通用動力 (GD) 2017 Q1 法說會逐字稿

Good morning, and welcome to the General Dynamics First Quarter 2017 Earnings Conference Call.

(Operator Instructions)

Please note, this event is being recorded.

I would now like to turn the conference over to Alison Harbrecht, Staff VP of Investor Relations.

Please go ahead.

Thank you, Gary, and good morning, everyone.

Welcome to the General Dynamics First Quarter 2017 Conference Call.

Any forward-looking statements made today represent our estimates regarding the company's outlook.

These estimates are subject to some risks and uncertainties.

Additional information regarding these factors is contained in the company's 10-K and 10-Q filings.

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

Thanks, Alison, and good morning.

Alison has replaced Erin Linnihan, who is now reporting to me in a different capacity.

Alison has had a distinguished 14-year career in the finance department, most recently as the Controller for Mission Systems.

We are pleased to have her here as our Staff VP for Investor Relations.

As for the quarter commentary, I will keep my remarks somewhat brief since this quarter's results are relatively straightforward, quite good, and the comparisons are generally attractive.

We reported earnings per share of $2.48 on revenues somewhat in excess of $7.4 billion.

Operating earnings are slightly over $1 billion and net earnings of $763 million.

EPS at $2.48 was $0.16 better than consensus.

We estimate that about $0.06 of that $0.16 was from operations in the form of higher-than-expected operating margin, offset modestly by somewhat lower-than-expected revenue.

The remainder came from a lower effective tax rate, offset slightly by a somewhat higher-than-anticipated share count.

With respect to cash, we had $533 million net cash provided by operating activities.

After capital expenditure of $62 million, we had $471 million of free cash flow from operations, $56 million more than in the year-ago quarter.

While our total backlog at $60.4 billion is down $1.8 billion from year-end figures, it remained quite robust.

It is also significant to observe that the important funded portion of that backlog grew by approximately $1.5 billion to $53.3 billion.

An impressive 88.2% of our total backlog is funded.

The general comparisons quarter-over-quarter reflect, as you would expect, strong operating performance.

All of the comparisons I will give you are with reference to 2016 numbers, as restated for the adoption of the new revenue recognition rules for this year.

So compared to the first quarter 2016, revenue was down $35 million or 0.5%.

However, our operating earnings were up $111 million or 12% over the prior year's quarter on the strength of a 150 basis point improvement in operating margin.

The operating margin in the quarter at 13.9% was particularly strong.

On a sequential basis, revenue was down $213 million or 2.8%, but again, operating earnings were up $267 million or 34.8% on a 390 basis point improvement in margin.

All of the foregoing is a reflection of very positive operating leverage.

Finally, EPS from continuing operations was up 40% or 19.2% -- or $0.40, up 19.2% over the year-ago quarter as a result of better operating earnings and a lower tax rate and share count.

Let me provide some commentary and a little perspective around the results of each of our operating segments.

First, Aerospace.

Revenue was up by $293 million compared to Q1 2016, about 16.5% and up $249 million or 13.6% sequentially.

Similarly, operating earnings were up $111 million or 33.4% against the year-ago quarter on a 280 basis point expansion in operating margin.

Sequentially, operating earnings were up $169 million on a 640 basis point improvement in operating margin.

The sequential result needs to be understood in the context of the restated 2016 revenue and earnings resulted from the new revenue recognition rules.

In the fourth quarter, we had 9 more green aircraft receipt of certificate of airworthiness than we had final deliveries to customers.

This negatively impacted Q4 2016, as we stated, because the green deliveries were no longer recognized.

By the same token, we had 4 more entry into service deliveries in Q1 2017 than we had green aircraft receipt of certificate of airworthiness.

That obviously helped the first quarter 2017 and should help next quarter as well.

Orders for the group were typical of a first quarter.

In the quarter, net earnings were $1.4 billion, and the dollar-based book-to-bill was 0.7.

This is consistent with what we have seen in the first quarter of 2012 through 2016.

The aerospace average booking for the first quarter over the last 5 years were $1.39 billion, a book-to-bill of about 0.7.

So it was a quarter with a lot of sales pipeline replenishment.

It was part of the normal cycle after a strong fourth quarter.

In particular, we noted sharp increases in activity levels in Europe and improved activity in China.

I should also note that the activity has been good in April and has clearly shifted in favor of large cabin.

This is quite encouraging.

On the product development front, we anticipate a late completion of all -- late October completion of all flight test requirements for the G500.

This leads us to believe that FAA certification will follow within 60 days thereafter.

And by the way, we are going to fly our third G600 test airplane today.

Think about it this way.

We are flying 3 test airplanes in the first 4.5 months since first flight, really quite remarkable.

So we are off to a very good start in the Aerospace group, somewhat better than our guidance to you at the operating earnings level.

We expected a strong first quarter for the reasons we've discussed with you at the beginning of the year.

However, the operating performance was better than expected.

Let me turn to the defense side of the business with Combat Systems.

Compared to the first quarter of 2016, sales were up $42 million or 3.4%, and operating earnings were up $18 million or 9.6% on a 90 basis point improvement in operating margin.

We had particularly strong performance on a quarter to year-ago quarter basis from European Land Systems.

Sequentially, revenue was down $374 million, but operating earnings were down only $25 million on a 210 basis point improvement in operating margin.

The sequential comparison is particularly difficult on a revenue basis because this group always has a very strong fourth quarter largely related to contract deliveries at OTS and EoS.

Also in the quarter, we largely completed the transition from engineering and prototype production on our 2 large international vehicle programs for Canada, the Mid East and the U.K. These programs will now enter full production and continue apace for the next several years.

Even given Combat's large backlog, they had a nice order activity in the quarter with a 0.7x book-to-bill.

All in all, extremely strong operating performance once again at Combat Systems.

With respect to Information Systems and Technology, we experienced very good operating leverage in the quarter.

While revenue was down $182 million or 7.8% against the year-ago quarter and down $125 million sequentially, operating earnings of $236 million were essentially flat with the year-ago quarter on the strength of an 80 basis point improvement in margin.

On a sequential basis, operating earnings were up $5 million, once again, on an 80 basis point improvement in operating margin.

These results are consistent with our guidance of an around 11% operating margin.

I think it's important to note that IS&T's backlog grew by $255 million in the quarter with a book-to-bill of 1.1x, following strong book-to-bill of 1:1, on average, for the last 4 years.

The significant orders in the quarter included a $450 million -- $415 million contract from the U.K. Ministry of Defense to design and develop its next-generation communication and information system; $85 million from the NATO Communication and Information Agency to upgrade its technical infrastructure; and $160 million from the National Geospatial-Intelligence Agency for the new Campus East.

So a pretty good start to the year from a new business perspective at IS&T.

Finally, let's turn to Marine.

Revenue of $1.93 billion was down $188 million or 8.9% compared to the year-ago quarter but up $37 million or 2% sequentially.

Operating earnings were down $23 million or 12.5% against the year-ago quarter and up $119 million sequentially.

The revenue variance from the year-ago quarter was solely attributable to lower Virginia-class block 3 material volume, offset only partially by higher Colombia-class engineering volume and higher repair volume.

Earnings were driven by a delay in the scheduled delivery on 1 ship in block 3 of Virginia-class submarine program.

Our performance on the Virginia-class program continues to be solid.

Also at EB, we are already over 40% complete on the design of the Colombia-class ballistic missile submarine, 4 years before start of construction.

This performance is far better than any submarine first-of-class design maturity to construction start date in history.

So we are pleased.

Bath ship-over-ship performance on the remainder of the DDG 1000s is outstanding, and we have stabilized the DDG 51s.

NASSCO continues to show performance improvement on each of its ships.

So the company is off to a very good start to the year, somewhat ahead of our expectations.

We do not, as a practice, change guidance at the end of the first quarter.

It is our practice to give you a full review of our expectations at the midpoint of the year.

Suffice it to say that we are a bit ahead of the operating plan upon which our guidance was based.

As always, we will continue to consolidate our improvements and strive to continue to improve our results.

I'd like to turn the call over now to our CFO, Jason Aiken.

Thank you, Phebe, and good morning.

Net interest expense in the quarter was $25 million versus $22 million in the first quarter of 2016.

The increase was due to a $500 million increase in our outstanding debt last year.

On the capital deployment front, we spent $354 million on the repurchase of 1.9 million shares in the first quarter.

When you combine our share repurchases with our dividend payments, we spent $584 million in shareholder-friendly actions during the first quarter, almost 125% of our free cash flow from operations.

We continue to anticipate deploying all of our free cash flow this year to share repurchases and dividends.

We ended the quarter with a cash balance of $2.2 billion on the balance sheet and a net debt position of $1.7 billion.

As Phebe mentioned, our effective tax rate was 24.5% for the quarter.

The lower first quarter rate was anticipated based on the timing of the vesting of our restricted stock and the associated tax benefit and is consistent with our full year tax rate forecast.

So despite coming out of the gate with a lower rate, we're still anticipating an effective tax rate of about 28% for the year.

Alison, that concludes my remarks, and I'll turn it back over to you for the Q&A.

Thanks, Jason.

(Operator Instructions)

Gary, can you please remind the participants how to enter the queue?

(Operator Instructions) The first question comes from Robert Spindorn (sic) [ Spingarn ] with Credit Suisse.

So Phebe, as you said, good performance across the board.

In Marine, you've got a lot of going on.

I wanted to ask you about that.

It's sort of a multi-part question, but it really gets to CapEx over the next several years.

With the Colombia-class coming in, a construction contract rumored to be around $5 billion, you have the advance procurement money that went into the December CR, that's nearly, I guess, $0.75 billion.

And then we've got this very ambitious 355 ship Force Structure Assessment, where large surface combatants go up from something like 88 to 104, attack submarines go up from 48 to 66, going from 2 per year perhaps to 3, same with the destroyers.

Given that, how do we think about the requirement for you, for GD, to invest in CapEx over the next several years?

So let me give you our investment philosophy across the board.

We invest in programs that we believe we can earn a sufficient and proper return.

So to the extent that those returns become increasingly clear, that then informs our investment.

And that's true across the entirety of our portfolio.

So I think you need to think about our investment proposition through that lens.

With respect to the increase in shipbuilding, to the extent that that materializes and we can understand both the quantum and the timing of those increases, we have the capacity to increase production at each of our shipyards as does the majority of our supply base.

But with all of these -- with any increase in production, we would need to replenish, as needed, our workforce, the supplier base and facilities over time.

And again, all of the potential investments with respect to that growth will be determined with our customers as we begin to identify the return.

So Phebe, would we go through a period where there is some pressure on cash flow from the added CapEx and maybe pressure on margins as you hire and prepare for future higher revenue?

So our current plan anticipates an investment in our shipbuilding programs commensurate with what we see the growth to be.

So we may see, in the out years, some cash demand on -- as a result of those investments.

But I believe it will be well within our capabilities.

And remember, too, the cash that's tied up at Gulfstream will begin to unwind naturally as well.

So we will consider all of those puts and takes as we think about our investment into the future.

You had a second part of that.

Well, I was simply talking about the possible impact to margins as you start to hire and so forth, yes.

So we have done a very careful plan on what our margin expectations are.

And we see it throughout -- we see our margins throughout, at least our initial plan period of 4 years, as essentially flat in the mid-8s range.

And that's because the increase in Colombia volume will continue to be cost plus and then offset somewhat by the Virginia-class submarine performance in that long-term successful program as we have continued improvement ship-over-ship.

So think about flat in the near term.

As we go out into the future, then it's our job to manage that growth appropriately.

And as you can imagine, with all -- when you think about shipbuilding, it's all about planning.

That's really the competitive advantage and the key to success in shipbuilding.

So we have put in place very, very detailed hiring plans, training plans, supplier base plans and facility plans to support that growth.

So as we sit here today, I'm very comfortable that we are both anticipating and thinking through the potential risk of both.

The next question comes from David Strauss from UBS.

Jason, maybe could you touch on the EAC's cume adjustments in the quarter on a year-over-year basis, given the new reporting structure?

And then, Phebe, wanted to ask you about Combat Systems and specifically the U.S. business.

How prepared are you or your production lines, Stryker or Abrams, for potential ramp-up there?

Yes, so as it relates to the EAC adjustments, I see you're probably alluding to -- we had been expecting, with this transition to the new revenue recognition rules and specifically the cumulative catch-up approach to our defense businesses, to start to see a little more volatility, perhaps a little bit more in terms of magnitude on this side.

As it terms out for the first quarter, in any event, the aggregate number was actually about $50 million and not too different from what we saw a year ago on a restated basis.

I think that was $58 million.

So still TBD in terms of what we'll see quarter-to-quarter.

Over time, still probably expecting some level of volatility.

But for now, it was a relatively inconsequential quarter.

So with respect to Combat Systems, there's been quite a lot of discussion in this new administration about potential increases to the land forces in the United States.

And to the extent, again, that which that -- those increases actually occur and the timing and the amounts of those increases, we will look at that as the details emerge.

But we have plenty of capacity and plenty of operating leverage, both within our -- within Combat Systems and within our supply base.

So I have very little doubt that we can ramp up to meet any expectations that our customers, both the Army and the Marine Corps, may have in the future.

The next question comes from Carter Copeland with Barclays.

At the risk, Jason, of asking again the nerdy accounting question on the EACs, just since you guys have never really had this before, is that $58 million -- or that $50 million, is that a net favorable, unfavorable number?

And if so, can you give us the pieces?

And then one for Phebe.

I just wondered, you made a statement about stabilizing the DDG 51 at Bath.

I just wondered if there was something beneath that.

What metric you're looking at in terms of stabilization that gave you the confidence to make that statement.

So good question.

I didn't clarify that earlier.

Both the current quarter and the year-ago quarter were net favorable adjustments.

And in parsing that, there was no material up or downs in there on any segment or any program.

So there were some positives and negatives, as you'd expect, but nothing material.

So let's talk a minute.

And this just might be a good opportunity to give you a little bit of color on Bath.

And let me break that into 2 buckets, first, the DDG 1000 and then to your specific question on the 51s.

So we delivered the lead ship of the 1000 last May, and the final 2 ships of this class are demonstrating very good levels of ship-over-ship learning in terms of labor hour/performance, which is our prime metrics that we look at when we look at shipbuilding.

And in fact, we have experienced the best ship-to-ship learning curve we have ever seen at Bath on that program.

So to the extent that there was any risk, I believe that is behind us.

With respect to the 51s, just to give you a little bit of a background, we delivered the 115, which is -- was our first ship in -- after the 4-plus-year break in production.

We delivered that in February.

We just floated off the 116.

But let me give you a little color here.

That 4-year break caused us a bit of a challenge, which the DDG 1000 program exacerbated.

And I think, by way of illustration, a recent example can give you a sense of how we've managed through all of this.

For the DDG 1002, we had late equipment delivery into the shipyard that required us to re-phase our production, and it created a production gap between the 116 and the 118.

We will see some learning from ship-to-ship as we realize steady-state production on this.

But the costs associated with those challenges were recognized in 2016.

So going forward, I'm very comfortable that the performance at Bath has stabilized.

I like where they are.

The next question comes from Ron Epstein with Bank of America Merrill Lynch.

Phebe, just maybe shifting back towards Gulfstream but maybe from a different angle.

If Northrop were to win the J-Stars program, how do you think about the impact that could have on Gulfstream kind of across the business and specifically for the 550?

Well, it is our practice to refer any questions about J-Stars to the prime Northrop.

But with respect to the 550, let me take some license with a quote that Mark Twain said, that the reports of his demise were greatly exaggerated.

We have sufficient orders, both on the commercial side and international orders, for the 550 to keep that production line opened for the foreseeable future.

So J-Stars would be additive to that if in fact the Northrop team prevails.

So I very much like where we are in the 550.

Great.

And just maybe as a follow-up on that.

Broadly speaking, can you maybe characterize more what's going on in the wide-cabin market?

I mean, are you seeing any customer hesitation around tax reform, accelerated depreciation, that kind of thing?

Or are you seeing follow-through with the pickup in the market that seemed to really happen postelection?

So in the first quarter, our activity was pretty much as we've seen for the prior years.

But we had definitely seen, frankly, about the last solid year now, increased interest in our aircraft.

And the extent to which we execute on that interest and put all those planes into backlog, that's simply a question of timing.

But we're seeing some very nice demand for our products as we have for the last few years, but I do see an uptick.

For whatever set of reasons, different customers are motivated by a different economic reality.

The next question comes from Doug Harned with Bernstein Research.

I was interested in looking at the -- now you're getting close to the G500 going into service.

When you look at the ramp for that program, how would you compare that to what happened in the G650?

Are you looking at a sort of similar production increase over the next few years to the G650 ramp?

So if you recall, the 650 was the first aircraft that we had a purpose-built manufacturing facility to outfit the end-to-end green assembly and then outfit the airplanes.

We experienced and had quite a bit of learning around that, around how we performed during that period.

So when I think about the ramp-up on the 500, we've taken yet another purpose-built facility, applied the lessons learned on the 650.

And I expect, and our plan anticipates, that we'll have a very nice ramp-up, both in terms of volume and performance, relative to the 650.

So -- and I know there obviously were some problems on the ramp of the 650.

But if you look at the size of the program, say, and if things go smoothly, if they run smoothly for the 650, is this one that you'd look at a similar kind of a rate increase over time to the 650?

I think I'd see a little bit, in terms of timing and amount, a little bit faster.

But step back and think about the 500 and the 600.

When we entered into the test program, we had retired an enormous amount of risk even before we had our first flight.

And at every step of the way, on both of the 500 and now the 600, we have met or surpassed our milestones and the capabilities that we had designed into that airplane.

So the design maturity of even the test airplane is far in excess of what we saw in the 650.

So the disequilibrium that I think I talked about back in '13, where we had a bunch of 650s on the tarmac that we had to go back in and retrofit, we do not anticipate anything like that for the 500 and 600 simply because the test airplane were really manufactured to production standard.

So we won't go back.

And as we have had changes and updates in some design parameters, we've done those at that time.

So I don't anticipate -- in fact, there's nothing to indicate that we would see anything like we did in the 650.

Does that answer your question?

Yes.

(inaudible) and the purpose-built facility, because a lot of what happened in the 650, as you made some pretty dramatic improvements in manufacturing processes, and I know you've done a lot of work in that regard on the 500 and 600.

Would you characterize the potential to improve cost of manufacturing on the 500 and 600 as a step comparable to what you did from the 550 to the 650?

Should we see an improvement like that?

Well, given that we will start out at a higher rate, perhaps the incremental improvement plane-over-plane may be less than what we saw in the 650.

But I think that we are poised to have a very nice learning curve plane-over-plane in both programs.

And that's how we have -- all of the analysis that we have done in terms of production preplanning suggests that will be the case.

The next question comes from Howard Rubel with Jefferies.

I will just use the cash flow statement to ask about 4 questions.

No.

To be serious for a moment though, there's -- but to be serious, there are 2 points.

One, to go back to Doug's question a little bit, we didn't see a lot of increase in inventory.

And so if we're preparing for reasonable growth in -- or entry into service of the 500, can you explain the puts and the takes there?

And then second, the -- I thought at some point we would get some further advances from some of your international Combat Systems business.

And when might we expect that?

Are there some milestones related to that?

And then just one small follow-up item.

Could you talk about FirstNet for a moment?

I'm going to -- Howard, I'll take your first part of your question on the inventories.

This is one of the other many underlying subtleties of the new revenue recognition rule that we sort of maybe skipped over at the year-end conference call as we touched on the major muscle movers.

But in this case, we used to have a fairly -- in the balance sheet categorization, I'll try and be as quick as I can, of these accounts, we used to have what we called contracts in process that was almost exclusively related to the defense business and the inventory that you could pretty -- as a general statement, pretty closely correlate to the Aerospace business.

The new rules have us categorizing these 2 accounts as what we called unbilled receivables in inventories now.

And it now co-mingles some of the different pieces of the defense and commercial Aerospace businesses.

So there were some decreases in inventories associated with the defense businesses in the quarter, offsetting some of the increase that we've talked about in the Gulfstream business as we built up on the 500 and 600 programs.

So there's a little bit of netting going on in there that you're seeing.

But still the story on the Aerospace inventory build and the working capital is consistent with the production ramp we've talked about.

So turning to our international Combat Systems vehicle orders.

We have, up until this point, had milestone payments.

But we move in this quarter and the second quarter into payment on delivery.

So we anticipate that we will have a more regular order of cash on the unit of delivery.

And again, we are ahead of plan on our production, so I'm comfortable that the cash flow that we modeled at the beginning of these programs, we will execute on appropriately.

FirstNet, we have been careful to refer to general questions to AT&T, to whom we are a sub.

We consider this a potential growth market into the future for many years to come.

And again, it'll be a nice franchise for us.

The next question comes from Samuel Pearlstein with Wells Fargo.

I was wondering if you could talk about 2 different segments in terms of the guidance.

Just IS&T, why the revenue looked so weak this quarter.

And can you still get that back to up modestly for the year?

And I guess, if you can address Aerospace, the same thing with the margin, where it is this year.

It would seem as though your low 19s is a pretty low hurdle.

So let me address this in the inverse order.

We had a particularly outstanding quarter.

I think that was obvious.

We anticipate that we'll be at about a 20% margin in the second and third quarter and then a decline in the fourth quarter.

So as of today, we're still holding to our guidance.

With respect to the IS&T revenue, let me talk about 2 things here.

We had anticipated -- remember, these are 2 -- that the 2 businesses in that group are short-cycle businesses.

So we had anticipated a lighter-volume quarter.

It was a touch lighter than we had anticipated largely because as we changed administrations, there -- we had some slowdown in the execution of the contract line items in a number of particular programs.

So our view today is that we are very much poised to recover that, and we're holding to our guidance.

Let me touch a little bit about, though, and I think this might be an opportune time, talk to you a little bit about how we built the guidance for this year, and equally importantly, in the out years.

When we built our plan in the fall, we considered only those then-known programs.

We factored them accordingly and then built into our plans the attendant cash flow.

To the extent, across the defense portfolio, that we see additional funding, that represents upside to us.

That's true in combat, in the marine group and particularly in IS&T.

So I think understanding the context in which we built these plans will help you get some sense of our confidence in our revenue estimates for the year as we stand today.

The next question comes from Cai Von Rumohr with Cowen and Company.

So Phebe, as I thought I heard you talk about Gulfstream 500 certification flights into October and then certification 2 months later, are we talking about certification late in the year?

And is that consistent with still hitting some initial deliveries in the fourth quarter?

This has been -- there's nothing that has changed in our plan with respect to our certification from the FAA.

And I think we -- our plan anticipated, and we're on track to do that, one delivery.

We'll have multiple green airplanes, but just we are -- right now, we're looking at one completed entry into service airplane on the 500, again, consistent with what we have been anticipating.

Okay.

And then based on what you said about the margins at Gulfstream, I think on the first quarter -- on the fourth quarter call, you talked about the quarterly earnings pattern.

Given where you started the year, could you maybe update us?

Because if the margins are going to go down in the fourth quarter, on paper, that would seem to be a tougher compare.

One thing I think we talked about in January on the call was -- and I think we talked about it in light of the transition to the new revenue recognition rules, how we were anticipating having a stronger first quarter.

And Phebe went into that in her remarks about the green deliveries, the extra green deliveries in the fourth quarter of last year and how those would translate into more outfitted deliveries in the first quarter.

But as we then went out of the year, we had been anticipating green production, as she just discussed, of the 500s, the G500s, which would now be deferred till their outfitted deliveries into 2018.

So while the year guidance is what it is, the slope is a little bit different than perhaps typical with the stronger first quarter and a little bit of that shift in the fourth quarter because of that transition to the G500.

So I mean, I can't reverse engineer it for you here specifically, but I think that slope is what we alluded to at the end of the year and consistent with what Phebe just described earlier.

The next question comes from Jason Grusky (sic) [ Gursky ] with Citi.

Phebe, I wonder if you could spend a few minutes back on Aerospace and talk a little bit about services, aftermarket, sort of aviation.

Just maybe describe a little bit about the current demand environment, particularly on the completion side of things for jets, kind of what you're seeing in cycles and the aftermarket for the existing Gulfstream fleet.

And then talk a little bit about the longer-term outlook for your businesses.

There's some of the recent M&A activity we've seen there.

And some of the other investments that you're making.

And kind of what your view is on the longer-term growth outlook for the aerospace services?

So our aerospace services business did very well in the quarter, both in terms of volume and particularly Gulfstream in terms of volume and margin.

And the service business is somewhat cyclical.

But we have continued to improve our operating performance on our service end at Gulfstream.

With respect to jet, we've got a nice pipeline of opportunities in the quarter.

We do not -- they're a bit of a drag on a book-to-bill basis in the quarter, but we expect a strong second quarter on the completion side in terms of demand.

And the demand at jet has been -- Jet Aviation -- -- has been pretty consistent for the last couple of years.

It's somewhat lumpy.

So as we see the additions in the backlog of new orders, it has been a touch lumpy on the completion side.

On the services side, we are -- we've been making a series of very targeted small investments to augment our SBO capability and our managed fleet capability.

One of the things I'm particularly pleased about is that we've seen additional synergies between Gulfstream and Jet Aviation as we have matured and begun to provide them additional resources and assets to support Gulfstream worldwide.

And we're continuing in that path.

So completions business steady, a little lumpy in terms of order activities.

But on the service side, very -- we see nice growth in the future.

And we're very pleased with the performance of the investments we've made heretofore.

The next question comes from Myles Walton with Deutsche Bank.

Just wondered if I could circle on to Gulfstream just for a second.

The fourth quarter margin of 19%, is that more indicative of the completions that were carried over being better margins in the first half of '17 and the flow-in of kind of initial deliveries of the 500?

And what does that tell us about '18?

You've talked about the top line growth in '18, but I don't think you've said if the EBIT grows in '18.

So as it relates to the fourth quarter, I don't know if you can state it that simply.

As always, the quarter-to-quarter margin in the Aerospace business is going to be the result of a number of factors.

We've touched on them from time to time over the years.

Obviously, mix is an important part of that.

You alluded to that, so there's piece of that there.

But it's also the level of preowned activity, the service business, Jet Aviation, R&D.

All of those have meaningful points that can move you 10, 20, 30, 40 basis points in a given quarter on each of those particular items.

So I wouldn't chalk it up to any one influence, but that's what the mix is shaking out to be as we look at the fourth quarter.

So when you think about margins, well, and earnings, too, but -- let's go back a couple of years ago when we -- as we entered into this transition from the 455/550 to 500 and 600, we told you all that our goal was essentially flat earnings.

And we were going to accomplish that by feathering in some additional 650.

We've done that, but on top of which, we've had superior cost control at a nice operating leverage at Gulfstream.

So that's combined to allow us to meet that commitment.

As we go into next year, we are anticipating -- we haven't given you specific year-over-year guidance on margins, but we're going to bring down that 650 production a touch, as you would expect, as we move up the ramp on the 500 and then ultimately the 600.

So we're -- when you look at -- the past has to be prologued, and you look at the operating performance of Gulfstream, I am very comfortable that they'll do nicely on their margin performance.

But we're not going to get into 2018 details until we get a little bit further.

In fact, we'll do it at the end of the year, as is our constant practice.

The next question comes from Rob Stallard with Vertical Research.

Phebe, I was wondering if you could comment on this whole continuing resolution situation, whether you've seen any impact of the, particularly on your short-cycle businesses.

And what your expectations are that if this should drag on.

Well, the Congress -- the customer has made it quite clear to the Congress of the impacts on national security of failing to enact a budget.

That said, we've done an analysis of a potential full year CR, which we do not anticipate.

But if we actually experience a full year CR, the impact on our 2017 is not material.

So that tells you something about the strength of our backlog, by the way.

So there's been no impact in IS&T that you've seen so far?

There's not -- no, not yet, other than a little slow to execute on some of the contract task orders.

But we anticipate that increasing.

And the final question will come from Seth Sizeman (sic) [ Siefman ] with JPMorgan.

Phebe, I wonder if you could talk a little bit about the M&A landscape these days and whether anticipation of a growing defense budget causes you to look at anything differently or whether high valuations remain a deterrent.

So I have an answer that I've been giving for the last 4 years now into the fifth, and it's just we're not going to comment on M&A.

It's simply not appropriate.

You all understand the landscape.

And we haven't seen much changes in valuation.

So no real change.

Okay, fair enough.

And maybe I'll sneak in another quick one then.

And maybe as you talk about -- thinking about the business jet market and where you think about the opportunity is longer term, I guess, as you think about investing in new platforms.

Not necessarily a specific plan, but whether you'd think about smaller or larger.

And also your future plans for the G280.

Well, let's answer this in this regard because any more specificity is inappropriate.

You can expect that we will continue to have a robust R&D profile to fund new product development through now and into the future.

That's our business proposition.

And in that regard, we're going to stick to our knitting.

We're going to stick to our market in which we have excelled, and frankly, the only company to truly excel.

So steady as she goes, past is prologue.

Great.

Thank you for joining our call today.

If you have any additional questions, I can be reached at (703) 876-3311.

Have a good day.

The conference has now concluded.

thank you, for attending today's presentation.

You may now disconnect.