General Dynamics Corporation

Good morning and welcome to the General Dynamics third quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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, sir.

Thank you, Rocco, and good morning to everyone. Welcome to the General Dynamics Third Quarter 2019 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, it's my pleasure to turn the call over to our Chairman and Chief Executive Officer, Phoebe Novakovic.

Thanks, Howard, and good morning. As you can discern from our press release, we delivered attractive third quarter results with revenue of $9.76 billion. operating earnings of $1.216 billion, and net earnings from continuing operations of $913 million. We reported EPS of $3.14 per diluted share, $0.25 a share better than the year-ago quarter, and $0.37 per share better than the second quarter this year. Compared to the year-ago quarter, revenue was up $667 million, or 7.3%. By the way, We have enjoyed top-line growth every quarter for the past 12 consecutive quarters on a year-over-year basis. Earnings from continuing operations of $913 million were up $49 million, or 5.7%, on a 7.1% improvement in operating earnings, partially offset by a higher effective tax rate and lower pension income. Operating margins returned to the 12.5% level. Sequentially, revenue was up $206 million, or 2.2%, and operating earnings were up $126 million, or 11.6% on higher operating margins. In short, we had significant sequential margin improvements. With respect to consensus, our margin rate was 40 basis points higher than forecasted by the south side. This was offset in part by below-the-line items, leaving our EPS 7 cents better than consensus. The difference was provided by stronger operating earnings. With respect to cash, we had net cash provided by operating activities of $1,091 million and free cash flow of $847 million. As you can see from the charts attached to the press release, we enjoyed a good quarter with a one-to-one book-to-bill. Total backlog of $67.4 billion decreased to $158 million, or about a third of 1%. I'll have more to say about order intake as I discuss the separate operating segments, and Jason will give you some color about cash and backlog in his remarks. Let me turn very briefly to the year-to-date 2019 compared to the first nine months of 2018. Revenue was up. 2.8 billion or 10.7% against the first three quarters of 2018, driven by strong organic growth plus the acquisition of CSRA at the beginning of the second quarter last year. To say it another way for clarity, CSRA's attributed revenue was in every 2018 quarter but the first. Operating earnings were up 89 million or 2.8%. EPS was 31 cents better. In short, we delivered good sequential improvement and a good first nine months. Essentially, we were on track to our internal plan and external expectations. So let me give you some perspective on the segment reporting for the quarter and the year to date. First, aerospace. Aerospace had a very good quarter in most important respects. Revenue of $2.5 billion was 23% higher than the year-ago quarter. Operating earnings of $393 million were $17 million or 4.5% higher on lower margins related to mix as fully expected. Let me give you a little color here with the quarter-over-quarter comparisons concerning earnings and operating margin. You may recall that the aerospace segment had a strong third quarter last year with 18.5% operating margin against 15.8% this quarter. This delta is driven only in part by mix. The third quarter of 2018 contained a positive non-recurring settlement with the supplier. On a sequential basis, the story is even better. Revenue was up $359 million or 16.8% and earnings were up $62 million or 18.7%. on a 30 basis point improvement in operating margin. Excluding pre-owned sales from both periods results in a 70 basis point sequential improvement in aerospace margin. The past quarter saw the first G600 deliveries in the quarter. Over 30% of our large cabin deliveries were comprised of new product, which is notably higher than the second quarter of 2019. So despite the challenges of MIPS, we are making good progress. We are focused on aligning our costs with our operating cadence. The G600 earned both its type and production certification on June 28, 2019. We have commenced deliveries and expect to approach double-digit total this year. This will help both revenue and earnings in the balance of the year and improve working capital turns. EASA validation for this G500 was received on October 11th, and the 600 validation is targeted for December 12th. With respect to orders, we had a booked bill of 0.7 to 1 in the quarter. Activity and interest ranged between very attractive to robust, but the process and time to closure of transactions was slower. We expect, as you would guess, a very strong order activity in the fourth quarter. you are undoubtedly aware of the announcement of the all-new G700. The materials related to this program and its specifications are publicly available. It is an expansion of our product line that brings advances in aviotics and aerodynamics to create an industry leader. The G700 incorporates new engines, new winglets, and brand-new avionics from the G500 and 600 series. The development of this plane is quite mature, and we expect first flight in December. The announcement of the G700 has cleared up some of the mystery and has, in some respects, stimulated G650 discussions. All in all, we are doing quite well at aerospace. Turning to combat systems, we had a good quarter, as the relative comparisons clearly indicate. Revenue of $1.74 billion was up $217 million over the third quarter of last year, or 14.2%. Similarly, operating earnings of $264 million were up $23 million, or 9.5%, over the third quarter of 2018. On a sequential basis, the story is similar. Revenue was up $81 million, or 5%, and operating earnings were up $22 million, a 9.1% increase. Combat systems margins returned to the 15-plus neighborhood. On a year-to-date basis, revenue was up $538 million, or 12% against the same period of 2018. However, operating earnings are only $11 million, or 1.6% higher. NICs and a one-time settlement of lease litigation in the first quarter explain why profits have expanded more slowly than revenue. We expect very good operating leverage in the final period of the year. I think it's worth noting that Combat Systems has enjoyed a year-over-year growth in 11 of the past 12 quarters. Our existing U.S.-based programs continue to perform well, with Abrams volumes up, strong striker business, and nice growth in the ordnance and munitions portfolios. In the aggregate, our U.S. government volume accounted for 57% of revenue year-to-date, compared with 49% in the first three quarters of 2018, underscoring the shift in mix. Army demand to upgrade our platforms in the coming year is manifesting itself in explicit program direction for the tank and striker, which puts us in good stead for continued growth. Furthermore, we recognize the Army set a high bar for the OMSC program, and we are focused on delivering a superior solution to replace the Bradley Fighting Vehicle. Our international programs continue to progress nicely. Work on the UK AJAX program is transitioning from engineering to test and then to full production. Live fire testing has been successful, and we entered into reliability testing in the third quarter of this year. We expect to enter steady-state production this year and continue through 2024. Combat systems enhanced their backlog this quarter with a book-to-bill of 1.3 to 1. The Government of Canada ordered 360 armored combat support vehicles for $1.3 billion. Work has begun on the program, and we expect to begin deliveries in Q1 of 2021. ELS is negotiating a contract with the Spanish Government to deliver the first tranche of 348 Piranha 5 vehicles. As a consequence, we have a very good line of sight for production planning and for driving continuous improvement in all businesses in this segment. We are turning in the right direction at Combat Systems. Every one of our businesses in this segment is on the move. With respect to the Marine Group, revenue of $2.24 billion was $232 million, or 11.6% higher than at Q3 a year ago. Operating earnings were up 40 million or 23.7% against the year-ago quarter, due in part to the progress toward closing out Virginia Class Block 3 and better year-over-year earnings at NASCO. On a sequential basis, revenue was down 90 million due to timing. Operating earnings were up 12 million. For the first three quarters of the year, revenue of $6.6 billion was up $413 million, or 6.7%, against the same three quarters of 2018. Operating earnings were $38 million better on a 10-voice basis point improvement in margin rates. Similar to combat systems, the Marine Group has enjoyed year-over-year growth in nine of the past ten quarters. Work on our submarine programs, the Virginia-class construction and engineering on Columbia ballistic missile submarine continues to make good progress. We have completed the design of Columbia and are 54% complete on the production drawings, which reflects good progress. Virginia-class Block 4 work remains steady. Volume at EB has been driven by early work on Virginia Block 5 in Columbia. We expect the plot contract to be awarded this year, resulting in a considerable addition to backlog. With respect to BAS, the challenges on the first DDG-1000 ship and the DDG-51 restart ships are behind us, with nice performance on the 1001 and 2 and the follow-on DDG-51 ships. We have 11 DDG-51 ships in backlog. with a very good opportunity to improve performance steadily across this large backlog. Finally, revenue at NASCO for the quarter was up due to higher repair volumes. Similarly, year-to-date volumes were up due to higher repair and work on the TAO class oiler program. We also expect the first two Madsen ships and the ESB-5 to deliver in the fourth quarter. In all, Marine Systems has been a compelling growth story for us and will continue to be so for a long time to come. Our focus going forward is operating efficiency and margin improvement over this very large backlog. For Mission Systems, Mission Systems had revenue of $1.2 billion in the quarter, flat with the year-ago results. Earnings of $187 million were up $6 million against the third quarter last year. Margins were an impressive 60 basis points higher. Sequentially, margins of 15.2% were up on the even more impressive 250 basis points. On a year-to-date basis, mission systems revenue was up $180 million, or 5.2%. Earnings for the nine months were up $17 million versus the first nine months of last year. Mission Systems has been a high-performance business for us and will continue to be so. It has enjoyed a book-to-bill of at least one-to-one in 2016, 2017, and 2018 and stands above one-to-one at the three-quarter mark in 2019. Its wins have been broad-based, reflect its capabilities in space, communication, and sophisticated command and control solutions. Information technology reported revenue of $2.1 billion in the third quarter, down $236 million against the year-ago quarter. This is largely a result of the divestitures made in the segment. Operating earnings were up $146 million, down $11 million, despite a modest improvement in margin rates. The results were somewhat lower than expected as the company entered into a termination settlement related to its exit of a non-core line of business. Absent that charge, earnings and margin would have more appropriately reflected the progress we have made in combining CSRA with GDIT. Our integration of CSRA into GDIT has gone very well and is ahead of our internal schedule. Our management team pulled from both businesses this job very nicely. We are meeting cost synergies and are working to exceed this year's goals. To that end, we have continued to generate good bookings. In the quarter, we generated $2.38 billion for a book-to-bill of 1.2 to 1. For the nine months, our book-to-bill was 1.2 to 1. Our nine-month booking for 2019 are nearly 8% higher than those captured during the first three quarters of 2018. Our total backlog of $9.16 billion is up 15% from the start of the year. The strong order activity comes in the face of a protracted procurement cycle. GDIT has close to a billion dollars in awarded contracts that have been delayed by protests. and over half of the $65 billion in outstanding awards that the customer had expected have slipped to the right. The underlying metrics of this business remain solid. Cash flow continues to be strong. GDIT generated robust free cash flow to imputed net income of over 190% this quarter, despite controlled investments in customer infrastructure and restructuring expenses. So to offer a summary on the performance of all of the defense businesses, operating earnings have grown over 8% in the quarter on a nearly 3% advance in revenue. Excluding the divestiture of the call center's business, the organic growth rate for revenue and operating profit are about 1 to 2 points higher. Booked a bill for the defense operations was 1.1 to 1 in the quarter. Orders are just shy of $8 billion. on a revenue of $7.27 billion for the quarter. For the nine months, defense bookings have essentially kept pace with approximately 8% in revenue growth. So I don't think I have any changes to make with respect to our prior guidance. We seem to be right on track with the comprehensive outlook I gave you last quarter. And finally, in closing, As tempting as it may be at this time of year for you to ask about next year, let me just remind you that we have our planning process later this fall when the businesses get better insight into the upcoming year. The guidance that we give you in January, as of last January, is grounded in that process and, as a result, will be full and thorough. So I don't want to prematurely piecemeal next year at this juncture. You'll hear from me in detail in January. It's been our custom for many, many years. So let me turn over the call to our CFO, Jason Aiken.

Thank you, Phoebe, and good morning. Our net interest expense in the third quarter was $114 million in both 2019 and 2018. That brings net interest expense to $350 million for the first nine months of the year, compared to $244 million for the same period in 2018. The increase in 2019 is due primarily to the debt we issued at the end of the first quarter of 2018 to finance the acquisition of CSRA. We've also been carrying a higher than anticipated commercial paper balance through the first nine months as we continue to work to resolve an outstanding receivable balance on one of our large international vehicle programs that's been outstanding since the fourth quarter of last year. As Phoebe mentioned, our cash from operations in the quarter was $1.1 billion, and our free cash flow was $847 million, a 93% conversion rate. The cash performance in the quarter reflected some progress on the international receivables I just mentioned. That said, we still have work to do to resolve the balance of the arrears. We're continuing to work this issue with the customer and expect to have the matter resolved by the end of the year. Assuming these outstanding payments come in this year, we still expect full-year free cash flow conversion to be well in excess of 100% of net income. Notwithstanding the progress made in the quarter, cash flow continued to be impacted by OWC growth at Gulfstream, for reasons you now know, and at Electric Boat. EB has been operating under an Undefinitized Contract Action, or UCA, on the 5th Virginia Class block as we continue to work with the Navy to get that effort under contract. Until we get that contract executed, our progress billings are temporarily limited. We expect that situation to unwind with the receipt of the Block 5 contract in the fourth quarter. On the capital deployment front, capital expenditures were $244 million in the quarter, or 2.5% of revenues, reflecting the investment in our shipyards to support the significant growth that's on the horizon. We also paid $295 million in dividends in the quarter, We ended the quarter with a cash balance of $974 million on the balance sheet and a net debt position of $12.7 billion. We expect to use our free cash flow to repay our outstanding commercial paper balance by the end of this year. In addition, we have a tranche of fixed and floating rate notes maturing in the second quarter of next year, so our focus in the moment, beyond internal investment and the dividend, will be repaying this debt. Our effective tax rate in the quarter was 16.2%. reflecting greater foreign tax benefits than previously expected, driven by the strength of our international operations. With a rate of 17.5% for the first nine months, we are lowering our anticipated full-year tax rate by 50 basis points to the mid-17% range. As a result of current market conditions, we've adjusted our assumptions for pension costs and recognized in the third quarter an increase in the expense associated with our non-qualified plans. The impact of the increased pension expense and the lower tax rate I just discussed offset each other relative to our full-year outlook. And one last point of color on the backlog at the end of the quarter, specifically at Combat Systems. We continue to experience a drag on that group's backlog balance due to the FX impact of the strength of the U.S. dollar. Specifically, Combat Systems has experienced a reduction in backlog of more than $400 million in the first nine months of the year. Despite this headwind, the group's backlog remains very strong at more than two times annual sales. 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 one question and one follow-up question so that everyone has a chance to participate. Rocco, could you please remind participants how to enter the queue?

Absolutely, sir. To ask a question, you may press star then 1 on your telephone keypad. If you are using the speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Today's first question comes from David Strauss of Barclays. Please go ahead.

Good morning.

Hi, David.

Phoebe, I wanted to touch on the G700 and how that potentially impacts the prior guidance that you've given with regard to Gulfstream, where I believe you talked about EBIT growing a little bit in 20, but then growing significantly in 21 and margins approaching the high double-digit range again. How is the G700 all factored into that?

So, no, because we expect the entry into service several years out. But I think it might be opportune just to remind you guys how we're really thinking about the portfolio of our airplanes in our operating strategy. So, as you know, we've had a plan for the past several years to bring down the 650 production and increase 500 and 600, and we're doing that completely independently of the 700s. We've been pretty voluble about the fact that G60 production and deliveries will be reduced next year and again the following year. So that will get production and delivery consistent with current demand. And on that score, we've had a very consistent order book for the 650 over the past three to four years. And as you know, we've had the benefit of a large backlog that we've been able to work down over time. So just to be clear, this has nothing to do with the 700 launch announcement. This was planned long ago. Our job is to balance the lost revenue and earnings from the planned reduction of G650 deliveries with an increased flow from 500 and 600 to keep earnings stable. By the way, this ain't without risk, but it comes with ample opportunity. And as I said, this has been a consistent plan and it remains our plan. And then as the G700 enters into service, that will then become another factor in our long-range, you know, earnings and revenue growth.

Okay. I guess just asking a different way, that prior guidance that you've given for Gulfstream for 20 and 21, does that still hold? Yes.

Well, I don't think we've given guidance per se, but we've indicated that we'll continue to grow our top line and our bottom line as we've made that, making this transition. I think the bottom line will be a little bit slower growth simply because we are managing that transition from the 650s. to the 500 and 600, but our idea is to stabilize earnings with this transition. And we've done that and we'll continue to do that. So I think when you think about the business going forward, this is the strategy that has driven our behavior today and will drive it on a going forward basis. So that ought to inform how you're thinking about our performance going forward.

Thank you. Our next question today comes from Peter Arment of Baird. Please go ahead.

Yes, thanks. Good morning, Phoebe. Just to follow up, just a question on the G700. You've always talked about the kind of dedicated production for the G500, G600. You started a dedicated production facility with the G650. How should we think about that with the G700? Is that going to be feathered in? Thanks.

Yeah. Well, it won't necessarily be feathered in, but to your question about do we have a dedicated production facility and line, we do. So you'd expect the type of learning that we've seen on our other platforms on the 700 is they come down our learning curve, increase production and come down our learning curve. That's all, of course, driven by the result of both our operating efficiency as well as our dedicated line.

And just as a follow-up related to that, on the order front, I know you mentioned you expect healthy orders in the fourth quarter here, and you've had to book the bill over one for nine months here to date. How are you approaching the bookings for the G700? Is it following a similar path to the G500 and 600? Thanks.

Yeah, as I think you know from the announcement, we've got a nice robust backlog for the 700. And as I said, our fourth quarter, we expect to have even better and improved order activity, increased order activity across our portfolio. By the way, we had more orders this year. as against this quarter, as against the third quarter of 2018. But, you know, that's compared against a 23% increase in revenue. So this is a good quarter for us.

And our next question today comes from Kai Von Rumer of Cowan & Company. Please go ahead.

Thank you very much. And, Phoebe, congratulations on the G700. It looks terrific.

Well, thanks, Kai.

You've indicated, I guess, first delivery in 2022. Given that, you know, you're fairly close to first flight, will you comment, is the hope to be in the earlier part of the year or the latter part of the year?

So, look, I think we're comfortable in the estimate of certification that we've given you. And we've looked through the prism as we've thought about going forward. We've looked through the prism of the current regulatory environment, which you well know even better than we do. And so we have factored that into our thinking. If it happens earlier, that's great.

Got it. And then I guess, you know, some industry sources suggest that you've been showing this playing out for some time under NDAs. Were there any firm orders included in your bookings in the third quarter for the G700?

We've had some bookings on this airplane. That's about all I'm going to say on that score. This airplane is going to be very popular with that particular market segment.

Our next question today comes from John Raviv of Citi. Please go ahead.

Hey, thanks very much. Bigger picture question for you guys, actually. Just actually on capital allocation decisions across the businesses, certainly appreciate, Jason, that the focus through first half of 20 is on repayment of debt. Just sort of thinking about, you know, how should we think about things going forward and how you make those allocation decisions across the businesses? Sure.

You know, John, I don't think we would really articulate any fundamental change to our longstanding approach to capital deployment as those priorities stand, you know, internal investment first where we have profitable opportunities for returns, followed by the steady and predictable dividend. And then it really is about M&A where attractive, accretive, and in our core opportunities exist and share repurchase. But in between that, as you articulated for the moment, the prioritization really is all about getting that debt paid down, at least through the first half of next year. Once we get to that point, we'll roughly pay down half of the incremental debt from the CSRA acquisition. We'll have the commercial paper balance behind us, and we'll have a chance to look forward. But I don't think in terms of prioritizing those various avenues for capital deployment, anything on that score has changed for us.

Thank you. And then just a follow-up on GDIT perhaps. Phoebe had mentioned that some of the dynamics are stretching out and there's obviously a pretty heavy protest environment out there. Any thoughts about the acceleration you previously pointed to heading into next year in the context of peers generally doing mid-single digits? Do we expect GDIT to take market share in that environment? Thank you.

So TDIT has been taking market share. I mean, if you think about their performance, the performance underlies their outcome since the acquisition. They've got a 75% win rate for the trailing 12 months. I mean, that is consistent month over month, quarter over quarter. And as you all know, the book to bill is in 1.1 for the year to date. So, look, we are winning more than our fair share, but we have seen a protraction. You know, it's a significant amount of money or contracts be tied up in protests at around a billion dollars. Now, protests, as you all know, historically... resolved to the benefit of the winner, so we're quite comfortable that that historical precedence will remain. But we've also seen a slowing in the execution of the contract awards, and we suspect that will resolve through the course of next year. And our rate of growth will be in part, in no small measure, driven by the increase rate in award volume. So nothing is systemic here. It's really a question of timing. Thank you.

And our next question today comes from Miles Walton of UBS. Please go ahead.

Thanks. Good morning. I was wondering, Jason, maybe you can give us a little bit more color on the cash flow and, in particular, if the Canadian advance was in the numbers this quarter. And also, just give us a boundary condition. If you don't make further progress on the study lab, how does that play into the $3.5 billion implied free cash flow for fourth quarter?

Yeah, sure. So, yes, in fact, the advance we received in the quarter is in the numbers that you've seen. So that's in the 93% conversion rate for the quarter. As it relates to the balance of the year, I think the way to think about it is we came into the year with just over a billion dollars of arrears from the fourth quarter of last year. That's grown somewhat, call it another half a billion dollars through the balance of this year. And so that's what we're after right now. That's what's currently outstanding. I think you can see in our disclosures there's an unbilled, total unbilled investment somewhere in excess of $2 billion, But that's not necessarily what's factored in here. It's really between $1 and $1.5 billion that we're still working to resolve before the end of the year.

Okay. And, Phoebe, that marine margin I think is the best in a number of years. Just curious, is there anything one time, and I know you didn't update the full year projection, but maybe just give us a little color at the start of the year. I think you said that's the segment that had the most upside opportunity. Is this it coming through?

So what you saw here was the strong and successful finish of Block 3. I mean, Block 3 is largely done. And that performance and that strong closing of that contract really drove our margins. But as you all know, margins in this business, in particular elected vote, have followed the same path for 18 years. We start a new block. And because of the contract structure with our customer, they received some of the benefits of our prior improvements on the previous block, and then we reset the bar and come back down our learning curve. And that's where we really are on block four. But block three is largely behind us, and we've closed out very well.

Okay, thanks.

And our next question today comes from Noah Poponik of Goldman Sachs. Please go ahead.

Hi. Good morning, everyone.

Hi, Noah.

Just coming back to the Gulf Stream margins, I want to try to ask a question about the progression there because I know there's a lot of investor focus on it. You know, first piece, just for the last quarter of the year, if I take the guidance that you had previously provided, literally it wouldn't. imply it's down sequentially in the fourth quarter. Sorry, expecting that. And then I had interpreted prior comments to suggest expansion but modest expansion 2020 because you're feathering 650 lower and you're still early in the 500-600 ramp, but then a larger degree of expansion in 21 as you're further along in both of those processes. Do I have that correct?

So look, as you would imagine for a business that has demonstrated superb operating leverage year in and year out on older models and newer models, Gulfstream will continue its march on margin improvement on a going forward basis. You know, don't forget that pre-owned carries no margins. So to the extent that she's got an implied lower margin in the fourth quarter, that's almost entirely reflected by the pre-owned. Because as you well know, it just has no margin and is included in revenue. So there you have it.

And am I directionally correct on the beyond 2019 comments? Yes.

Well, I think we've been pretty consistent all along that this business is going to get better and better over time. That's about all we're going to say at this juncture.

And will the G700 be the highest margin airplane in the portfolio once it's at full rate production?

Oh, we are so not going there. So, look, you can imagine that we do well on our – on our airplanes because we don't compete on price and we have an unerring commitment to cost reduction and cost optimization every quarter. Every month, every quarter, we get better.

And our next question today comes from George Shapiro of Shapiro Research. Please go ahead. Good morning.

Hi, George. Your comment about the Q4 margin being lower from higher pre-owned. I mean, this quarter looks like there was four pre-owned for about $90 million. So you would have earned 16.3% margin on the zero for the pre-owned. Are you suggesting the fourth quarter is going to have higher pre-owned? And I would have thought we're kind of through with the G500 block so that the fourth quarter margin would still be above the third quarter.

So, George, taking your premises in reverse order, you're right about the progression on the underlying manufacturing improvements, and I think that's what Phoebe was alluding to earlier. We'll continue to see that progress quarter on quarter for Gulfstream. But, yes, to your first premise, based on the inputs we're seeing right now and the contracts that we'll deliver in the fourth quarter, we would expect to see, at this point, more pre-owned aircraft sales in the fourth quarter.

And, Jason, that will more than offset the fact that the 500 is through its initial block, so the margins should step up some in the fourth quarter?

I mean, I don't know that I want to piecemeal it down to that level. Those are two of the many inputs that go into the margins at Gulfstream in any quarter. You know, we've talked about this many times in the past. There's varying R&D levels. There's different mix of aircraft deliveries and all the different inputs, the jet aviation service margins. and so on. So I think we've articulated a couple of those discrete ones that are clear at this point, but the implied fourth quarter that a couple people are picking up on is, as usual, a blend of a whole myriad of factors. So I think the most important point here for the long-term investor is the steady, regular improvement in the operating cadence and margin of the production of the airplanes at Gulfstream.

And just a clarification for you, Jason. The advance you got this quarter from Canada, was that just for the new Canadian contract, or was there also some from the Saudi receivable?

That is strictly related to our relationship with the Canadians.

On the new program.

On the new program.

On the new program. Okay, so when you commented in the third quarter you expected to get some cash in August and then the balance by the end of the year? You were really just referring to this new contract, which obviously hadn't been announced at that point?

Well, let's parse that. We had anticipated that we would get this contract award and that there would be an attendance advance along with that. That is one separate and distinct issue. As you well know, our international The payments on our international program out of Canada have remained slow. Let me just remind everybody, there's no dispute on quantum. There's no dispute on the fact that it is owed. It's simply a question of timing, and we're still hopeful that we resolve that by the end of the year. But two distinct elements, okay? Okay.

Our next question today comes from Hunter Tay of Wolf Research. Please go ahead.

Hey, good morning, everybody. Thank you. You've been sort of touching this a little bit, Stevie, but can you elaborate on a comment you made when you said the G700 has stimulated G650 discussions, what you mean by that? And then the second part, and I'm done here, is any thoughts on the tariff situation in Europe? Have you heard any concerns from your customers? It looks like those jets are going to be exempt, but any rumblings about that over there? Thank you.

So in inverse order, none. And, in fact, our ex-U.S. business continues to be very fulsome. But let's talk a bit about the 700. Frankly, the introduction of the 700 clarifies the 650. And let me give you a little bit of an explanation on why and talk to you about what the 700 is and what it is not. The G700 is in a slightly different market space, but in the same market segment as the 650. It is not a competitor. It is an alternative. It is not a replacement for the 650. Customers very clearly understand that. buying decisions are motivated by a host of factors, idiosyncratic and individual factors, including the missions they fly, the ramp size, the makeup of the rest of their fleet. So I think it has clearly, in our experience, the 700 has clarified the 650 and been helpful.

Yes, sir. Our next question today comes from Robert Springhorn of Credit Suisse. Please go ahead.

Rocco, this is Mr. Rubel. This will be our last question.

Thank you, sir. So, Phoebe, I wanted to go to GDIT and just talk about the margin progression. You talked about some of the expenses in the quarter or pressure on the margins in the quarter that otherwise would be higher. If we go back to your prior guide, I think that indicates a pretty robust fourth quarter. So can we talk about that and what normalized margins look like? And then just for a follow-up, Jason, I hear you on the cash deployment and retiring the debt, but given interest rates, might it not make sense to look at a share buyback here, just doing the math? Thank you.

Look, we're comfortable with our leverage, and we're going to pay down that debt. And we historically have never taken out debt to buy stock for all sorts of reasons that we have discussed over the years. But, look, GDIT margins were consistent with what we anticipated, minus this one-time charge as we exited the line of business that we had inherited. with CSRA. You know, I don't think I need to remind you, because I know you understand this, that, you know, their EBITDA margins are industry-leading. So their margin performance will continue to improve.

Rocco? Yes, sir. This is Mr. Rubel. Thank you very much for the call today. And thank you, everybody else, for joining us. As a reminder, you should refer to the General Dynamics website for the third quarter earnings release and the highlights presentation. If you have additional questions, I can be reached at 703-876-3117. Thank you. And thank you, sir.

Today's conference has now concluded. You may now disconnect your lines and have a wonderful day.