Good morning, and welcome to the General Dynamics' Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. 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, Gary, and good morning, everyone. Welcome to the General Dynamics' third quarter 2018 conference call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K and 10-Q filings. With that, I would like to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Thanks, Howard, and good morning. As is apparent from our press release, we enjoyed another solid quarter. We reported EPS from continuing operations of $2.89 for fully diluted share on revenue of $9.1 billion, operating earnings of $1.14 billion, and income from continuing operations of $864 million. The EPS performance was $0.37 better than the year-ago quarter and $0.13 better than consensus. With respect to consensus, it would appear that our revenue was somewhat lower, margins somewhat higher and operating earnings essentially in line. Most of the beat occurred on the tax line. Against the year-ago quarter, revenue was up $1.5 billion or 20%, attributable in large part to the CSRA acquisition. However, revenue was up 4.6%, excluding the impact of CSRA. All five reporting segments grew quarter-over-quarter. Operating earnings were up $72 million, a 6.8% increase, and income from continuing operations was up $100 million, a 13.1% increase. The quarter's operating margin at 12.5% is 150 basis points lower than third quarter 2017, largely attributable to the amortization expense of the CSRA transaction. In terms of economic earnings, the operating earnings absent the amortization expense related to the transaction were $1.2 billion with an operating margin of 13.2%. Sequentially, revenue was down $92 million, or 1%, and operating earnings were up $47 million. The two quarters were very much alike. On a year-to-date basis, revenue of $25.8 billion is up $3.12 billion, or 13.7%. Operating earnings were up $55 million, or 1.7%. Importantly, earnings from continuing operations were up $173 million, 7.6%, and diluted earnings per share from continuing operations were up $0.71 or 9.5% better year-to-date. With respect to cash, we had net cash provided by operating activities of $790 million and free cash flow from operations of $622 million after a discretionary pension payment in the quarter…

Thank you, Phebe, and good morning. Our net interest expense in the quarter was $114 million, bringing the year-to-date expense to $244 million. That compares to $27 million and $76 million in the comparable periods of 2017. The increase in 2018 is due to the roughly $10 billion of debt we issued to finance the acquisition of CSRA. For the year, we expect interest expense to be approximately $355 million. Our effective tax rate was 15.5% for the quarter and 17.1% year-to-date. This is lower than our previous expectation and is attributable to the finalization during the quarter of our 2017 tax return. As a result, we are lowering our target for the full year tax rate from our previous estimate of 19% to a rate in the low 18% range. This implies a fourth quarter tax rate of approximately 21%. One more point on the income statement. We had a discontinued operations charge in the quarter of $13 million or $0.04 per share. You'll recall, we sold a piece of the CSRA business due to an organizational conflict of interest issue. Under the accounting rules, this sale resulted in a breakeven pre-tax GAAP P&L outcome. However, there was a gain on the sale for tax purposes, and the tax expense on that gain is reported in discontinued operations. Turning to capital deployment, we paid $275 million in dividends in the third quarter and purchased 450,000 shares of our stock, bringing us to 2.5 million shares year-to-date for $522 million. This is consistent with our plan to acquire enough shares in 2018 to hold our share count steady. In addition, as Phebe discussed, in light of the benefits associated with the recent tax reform, we made a $255 million discretionary contribution to our pension plan in the quarter and have…

Thanks, Jason. As a reminder, we ask participants to ask only one question, so that everyone has a chance to participate. If you have additional questions, please get back in the queue. Gary, could you please remind participants how to enter the queue?

The first question comes from Sam Pearlstein with Wells Fargo. Please go ahead.

Good morning.

Hi, Sam.

Hi. I was wondering if you could talk a little bit more about the G500 and just this whole NORDAM situation. Only because United Technologies talked about a settlement, I believe, that there was a cash inflow. So, can you help us in terms of any impact that might have had in terms of the P&L and did it occur in this quarter or is it something that is still to come in the fourth quarter?

So, there were no material adjustments to revenue or earnings as a result of this settlement. That said, the details of the settlement are subject to a non-disclosure agreement, so that's all we can say.

Okay. Thank you.

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

Good morning.

Hi, David.

Phebe, I wanted to ask about a couple part question on Gulfstream. So, I know you said you didn't want to talk about 2019, but I think this is fair game since you've talked about before, just the operating income cadence from here in 2019 and 2020 relative to the $1.5 billion for Gulfstream. I think you talked about a slight increase in 2019 and a slight increase off of that in 2020, how you feel about that now. And then, NBAA, we heard comments about G550 orders coming through pretty well and the rate going up there, but we also heard about maybe a little bit nearer-term availability on G650; if you could tell us where that stands today. Thank you.

So, let me just get clarity on the first part of your question. Can you restate that for me?

Yeah. Yeah. So, previously, I believe you've talked about $1.5 billion in EBIT at Gulfstream in 2018 and then a slight increase in 2019 and a slight increase off of that in 2020. If that still holds, how you feel about that. Thanks.

So, I don't want to get into 2019, but think about it this way. We have 8 to 10 of the G500s delivering this year that carry really relatively very low margins. We'll have the remainder of that lot delivering in 2019. And then, as we move into the G600 production, those margins are going to be higher since the G500 carried a disproportionate burden of the test program. So, all-in-all, we're comfortable with the implied guidance that we gave you back in January this year and that's about all I could go into at the moment until we set all of our production rates. So that's with respect to that. On the G550, we adjust that rate accordingly. We haven't made that decision yet, but there is very nice demand for that platform, particularly in the ISR space. So as long as there continue to be government customers who see this as a powerful ISR system, and then we'll continue to produce those at fairly low level. And the availabilities of G650 are still out there. I'm not aware of any near-term availabilities whatsoever.

The next question comes from Carter Copeland with Melius. Please go ahead.

Hey, good morning, all.

Hi, Carter.

I just want to go back quickly to the NORDAM settlement. I mean UTC was pretty explicit yesterday that they had a $300 million payment related to that. So I can appreciate the terms of the NDA, but just methodologically speaking, if you didn't have a gain in Q3 and the guidance doesn't imply a gain in Q4, like where does this $300 million go?

First of all, no one can discern the number. Second of all, it is simply not material. So I – and while UT can be a little more expansive on this agreement, we, however, are bound by a nondisclosure, which I will not violate. So there you go.

Okay. Thank you.

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

Thanks so much. Good morning.

Good morning.

Phebe, on the defense side of the business, obviously been some issues with Saudi Arabia of recent. I was wondering if you could comment on what the potential backlog exposure you have is to Saudi Arabia and whether this is having any impact on your near-term order prospects.

So I don't know what the backlog is. We don't look at it in that regard. I will tell you the largest contract we have is with the government of Canada. We are continuing to build that vehicle on schedule, and we see no indication that that contract has changed, the status of that contract has changed in the moment. So, steady as she goes.

The next question comes from Peter Arment with Baird. Please go ahead. Peter J. Arment - Robert W. Baird & Co., Inc.: Yes. Good morning, Phebe. Quick question just, I guess, on Marine Systems – I mean, Mission Systems. The margin performance continues to be really impressive there. 14.6% and 13.8% year-to-date. I mean, is there a natural ceiling here for margin when you look at the contract mix? Or what's the kind of cadence, I guess, when you think about Mission Systems?

So, Mission Systems margins are driven most especially by mix and product mix. And that can, in any given quarter, in any given year, vary. But their performance, I think, is indicative of their future performance, again, driven by their mix. And it's wholly dependent on thousands of different products and simply the timing of the orders and the profitability of various different products within that portfolio.

The next question comes from Hunter Keay with Wolfe Research. Please go ahead.

Thanks. Good morning. Phebe, can you just do me a favor and parse back that comment you made around the margin differential between the G500 and G600, particularly around the test flights? Is it fair to assume that the margins on the G600 should probably hit a double-digit rate before G500, despite the G500 deliveries ramping a little bit quicker?

Oh, I'm not going to parse that. I don't think I know that in the moment. And frankly, I start to get nervous about giving specificity of margins by airplane that becomes highly competitive. But the fact is, is they will carry better gross margins because they do not have the larger share of the test program. And you'll recall, there was a fair amount of commonality between the G500 and the G600 test program. So we'll come down quickly. We'll go up where margins will increase nicely on the G500 once we get through the first lot, and they will continue to perform well once we – it's an analogous performance on the G600. Think about it that way. But just at a higher start rate.

Thank you.

The next question comes from Myles Walton with UBS. Please go ahead.

Thanks. Good morning.

Hi, Myles.

Hey. I have one clarification question, and one question. So on the clarification, you mentioned the fourth quarter color of greater than $10 million sales and segment margin similar to last quarter. I just wanted to make sure you're talking about 2Q and not the 3Q reported number?

Yes.

Okay. 2Q. And then in terms of the top-line, the greater than $10 billion and the implied 4.9% organic growth, I just want to make sure we are triangulating to the right sales number, so we are now looking somewhere in the lower $36 billion? Is that right, for the full year?

Yes. Yes, and we gave you, you will be able to discern all of the particular puts and takes in the Q. We have laid all that out for you, okay? So that should help you.

Is there a particular segment, I imagine it's Aerospace on the G500 deliveries, is that right?

Well, there's Aerospace in two regards. One, it looks like we are going to have considerably lower pre-owned sales than we had anticipated, which frankly is a good thing from a bottom-line perspective. And as you quite accurately point out, we've had fewer G500 deliveries than we had originally anticipated. And then on the other defense groups, it's really just a question of timing and when the contracts get executed. So nothing of note across any of the defense units.

All right. Thanks.

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

Good morning.

Good morning, George.

On your comment, Phebe, about the book to bill of being 0.9 and you didn't have G500 and G600 orders delayed but you didn't deliver any G500s, so the fact that the book to bill was 0.9, does that imply G650 orders or G550 book to bill were less than one? And also, what's the number of months now that you are sold out to on each of those planes? Thanks.

So, I don't track that data that you asked for. And by the way, I have come to a conclusion that I'm not going to give you detailed, first available, because it becomes meaningless with all these new airplanes coming out. We may ultimately go back to that but there's too much churn in the next year or so because we've got so many new airplanes coming out. But they are well within the comfortable levels that I've talked about before, so I don't have any concern across our existing plane portfolio.

But was the book to bill less than one for the G650 and/or the G550?

No, we don't track that.

Okay. I will stick with my one. Thanks.

Painful as it is for you.

That's right.

The next question comes from Robert Spingarn with Credit Suisse. Please go ahead. Robert M. Spingarn - Credit Suisse Securities (USA) LLC: Good morning.

Good morning. Robert M. Spingarn - Credit Suisse Securities (USA) LLC: I wanted ask – hey, good morning, Phebe. I wanted to ask you about Marine, couple of things on Marine. The first and they're both on margins. I wanted to think about the ramp of the Columbia over the next couple of years, few years and how we should think about margins on that. And then separately on the DDG-51, the recent award, which has the Huntington pricing, you've got four ships there out of 10, how do we think about that impact from a margin perspective? I suppose while we're at it, perhaps we could talk about revenues too.

So, we were very pleased with the outcome of that competition with four ships, because it gives Bath a nice opportunity to improve its profitability. And if you think about Bath's performance, on the DDG-1000, we've had terrific ship over ship learning. We have delivered the first of the restart, I think, guess the second of the restart ships on the DDG-51 and the third is under construction. We are seeing some nice ship over ship learning there. So from my point of view, this is a wholesome development for Bath and gives us really the opportunity to get where they need to be. With respect to margins, a bit large, I think in Marine. Right now, margin performance in the Marine group is driven almost entirely by timing and mix at Electric Boat. You've got higher Block IV and Columbia-class engineering volume lower margins offset by the lower Virginia-class Block III, a very mature contract that is close to – I think we delivered our final ship. So, if you recall, you've been with us now through three of these block transitions and remember that we did these ships on a continuous learning curve. So, it's incumbent upon us to ensure that we've got the operating excellence moved down our learning curve and we've done that with all three ships, or all three blocks. And you're just going to see some of that again on Block IV. There are, however, opportunities to improve those margins on Block IV, obviously, as we have in the past, and we've got improvements coming at Bath and NASSCO. Ultimately, margins can benefit as we – if you think about Columbia as we decrease our engineering work and move more toward construction of Columbia, but none of that will be clear until we get a contract in place on Columbia. And we don't think we're going to see that for the next year or so. Robert M. Spingarn - Credit Suisse Securities (USA) LLC: Should we think about, though, as your mix of business going to a less mature phase, though, so overall margins could drift down a little bit?

I don't want to get out there too much on margins. I said something, I think, inadvisably the last time, I think, on this call. And the way that I think about these margins is, look, we've got quarter variability, but the trend is there. And there's a lot of moving parts as we move into Columbia, because the decrease in the cost plus decrease in the engineering work, which carries lower margins and the advent of construction, that offers some opportunities. So, I think that at the moment it's too soon to tell, but there is potential to get better. Robert M. Spingarn - Credit Suisse Securities (USA) LLC: Okay. Thank you.

The next question comes from Jon Raviv with Citi. Please go ahead.

Hey. Good morning.

Hi.

I was wondering if you could talk about some of the portfolio-shaping opportunities you've had thus far. Is there space to do a little bit more in terms of trimming down CS GDIT or is that about it? And then, also on the other side, is there capacity to do more M&A, as that integration seems to be progressing well and you're progressing down the deleveraging process? Thank you.

So as is our want, we are constantly looking for opportunities to shape our portfolio to better align our lines of business with our core. And in the case of the large public-facing call centers, they really have a better home with MAXIMUS, which allows us to focus on our core, enterprise IT, IT infrastructure and professional services and IT business solutions. On a going-forward basis, we, as you can expect, will continue to look for portfolio-shaping opportunities. However, I think we've made it pretty darn clear, our priority for capital deployment is we're going to draw down net debt, pay down net debt fairly expeditiously. So, you should think about that.

Thank you.

The next question comes from Cai von Rumohr with Cowen & Company. Please go ahead. Cai von Rumohr - Cowen & Co. LLC: Yes. Thank you very much. So, Phebe, NORDAM, you took over the plant in early September, and you said that basically the orders were hurt because of uncertainty about delivery positions. Is it fully on track now? And, therefore, I assume you can offer firm delivery positions. And have we seen any pickup in orders? And what is the extent of the delay about, from the fact that they were kind of down for, what, 50 days or something without any production? Should we look for the first quarter to be a lot weaker than the rest of the year?

Well, look, you quite rightly point out that we now own a line, and I am always more comfortable when I can control my own destiny, particularly when it's in our sweet spot of operating excellence. So, as you can well imagine, Gulfstream has started up that line, stabilized the supply chain and we're in the process of sending nacelles to Gulfstream to support our G500 and G600 deliveries this year. We don't have a – we are not at full rate production, it takes a while at the nacelles, on the nacelle line, it takes a while to get that up, and you can be rest assured, we will get there and then have real clarity around – and specificity around delivery times. And yes, we've seen customers who are increasingly comforted and interested because we can now give them with greater assurity you're going to get your airplane on date certain. So I consider that all very wholesome. Can you repeat the last part of your question? Cai von Rumohr - Cowen & Co. LLC: I think, so we've heard that it's like a one-month delay. Excuse me, a one quarter delay. So should we expect that Q1, you're kind of going to be up or are we going to see Q1 still being very, very depressed because of the recovery from NORDAM issues?

Okay. I understand now. So the way to think about this is that we are reducing the impact in terms of time, shortening the time span as we increase our production on the nacelle. So it's really too soon to tell, but I think we will be well-positioned to support pretty robust manufacturing of the G500 in Q1. Cai von Rumohr - Cowen & Co. LLC: Thank you.

The next question comes from Doug Harned with Bernstein. Please go ahead. Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC: Thank you. Good morning.

Hi, Doug. Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC: Hi. On Marine, there's been a lot of discussion around the Navy about the need for a larger fleet, but also certainly the ability to fund the growth. And history has shown these growth plans can have a lot of uncertainty. Can you describe how you think about your capital investment plans for Marine? Huntington Ingalls has raised theirs even more. I mean, when do you decide to invest and when do you wait?

Well, yeah, the key in any capital deployment investment is to, as quickly as possible, marry in terms of time the capital expenditure with the return. And so the Navy understands that and has worked very closely through contract provisions to ensure that that happens. We've got $1.7 billion in our facilities master plan, not exclusively, but well, actually exclusively at Electric Boat. And there's another couple hundred million at the other two yards in order to support this increase in Navy shipbuilding. So I am quite comfortable that our – particularly at Electric Boat where the preponderance of the funding is deployed and will be deployed is appropriate, and timed well to support the Navy's construction. This is all pretty wholesome. We have got to prepare for the construction of this very, very large and important Columbia-class missile boat. And that's what we're doing right now. Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC: So that's the main – would that be the main focus then? I guess what I'm getting at is the Columbia classes, we've said, is a very secure trajectory. Some other programs may be less so and...

Well, look, I am capitalizing for the ships that I know that I'm going to compete in. We do not capitalize for programs that have yet to become programs of record and fully funded and supported by the U.S. Congress. That's not a wholesome business decision. Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC: Okay. Thank you.

The next question comes from Seth Seifman with JPMorgan. Please go ahead.

Thanks very much, and good morning. So I noticed a nice pickup in the backlog in Mission Systems, and since there are a wider variety of smaller programs, I guess, in that segment. So, just as we think going forward maybe relative to investment account outlay growth over the next few years which is probably going to be mid or high-single digits, how should we think about the ability of Mission Systems to grow relative to that? And are there any of the pieces of the business, are there any of them that are much more positioned to outperform or underperform that level?

So in terms of cyber, EW and ground forces communications and networks, we are very well positioned on a going-forward basis. If you think about the backlog increase, we had an award of a very large contract for IDIQ for CHS-5. And then we also had a new line of business, Life Cycle Product Management (sic) [Life Cycle Product Line Management] contract from the Army. So those were all – those were both very important, and provides a platform for continued growth. As the Army re-capitalizes and innovates around its ground forces, networking and comms, we are in the sweet spot of that relationship with the Army. So look, a lot of – if you think about it, these very impressive win rates for high-cycle businesses are really driven by being a low-cost, high-quality producer with – undergirded by very strong intimacy with our customers to understand their needs so that we're bringing them the products and capabilities, frankly, irrespective of vendors that can best suit their needs.

And, Gary, I'd like to afford the time for one last question, please?

And that question comes from Pete Skibitski with Alembic Global. Please go ahead.

Yeah. Thanks. Good morning. Hey, Phebe, just a follow-up on Marine. There was some news over the summer about missile tube production issues from at least one of the suppliers and I think some people in D.C. feared it could negatively impact the whole program from a cost and schedule standpoint. So I just was wondering if you could maybe talk about that and if you think it'll impact the program or if it's a problem may be easily resolved.

So we have worked very closely with the Navy on ensuring that the issues are identified and resolved, and it has not had an impact on Columbia's schedule. But you raise tangentially an interesting point, and that is the readiness of the supply chain to support what is significant growth. And the U.S. Navy and the Congress have recognized that with an appropriation of about $450 million for precisely the purpose of supplier and Electric Boat production readiness. So you don't – you want to exercise that supply chain before you go into full rate production to identify any potential challenges, and we're in the process of doing that. This is a very important risk reduction effort that the U.S. Congress and the Navy have undertaken, and we are very pleased with it. So this is – more to come on that, all right?

Good color.

This concludes our question-and-answer session. I would like to turn the conference back over to Howard Rubel for any closing remarks.

Thank you for joining us on our call today. If you have any additional questions, I can be reached at 703-876-3117. I look forward to speaking with you soon. Thank you. Bye.

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