通用動力 (GD) 2018 Q1 法說會逐字稿

Good morning, and welcome to the General Dynamics First Quarter 2018 Earnings Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations.

Please go ahead.

Thank you, Chad, and good morning, everyone.

Welcome to the General Dynamics First Quarter 2018 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, Howard, and good morning.

I intend to keep my remarks on performance in the quarter somewhat brief since the results are relatively straightforward, pretty solid and the comparisons generally attractive.

I will, however, spend more time providing color around the business segments, and IS&T and Aerospace in particular.

For the quarter, we reported earnings per diluted share of $2.65 on revenues somewhat in excess of $7.5 billion, operating earnings of slightly over $1 billion and net earnings of $799 million.

All of the numbers that I'm about to give you, with reference to the first quarter 2017 for comparison purposes, are restated for the adoption of accounting standard update 2017-07 with respect to the presentation of retirement benefit costs.

So compared to the first quarter 2017, revenue was up $94 million or 1.3%, and operating earnings were down $38 million or 3.6% over the prior year's quarter.

The operating margin in the quarter was 13.4%, was very good, but did not compare favorably to last year's stellar first quarter of 14.1%.

On the other hand, net earnings of $799 million were up $36 million or 4.7% on the strength of a lower provision for income taxes.

EPS of $2.65 was $0.17 or 6.9% better than the year-ago quarter and $0.15 better than consensus.

We estimate that about half of that $0.15 beat was from operations in the form of higher-than-expected operating margin, and the remainder came from a lower-than-expected tax rate.

Now let me provide some additional granularity for you.

Our 3 defense segments posted very strong revenue growth of $343 million or 6.4% over the year-ago quarter.

The same was true with respect to earnings.

The defense segments' earnings grew $53 million or 8.8%.

Each of the defense groups grew both revenue and earnings over the year-ago period, demonstrating what we believe will be strong growth in our defense businesses across the board.

This leads quite naturally to a discussion of the Aerospace group.

Revenue in the quarter was $1.82 billion, and earnings were $346 million.

Aerospace revenue was down $249 million or 12%, and earnings were down $93 million or 21.2% on a 220 basis point contraction in margin.

These earnings were consistent with our guidance and pretty much is anticipated by consensus.

It would appear that Aerospace was somewhat lower on revenue, but higher on earnings and consensus.

In fact, we had planned to deliver 2 more aircraft in the quarter, a special mission G550 and a G280.

They were ready and scheduled for delivery in the quarter but were delayed for the convenience of the customer.

The G280 delivered during the first week of April.

The G550 will deliver in May to allow additional customer changes.

If we had managed those deliveries as planned, we would have been consistent with or slightly ahead of revenue expectations.

It was kind of difficult to work deliveries during the Easter week.

The same could be true -- the same could be said for completing orders during that week.

Nevertheless, Aerospace is right on plan for earnings and modestly behind on revenue, which will be caught up.

It was a simple timing problem on 2 deliveries.

It is also well to remember that our plan for revenue is back-end loaded with deliveries of G500 in the second half.

Orders for the group were reasonably typical of a first quarter.

In the quarter, the net orders were about $1.4 billion, and the dollar-based book-to-bill was 0.8:1.

This is consistent with what we have seen in the first quarter of 2013 through 2017.

There Aerospace average bookings for the first quarter of the last 5 years were $1.4 billion, a book-to-bill of about 0.7.

So it was a strong -- it was a quarter with strong sales pipeline replenishment.

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

I should also note that the activity has been good in April, with evidence of strong interest in North America and a growing opportunity set in Europe.

The reports from our people who attended the Asian Business Aviation Airshow were that the talk of Chinese tariffs on business jets was more of a media discussion.

It has not caused any deal discussions to stop.

In fact, it may have stimulated some near-term activity.

The Chinese customers believe that the question of tariffs will be resolved.

Other than that note of caution, we are optimistic about the market and our sales activity.

With respect to product development, our G500 continues to mature, moving closer to final certification this summer and entry into service only a few months after the original EIF we announced 4 years ago.

As you know, we have pursued simultaneous FAA and EASA certification requirements.

We have now completed key supplier component level test, which expanded the program as we developed configurations to meet regulatory requirements.

This work is now behind us.

This work, coupled with the G500 and G600 range enhancement testing, has added to our total program time but produced outstanding results.

We have recently completed tests for flights into known icing and high field elevation.

We have begun the last phase of our flight testing known as function and reliability testing.

The 300-hour function and reliability testing will complete the flying portion of the program.

The program will then shift to final docket -- document approval by the FAA.

To date, we have submitted 98% of the final certification documents to the FAA for review.

We expect certification in June or July.

We will begin pilot training with FlightSafety in August and commence deliveries later this year.

We remain on plan to meet our 2018 G500 planned customer deliveries.

This new technology aircraft with active control side sticks, touchscreen displays and fly-by-wire and continues to exceed our expectations.

As we progress closer to G500 certification, our testing has logged more than 4,000 hours.

The G600 is benefiting from all of these efforts, and we'll wrap up its certification in the second half of 2018.

We will begin deliveries of the G600 in 2019.

Our service business at Gulfstream remains strong, with very nice growth in the quarter and strong margins.

Second quarter loading is solid.

We expect solid performance for the year in this business, which is in excess of $1 billion in annual revenue.

We look forward to concluding the recently announced Hawker Pacific acquisition for Jet Aviation.

It's a very strategic acquisition for Jet and simultaneously helpful to Gulfstream in places where it does not have stand-alone Gulfstream support facilities.

Now let me turn to the defense side of the business, starting with Combat Systems.

Compared to the first quarter of 2017, sales at $1.44 billion were up $153 million or 11.9%, and operating earnings of $224 million were up $19 million or 9.3%.

There was strong performance across the board in each 1 of the 3 businesses within this group.

Sequentially, revenue was down $308 million, but operating earnings were down only $36 million on a 70 basis point improvement in operating margin.

This is a particularly difficult comparison on a revenue basis.

This group always had a very strong fourth quarter, largely related to contract deliveries at the end of the year.

With respect to the demand environment, the U.S. Army continues to fund readiness, which includes significant upgrades to our major weapon platforms, the Stryker and the Abrams main battle tank.

We are also seeing increases in funding for our munitions products, both domestically and internationally.

Internationally, our European-based business continues to have nice order activity throughout Europe and into parts of Africa.

Given Combat's large backlog, they still had nice order activity in the quarter of a 1:1.

Funded backlog at $17.1 billion was down only $32 million against the fourth quarter of 2017 and $68 million against the year-ago quarter.

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

Turning to IS&T.

This is going to be the last quarter we report to in this particular format.

I will do so here give you some numbers for the individual companies that make up the group, and then ask Jason to make some forward-looking statements that we think will be of assistance to you.

IS&T had revenue of $2.24 billion.

That is $90 million or 4.2% more than the year-ago quarter.

Earnings followed suit.

Operating earnings of $247 million were $11 million or 4.7% better than the year-ago quarter.

The operating margin of 11% was the same in both quarters.

Book-to-bill was once again about 1:1.

These results were very consistent with consensus.

IS&T total backlog has remained relatively constant over the past year.

At $8.8 billion, it is up $94 million against the year-ago quarter and down $60 million sequentially.

Funded backlog at $6.74 billion is up $57 million against the year-ago quarter and sequentially.

So a pretty good start to the year from a new business perspective.

Now to help get everybody on the same page, let me break down the revenue, operating earnings and operating margins in the quarter for each of the 2 businesses that made up IS&T, which will be reported separately going forward.

Mission Systems had revenue of $1.1 billion, operating earnings of $134 million and an operating margin of 12.2% in the quarter.

GDIT had revenue of $1.14 billion, operating earnings of $99 million and an operating margin of 8.7% in the quarter.

At this point, I'd like to turn to Jason to interject some comments about dividing the guidance we had given you in January for IS&T into each of the businesses, and then comment on the impact of CSRA on GDIT for the year.

As Phebe discussed, starting in the second quarter, we'll report the 2 IS&T businesses, Mission Systems and GDIT, separately.

To give you a sense of how to think about that, let me start with how those businesses comprise the original guidance we gave you for IS&T for the year.

For the full year, we expected IS&T revenue in the range of $9.3 billion to $9.4 billion with a margin rate of around 11%.

Mission Systems represents slightly more than half of those revenues, between $4.8 billion and $4.9 billion, while GDIT is approximately $4.5 billion of that forecast.

From a margin perspective, you can think about Mission Systems in the 13% to 14% range and GDIT in the high single-digit range, around 8%.

So with that as a baseline, how does CSRA impact GDIT for the year?

We closed the transaction on April 3, so we'll have 3 quarters of the year with the combined company.

We expect that to add approximately $3.6 billion in sales for the year.

The impact of the combined GDIT margins and the company's bottom line EPS will depend on the outcome of our purchase price allocation to intangible assets and the resulting amortization, which we'll have a better sense of this quarter and report to you on our second quarter call.

But at a macro level, we expect that after the onetime charge associated with the cost to complete this transaction, which will be approximately $80 million and be taken as a discrete item in the second quarter, CSRA will be breakeven to slightly accretive to our GAAP earnings per share starting in the third quarter.

Thanks, Jason.

Finally, let's turn to Marine systems.

Revenue of $2.03 billion was up $100 million or 5.2% against the year-ago quarter.

Importantly, revenue was up in each of the 3 shipyards.

Earnings were $184 million, a $23 million or 14.3% increase against the first quarter 2017.

Just like the revenue story, earnings were up in all the 3 shipyards.

The earnings performance was driven by a 9% operating margin, a 70 basis point improvement over first quarter 2017.

Sequentially, revenue was down $26 million or 1.3%.

But earnings were up $17 million, a strong 10.2% on a 90 basis point improvement in operating margin.

The backlog story here is very strong.

Total backlog at $23.8 billion is down $451 million sequentially, but funded backlog is up over $2.4 billion.

This is on the strength of $1.6 billion in orders in the quarter.

Electric Boat is continuing to work on its 27th Virginia-class submarine, and we are deep into the final engineering phase on the Columbia ballistic-missile submarine.

We began material purchases early this year to support construction on the first ship for Columbia forecast to begin full construction in 2020.

Bath is working down its learning curve on the restart DDG 51s and delivered the second DDG 1000 yesterday.

The last of the 3 DDG 1000s delivers in 2020.

NASSCO continues its strong performance on each of its class of Navy and commercial ships.

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

The first quarter should be received as a constructive building block to a good year.

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 work to consolidate our improvement and strive to continue to improve our results.

I'd now like to turn the call back to Jason for additional remarks about taxes, pension and cash.

Thanks, Phebe, and good morning.

First, a couple points on the income statement, starting with interest expense.

Net interest expense in the quarter was $27 million versus $25 million in the first quarter of 2017.

The increase was due to the slightly higher interest rate on a debt we refinanced late last year.

You'll note we ended the quarter with $2.5 billion of commercial paper outstanding in addition to the $4 billion of fixed-rate notes we had at the end of the year.

That CP was drawn in anticipation of the CSRA acquisition.

We had other expense in the quarter of $21 million compared with $11 million in the first quarter of last year.

This reflects the adoption of a new accounting standard that Phebe alluded to, ASU 2017-07, which requires us to report the nonservice cost portion of our pension expense in other income and expense.

That's what you see reflected in the quarter, and the 2017 numbers have been adjusted for a comparable reporting.

This new rule is nothing more than a modification to the geography of our pension, income and expense on the income statement.

No impact to the aggregate amount of income or expense.

One more point on the subject of pensions.

We noted on our fourth quarter earnings call that we were considering making additional pension contributions this year in light of the benefits afforded by the recent tax reform.

After finalizing that analysis, we're now planning to make approximately $550 million in pension contributions this year, up from our original plan of $300 million.

That $250 million increase will, of course, impact our operating cash forecast, which I'll touch on in just a minute.

But before I go there, one more point on the income statement.

Our effective tax rate was 16.8% for the quarter.

While our full year tax rate guidance was 19%, the lower first quarter rate was anticipated in that guidance based on the timing of divesting of our restricted stock and the associated tax benefit.

So the lower rate in the quarter is consistent with our full year tax rate forecast, which remains unchanged at 19%.

Of course, with the lower first quarter rate, you can impute a slightly higher than 19% rate for the balance of the year to end up with 19% for the full year.

On the capital deployment front, we paid $250 million in dividends and spent just shy of $270 million to repurchase 1.2 million shares of our common stock in the quarter.

We plan to acquire enough shares in 2018 to hold our share count steady.

Otherwise, we anticipate deploying our remaining free cash flow to pay down our short-term borrowings used to acquire CSRA.

We ended the quarter with a cash balance of $4.3 billion on the balance sheet and a net debt position of $2.1 billion, including the $2.5 billion of commercial paper I mentioned earlier.

On the subject of cash, our operating activities used cash of roughly $500 million in the quarter.

This reflects the timing of payments from customers and 2 suppliers and doesn't affect our full year outlook for cash from operations, which remains unchanged, but for the additional pension contributions I discussed earlier and of course, the addition of CSRA, which we'll give you a more granular sense of when we update our full year guidance in July.

Howard, that concludes my remarks.

I'll turn it back over to you for the Q&A.

Thanks, Jason.

As a 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.

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

(Operator Instructions) The first question comes from Carter Copeland with Melius Research.

Just a quick question on the Aerospace margins in the quarter.

Just given the work you got going on and a little bit of concurrency on the G500, is there anything we should note in terms of additional R&D expense or interperiod expense that we should consider there?

Yes.

So the margins in the quarter were driven by a couple of things, productivity and our large cabin.

We had improved margin in our services due to mix at Gulfstream, and net R&D was down somewhat sequentially from fourth quarter 2017.

The next question comes from Matt McConnell of RBC Capital.

So the CSRA contribution of about $3.6 billion, it looks like that would be down a bit versus what CSRA did in the comparable period, the three-quarter period in the prior year.

And they'd been guiding to organic growth, plus they have a couple of small deals in there.

Could you just share what you're seeing in that business?

Am I correct that, that would be a little bit of a year-over-year revenue decline for CSRA?

There's actually a couple of moving parts in the there.

First, we do have, and I believe we've discussed before, a little bit of OCI business that we've got to divest of and we're in the process of making that happen now.

So that will take a little bit out of the top line number you're referring to.

The other element of it is, of course, CSRA was on a fiscal year ending March 31.

So if you look at the pattern of their revenue, it was at its peak in their fourth quarter.

So when we talked about the first full year guidance and they talked about their next year's guidance, that went the 9 months of this year that we'll have them plus the first quarter of next year.

So when you normalize for sort of that seasonality and their revenue curve, the numbers we're projecting are right on with the previous estimates you heard from them.

The next question will be from David Strauss with Barclays.

Phebe, I wanted to ask you about the fiscal '18 budget.

It looks like all of your key programs were well funded, particularly on the Combat Systems side.

Could you talk about the upside that you guys saw in the budget relative to what you were thinking and what that might mean for your longer-term forecast for Combat?

Because I don't think you had baked in there much for U.S. Army recapitalization.

Well, actually, we had -- given that we're so close to our customer, we had anticipated their funding increases, both in the readiness accounts, which we see in our OTS munitions line, and then upgrades to our major platforms, Stryker and Abrams.

So there was no particular surprise in '18 beyond what we had anticipated.

We get insight into the budget deliberations relatively early on and had planned accordingly.

So Stryker and Abrams in particular are doing quite well and were nicely funded in the budget and consistent with what we anticipated.

So no real surprises, which is exactly what you want.

The next question will be from Cai Von Rumohr with Cowen & Company.

So Phebe, in the past, you've talked about the problems with the G650 kind of doing the completions before cert and all the problems that caused.

And you said you wouldn't start completions until you receive the cert.

What does that imply for the deliveries in the remainder of the year?

And I assume that means mid- to late fourth quarter because it takes, what, 4 to 6 months for initial completions.

And secondly, now that you're approaching the cert, are we likely to see the orders pick up as you can take customers flying with you?

So the 650 was a different case.

We had built a fair number of green airplanes and had considerable FAA regulatory changes that we had to make.

That pattern has not repeated here.

This was a very mature program having run through all of our tests.

Frankly, the changes that we've made to the original aircraft have all been manageable.

So with respect to timing, we're -- in the 650, we had a delay from cert to delivery.

We don't expect that in this case.

We'll be ready to go with only some minor changes and very manageable on the 500s that we've got in service.

And frankly, we'll deliver.

Frankly, our order activity has been quite nice.

We're well over 50 orders on the 500 and close to that on the 600.

So don't -- our deliveries will be backwards-loaded, but really think the second half not the fourth quarter.

They will come pretty quickly coming off the line, all right?

The next question comes from George Shapiro with Shapiro Research.

Phebe, can you update deliveries for the year at Gulfstream?

Now -- and you had been saying you would deliver a few less 650s.

But given that the 500 is going to deliver a little bit later, are we still see somewhat less 650s or not as much?

Yes.

We're not changing the mix of our build plan at all.

We have exactly the same number of 650s that we had anticipated.

We're not moving off of our deliveries.

We'll be right in that range, maybe 1 or 2, depending on customer preferences.

The 500 -- the couple of months delay we've had in certification from our original estimate has really had no, 0, impact on our deliveries forecast for 2018.

Next up is Peter Arment with Baird.

Phebe, a question just, I guess, speaking on Gulfstream.

Maybe you could just update us.

You kind of highlighted that you've had kind of exactly what you planned in terms of order activity for the first quarter and you had a really strong fourth quarter.

But maybe we're 4, 5 months into this tax reform, and are you seeing any differences between domestic and international?

Maybe just give us some color on what you're seeing on -- in demand.

Sure.

So the demand in Gulfstream is quite nice, and I think you quite accurately posited that.

Tax form has certainly helped.

We have very strong order activity in North America and increasingly strong in Europe, by the way.

But we attribute our North American order activity to a number of factors: our long-term customers replenishing their fleet as well as the incremental benefit to cash flow from tax reform.

So frankly, all solitary impact for us.

The next question comes from Sam Pearlstein with Wells Fargo.

Can you talk a little bit about free cash flow?

I know some of it is timing, but it seems like across the board, whether it's unbilled, receivables, payables, inventory.

Cash flow seemed weak.

How much was the G500 delay in there?

And I know you mentioned the higher pension.

If you ex the higher pension, can -- could you still get to the 100% conversion?

And lastly, if you can talk about how CSRA impacts cash, that would be helpful.

Okay.

So I think the bottom line is with respect to the cash in the quarter, as you pointed out, it's a variety of the working capital accounts, but it really is nothing more than timing.

It's payments from customers and payments to suppliers.

But frankly, it was largely profiled for the quarter.

We anticipated a softer first quarter this year within the forecast we originally gave you.

Part of that is the continued build at Gulfstream.

But again, nothing outsized or outside of our original plan.

So all of that is par for the course and everything we expected in the first 3 months of the year.

We did have a billing system implementation in a business unit that caused the catch-up, and that's already been caught up in the month of April so we're back on track there.

So I feel very good about the cash forecast we gave you.

As it relates to pension contributions, we really don't think about it in this point in terms of free cash flow conversion as a percent of net income.

Because as we talked about, that's a metric.

That 100% number is a metric that it's interesting to talk about.

But in a period of growth and investment in the company, I think it's more constructive to talk about the strength of our operating cash conversion, and then how we're going to deploy that operating cash for the growth of the company.

So as I said, everything remains consistent with our original plan from an operating cash generation standpoint.

CSRA will contribute nicely to that.

There's a number of factors that obviously have to be finalized.

We've had that business now closed for about 3 weeks, so we're still closing the books on their fiscal 2018 and working out the finer details of the implications of that for the year.

But I think suffice it to say right now, the cash accretion we anticipate from CSRA is looking to be better than what we modeled in our valuation and deal forecast when we came through due diligence.

So I feel bullish about the contribution they'll make for us this year.

And remember, our -- one of our rationales for both liking IT services and buying CSRA is IT services companies have very strong cash conversion.

And so I'm -- CSRA will add nicely to it.

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

Quick question for you.

It seems like some of your suppliers on the 500 program have struggled to meet the targets that you need to for delivery for you guys.

Can you expand at all on what has been the difficulty in the supply chain?

Well, we've had very few issues with any of our key suppliers.

I will not discuss our suppliers' supply chain.

I think you got some color on that from the UTC call yesterday.

But it's -- our suppliers had done a good job managing their supply chain and will continue to do that.

So frankly, the -- our supply chain is geared up nicely to support our expected deliveries on our new airplanes as well as continue to perform on our existing air fleet.

So you're comfortable from here forward that everything is kind of stable?

Yes, we are.

We're going to enter into service, as I told you on the 500 and the 600 to follow not long thereafter.

And the supply chain supports that.

The next question comes from Robert Spingarn with Crédit Suisse.

So Phebe, you mentioned Bath briefly in your prepared remarks, and you noted some of the milestones on the destroyers up there and some progress on the learning curve.

But recently, the Navy still seems to suggest that this is your one yard with operational upsides.

So I was wondering if you could give us some more detail on how the learning curve progresses from here and how the margins might benefit from that, especially as you continue to mature on the Flight III DDG 51.

Sure.

So the margin performance on the 1000 program has been quite nice with excellent ship-over-ship learning.

Our performance on the restart starting with the 116 has proceeded according to our plan, and we're continuing to see learning and improvements on the whole overhaul.

So on the -- and we have a number of Flight IIAs still in the queue.

Our work on the Flight III, which we got appropriated and contracted with us late last year, continues to go very well.

We're in detailed design and the early stages of the manufacturing work papers.

And again, our learning on the haul continues nicely apace.

So that shipyard has had some issues, which we've talked about in the past, but we are comfortable that is largely behind us.

And we're going to continue to do well as we go forward on what are really legacy platforms for us after we got that line restarted from a dead stop.

Is there any way to quantify what margins would look like in Marine once that yard is back where you want it?

Well, that's going to be a complicated question because you've got an increased mix in Columbia, which will be cost-plus through the duration of our planned period and then into the next as we move from our engineering and detailed design into the early phase of construction and full rate construction.

So that's -- our margins are going to bump around in, I'd say, anywhere between the 8% and 10% on any given quarter, depending on the mix of Columbia.

It's a cost-plus work in the middle of it.

So that rather dwarfs incremental improvement.

That said, we expect our shipyards to get better quarter-after-quarter, and Bath is doing precisely that.

Our next question comes from Pete Skibitski with Drexel Hamilton.

Phebe, can you talk more about Aerospace as kind of continuing to drive into the biz jet aftermarket?

I think you announced a bunch of service center expansions in Savannah and Appleton, and Van Nuys, either during the quarter or after, and then, of course, the Hawker deal.

Just wondering, is this you guys just trying to get more access to your own jets?

Or does the market growth seem really strong?

And kind of number two, are these moves kind of dilutive or accretive to overall Aerospace margins?

You mean the service business in general?

Right.

Okay.

So look, as our fleet has grown and flying hours have increased, it is incumbent upon us to increase our services to our customers.

Our customers expect Gulfstream service and the excellence implied with Gulfstream service, and we're delivering it.

So we continue -- we anticipate continued growth in that market as our feet increases.

And frankly, while on any given quarter the service margin, let's just talk about Gulfstream for a second, may be slightly dilutive to new airplane margins, they're very wholesome.

And the margins of service are really depending on -- depend on a number of things.

The loading at the service centers and the mix.

So it tends to move around a fair amount, but we really like this business.

And it's key to continuing to satisfy our customer needs.

So we're going to expand it and expand it accordingly.

With respect to Jet Aviation, we have added service capacity, again, to support Gulfstream's expanded footprint, particularly outside the United States, where Gulfstream doesn't have an existing capability.

So in the case of the Hawker acquisition, we added 6 FBOs, 14 maintenance facilities and over 400,000 square feet of hangar space.

So again, this is all in an attempt to support Gulfstream sales as our fleet increases, and I think we're doing that quite nicely and quite deliberatively.

By the way, this aircraft services business is a relatively low-risk business.

And if you think about Jet Aviation, I like our service business because it is low risk and very nice margins and great cash flow.

So all good from that perspective.

The next question will come from Doug Harned with Bernstein.

I'm interested now that we're getting close to the G500 and then the 600 coming out.

When you look at over the next few years where you see G650 demand going, delivery is going, how do you see that trending?

You've got the Global 7000 coming out.

You've got your G600.

Do you see either of those as having an effect on the rate for the G650?

In neither instance.

Look, I don't much pay -- don't pay much attention to other people's airplanes, but the 650 sales had been very fulsome.

We continue to have -- anticipate that, that airplane will sell.

It has an important market that, frankly, can't be satisfied by any other airplanes in terms of speed and range and the success of that platform.

And the G600 is in a completely different market space.

So we think as we design these airplanes and thought about the replacement of our legacy 450 and 550, each one of these airplanes fits a very different kind of mission.

So we think this is all additive and not an issue for the 650.

Do you see the trend line here as -- I mean, do you see it as being a pretty stable delivery outlook over the next few years then for the 650?

I do.

Recall, however, that we were going to, as we fettered in 650 deliveries, to cover the decrease in the 450 and elimination of the 450 line and then low-rate production on the 550.

We will begin to take a few out over the next few years on a general float, consistent with what we told you I think at your conference 2 years ago.

The next question is from Noah Poponak of Goldman Sachs.

Phebe, if I could just follow up on that last question from Doug.

Recognizing that you want to focus on your own portfolio and not on others, as you mentioned, the Global 7000 is a pretty significant competitor.

In your view.

That is a hypothesis.

It remains to be seen.

That's really my question.

That's why, frankly, I don't look at anybody else's airplanes because it's our business to sell our airplane into our market, and we've been very successful at that.

Right.

So I mean, that's really my question is, is it a competitive aircraft?

I mean, certainly, just looking high level at specification and price range, it looks that way.

And so I was hoping you could elaborate on what the differences are, what your customers say the differences are that allow it to be -- drive them to actually be more different than they can appear on the surface.

Well, you have an airplane that has been in service now for -- since 2012.

That's 5 years.

We have 400 in service now, and nobody else is the competitor airplane.

And it remains to be seen whether the 7000 is an issue at all for Gulfstream, but we have not lost a single sale to date to the 7000.

So again, I think you all can worry about that to your heart's content.

But the fact of the matter is this is a very, very effective airplane with a capability set in range and speed that has proven unequal.

So we worry about what we control and what we see, so all good for the 650.

That question comes from Seth Seifman with JPMorgan.

Maybe just a quick 2-parter related to the CSRA deal.

Can you talk a little bit about the JEDI contract and potentially what that means for CSRA and how CSRA may or may not be involved?

And then, Jason, can you talk about what the ongoing interest expense is going to be once the deal is done?

Sure.

CSRA won a -- the milCloud contract and anticipates teaming with a number of our traditional teammates as we look at JEDI.

But milCloud will have to be an important part of whatever happens with the conversion of the overarching DoD network.

So we're comfortable in where we are.

We've got strong partnerships in place from our folks who live in the IT services business today and some nontraditional.

By the way, the "nontraditional" guys have been with us for years, so I see this as well within our normal experience set.

But we'll see.

We'll see as it all comes out.

I think that contract is due out sometime in the next couple of months, and we'll see how all that shapes out.

And as it relates to your question on interest expense, that's one of the moving parts that we have to pin down.

We obviously haven't gone to the market for that yet.

That will occur next month.

And once we do that, we'll have -- that will be part of the factors that will allow us to give you a more granular sense of the bottom line impact of the deal.

Right now, what we're seeing in terms of our pulse of the market and the rates we're seeing out there, it's all consistent and well within the parameters we established when we priced the deal.

So we're very comfortable with where that is right now.

Operator, with that, we'll end the call.

Thank you all very much for joining us today.

And if you have any additional questions, I can be reached at (703) 876-3117.

Thank you again.