance.

And we've seen some of that improved operating performance throughout that group.

Just to give you an example, we had a book-to-bill of one for the quarter in IS&T.

So nice order activity, and I really haven't seen any material change in the contracting.

Okay, great.

Thank you.

Peter Arment, Sterne, Agee.

Yes, thank you.

Good morning, Phebe.

Just a question.

It's on IS&T.

You've talked about the combination [and] creating this Mission Systems business.

And you just mentioned the contracting environment.

Do you think this business, ultimately, can continue to see margin expansion?

Or is there something structural that keeps it below 10% for the long-term?

Oh, I see no reason why this business can't get into the double digits.

We undertook this consolidation because our markets are changing.

So it was an opportune time for us to take a fresh look at our entire portfolio.

And it became pretty clear to us that we were going to benefit from a consolidation.

So from my perspective, the consolidation is going to result in additional cost savings going forward.

So that is margin expansion opportunity.

Okay, I'll stick to the one.

Thank you.

Sam Pearlstein, Wells Fargo.

Good morning.

Phebe, can you talk a little bit about the $0.25 improvement in terms of the guidance, in terms of where that's changing -- which of the different segments?

Because I know, as an example, IS&T down 15%.

You're certainly down a lot less than that year-to-date.

So it would imply a pretty weak fourth quarter unless there's some changes amongst those.

No, our guidance reflects our year-to-date performance.

And the fourth quarter is going to look very much like what we are leading and what we're guiding to on the overall Company.

So Marine will be a little bit up.

And everybody -- all the other groups are pretty much steady.

There's some margin compression in IS&T, but not much.

So I think when we -- we've increased our guidance, really, to reflect where we've been and where we see going forward for the remainder of the year.

So this is -- I'm comfortable with our guidance.

But in terms of each of the four segments, did the outlook change relative to what you talked about?

I'm trying to understand where are you moving that increase of $0.25 from?

Well, it is really across the board.

We've got higher earnings, and we anticipate higher earnings in Aerospace, higher earnings in the Marine Systems, and about (Inaudible) higher earnings in Combat.

So a little bit margin compression, as I said, in IS&T in the fourth quarter.

But when you roll it all up -- where we've been and what we see for the fourth quarter, $7.60 to $7.70 is -- we're very comfortable with that.

Okay.

Thank you.

Robert Stallard, Royal Bank of Canada.

Thanks so much.

Good morning.

Morning.

Just a couple things on cash.

Phebe mentioned that the [conversion] rate is obviously being above average over the first nine months.

Where do you expect this to go in the future?

Are we going to go back to 100% or below that as you burn through these advances?

We'll be at about 100% as we begin to take that cash off the balance sheet and send it on its way to our suppliers.

So we target about 100%.

Okay --

Still very good cash generation.

Yes.

On the buy back, is there any reason why your easing off in the fourth quarter?

We told you all and our investors that we would apply most if not all of our free cash flow to share repurchases and dividends.

And we're about at that point.

So we'll go a little bit slower in the fourth quarter.

But I expect to pick the activity back up in the beginning of the year.

Great.

Thanks so much.

Doug Harned, Sanford Bernstein.

Yes, good morning.

You talked earlier about that the G500 and 600 and then the G450 and 550 and how this gives customers the opportunity for a lot of different decisions.

But when you look forward on the 450 and the 550, what's the level of backlog that -- in terms of months -- that you're comfortable with to make sure that you can continue to keep production at the levels you're at today until the 500 and 600 come out?

I'm curious where you stand today in terms of that and how you get confidence that you're going to be in a good position.

Let me give you little bit of color on that.

In the quarter, our backlog increased by a quarter for almost all of our models.

650, 650ER -- third quarter of 2017.

550 -- first quarter of 2016.

450 -- about the same.

280 -- third quarter of 2015.

And the 150, frankly, the largest increase at the first quarter of 2016.

So that provides us pretty steady production rates as we go forward to plan for the next at least 12-month period.

And you'll recall, we set our production rate at the end of the prior year.

And then we'll give you some details about those rates as we go forward.

But I think it's just too soon to project when we have any material changes in production as a result of the new airplanes.

And when we get closer to that point, we will give you a little bit more clarity.

Is it fair to say you're looking at having some flexibility there as you see how demand rolls out for each of the different models over time?

Yes.

We always have flexibility.

I think that ability helps us keep our profitability high and -- as we balance resources against demand.

So I'm comfortable that as we stand here today, we've got an executable plan going forward.

And as I said, as we get closer to the entry into service for the 500 and then the 600, we'll give you a little bit more color into the relative production rates.

Okay, very good.

Thank you.

Joe Nadol, JPMorgan.

Thanks, good morning.

Good results.

Thanks.

Phebe, just on Marine -- the margins have come down a little bit the last couple quarters.

And you've indicated that it's transitioning on the multi-years for the Virginia-class plus the MLP over to the new commercial ships.

How are the ships coming?

This was your business before your current position.

And so, as you look at the early stages of the curves on the ships, how are they coming?

And where do you think the margins bottom out before we start seeing an uptick as they mature?

Well, you could much got it right on the mix shift.

We've got mix shift from Block III to Block IV.

And then the transition from the MLP to the Jones Act ships.

It's an interesting -- when you think about what NASSCO has been able to do, they've demonstrated that they can build these ships and meet the customers' needs competitively and profitably while they are continuing to deliver Navy ships.

So the current work we have in house at NASSCO provides us nice revenue and earnings for the foreseeable future.

We've got three ships in production.

They are all performing on or above plan.

So I would -- now, one thing, one caution here is that, think about commercial shipbuilding as providing nice, strong margins -- or nice, strong earnings.

But the margins are going to be a touch lumpier as we move from one ship class to the next ship class because these are shorter cycles than Navy shipbuilding.

So I suspect we'll see continued margin improvement at NASSCO and at Electric Boat as we work through some of these mix shifts.

I would suspect to see some of that next year and certainly going into 2016 and beyond.

Just to be specific -- so next year, you expect to see margins start to perk up?

Yes, they ought be -- we haven't done our detailed planning yet.

But I anticipate that they will somewhat mirror this year's.

Okay.

Thank you.

Cai von Rumohr, Cowen and Company.

Yes.

Thanks so much, Phebe.

So, if you can give us maybe a little bit more color on Gulfstream, are the 650 margins above -- you said they're above the 450.

Where are they relative to the 550?

And in terms of cash, when do you expect to get initial signed contracts for the G500?

And what kind of impact is that going to have?

That should have a positive impact on cash.

Thanks.

Yes.

So the 650 and 650ER margins are beginning to approach the 550.

And I suspect sometime next year, we may have the crossing point on that.

We haven't yet planned out our cash in any detail, with respect to the 500s and 600s.

We expect to see some this year, but more going into next year.

And by the way, we'll give you a lot of color in the fourth quarter call in January about the order activity on both of those airplanes.

Can you give us some initial color on that order activity or just the reception and whether you --

Yes.

So, we announced at the rollout that we had several orders -- large orders.

And the order activity has been very positive since then.

But I don't really want to give you a battlefield update when we're barely into this quarter.

So we'll be able to give you some firm color and details in the fourth quarter call.

Okay, thank you.

Hunter Keay, Wolfe Research.

Thank you very much.

Phebe, can you give us a couple updates on a couple ground vehicle programs that I think are in a bit of a state of flux for you guys?

One is AMPV, and the other is JLTV.

On JLTV, can you confirm -- have you guys excluded yourself from bidding on the LRIP contract next year?

Are you officially out of that program at this point?

Yes.

Yes.

I was also asking on AMPV, too.

Giving an update on that.

That'd be great.

Thank you.

Yes.

We haven't played in the JLTV market.

And on AMPV, we're continuing to work with our customer on options for where our vehicles may make some sense.

But our mature programs and our tanks and strikers are doing exactly what we thought they would do.

And very good margin performance and good earnings.

We have a lot of stability as of today on our ground systems -- domestic market.

Okay.

And just one quick follow-up.

I missed it.

How long was the wait for G650 right now?

Thank you.

It is -- G -- for 650, the third quarter of 2017.

Thank you.

Robert Spingarn, Credit Suisse.

Good morning.

Phebe, I was going to ask for some more help on Aerospace backlog.

And just reconciling the book-to-bill with the extension of the backlogs for the models that you talked about earlier.

I suspect a lot of what's happening is you've been working off a very strong 650 bookings back in 2011, so there's distortion.

Is there a point at which we start to get current on bookings and deliveries?

Or does the introduction of these two new aircraft create new distortion in the next couple quarters as these orders come in?

You quite aptly and correctly pointed out the 650 order book.

And given the length of time between order today and a delivery of that aircraft, it has caused some distortion in our book-to-bill.

And we've talked about that, I think, for the last five or six quarters.

As we move into the new airplane orders, we expect something very similar.

So I think that we used to watch a book-to-bill in the Aerospace group with great -- I wouldn't say consternation, but detail.

And I think that's less apt now.

So what we watch for is the mix of the airplanes.

And so far, our in-service models are doing very well.

Okay.

And then just switching topics, a quick one if I could on a potential additional striker bridge.

Could you talk about any upside there in timing?

Well, that depends on when we get an appropriations bill passed -- if we've got money in the 2015 appropriations for the striker bridge.

The customer is very anxious to get those vehicles, so it was pretty much in line with what we planned for in 2015 and 2016.

But as I said, we don't have our detailed plans done, but there were no surprises.

Okay.

Thank you very much.

John Godyn, General Dynamics (sic - "Morgan Stanley").

It's John Godyn from Morgan Stanley.

But thank you for taking my question.

So you got a battlefield promotion here.

That's right.

Phebe, I wanted to follow-up on Aerospace margins a bit.

When I think about the progression throughout the year, I think it's safe to say that they've exceeded expectations.

Earlier in the year, you had highlighted a number of puts and takes.

And when we think about your full-year guidance now, it seems like those aren't -- I guess the downside risk isn't coming to.

I was hoping you could just give us a bit of color and, maybe, a play-by-play on what exactly drove the beat versus earlier concerns in the year.

And what that means as we look out into 2015 and risks and opportunities to improve margins from here.

So the single largest factor, particularly for this quarter, in margins was pre-owned.

And we've talked, I think, for the last couple of quarters about with a business of this level of complexity, there are a lot of puts and takes.

Aircraft mix, the mix of service -- both in terms of volume and types of service -- [work].

Some service jobs come in with a lot more high content work.

R&D is lumpy.

G&A can be lumpy.

The pre-owned in this quarter was significant.

We didn't have much pre-owned in the first couple of quarters of this -- in fact, zero in the first half of this year.

And we had three this quarter.

So that is what affected our margins this quarter.

And then for the fourth quarter, we're looking for pretty much the same.

We'll have some margin compression, but not a whole lot.

Again, we anticipate a couple of pre-owned that carry no margin with it.

Going forward, we believe that we're going to see some margin expansion, particularly as the 650 comes down its learning curve.

We're not done improvements on the 650.

In fact, on production, [in fact] you're never really done.

And then, in the out years, when we start to ramp up 550 -- or 500 and 600 production, we'll see some compression in margin as we come down our learning curves.

But again, nothing that is remarkable or particularly out there.

Got it, thanks.

Myles Walton, Deutsche Bank.

Maybe, first a clarification -- the cash conversion that you expect in the fourth quarter.

And then -- usually, it's seasonally strong.

I just don't know how much of an influence this pull forward will have.

And if you'll extend suppliers cash here from the advance in the fourth quarter.

But the real question, Phebe, is given the breadth of growth in the defense backlogs, it seems like you'd be in a place to -- I don't want to say, declare bottom for your defense business, but certainly look toward a potential for growth in 2015 across the defense portfolio in aggregate.

Is that an accurate statement?

Yes.

Let me talk about growth, and let's go by group.

In the Marine group, you ought to see steady, low-single-digit growth year-over-year.

And we've been predicting that.

And that's, in fact, what has happened.

Combat Systems -- given the considerable backlog it has, when we start ramping up production -- and that's largely going to be in 2016 and 2017 -- I think you're going to see good bottom line and top line growth.

And IS&T -- we believe we are at the bottom.

And we've had a good order book in this last quarter.

So we see some good potential there.

So on cash conversion, the fourth quarter will be lighter, obviously, because we're beginning to disperse some of that cash to our suppliers.

Will it be positive free cash flow?

Yes.

Okay, thanks.

George Shapiro, Shapiro Research.

Yes, good morning.

Phebe, I wanted to explore a little bit the Aerospace margins in a different way.

And if you just looked at the incremental margin this quarter, it was 31%.

The second quarter, you couldn't calculate because the margin was up on down revenues.

And the first quarter was also close to 30%.

So I know you say there's a lot of moving parts and everything in there, but it does seem like the incrementals still come out to around 30%.

Is there any reason why that shouldn't continue as we go forward?

And then also, if you could just update us on what your expected large cabin deliveries are for the year, if that's changed any from the second quarter?

No.

We're at 116 large cabins and 32 mid cabins.

And that's on [green] delivery.

Okay.

And basically the same for completions.

Look, margins are going to be -- and I think you've seen, they are somewhat lumpy.

They will -- earnings are going to follow revenue growth, but we will have lumpy margins for the whole series of reasons that we've talked about at some length.

R&D will fluctuate.

Net R&D will fluctuate.

G&A will fluctuate.

Mix is going to fluctuate.

Pre-owned -- it's a complex business with a lot of moving parts.

You've got a lot of puts and takes, right?

Right.

And that's why, to me, it's still surprising that when you look at the incremental margins, they don't seem to vary all that much.

[Things] seem to be up around that 30% level.

Well, our performance continues apace.

It's just that you've got -- in any given quarter, there are things that are affecting it.

And activities that are affecting it.

So we have on our growth margins on our airplanes continue to be very strong.

And we see improvement across the board, quarter-over-quarter.

One quick one, maybe, for Jason.

How much were the revenues in the quarter associated with the three pre-owned aircraft?

Yes, one second.

That--

I think it is over $100 million.

It is actually closer to about $70 million or so.

Okay.

Thanks very much, Phebe, and good performance.

Thanks.

Pete Skibitski, Drexel Hamilton.

Good morning guys.

Nice quarter.

Phebe, just wondering if you could give us some color on what's going on with Russia and China with the sanctions and, I think, the corruption crackdown in China?

Are any of those issues, particularly the sanctions, holding up any Gulfstream deliveries?

And overall, for both countries, are you seeing any orders being deferred or slowing in general because of what's going on in those regions?

Not yet.

The sanctions have only impacted us at the very far margins.

And more at Jet Aviation than in Gulfstream.

And China -- China has a history of variability in its order activity.

So I don't see anything abnormal there.

Okay, got it.

And then, you touched on the pre-owned market a little bit.

Can you talk about the pricing in the pre-owned market, maybe, by mid cabins and large cabins?

Is it fairly stable year-over-year, or not really improving?

Or can you add color there?

Yes, it is stable.

And we're seeing some improvements, particularly in the larger cabins.

Prices are firming up in the pre-owned.

Thank you.

Howard Rubel, Jefferies.

Thank you very much.

Phebe, it seems as if you're continuing to go to businesses and find opportunities for either sell thing or reposition them.

And obviously, you've done in one in Combat, and then you have a small to MDA.

Can you elaborate a little bit on some of the longer-term objectives that you're looking for for each of the businesses?

You've hinted at some of them in earlier questions.

Could you provide a little granularity, please?

Yes.

So in the case of Combat Systems -- and by the way, all of our internal reorganizations have been in response to changes in our market.

So as we looked at last year our ATP and OTS business, it made imminent sense to go ahead and combine those two.

Primarily -- some for scale, but primarily for cost reduction.

And that has executed beautifully.

So we've got nice margin activity at now the new OTS.

The IS&T was something we thought about for a while.

But again, as the markets have contracted, it made sense now to integrate those two business, primarily, again, for cost reductions.

And we ought to see that -- the margin benefited from that starting next year and going into the future.

But also, it provides us some scale, which is helpful, too, in this down market.

Now look, what you want to do in a down market is manage what you can manage and keep our margins as high as possible.

So we've had a long road of recovery on IS&T margins.

But I anticipate that they will continue to improve.

Then just -- I don't know -- the other thing that you've done is you clearly took work in-house for Gulfstream.

And you've hinted at some exciting manufacturing changes.

Could you just elaborate a little bit more on what you've done there to [take productivity] to a new level?

And what does that imply for what you're setting a standard for other parts of the organization to look at these options?

Well, that's an interesting question.

Let's go to the -- what we have done in anticipation of the new airplanes.

We learned a very important lesson with the 650, that a purpose-built facility provides much greater margin expansion over time.

That, plus the way these airplanes were designed is, they were designed for produceability.

So fewer parts and cleaner and clearer build paper -- work paper -- that gets out on the shop floor.

So given that we have these purpose-built facilities and the way these planes were manufactured -- or designed-- I think we've got very good earnings potential in the future.

We've taken some work in-house that we previously had outsourced, largely, as a matter of control and efficiency.

For some of these parts that we are now manufacturing at Gulfstream, the transportation cost is significantly less when you move it from one building right over to the next building.

So that was a factor in how we thought about optimizing earnings potential, going forward, for these new airplanes.

I don't believe that this is necessarily a model for the defense businesses -- not something that they look at.

The Marine group is not a vertically integrated group, neither is our land system.

So they have a very robust and disciplined supply chain network, and I don't see them bringing more work in-house.

Thank you very much.

David Strauss, UBS.

Good morning.

Phebe, where are you in the process of selling AxleTech?

As you know, we moved AxleTech into discontinued operations.

And we are selling it.

And I think it's not appropriate to comment any further than that.

Okay.

As a follow-up, Jason, on the pension legislation, [HAFTA] legislation -- I know you guys deal with [CADS] differently than everyone else.

But how does that impact you from a mandatory contributions standpoint, going forward?

Does that help you?

It does.

I think, like just about everybody else, it brings down pretty meaningfully the mandatory contributions that we are projecting.

That said, I think as you are aware, those contributions that we've had in the past and are forecasting aren't necessarily potentially as significant to us as it may be to others.

So the reduction isn't something that we focused on as a material item that will change our cash flow outlook or anything else like that in a significant way.

Okay, great.

Thank you.

Tahitia, I think we have time for one more question.

No problem.

Carter Copeland, Barclays.

Good morning, Phebe, Jason, and Erin.

And good quarter.

Just a couple of quick clarifications.

Jason, you said that the contribution from Jet was good in the quarter.

I wondered if you could characterize whether that was better than what you've seen in, maybe, the past couple of quarters.

And then, with respect to the Mission Systems creation, I wondered if there were any restructuring or other expenses associated with the combination that are non-repeating for next year.

And if you can help us think about what that might contribute to next year's margin.

Thank you very much.

I think, with respect to the Jet Aviation question, we continue to see steady improvement in the business.

And year-over-year, each quarter, we're seeing improvement -- second-quarter to second, third-quarter to third, and so on.

So we expect to continue to see that slowly and steadily improve in their operations.

Any charges with respect to restructuring will be taken in the quarter in which they are incurred and more than offset by the cost savings.

So we don't see any material headwinds as a result.

Okay, great.

Thanks for the color.

Thank you for joining our call today.

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

Have a great day.

Ladies and gentlemen, that will conclude today's conference.

Thank you for your participation.

You may now disconnect.

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