General Dynamics Corporation

Good morning and welcome to the General Dynamics fourth quarter 2019 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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, Alyssa, and good morning everyone. Welcome to the General Dynamics fourth quarter and full year 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 10K and 10Q filings. With that concluded, I would like to turn the call over to our Chairman and Chief Executive Officer, B.B. Novakovic.

Good morning and thank you, Howard. So earlier today we reported fourth quarter revenue of $10.77 billion, earnings from continuing operations of $1.02 billion, and earnings of $3.51 per fully diluted share. This 14% improvement in EPS against the fourth quarter of 2018 was the result in part of a 50 basis point improvement in operating margins. The -over-quarter earnings improvement at aerospace was a major driver of this result. We enjoyed a very solid fourth quarter and a strong 2019. We achieved most of our operational and financial goals and added meaningfully to our backlog, in some cases rather dramatically. The results and comparisons with prior periods are straightforward and rather compelling. I'll go through them briefly to leave more time for my thoughts on the business segments, our outlook for 2020, and your questions. I also think you'll find the press release and the highlights chart on our website fulsome and helpful. As we had indicated at the start of the year, the final quarter was our strongest. Earnings per share at $3.51 be consensus by $0.06. Revenue and operating earnings were somewhat better. Our provision for tax was lower, offset somewhat by a higher share count and higher borrowing costs. So all in all, a solid quarter with good performance compared to the year-ago quarter as well as the third quarter of 2019. For the full year, we had fully diluted earnings per share from continuing operations of $11.98. Revenue of $39.35 billion was up over 2018 by $3.2 billion and increased at each of our reporting segments. Operating earnings of $4.6 billion were up $191 million or .3% over 2018. Earnings from continuing operations of $3.5 billion were up $126 million or .8% over 2018. Importantly, earnings per share from continuing operations were $0.76 above 2018. Our business was strengthened by significant growth in our backlog to a new high of $87 billion. A very strong order take, particularly in aerospace and marine, positions the company well for 2020 and beyond. Let me review the full year and the quarters on a -over-year basis without reference to sequential comparisons. On a sequential basis, suffice it to say that we had significantly more revenue, higher operating earnings, higher earnings from continuing operations and higher earnings per share than in the third quarter of 2019. So I'll discuss each group, provide some color where appropriate. First, aerospace. Aerospace revenue of $2.9 billion was up $226 million or .4% against the year-ago quarter. This increase was attributable to deliveries of the $600 and favorable mix related to the rest of the product line. Services were stable. Quarterly earnings were up $98 million, an increase of more than 25%. For the full year, revenue of $9.8 billion was up $1.35 billion or 16% over 2018. Operating earnings of $1.53 billion were up $42 million on lower operating margins. The lower operating margins were attributable to the mix as we continued the transition at Gulfstream, delivering G500s and the initial G600 aircraft. Pre-owned sales also negatively impacted margins and profits. Excluding the pre-owned revenue and losses provide an indication of the underlying strength of the operations. Margins on that basis were .1% versus .6% as reported. Furthermore, margins increased on a sequential basis throughout the year. At mid-year last year, we told you to expect revenue of about $9.95 billion with earnings of about $1.525 billion. We finished the year with somewhat less revenue, a better margin rate and somewhat higher earnings. Deliveries were $147 versus our forecast of $145. All in all, very close to the forecast we gave you. On the order front, activity in the quarter was stellar and the pipeline remained strong. The book to bill at Aerospace in the fourth quarter was $1.7 to $1 denominated and better than that for Gulfstream alone. For Gulfstream airplane deliveries versus orders, it was two times on a dollar basis. For the year, on both a unit and dollar basis, orders were 54% higher than 2018. Backlog is up about $2 billion sequentially and for the year. From a qualitative perspective, we were quite pleased with the customer mix and product demand. All major regions experienced greater demand including Asia Pacific, the Mideast and particularly Europe. During the year, we delivered the 400th G650. The airplane continues to be in demand. Order for the aircraft were up year over year. We continue to work with the ASSA and expect G600 to be certified shortly. All five of the G700 flight test aircraft are complete and we have begun installation of an interior on the six aircraft. We are making good progress toward first flight. G500 and G600 unit manufacturing costs continue to decline and we are producing very good quality. You should see more G500 and G600 deliveries as the year unfolds. Next combat. Revenue in the quarter of $2 billion was .1% above a year ago. Operating earnings of $284 million were also well ahead of the final quarter of 2018. For the full year, revenue of $7 billion was up $766 million, a .3% increase. Operating earnings of $996 million were up $34 million. By the way, this performance is reasonably consistent with the guidance we provided at mid-year. We enjoyed better revenue than our forecast and had earnings of about $1 billion similar to our outlook. We continue to see the opportunity for further growth of the business. The FY20 Army budget fully supports our programs and we continue to see significant international opportunities, particularly in Europe. We are continuing to negotiate with Spain on a large vehicle program that provides the Spanish Army with important new capabilities. In the U.S., our Army customer is modernizing, which provides steady demand across our combat vehicle munitions businesses. In short, this group had quite positive revenue growth, continued its history of strong margin performance, and had very good order activity. Next, Marine Systems. This is a really good news story. Marine's fourth quarter revenue of $2.57 billion was up $268 million, a compelling .7% increase over the year-ago quarter. Operating earnings of $199 million were down $14 million against a strong fourth quarter in 2018. For the full year, revenue of $9.2 billion was up $681 million, or 8%. Operating earnings for the year of $785 million were up by $24 million, or 3%, despite a 50 basis point drop in margins. At the midpoint of 2019, we expected revenue of about $9 billion and operating earnings of $770 million. We came in above that for both. As you are aware, we signed the Virginia Class Block 5 contract in December. This $22 billion award provides the Navy an important increase in its capability and affords us the opportunity to make a fair return. In response to the significant increased demand from our Navy customer, we continued to invest in each of our yards, particularly at EB, to prepare for Block 5 and the new Columbia Ballistic Missile Submarine. In preparation for EB's increased work scope on Block 5, we constructed additional facilities at constant point to build the payload modules. So suffice it to say that we are poised to support our Navy customers as they increase the size of the fleet and deliver value to our shareholders as we work through this very large backlog. Now to information technology. IT generated revenue in the quarter of $2.024 billion and operating earnings of $172 million with an attractive .5% operating margin. EBITDA margin was 13.1%. The -over-quarter revenue was lower due to several build estatures, delays in award execution, and the completion of mature programs in the start of new ones. In other words, timing and mix. A case in point, there are now $22.7 billion in awards that have been delayed compared to $10.4 billion at the end of 2018. Our integration remains ahead of schedule both in terms of building an integrated and unified business as well as achieving our cost synergies. The benefit of both are beginning to emerge. For the year revenue was $8.4 billion and operating earnings were $628 million with a .5% margin. EBITDA margin rose to .6% in 2019 from 12% in 2018. We are encouraged by the .7% -over-year increase in our backlog to $9.1 billion, but there is more work to be done. At mid-year, we had indicated revenues of about approximately $8.5 billion and operating earnings would be around $630 million. We were a touch light in revenue, but operating earnings was predicted. Let me remind you of something about us. We never accept lower margins in exchange for revenue. Next, mission systems. Revenue in the quarter of almost $1.3 billion was up .5% against the year-ago cost. The quarter operating earnings of $188 million were up $7 million with margins up 20 basis points to 14.7%. For the year revenue of $4.94 billion was up $211 million or 4.5%. Operating earnings of $683 million were up $24 million or 3.6%. Book to bill for the year was one time with backlog at $5.4 billion. Mission systems revenue of $494 billion was just a touch short of the approximately $5 billion in revenue we'd expected for this business at mid-year. Margins of .8% matched our expectations. The business continues to show steady, profitable growth. Mission systems offers critical, high-consequency for ISR and cyber systems that are built into platforms and missions that our customers rely on. This has positioned them well as they have worked to expand those capabilities into new market segments and to new platforms. On this call at mid-year on a company-wide basis, our forecast for 2019 was to expect revenue of approximately $39.2 billion, operating earnings of $4.6 billion, and EPS of $11.85 to $11.90. As you know, we wound up ahead of that forecast. Now, before I address guidance, I'm going to ask Jason to address cash, specifically the near resolution of our issues with respect to our large international contracts, Canada and several other key items. There have been some positive, very positive developments with respect to these issues in the last three weeks. Jason?

Thank you, Phoebe, and good morning. I'm going to cover a number of topics to provide some color with respect to our 2019 results and some context for the 2020 guidance that Phoebe will give you in just a few minutes. First is cash. As you can see from our press release exhibits, we generated just over $2 billion of free cash flow in the fourth quarter, reflecting approximately 200% of net income. That resulted in a cash conversion rate of 57% for the full year, obviously lower than we were striving for. As you might infer from this result, we did not collect the outstanding arrears on our large international combat vehicle program before the end of the year. As Phoebe noted, the good news is that in the weeks following the end of the year, through engagement with our principal customer, we have laid out a new path forward that re-baselines the program, including updated delivery schedules, a revised payment plan going forward, and a number of contractual terms that provide greater assurance of payment on a go-forward basis. In connection with this, we received a $500 million progress payment in January, and we will continue to receive scheduled progress payments on a newly established payment schedule. This includes an additional $500 million this year and regular payments for product delivered in 2021 and beyond that will bring down the working capital balance on this program over the next three years. This increased clarity around payments on the program gives us a greater level of assurance with respect to our expectations for free cash flows in the coming years. To that point, we expect our free cash flow conversion for 2020 to be in the 85 to 90 percent range, reflecting an increased pension contribution and the peak of our capital investments in our marine systems business to support the sizable growth that is coming in this decade and beyond, as well as the build of G700 test articles and initial inventories in anticipation of its 2022 entry into service. With these capital needs winding down and the liquidation of the working capital and combat systems, we expect free cash flow to exceed 100 percent of net income starting in 2021. Despite the cash shortfall in 2019, we were able to retire 100 percent of our outstanding commercial paper balance as anticipated. We ended the year with a cash balance of just over $900 million and a net debt position of $11 billion. Our net interest expense for the fourth quarter was $110 million, bringing interest expense for the full year to $460 million. That compares to $112 million and $356 million for the comparable 2018 periods. Our next scheduled debt maturity is for $2.5 billion in the second quarter of this year, and we expect interest expense to drop to $410 million in 2020, accordingly. With our strong balance sheet and the increased certainty around our international cash forecast, we now have a level of financial flexibility that we did not enjoy last year. On the capital deployment front, in addition to repaying our commercial paper, we had capital expenditures of approximately $380 million in the fourth quarter for a full year total just shy of $1 billion, or 2.5 percent of revenues. You may recall that we expected 2019 CapEx to be closer to 3 percent of sales, but it came in slightly lower as we prudently managed these investments while working to resolve the international cash situation. At $449 million, CapEx in the 2019 for Marine Systems accounted for 45 percent of our capital spending and was nearly four times its depreciation for the year. We again expect Marine Systems to command the largest share of our capital budget in 2020 as we work towards satisfying the nation's need for its critical naval systems. As a result of some of the 2019 investments pushing to the right, we expect our capital investments to remain elevated in 2020, similar to the 2019 level and declining thereafter. We also paid $294 million in dividends in the fourth quarter, bringing the full year of $1.2 billion. I alluded to our pension contributions earlier, and with respect to our pension plans, we contributed $185 million in 2019, and we expect that to increase to approximately $470 million in 2020, the majority of that in the third quarter. Turning to income taxes, we had a 16 percent effective tax rate in the fourth quarter, resulting in a full year rate of 17.1 percent, a little better than our previous guidance attributable primarily to the finalization of our 2018 tax return. Looking ahead to 2020, we expect a full year effective tax rate of around 17.5 percent. Next, I'd like to alert you to an accounting change that we've made starting in 2020. This relates to our treatment of pre-owned aircraft sales in our aerospace group. As you're aware, this is an immaterial activity for us, with transactions that are generally break-even or at a de minimis loss. However, the forecasting and reporting of pre-owned sales results in non-economic perturbations in revenue and operating margins for the aerospace group that create unnecessary confusion around the group's performance. As a result, we will no longer report pre-owned aircraft sales going forward. Only the bottom line earnings impact, which has again, historically been close to break-even. When you consider the 2020 revenue guidance for the aerospace group that Phoebe will provide in just a moment, you should level set 2019 revenues, excluding $292 million of pre-owned sales. So for comparative purposes, that would bring 2019 revenue for the group to approximately $9.5 billion. The last item I'd like to provide a little color on is our backlog. We ended the year with a backlog at an all-time high of approximately $87 billion, exceeding the previous mark by more than $10 billion. And the total potential contract value, including options and IDIQ value, ended the year at over $126 billion, an increase of more than 22% over both the prior quarter and the end of 2018. This is the result of very strong order activity across the board, as four of our five segments posted a -to-bill of -to-one or greater for the quarter and the year. As Phoebe noted, the aerospace group had a very strong quarter with a -to-bill of 1.7 times on revenue growth of almost 8.5%. This was the result of the second-highest order quarter for the group ever, and its highest in over 10 years. That brings the full year -to-bill to 1.2 times on revenue growth of 16%. Combat systems had a solid -to-bill of 0.8 times on revenue growth of over 12% for the year, though they were negatively impacted by foreign exchange rate fluctuations that reduced the backlog balance by $300 million versus the end of 2018. GDIT and mission systems continued to have strong, steady order activity, each with a -to-one -to-bill in the fourth quarter, and that brings mission systems to -to-one for the year and GDIT to 1.1 to one for the full year. This marks five consecutive years that each of these businesses have had a -to-bill of -to-one or greater. And I would remind you that for both of these segments, the IDIQ value, which we don't report in orders or backlog, generates roughly half of their respective annual sales. For mission systems, this value was almost $7.5 billion at the end of the year, and for GDIT, it reached $19 billion. This conservative approach of excluding this contract value from our reported order activity makes a direct comparison with some of their industry peers somewhat less meaningful. And finally, Marine Systems had an outstanding year with a -to-bill of over eight times in the quarter and approximately three times for the year. As we've discussed in the past, this group has large, long-term contracts to provide clear visibility to revenue growth well into the future. To put a finer point on it, each of the shipyards in the group has firm backlog at the end of 2019 that runs through the -to-latter part of this decade, providing significant opportunity for both top line and bottom line growth. That concludes my remarks, and I'll turn it back over to Phoebe to give you guidance for 2020 and wrap-up remarks.

Thanks, Jason. So let me provide our operating forecast for 2020, initially by business group and then a company-wide roll-up. In aerospace, we expect 2020 revenue to be about $10 billion without pre-owned sales up from 2019. Operating margin will be about 15.7 to 15.8 percent. Revenue will be much stronger in the second half, as will margin rate. Operating margin will accelerate through the year similar to 2019, starting in the 14 percent range and ending around 18 percent by the fourth quarter. We are seeing 5 percent revenue growth in 2020, in between 40 to 45 million of improved earnings. In combat, we expect revenue of about $7.3 billion and approximately $300 million increase over 2019. We expect operating margins to be about 14.3 percent. Here again, look for both revenue earnings and margin rate to grow quarter over quarter during the year, with a particularly strong fourth quarter. We continue to see solid growth for the business with orders for the Abrams and solid demand for the striker vehicles and munitions. Like last year, we see domestic volumes rising faster than our international business, although a few international opportunities could tip that balance. The Marine Group is expected to have revenue of approximately $9.85 billion and increase of almost $700 million over 2019. Operating margin in 2020 is anticipated to be about 8.6 percent. We anticipate growth at each of our yards. The long-term driver of growth here is the submarine work, which is expanding exponentially. Our biggest opportunity in this group is to outperform the forecasted margin rate. We expect IT revenue in 2019 of about, excuse me, we expect IT revenue of approximately $8.45 billion, consistent with 2019. With margins in the 7.6 percent range, the results in a modest increase in operating earnings. We expect mission systems revenue in 2020 of about $5.1 billion, an increase of approximately $140 million. We anticipate operating margins about 14.1 percent, again, building throughout the year. So for 2020 company-wide, we expect to see slightly more than $40.7 billion of revenue, up 4 percent over 2019, an operating margin of 11.9 percent. We expect to see a significant increase in operating earnings. All of this rolls to a forecast of $12.55 to $12.60 per fully diluted share. On a quarterly basis, we expect EPS to play out much like it did in 2019, with Q1 about $2.60 and progressively stronger quarters thereafter. Let me emphasize that this plan is purely from operations. It assumes a 17.5 percent tax provision and assumes we buy only enough shares to hold the share account constant with your end figure so as to avoid dilution from option exercises. So much like last year, beating our EPS guidance must come from outperforming the operating plan, achieving a lower effective tax rate and the effective deployment of capital. I should leave you with this final thought. The near-imminent resolution of our large international contract and attendant cash issues, including the current receipt of funds, provides enormous clarity and reliability of funds. This coupled with our strong balance sheet leaves us with greater flexibility for capital deployment than we have had in the recent past. We intend to utilize it to create value for our shareholders.

Thanks. Thanks, Phoebe. As a reminder, we ask participants to ask one question and one follow-up. So, Alyssa, would you please remind the participants how to enter the queue now, please?

Yes, thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1, on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. As another reminder, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. And the first question today comes from Ronald Epstein of Bank of America, Maryland. Please go ahead.

Good morning. Hi, Ron. Just following up on your final comment there, that you have more flexibility around capital deployment, that was a bit of a teaser. What are you thinking? Buying back shares, what are you thinking about that?

So, we will deal with our short-term debt and then we will buy back shares appropriately.

Anything else? Are you thinking about other things to do in the portfolio? Meaning, we have seen a flurry of M&A in the space. We don't comment

on M&A. Nice try, Ron.

Okay. All right. Thank you,

Jess. The next question comes from David Strauss of Barclays. Please go ahead.

Thanks. Good morning. Hi,

David.

Phoebe, on the Gulfstream, I guess, revenue forecast, can you help us a bit, maybe at a high level, in terms of some of the moving pieces there? What are you expecting for total aircraft deliveries, kind of the ramp down on the 650?

So, we expect about 150 aircraft deliveries this year and consistent with our express plan to you all, some time ago, we will ramp down the 650 deliveries as we increase the 500 and 600 deliveries. So, that mix and cadence around that mix is playing out as anticipated.

And do you expect more of the 650 ramp down to occur in 20 or 21? I think before you had been talking about more of that hit coming in 20 versus 21.

Largely in 20, but we'll continue to ramp according to really the demand. We are ramping to a point where we have demand and delivery in an equilibrium, and I'm quite comfortable that we'll get there. But it's pretty clear to me that in 2020, 650 deliveries will, as anticipated, decrease.

The next question today comes from Robert Stallard of Vertical Research. Please go ahead.

Thanks so much. Good morning. Good morning. On GDIT, Phoebe, it looks to me like the organic revenue growth has been a little bit below what some of the other peers in the industry have been able to achieve, and that's like to continue in 2020. Now, is this a consequence of these award delays, or is it something to do with just the time it takes to integrate CSRA or something else? And when would you expect this revenue growth rate to pick up?

So, I try to be pretty...it was pretty explicit in my remarks around that, but just to reiterate, there were three fundamental factors. First, we experienced significant delays in the execution of awards. The velocity of execution slowed considerably, and the number of awards, potential awards, caught in this bit of purgatory increased dramatically. Second, and don't forget this, we exited two lines of business last year. And third, we had several mature programs end, and we lost one or two recompete, both of which reduced near-term volume that will be replaced over time by our new wins. So, think of this latter category as mix in timing.

Is it safe to say that, sir? And so,

to your second question, we had anticipated that 2019 from 2020 would show some growth. And that growth has now moved to the right in 2021, and we're expecting -signal-digit growth, again driven by the execution and velocity of the contrast awards.

Okay. Thanks so much.

The next question comes from Doug Harnett of Bernstein. Please go ahead.

Thank you. Good morning. Hi, Doug. Hi. Can you take us through a little bit on the Block 5 Virginia class? Because this is obviously, you know, a bigger boat. It's very important. What are the differences that you see between Block 5 and Block 4, and how should we expect that to flow through to financial performance over the next several years?

So, you quite accurately point out that Block 5 represents a considerable increase in capability for the U.S. Navy and a considerable increase in our workload, given that the addition of the new capabilities is executed entirely by us. And so, as we think about from Block 4 to Block 5, we continue to come down our learning curve, and we are sequencing all of these now bills around the first delivery of Columbia, which will start work at the end of this year. So, I think that with respect to Block 5, our job is simply to execute Block 5 effectively. And as I said in my remarks, you know, the key here is just increasing our margin and really improving our -over-ship capabilities. So, we've got Block 5 in very good shape, along with our Navy customer,

and

we've begun to work on it, and we'll continue that execution for the next several years.

And then you talked about the investment you're having to make to CAPEX for both Block 5 and Columbia class. But when you think about the trajectory for that investment, it's not just facilities, but it's also labor. And when you look at planning for this, how do you see the trajectory for your costs and for reimbursement by the customer as you work to build up here?

So, let's take that in two-fold. First, our customer is well aware of the imperatives that we face, and they have worked closely with us to better match the investment with the return, which is wholesome for everyone. With respect to the essence of none of your questions, ramping up on growth in our workforce, we started this about eight years ago working in public-private partnerships with Rhode Island and Connecticut to begin to train the kinds of workers that we needed and in large numbers. And that coupled with our internal training program we have demonstrated over the last four years, we have brought new shipbuilders into the yard at a higher initial capabilities, and then they continue to learn. So, the Navy has fully supported our efforts with respect to expanding our workforce and the need to bring training up and some skills that, frankly, in this country, it afterfeed. When you think about plumbing and pipe fitting and electricians and welders, welders are a critical and key capability. A number of those in the US training programs throughout the United States had afterfeed a bit, and in our world, up in New England, we are rebuilding those at a very rapid rate. So, we are very comfortable that we can meet our expectations for growth.

Thank you. Our next question comes from Kai Von Rumer of Cowan & Company. Please go ahead.

Yes, thank you very much. So, at one point, Phoebe, you were talking about the G500 and 600 coming down the learning curve and becoming more profitable as we move out in time. And I think you suggested in 2021, directionally, margins should be up as that plus outweighs the mix shift away from the 650. Is that still a trend that you look for?

Yes, it's a trend that we look for and that we are experiencing. As you would expect from the operating discipline and the price discipline that we have, we continue to see learning and nice learning on each and every one of these aircraft coming down the line to offset the reduction in parts, offset the reduction in 650 deliveries. We had clearly articulated this plan several years ago and we've been right on sequence on it. So I think there's nothing new there in terms of the strategy and the execution around that strategy.

Terrific. And then, Jason, quickly for you, you talked of conversion going to 100% in 2021. Can you give us some color in terms of how much does pension contribution come down, if at all? How much does CapEx come down? And what kind of a benefit do you get from inventory liquidation on the 500 and 600?

Thanks. Sure. So when you think about the capital investment, I think I said earlier, we had expected about 3% of sales in 2019 and ended up at about 2.5%. You should expect to see that in a similar range, call it .5% in 2020 because of the elements of that that we pushed to the right. That'll step down starting in 2021 so that by, call it 2023, we'll be back to the typical, more historic typical 2% range that we're seeing. Pension contributions, on the other hand, are, as I mentioned, elevated, 400 plus million in 2020. It'll stay elevated for another year or so, maybe a year, and then come back down from there. So a little bit of a surge in pension contribution and then returning back down to a lower level. And then I think in terms of the working capital, the biggest single thing that you should expect is we ended the year with somewhere close to the neighborhood of $2.9 billion of unbilled receivables, contracts in process, if you will, on the large international combat vehicle program. That will step down to the point that that working capital is essentially liquidated by the end of, call it 2023. That, along with the $500 and $600, as you mentioned, those test articles will be sold here in 2020 and 2021, respectively. So those will be a benefit, and as a result, the aggregate outcome of that is we expect to actually see free cash flow in 2021 and beyond, call it 2021, 2022, even 2023, actually in excess of 100% of net income. So we'll start to recapture some of that shortfall that we've had over the past couple years.

The next question comes from Joseph Denardi of Stiefel. Please go ahead.

Hey, good morning. Phoebe, if we go back four or five years, I think there was a debate as to how the Navy would afford Columbia and Virginia, and they've decided to kind of fill both simultaneously. When does that actually get locked in? Do you see any political risk to that, that that decision gets revisited, whether to feather in Columbia and placement Virginia, or is that risk gone at this point? Thank you.

So think about long-term demand for a given product line as driven by the warfighter's needs. And with respect to both classes of our submarines, there is real warfighter demand on Virginia and then on Columbia. It's a national program, and it can't wait. So the nation sees the decision-makers and both the executive branch and on Capitol Hill see the imperative to fund and wholesomely fund both of those programs. And as we sit here today, we see pretty good surety, very good surety on a going-forward basis of the stability of that backlog and the reliability of increasing backlog in submarines for quite some time to come. Think about the submarine business, shipbuilding in general, but the submarine business in particular, as executing slowly over time, relatively slowly over time, given the complexity of building nuclear submarines. That is offset in terms of predictability of backlogs. These are very secure platforms because they're in demand. They're in current demand and they will be in future demand. There are certain imperatives.

The next question comes from Noah Poppenack of Golden and Saks. Please go ahead.

Hi, good morning, everyone.

Hi, Gena.

Phoebe, I wondered if you could just expand on what you're seeing in the overall business jet and Gulfstream demand environment because on the one hand, some of the leading indicator data there has looked a little tougher, but obviously you've got your new product set and have the really strong bookings in the quarter. So just kind of curious to hear what you're seeing and was the book to bill excluding the G700 also above one in the quarter?

So the answer to your question, the latter question is yes. If you have been following us and you have for some time, you'll know that our basic predicate for this business is that new product and truly new product, clean sheet airplanes, all new, drive demand, and that predicate is worn out, not surprisingly in my mind. So our new products are generating demand and our expected new product in the 700 is generating demand. So think about the experience of OEMs in this market as really idiosyncratic to the product offerings they have. So what our experience in this market is that we have enjoyed nice steady demand year over year and that demand is increased as the new products are announced and enter into service. And in addition, so much of selling airplanes is predictability of the delivery and reliability of the airplane and the ability to service. All of that drives demand and we are, I think, arguably, without question, the best in class with respect to all of those key factors. So we are quite comfortable with our positioning and the fourth quarter was good and the pipeline is active.

And then just on the margins in the segment, I think the company has said that the 2021 rate of expansion should be faster than the 20 rate of expansion and I think you've even said getting back into the high teens of 2021, maybe 22. Do I have that right? Does that still hold in terms of the trajectory from here?

The trajectory does hold. We'll end this year in the high teens margin but then, this is a complex business with lots of moving parts so margins tend to be somewhat variable quarter over quarter largely driven by mix. But again, the basis, the basic thesis around the introduction of these airplanes and the profitability and the realization of that profitability remains today the same as it was.

The next question comes from George Shapiro of Shapiro Research. Please go ahead.

Yes, good morning. Phoebe, it doesn't look like the 650 deliveries really came down much if anything in 19. So are the declines in 20 reflecting just lower backlog in 650 today than a year ago or what's really driving the 650 decline?

The 650 backlog has not declined. We've seen a nice increase. The deliveries quarter over quarter of these airplanes is often driven by customers. So we had about three 600s that were various outside the United States regulatory issues or delayed. We'll move into this. Their delivery is expected for this quarter. And we had some 650s that customers wanted earlier, so we took a few of those. So this is, and we're able to execute and satisfy those customer needs. So 650 has done extremely well. You know, not insignificantly as we talked about in this call in the third quarter. There are a lot of demand signals and demand catalysts for the 650. The introduction of the 700 clarified it, and frankly, as we told you, it would, it increased 650 demand. So, and by the way, this airplane, we've got 400 of them in service and some of them are coming out of warranty and there's a natural replacement cycle. So we continue to see nice demand for the 650.

So why bring down the deliveries if the backlog is up? I must be missing something here.

Because ultimately over time you want to fully match the backlog with the deliveries. And if you recall, we entered this transition period with an extraordinarily long, and I argue the time too long, wait time. And we have equalized that wait time to order to wait time significantly during this transition period. And we'll get back to that regular cadence. But our, look, our 650 order book and what we've got in backlog fully supports our going forward 650 production estimates. That's what you really want to see. The order book is enough to satisfy your 650 deliveries.

Operator, this upcoming question will be our last.

The last question today comes from Seth Seisman of JP Morgan. Please go ahead.

Thanks very much. Good morning. Good morning. Phoebe, you mentioned in marine systems that there was opportunity to increase the operating margin. Are there specific milestones that you would point to potentially coming up this year? And if so, what and when are they?

So there are multiple milestones in any given year. And they are tied to an exceedingly large number of internal milestones and milestones to our Navy customer. But that's not the only thing that drives. So we will see some of those as we always do in any given year. But really our ability to drive margins is all about the cost control and performance. And we continue to drive hard on both. This is a very high performing shipyard.

Thank you very much.

Thank you. Thank you very much. And thank you all for joining our call today. As a reminder, the General Dynamics website for the fourth quarter earnings release and our highlights presentation, which will be available at the conclusion of this call. If you have any additional questions, I can be reached at -876-3117. Alyssa?

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.