General Dynamics Corporation (GD) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2013 General Dynamics Earnings Conference Call. My name is Glenn, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Miss Erin Linnihan. Please proceed.

Thank you, Glenn, and good morning, everyone. Welcome to the General Dynamics' third quarter conference call. As always, any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some 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.

Thank you, Erin, and good morning. I am pleased to report that we had a very good third quarter, with revenues of $7.8 billion and net income of $651 million. We reported EPS of $1.84 per diluted share, $0.14 ahead of the year ago quarter and $0.03 better than the second quarter this year. This was also $0.16 per share better than consensus. So how did we get there? Revenue was 1.7% less than the third quarter 2012. Once again, however, revenue for each of our operating groups was higher than the year ago quarter, except for Combat Systems. The same is true for the first 9 months of the year. Revenue for the first 9 months is up over 2012 in our Aerospace, Marine Systems and Information Systems and Technology groups, but offset by a significant decline in Combat Systems revenue, leading the company down 1.4% for the first 9 months. The real story in the quarter, however, is the positive operating leverage achieved in the period. While revenue was down 1.7%, operating earnings were up 5.7% in the quarter, a clear reflection of positive operating leverage. This resulted in 12.3% overall operating margin. Net earnings and earnings per share were ahead of Q3 2012 by $51 million and 8.2%, respectively. The ratio of net earnings to revenue or return on sales was 8.4%. With respect to cash, we had $364 million of free cash flow from operations in the quarter, about 56% of net income. We had $1.3 billion for the first 3 quarters, about 69% of net income. In Q3, we repurchased slightly under 1.6 million shares for $134 million. Year-to-date, we have purchased over 9 million shares for $718 million. In addition, if we add that -- if we add to that number the 2 dividends…

Now we will hear from our Chief Financial Officer, Hugh Redd. Hugh?

Thank you, Erin. Thank you, Phebe, and good morning. I'd like to cover the usual miscellaneous financial items before the question-and-answer period. First, net interest expense was $22 million for the quarter versus $39 million in the third quarter of 2012. For 2013, we expect net interest expense of approximately $85 million. At the end of the quarter, our balance sheet reflects $129 million of net cash. And by that, I mean cash in excess of debt. This represents an improvement of $1 billion over the net debt position of a year ago. The effective tax rate was 31.2% for the 9 months of 2013, consistent with that experienced in the same period of 2012. For 2013, we expect an effective tax rate of approximately 31.5%. During the quarter, we contributed approximately $370 million to our pension plans. And through the end of the third quarter, we funded over $500 million to our plans with less than $100 million left to contribute in 2013. Erin, that concludes my remarks and I'll turn it back over to you for questions and answers.

Thanks, Hugh. [Operator Instructions] Glenn, could you please remind participants how to enter the queue?

[Operator Instructions] And your first question comes from the line of Robert Spingarn with Credit Suisse. Robert Spingarn - Crédit Suisse AG, Research Division: I'm out at NBAA. And I wanted to focus on Gulfstream this morning. The Aerospace book-to-bill I think...

By the way, you and everyone else, I think. Robert Spingarn - Crédit Suisse AG, Research Division: Possibly, it actually looks a little quieter this year, but I think some of that's the timing in the quarter. I wanted to ask you, though, about the order environment. And I think we've been hearing that, for your platforms, order demand is fairly even across the different areas, across the different markets, but at a lower level. And this is reflected, I think, in the 0.6 book-to-bill. And we really haven't seen a 1.0 book-to-bill for a while here. So I was going to ask you if you can talk about the different markets. And we sense that maybe large-cabin is softening a little bit on the order side, but at the same time, mid-cabin may be getting a little stronger. How would you comment on that?

Look, I'm pleased with our book-to-bill, and I think year-to-date, we have -- important to understand that we've got 10% more airplane orders in units than we did last year. But let me give you a little bit of background here. That said, we are a few orders shy of planes in the quarter as against our plan. And I think this is interesting. The quarter started out very strongly, but closed slower with getting to contract taking longer. And I think, certainly, the domestic order activity has been impacted by the uncertainty caused by the government shutdown and debt ceiling deliberations in Congress. But at the same time, we've seen a year-over-year growth in emerging markets and the rest of the world. So that's providing us some stability in our order book. And by the way, on the domestic side, we've got a very strong funnel. It's just taking, I think, longer to get to contract in the environment of a considerable amount of uncertainty. We've talked about in the previous quarters that when thinking about Gulfstream orders, we need to consider the mix, right? So again, this quarter, Gulfstream booked orders for each of our aircraft, and the 450 and 550 constituted about 70% of those orders. So I always look at the order in terms of mix because I think that, that tells a pretty good story. So all in all, we've seen a pretty consistent increase in our mid-cabin 280 and across our large-cabin, and I don't see anything that materially changes that in the horizon that we can see. Robert Spingarn - Crédit Suisse AG, Research Division: So Phebe, just to close. On the 650, is it fair that because you're so sold out that the order environment is a little quieter there? And then the last part of the question is could you update us on the software development on that platform? It sounds like that is still progressing, but not quite where it needs to be.

650 continues to take orders. So I consider that quite positive. And the software development, I think largely what we've had is superb operating performance of that airplane, and it's meeting and exceeding the users' expectations. We've still got some back end in terms of cabin software issues, and that's as much as user interface training and we need to make some changes, and really modest and moderate, so nothing that has been -- things that are a little bit of annoyance, I think, but quite rightly so to our customers, but nothing material. We're not concerned about that. These are normal and, frankly, far less sort of squawks that we've had in any of our other airplanes. So I think, that said, that 650 is really a game changer.

And your next question comes from the line of Doug Harned with Sanford Bernstein. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: I wanted to continue on Aero. When I think back a little ways, you all had commented that ultimately you could produce the G650, given the operation -- basically, a much better operational design for costs that would be even less than the 550. And what I'm interested in is when you look at how this is going in terms of cost performance and production, how do you see that trajectory today? In other words, are you on the path that you had hoped? Is it more challenging than you thought? Where does it stand?

All right. Let's talk about that in 2 parts. First, green, green manufacturing. We have, as you know, a purpose-built facility, along with the fact that we designed for producibility. So both of those have improved our learning curve as we have continued to move green aircraft through our facility and through the line. So we're not at our optimal, you wouldn't expect that. In fact, I don't know where optimal is and we won't know until we hit it. And our experience is that no matter where we are in the maturity of our platforms, we seem to get -- we do get better and better and better. So with respect to green, we are in line with and even a touch ahead of where we anticipated we might be. But I think we talked about early on this year that we had yet to -- we had a disconnect between green and completion. So we have largely taken care of what I termed a disequilibrium between the 2, but we haven't gotten to a steady running rate on green -- or on completions and margins on completions. So that's going to take some time and have -- provide some upside, but it's going to take some time for us to work through that. But all in all, we're very, very pleased with the manufacturing process on the 650. Douglas S. Harned - Sanford C. Bernstein & Co., LLC., Research Division: And when you look at completions, what is making that so challenging? Is this more challenging than perhaps you've seen on earlier programs, say, the 550?

Absolutely not in this stage of the development, right now. Now going back 2 quarters, yes, it was far more challenging because we had built up this backlog of green in anticipation for the flight certification, and then we had an awful lot of fairly expensive rework. But we're past that, we're through that. And so our experience now is frankly there's -- it's the completion challenges aren't as great as they were in the early days of the 450s and 550s or the 5s and 4s. But nonetheless, we haven't hit full stride there and we probably have a little bit ways to go before that happens. That's just normal learning as we come down various learning curves.

And your next question comes from the line of George Shapiro with Research (sic)[Shapiro Research].

I just want to push a little bit on your Gulfstream margin. I mean, that would imply like the fourth quarter's got to be like about 16%, substantially below this quarter on similar revenues, which would tell me there's maybe $25 million of these added expenses that you were talking about. So could you just break out how much of that you think is R&D and some of the other issues you mentioned?

Look, I think some of that is going to be available in our Q to the extent you can parse it. I don't really want to give you the eaches but let me give you just some general magnitudes. We have pushed R&D to the right as a normal part of -- as we've gotten into our development program. That will hit us in the fourth quarter. At the same time, launch assistance is an important part of our overall product development. And the launch assistance comes in lumpiness. So it's a little less in this quarter. So that's a fairly significant part of what's driving the margins down. In addition, we've got some timing issues at Jet, really fourth quarter, first quarter '14 kinds of issues, that are also having some margin compression. So in general, we're looking for margins in the close to 16% -- 15.7% range in Aerospace for the fourth quarter, as I've kind of articulated. And we're going to have a few -- fewer large-cabin deliveries, which is often what happens in the fourth quarter as we move around airplane deliveries to suit the needs of our customers. So it is a combination. You can imagine with a big business like this with a lot of moving parts, it's a combination of those items that I've already articulated.

And the next question comes from the line of Sam Pearlstein with Wells Fargo.

I was wondering if you could talk a little bit more about cash flow. It looks like you contributed a little bit more to the pension plan than I think you had planned. But in the past, you talked about being able to get to 90% of net income in free cash and then use more than 100% of that towards buyback and dividend. That would imply an awfully steep fourth quarter. And is that still on track, and what's going to change between now and year end?

Yes. So before I get into that, let me argue a little bit with the predicate. I don't recall ever saying that we would contribute more than 100%. That would require going into the balance sheet. And I actually was very careful not to say that. But I don't want to quarrel on that[ph] noise, but I do want to talk a little bit about -- and thanks for asking the question -- about cash and cash deployment in several respects. So first, I think you can see from our schedules in the press release that we have an increase in inventory and work-in-process. We are hard-working this because I don't like increases in working capital. And frankly, we're having trouble getting paid in a few instances. So we'll work through that, but it's affecting our free cash flow conversion. Second, we have higher pension contributions that we -- and we had planned those at about the $600 million level. Free cash -- we had expected free cash flow to be below 100% and anticipated around 90%. That was before the government shutdown and the latest crisis. And third, cash has been coming in late this year. I mean, we've been meeting our plan but it is coming in slightly [ph] later, usually the last day or 2 of the quarter and something we had anticipated -- or experienced in the first couple of quarters. But I think that this brings me to something that I'd like to share with you. I'd like to talk to you about the import of the brinksmanship on the debt ceiling and the shutdown, at least from my perspective. I think we should think about the shutdown in 2 phases for us. Phase 1 is DFAS and DCMA civilians were furloughed, execution on in-process invoice stopped. Phase 2, DoD calls DFAS and DCMA back to work, payment resumed. An extended phase 1 ultimately challenges liquidity. Simultaneously, this is no news to anybody, the government took the nation to the edge on the debt ceiling extension. And in my mind, we were forced to gaze into the abyss, where we saw the full faith and credit of our principal customer at risk. That was sobering and suggests that we need to be cautious with cash as we finish the year and move into next. And frankly, as I think about it, I think it is premature to assume that the conditions extend[ph] in October cannot repeat in January. It's entirely possible that we find ourselves an extended period of time trapped in Dante's first circle of hell. So I think all of that suggests that we need prudence and caution as we move into the rest of the year and the beginning of next year, until we can get a more stable plan from the government with respect to both the debt ceiling and funding for our principal customer.

But most of those...

That's kind of how I'm thinking about cash.

Is that a timing issue, though, so that if something slips out of this year, it's just next year, because of the timing of that cycle? Or is there actually a change in the actual collection?

No. We're pretty much meeting our plan. But I'm mindful that we have seen some timing issues. They've all cleared, largely, within the quarter. But I think we're seeing slowdown in payments, certainly by our government customers and some of the customers for whom we are suppliers. So that just brings some caution. And there is nothing intrinsically, other than those things that I've mentioned, that will ultimately affect our cash generation capabilities. But it's largely a question of timing, not something that I'm alarmed at but something I'm watching very carefully.

And your next question comes from the line of Cai Von Rumohr with Cowen and Company.

So Phebe, the Gulfstream margin was very significantly better, even though you have this adverse mix shift more towards the 650 and away from the 450 and 550. Can you give us a little bit more color on some of the issues you laid out? For example, was -- launch aid was high or how big about and how big for the year? Was there sequential improvement in the productivity and the profitability of the 650 as well as the 450, 550, x the supplier price hikes? Was there sequential improvement in Jet versus the second quarter?

All right. Let me give you a little bit of more detail here. We had higher performance across all of our lines, at all of our new plane production lines at Gulfstream, with the exception of the 450 and a little bit the 550 because of some of those supplier costs. But x that, clearly, productivity increases. Second, we had one of our best service quarters ever in revenue and margin. So it's a very -- at Gulfstream, very strong service and margin performance there. And I talked to you a little bit about Jet because that's a very -- that's a good news story compared to where we've been. Think about Jet in 3 respects. First -- in 3 lines of business. First is their FBO and service business. Those have continued, since we've owned them, to perform very well and exceeding our expectations. Second is their maintenance business. And if you recall in the fourth quarter of last year, we sold or closed a number of our facilities in Europe, maintenance facilities. So our revenue was lower on maintenance, as we anticipated, but margins are up. So I'm very pleased with that. And then the big muscle movement has been all along with Jet completions. And I've been reporting to you steady improvement on our operations at Jet. That team has done an excellent job turning around what was a very troubled program -- or a very troubled line of business. And we are at profitability. Our order book has increased, our funnel has increased. And I -- but I'm very cautious about sales in the completion side because they're big and they're lumpy. And we need to approach that, as we do, with a fair amount of realism about the art of the possible, good terms and conditions, fairness and ability to meet schedule for our customers. But Jet is a good news story and that team out there needs to be commended. So all of those things -- and Jet, by the way, has been profitable every quarter this year. All of those elements combine to drive up margins, a little bit above where I had anticipated. But don't get out ahead of me in the fourth quarter, because we do have higher R&D. And by the way, we did -- you asked a question about launch assistance in this quarter, in third quarter, not material. But in the fourth quarter, it's going to be less and that's just a question of timing, nothing specific. All right?

So when you say launch assistance, is this a payment that you make or a payment that is made to you?

In the Aerospace business, suppliers tend to contribute to the development of new products or refresh. We certainly do when we're supplying to Aerospace prime and on the commercial Aerospace side, and our suppliers do as well. That's nothing new. That's something that we've seen for the last 10, 15 years since we've been in development.

Your next question comes from the line of Joe Nadol with JPMorgan. Joseph B. Nadol - JP Morgan Chase & Co, Research Division: Just over on the Combat business, sales have been obviously really kind of trailing off and were down 30%. There was a slight uptick in backlog, which was a very good sign. Just wondering if you could revisit your expectations on bookings, both domestic and international, what you're looking for there and the timing or the visibility or lack thereof. And even -- to the extent you're willing to do so, looking into next year or the next couple of years, where you think we're going to start to bottom out?

Okay. I appreciate this because I think this is an important question. As I go back and think about it, I explained to you all in January that we're going to work hard to make our order book, but I was uncomfortable giving you guys guidance around revenue, other than the most general, particularly in Combat. Because while we were going to work hard at revenue, we can't control it. And also, you may recall that the guidance I gave you was without regard to sequestration, let alone furloughs and the shutdown, all 3 of which has happened. So in a way, it's been, frankly -- it's no wonder that our revenue was lower. But I think this question deserves a little bit more clarity and detail, so let me give you that. Our sales are lower in Combat for 3 primary reasons, and I'll walk through each. First, most of the international orders we anticipated in the first quarter have not yet materialized and it's consistently slipped to the right. And clearly, without those, our sales estimates are going to be off. Second, we did not foresee the sharp decline in the military axle market as a result of the budget uncertainties in the Army and Marine Corps that have impacted both their force structure and equipment. And while MRAPs are remaining at some level within both of those services, they have been prioritized at a much lower priority as those services wrestle with the current environment. So we think that, as we can look forward, MRAP reset and modernization will occur in the future, but not at anywhere close to the level we anticipated. In my perfect world, in a sequestration-free environment, I suspect the outcome might have been otherwise, but that's not what we're facing. Finally and…

I'm not comfortable giving the backlog, but I -- we anticipate several of those international orders which have -- I think I've been pretty clear and it's been obvious, have slipped to the right quarter-by-quarter. But the circumstances that we had, the marketing circumstances and the environment that existed in the first quarter are still here, it's just a question of patience, which is something I'm not particularly good at, but I am nonetheless required to be patient here. But we continue to see several of those orders coming in, in the fourth quarter.

And your next question comes from the line of Myles Walton with Deutsche Bank.

Can we go back to Gulfstream for a second? Phebe, I think you mentioned, in the quarter, you were maybe a couple light -- or a few light of your plan from an order perspective. And you also mentioned 70% of the orders, I think, in the quarter were 450, 550. The question really is can you give us some color on just the 450, 550 book-to-bill as you've seen it year-to-date? And would you actually have to see kind of better-than-planned closure of orders in the rest of the year to keep that production flat?

I really don't want to get into it, no surprise to you, but nice try asking, and to the book-to-bill by unit, because then I'll spend the rest of my time here in an exegesis on the various lines of airplanes we've got. But we've -- we have an order book and the funnel on the 450 and 550 have continued, and we see an uptick also in the 280. So everything that we see in our funnel and where we are in that funnel suggests that we just really need, on the domestic side, some stability coming from our government with respect to -- and the debt ceiling primarily, and the shutdown. But primarily, the debt ceiling, as we look at a lot of our domestic customers and they are a little wary. They're very interested. Interest is up across all of our lines, airplane lines, including the 450. And service revenue is up and continuing to look good, so far, into this quarter. So absent some exogenous force, like a real contraction in the U.S. economy, we're good to go on Aerospace.

One quick one, if I could squeeze it in. The employees that you're carrying, the 95,700 that you disclosed in the quarter, you're one of the few, if only, defense companies that actually has grown the employment, certainly in the last couple of years. Is that completely isolated to Gulfstream? And what does that picture look like just in the defense businesses?

Well, this is actually one of my favorite questions because it's something this management team and I look at frequently. If you parse this down, it's a tale of 2 cities. Gulfstream has increased its sales -- or its employees, as you would expect. Marine group somewhat, as we've begun to gear up, and particularly on our research and development side that are cost-plus engineers. IT has continued to increase, based on their order book and their sales, but it is -- so that's the tale of 1 city. And then everywhere else, in some instances, we're down 50% of our sales force. So this has been extremely painful across some of our businesses. They've done what they needed to do to respond to the environment. But I'm very mindful of the human impact of all of this and it's camouflaged by that gross number. But you can imagine that we work this very, very hard, as I see this as the level of our overall productivity. But there's a lot of specifics embedded there that tell 2 very different stories.

Your next question comes from the line of Carter Copeland with Barclays.

Just wanted to go back quickly to the Aerospace margin dynamics you outlined for Q4, and I wondered if you could help us think about what in that is temporary. You -- I think I heard you say that Q4 and into Q1, you expect the impact of the timing issue at Jet. But when you look beyond Q4 and into next year, is the R&D or launch assistance dynamic, does that play a material role in how we should think about the longer-term profitability? Or is there anything else that we should think isn't sort of temporary from what we're seeing in Q4? I guess the supplier renegotiation of 450, 550, anything like that.

It's temporary. Well, yes, so it's temporary on R&D and launch assistance, which tends to be kind of lumpy. And that, we will smooth as we plan for 2014. And I don't want to get too much into 2014. I suspect that the timing issues at -- on completions at Jet will resolve right away, quick. So that's nothing systemic. So when I think about the margin compression, absent what we talked about last quarter on higher supplier costs, there is nothing structural here going into '14. But as we go through our planning process, I'll have -- and on the fourth quarter call, I'll give you an awful lot more clarity about '14 and Gulfstream and margins and Aerospace in general. It's pretty typical of our planning process.

So it really just comes down to the margin performance differential between the legacy large-cabins and the improvement you make on the 650 at this point once you look out there.

That's right, and that's going to be mix. And we'll get -- as we plan through next year and we'll take a look at what our really incremental learning is down each one of those lines, we'll begin to estimate, but that's not where we are yet. Going back to, there's nothing really structural here.

Your next question comes from the line of Howard Rubel with Jefferies.

Well, the other surprise was IS&T. And in some ways, Phebe, could you -- you talked a little bit about the environment, but the business seemed to outperform the environment. Could you provide a little more granularity and where some of your successes are and where some of your challenges are?

Yes. So look, IS&T has done very, very well, and frankly, exceeded, I think, everybody's expectations, including mine. This team has worked hard. Without chasing revenues, they've held their own in a tough environment. That's across the board with AIS and GDIT on the revenue side. GDIT has performed very well on revenue and they're fighting their margins. As you know, that's a very tightly fought environment, but they're doing quite well. C4 has had an outstanding quarter with respect to margins. So let me give you a little bit of color on this. If you recall, as we entered the year, at the end of last year, we had 4 separate business units. We have now contracted to 3 in IS&T, because we, for reporting purposes, included GD U.K. within C4. And C4's margins have been very, very good, particularly in light of the drag out of GD U.K. And I think in the quarter, we have $11 million in charges out of GD U.K., and headwinds for and charges for the entire year-to-date at about $20 million, so very disappointing out of GD U.K., very disappointing. That said, we've got the A team in place there. Each one of those programs that we are participating in are strongly supported by our customer and by the team that we've got in place. So we're meeting the needs of our British customer, to which we're highly attuned and dedicated and have been for many, many years. This was just a prior management team that took its eye off the ball. And so we've got some cleanup. I spent a little time on that so you can understand the headwinds that, that entire group has faced in a difficult market on margins. So I'm very, very pleased with where they are. They've got a pretty good book-to-bill. We've had a steady order intake and we're really on the mend here. GDIT is quite a powerhouse, disciplined, mature management team, and I'm very confident where they are all headed. Does that help you?

Well, just as a follow-up, I mean, this business in some ways probably has the most sensitivity to some of the turmoil you described with your major customer. How is it you've been able to do a little bit better? I mean, other than discipline. I mean, is it -- I mean, the Army, clearly with Combat, with its radios and so on, on one hand, you have that market on the other. There's elements of a withdrawal that clearly should be hurting. So maybe a little more granularity.

Okay. Let me -- Yes, sure. Let me help you -- try to parse that a little bit for you. C4 is the business with the largest exposure to the Army, not exclusive but the largest. The IT business has some exposure but we have reorganized in all 3 of those business units -- by the way, don't think that I think reorganization is a panacea to performance, but it's a predicate to improved performance in a down environment. So in IT, we've consolidated a number of the businesses to take -- lines of business to take advantage of growth in some businesses en masse. So they are accommodating. They're somewhat small and offsetting their somewhat small exposure to the Army. AIS has almost no exposure, in fact, none to the Army. So that leaves C4. And I think in that context, let me give you a little bit of color on C4's -- and maybe this will help you, on C4's programs of record. We've got WIN-T and that network clearly remains a priority. If you think about the Army historically, they balanced out force structure with capability. And that network allows them to do more with less. So we're fortunate to be the incumbent on this program of record. And we've been adjusting our business to deliver the capabilities in whatever deployment schedule the Army is on. So we've had a number of LRIPs approved year-to-date and we're continuing to perform on that network. And again, we size our business to the demand of the Army. On the rifle -- or on the radios, I think it might help you to give a little bit of program color there. As you probably know, we're the incumbent for both HMS Manpack and the Rifleman radios, which take our network capabilities from the WIN-T backbone and down to the individual dismounted soldier. And we're currently delivering on both products in the thousands of units. So I think that, that's important in understanding what's driving the underlying demand at C4. That said, C4 is completely restructuring its business in order to meet the current environment and -- which will, I believe, going forward, give it significant opportunities to further right-size itself and adjust to the demands of its principal customer. And by the way, not exclusive customer as we get outside the United States. So I'm very pleased with the agility of that particular -- or all of our businesses, but that business to recognize the environment they are in and take appropriate actions. So I hope that helps you understand.

And your next question comes from the line of Jason Gursky with Citi.

Phebe, I just wanted to ask about the portfolio and whether you feel like this is the right portfolio or there's still some portfolio shaping to do either through divestitures or acquisitions. Just kind of update us on your view of the portfolio at this point.

Well, let me talk about acquisitions. I think I've been pretty clear in the year that we are and will be focused on operations. I haven't had any acquisitions on my horizon. I don't now and I'm not looking. So let's take that off the table. But with respect to the portfolio, my vision hasn't changed. And I've talked to you all about that balance in our portfolio. With respect to positioning, let's talk about that in a little bit more detail. In the platform businesses, it's pretty easy to see that we're the clear market leader with critical mass, right? But in the IS&T portfolio, it's a bit harder to discern who does what to whom when, simply because our businesses are each comprised of thousands of programs. So positioning in IS&T tends to be by line of business rather than by major programs. So what the IS&T management team and I look at to balance our portfolio, pretty much continually, is that line of business positioning. And no real shaping is required now, not of any material issue. I mean, we may take some paring here and there as we walk through and see what's core and what's not. But so far, steady as she goes.

And your next question comes from the line of Robert Stallard with Royal Bank of Canada.

Phebe, just a quick question for you. In the past, you've given us some idea of what the lead time is on your Aerospace models, in terms of when the next slot becomes available. I was wondering if you could give us an update maybe on the 650, the G450, 550 and the G280 on that basis?

Well, those -- each one of those -- well, 2 of those aircraft are legacy mature programs, right? And you would expect us to have some significant changes to -- in that environment as we go forward. 650 and 280 are brand-spanking new. So we would think about, in the normal course of business, refreshes, but I'm -- in a several-year time horizon. But I'm not going to get any more specific about that, since it seems to be high sport to what we're going to do and when we're going to do it. But I can tell you that our planning is very deliberative, it's not reactive. And when we announce an airplane, it's a real airplane and not a PowerPoint. So we're on track to do what we've always anticipated we would do, and we'll announce when we're ready.

The 450, 550 lead time has come down from 18 months, which it used to be. We shouldn't be too concerned about that then?

No. We've got, I think, some availabilities about a year out and we'll continue to work that. Those are very efficient, highly scalable lines. So we've got enough in our backlog that we're comfortable. So I'm not particularly concerned about that. If that changes, we'll let you know. But we're looking at the late, late end of '14, early '15. So I'm still comfortable that, that's a pretty good margin. And then, as I said, particularly about our hedge, as I said particularly in this quarter, where we saw a little bit of softening in the domestic environment. And I think that's wholly attributable to the machinations in our government.

Your next question comes from the line of Peter Arment with Sterne Agee. Peter J. Arment - Sterne Agee & Leach Inc., Research Division: A question, I guess, back on IS&T. I just wanted to dig in a little further. You're consolidating the GD U.K. and I appreciate the color there. When you think about the kind of the business lines, still 50% of the portfolio is on kind of the IT services side. Are there opportunities to kind of restructure or scale that if needed? I know you kind of look at it by lines of business, but maybe just some additional color there.

That management team has, in fact, reorganized to meet the current demand. So we've taken our units down from -- or the lines of reporting at the macro level from -- within IT, from 4 to 3, better streamline, reduce costs. And there, it's a daily fight across thousands of programs in multiple portfolios, from intel to each one of the services and beyond DoD into non-DoD agencies. So they are doing very well, I think because of their reputation and their cost structure, in winning more than their fair share of new contract awards. So I'm very proud of that management team. They're tough, they're mature, they're great businessmen.

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

And that question comes from the line of Ron Epstein with Bank of America Merrill Lynch.

So maybe more of a fuzzy question. We walked through a lot of details on a lot of the business units, so thank you for all the detail on that. Now that you've been sitting in the role that you have been for a while, what really has been, from your perspective, maybe some of the biggest challenges that you've had to deal with in the role of CEO over the last couple of quarters? I mean, when you were kind of preparing for the role and now that you have it, I mean, what has been the biggest challenges?

Well, I think -- it's interesting, I don't face these challenges alone, I face them with a management team. We spend an awful lot of time communicating among each other, as you would expect. And we have complete goal congruence. We are challenged in some of our markets by an environment, but I see that as an opportunity, frankly. In tough times, that's where you see human beings' character and their mettle and the strength of an organization. And GD is doing quite well, in my mind, managing what we can control. We're not going to lose a lot of sleep over those things that we can't control. But to the extent that we can control our operations, we're getting at it and getting at it hard. So I don't know that there have been any unique challenges. I think we've had a few curve balls as a country, frankly. I think we got a little bit further down the shutdown and brinksmanship paths than I think any of us, as Americans, would be comfortable for. But that wasn't idiosyncratic to General Dynamics, that's just, I think, at large. So I think that the challenges have been those that I expected, that we were going to see a little tougher environment. And that's the time when you differentiate yourself. So I've been very pleased with the management team. And it's about hanging tough and good leadership across the board. By that, I mean all of us, not just me.

Yes. And then if I may, just one follow-on, just one quick detail, I don't think you discussed too much about it. In the quarter, the margins in Land Systems were outstanding, right? I mean, they were just about, what, 100 basis points behind...

Combat.

Yes, Combat, excuse me, yes, behind Gulfstream. Was there...

By the way, they're well aware of that.

I'm certain they are. Was that team catch-ups? Or I mean, how should we think about it? And I was really like...

Yes, recall that we are not on team catch-up, okay? So look, this was the result of superb operating performance in that group. And as they continue to perform on each one of their programs, they've retired risks. And so this was really a really strong line-by-line focus on cost reduction. And I think that you've seen we anticipated this down cycle. I mean, we are in a cyclical business and we anticipated this down cycle and got out ahead of it with a fair amount of restructuring. So that's coming to fruition. The fourth quarter will see a little bit of margin compression. You haven't asked us, but I'll just give you a little bit of color. We've got the remainder of the ATP-OTS consolidation costs, which we will cover. It's the right thing to do and will put us in good position going forward. It's been clear, I think, from some of the press announcements, we've got a bit of mix shift at Land Systems as we move from mature programs into the double-V hull. And now, we're going to pick up some headwinds on that axle market. But in general, this is solid performance of a very good management team. And by the way, a lot of these guys lived through the last downturn, post the end of the Cold War. They know what to do. And that culture has, at both Air[ph] and Electric Boat[ph] , has permeated all of GD. Enough of my proselytizing, but that's what happened.

Thank you, all, for joining our call today. If you have additional questions, I can be reached at (703) 876-3583. Have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.