General Dynamics Corporation (GD) Q4 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the General Dynamics' Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead.

Thank you, Nicole, and good morning, everyone. Welcome to the General Dynamics' fourth quarter and full year 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, it’s my pleasure to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Good morning and thank you Howard. We enjoyed a solid fourth quarter, the results in comparisons with prior period were straightforward for the most part. As a result, I will go through them briefly to leave more time for my thoughts on the business segments, our outlook for 2019 and your questions. I also think you will find the press release and the additional presentation on our website fulsome and helpful. So earlier today, we reported fourth quarter revenue of $10.38 billion, earnings from continuing operations of $909 million and earnings of $3.07 per fully diluted share. This is a significant improvement against the fourth quarter of 2017, which was adversely impacted by a discrete, $119 million increase in the tax provision as a result of a 2017 Tax Cuts and Jobs Act. Even after adjusting for the adverse impact in Q4, 2017. EPF was up $0.07 and earnings from continuing operations were up $154 million. Earnings per share at $3.07 also beat consensus by $0.09. Revenue and operating earnings were largely consistent with consensus. Most of the difference comes from a lower tax provision and a somewhat lower share count. For all-in-all, a solid quarter, with good performance, particularly compared to the year ago quarter as well as the third quarter of 2018. For the year, we had fully diluted earnings per share from continuing operations of $11.22. This is also $0.09 above consensus. Revenue was $36.2 billion was up over 2017 by $5.2 billion. On an organic basics, excluding CSRA, revenue was up $1.5 billion. Revenue was up across each of our reporting segments. Operating earnings of $4.5 billion were up $221 million or 5.2% over 2017. Earnings from continuing operations were up $446 million or 15.3% over 2017. Importantly, earnings per share from continuing operations were $166 above 2017. All-in-all, 2018 was a very good year. A year of growth and a year of important order intake that left the company well-positioned for 2019. I will review the full year and the quarters on a year-over-year basis for the groups without reference to sequential comparisons. On a sequential basis, suffice it to say that we had more revenue, higher operating earnings, higher earnings from continuing operations, and higher earnings per share than in the third quarter 2018. So let me discuss each group and provide some color where appropriate. First, Aerospace. Aerospace revenue of $2.7 billion was up against the year ago quarter by an impressive $722 million, that is 36.4%. This was attributable both in large part to the delivery of nine G500 in the quarter, and also a strong fourth quarter in the service centers. For the full year, revenue of $8.46 billion was up $326 million, or 4%. Operating earnings of $1.49 billion were down $87 million on lower operating margins. The lower operating earnings were attributable to poor performance in the completions business at Jet Aviation, the mix shift at Gulfstream, and cost attendant to the introduction of the G500. This time last year, we told you to expect revenue between $8.35 billion to $8.4 billion with a margin rate of 18% leading to forecasted earnings of $1.5 billion. We finished the year with more than forecasted revenue at 17.6% margin, and $1.49 billion of operating earnings. All-in-all, very close to the forecast we gave you this time last year. On the order front, activity in the quarter was good and the pipeline activity remains robust. The book-to-bill in Aerospace in the fourth quarter was 0.8 to $1 denominated. You can see more information on deliveries and orders in the Exhibit J to the press release. We expect the G600 to be certified this year, although the exact timing is hard to predict given the impact of the government shutdown on the FAA. But we fully expect certification of the 600 this half. The pacing item for deliveries of the G500 and 600 will be our ability to deliver in the sales. We have that line in good order. Costs are increasingly under control and we are producing very good quality. But we had to restart the supply chain that had gone dormant with the far filing of the NORDAM bankruptcy proceedings. That has impacted right in our ability to keep schedule. We expect all schedule issues to be behind us by mid-year. As a result, you will see accelerating G500 deliveries as the year progresses, and our ability to provide in the south to support G600 deliveries in the second half as well. Next, Combat Systems, Combat revenue of $1.74 billion was almost the same as the year ago quarter. The same holds true for operating earnings of $251 million and an operating margin of 15%. For the full year, revenue of $6.24 billion was up $292 million, just short of 5%. Operating earnings of $952 million were up $25 million on a 40 basis point contraction in margin, largely related to mix shift. By the way, this performance is reasonably consistent with the forecasts we provided at this time last year. We enjoyed somewhat better revenue than our initial forecast, which was an increase of $200 million to $250 million over 2017. We actually grew revenue $292 million. We forecast operating earnings of $970 and came in at $962, an $8 million shortfall largely attributable to the diplomatic issues that slowed production of a vehicle program in Canada in the fourth quarter. We continue to see nice order activity in this group, but fourth quarter orders of $2.19 billion, a book-to-bill of 1.3 to 1 in the quarter and 1 to 1 for the year. Tank orders alone are in excess of a billion. We also continue to have significant international opportunities particularly in Europe. We’ve been negotiating with Spain with respect to a program valued at $2 billion for Piranha vehicles. And of note, we acquired FWW, a qualified maintenance and service provider to the German Army and other international customers to enhance our position in a key market. FWW will become part of European land systems. In our U.S. market, our army customer is modernizing and providing a growing demand across our Combat vehicles and munitions business. 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 across the board. Marine revenue of $2.3 billion was up $237 million, a stunning 11.5% over the year ago quarter. Operating earnings of $213 million were up $46 million against the year ago quarter, a 27.5% increase on a 120 basis point improvement in operating margin. This is very strong operating leverage in a growth environment. By the way, the sequential comparison equally impressive. For the full year, revenue of $8.5 billion was up $498 million in excess of 6%. Operating earnings for the year of $751 million were up $76 million over 11% on a 40 basis point improvement in operating margin. At this time last year, we told you to expect revenue of $8.4 billion to $8.5 billion and operating earnings of $735 to $745. We came in at the higher end of the revenue range. Operating earnings of $761 outperformed our forecasts by $16 million to $26 million. In response to the significant increased demand from our Navy customer across all three of our shipyards, we continue to invest in each of our yards with particular emphasis at electric boat to prepare for increased production associated with the Block V of the Virginia submarine program and the new Columbia ballistic missile submarine. As you may recall, Block V is a significant upgrade in size and performance requiring additional manufacturing capacity. As you know, we have also increased our internal training program as well as our public private partnerships with Connecticut and Rhode Island to meet our need for skilled trade. At $243 million CapEx in 2018 from Marine was more than double its depreciation for the year. For 2019, we again expect a Marine segment to command a larger share of our capital budget as we work towards satisfying the nation’s need for its critical naval systems. So far suffice it to say, we are poised to support our Navy customers and increase the size of the fleet. As you are aware, the information systems technology group have been realigned and reshaped into two separate segments. Mission Systems, a large C4ISR business; and GDIT, a leading providers of Information Solutions to the federal government and its agencies. That was supplemented in the second quarter of 2018, by the acquisition of CSRA. I’m going to ask Jason to interject from comparison data here that you might find relevant and helpful.

On that note, let me make some comments about GDIT and Mission System’s performance in 2018. We originally guided to full year revenue for the former IS&T business group between $9.3 billion and $9.4 billion, and operating earnings of approximately one billion 30 million. If we look at how Mission Systems and GDIT excluding CSRA did for the year, they combined for $9.325 billion in sales, so in line with our expectations and that includes an organic growth rate of 4.3% for GDIT notwithstanding the impact of several divestitures during the year. From an operating earnings perspective, they were actually closer to $1.50 billion on a combined basis, so somewhat better than we had expected. So all-in-all a solid year for both businesses. As I alluded to, we also completed several portfolios shaping our activities in our GDIT segment during the year. These included the sale of a commercial health products business, CSRAs SETA business, and our public-facing call centers. These divestitures of more than $1 billion of annualized sales enhance the group's focus on high-end solutions and high-value added customer needs.

So let’s first address information technology. Information technology enjoyed revenue in the quarter of $2.38 billion and operating earnings of $194 million with an operating margin of 8.1%. Since the numbers for the fourth quarter of 2017 did not include CSRA, comparison to the year ago quarter are not particularly meaningful. However, sequentially revenue is up $75 million, operating earnings up $37 million and operating margin up 130 basis points, evidence of our continuing ability to extract cost synergies here. For the year, revenue was $8.27 billion and operating earnings were $608 million with a 7.4% margin, once again annual comparisons do not offer meaningful perspective since the prior year did not include CSRA. Next, Mission Systems. Revenue in the quarter was essentially flat against the year ago quarter, while operating earnings of $181 million were $6 million lower than the fourth quarter last year on a 40 basis point decrement in operating margin. For the year, revenue of $4.73 billion was up $245 million or 5.5%. Operating earnings of $659 million were up $21 million or 3.3% due to a 30 basis point decline in operating margin driven in part by mix. Book-to-bill for the year was somewhat above 1 times till the end of the year with the modestly higher backlog at 5.3 billion. So on this call last year on a company wide basis, our forecast for 2018 was to expect revenue of 32.35 billion to 32.45 billion. Operating earnings of 4.25 billion and an operating margin of 13.1%. And as you know, we wound up with $36.2 billion on an organic basis, but on an organic basis, revenue was up $1.5 billion, $500 million more than forecast. At the EPS line, we forecasted $10.90 to $11 and came in at $11.22 including, the transaction costs related to CSRA, which are about $0.20 [ph] per share. So let me provide our forecast for 2019, initially by business group and then on a companywide roll out. In Aerospace, we expect 2019 revenue to be about $9.7 billion, up more than $1.2 billion on deliveries of approximately 145 business jets. Operating earnings will be slightly in excess of $1.5 billion with an operating margin rate of approximately 15.5%. The margin rate is lower than 2018 as a result of the mix shift as well as a modest increase in pre-owned sales, which again generally carry no margin. The revenue will be back-end loaded as well as the margin rate. In general, the quarterly spread in revenue progression will look something like $2.2 billion, $2.3 billion, $2.4 billion and $2.8 billion. Operating margin in the first two quarters should be in the mid 14 area, strengthening in Q3 and moving to well over 17 in Q4. We believe that last year will be the low point in operating earnings during this transition to our new models with modest earnings increase in 2019 and 2020, and significant earnings traction thereafter. In Combat, we expect revenue to be between $6.5 billion and $6.6 billion, $250 million to $350 million increase over 2018 with operating earnings of $965 to $975 slightly better than last year. Here again, look for both the 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 this business with orders for the Abrams and sudden demand for Stryker vehicles and munitions. We see domestic volume expanding faster than our international business. The Marine Group is expected to have revenue of approximately $9 billion, a 6% or $500 million increase over 2018. Operating earnings in 2019 are anticipated to be about $770 million with an operating margin rate of around 8.5%. We anticipate growth in each of the yards with mix being reflected in margins. We continue to see long term growth with an expanding need for submarines, surface combat, and support ships and overhaul work. Our biggest opportunity here is around outperforming the forecasted margin rate. We expect information technology revenue in 2019 of approximately $8.3 billion consistent with 2018 with margins in the 7.5% range, a slight improvement over 2018s performance. To the plus side, we have a full year CSRA offset by the divestitures of the call centers and SETA businesses, which represented just over a billion of prior year revenues. We see the business making excellent progress towards optimizing the acquisition as we combine teams, deeply integrate business systems, consolidate facilities and increase our value proposition to diverse, defense, Intel and federal civilian agencies. For Mission Systems, we expect revenue in 2019 somewhere between $4.8 billion and $4.9 billion, an increase of just over $100 million or between 2% to 3%. We see strong growth in our maritime, cyber and space-related markets with fairly steady top line in our core tactical network incumbency. We are anticipating operating earnings up modestly over last year with margins in the mid, between mid and high 30s, once again building throughout the year. So for 2019, company-wide all of this roll up to approximately $38.5 billion of revenue up by 6% over 2018. Operating earnings of $4.5 billion and operating margin of around 11.7%. This gives us an EPS forecast of $11.60 to $11.70 per fully diluted share. I may emphasize that this plan is purely from operations. It assumes a low 18% tax provision and assumes we buy only enough shares to hold the share count steady with year-end figures 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. With respect to the quarterly progression for EPS, the first quarter should be seasonally low at about 20% of the full year’s results. The second quarter should be more than 10% better than that, and the third quarter should account for over 25% of EPS and the final quarter of the year could represent about one third of our EPS. So now let me turn this over to Jason for additional commentary around cash backlog and other items and then we’ll take your questions.

Thank you, Phebe. Our net interest expense in the quarter was $112 million bringing the interest expense for the year to $356 million. That compares to $27 million and $103 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. We repaid approximately $1.7 billion of this debt during the year, and will continue to prioritize paying down debt consistent with our Mid-A credit rating. We ended the year with $850 million of commercial paper outstanding, and our next scheduled fixed debt maturity is in the second quarter of 2020. For 2019, we expect interest expense to be approximately $430 million reflecting a full year of the notes issued in 2018. Our effective tax rate was 19.7% for the quarter and 17.8% for the year in line with our previous guidance. Looking ahead to 2019, we expect a full year effective tax rate in the low 18% range, between 18% and 18.5%. This is slightly higher than 2018, but recall in 2018, we took advantage of a onetime benefit provided by tax reform, and made a $255 million discretionary pension contribution, which lowered the tax rate by approximately 75 basis points. Looking at capital deployment, we paid $274 million in dividends in the fourth quarter bringing the full year to $1.1 billion. We also took advantage of the market decline in December, by purchasing our shares to a greater degree than planned. In the quarter, we purchased 7.6 million shares of our stock for $1.3 billion bringing the full year to 10.1 million shares for $1.8 billion. Looking ahead, while debt repayment will continue to be a priority as I mentioned, we continue to have the flexibility to adjust our capital deployment in response to changing market conditions as we did in December. Moving on to our pension plans, we contributed approximately $570 million to our plans in 2018, including the discretionary contribution. For 2019, we expect that amount to be approximately $200 million to be contributed mostly during the third quarter. We’ve also ramped up our capital expenditures, which were almost 2% of sales for the year. That’s up 60% from 2017, as we invest to support the growth of our businesses, particularly Marine Systems and Aerospace. For 2019, we expect capital expenditures to rise to 3% of sales, driven by the continued investment in the Columbia Class program. Our free cash flow conversion rate for the quarter was 200% bringing our rate for the year to 78% excluding the discretionary pension contribution, and this is below our typical 100% conversion target. If you’re following the headlines out of Canada, you know there are discussions taking place between the Canadian government and their customer on our armored vehicle supply contract. As a result of these discussions, we’ve experienced payment delays that significantly impacted the free cash flow we expected last year. To be clear, this is a timing issue and we expect to receive the delayed payment this year. Assuming the resolution of this matter, we expect the cash conversion rate well in excess of 100% in 2019 and looking ahead, we expect cash performance throughout the planning horizon to be very strong in our typical 90% to 100% range. And one last point on backlog, we ended the year with total backlog of approximately $68 billion, that’s up 7.5% over this time last year. That increase came in spite of a headwind from foreign currency exchange rate fluctuations, which reduced the backlog by $840 million, $700 million of which impacted the Combat Systems Group. Beyond the firm backlog, our total potential contract value, which includes options and IDIQ arrangements, increased by an impressive 17.5% over the end of last year, including the multi-billion dollar CHS-5 IDIQ award admissions systems. In addition, we entered into a $1.1 billion contract with an existing corporate customer for a multi-year airplane, multi-year order that requires their board approval this quarter. Once approved, that order will move into the firm backlog. So these awards along with the firm backlog provide a nice foundation for the continued growth we see ahead. Howard, that concludes my remarks, and I’ll turn it back over to you for the Q&A.

Thanks Jason. As a reminder, we asked participants ask one question and one follow up so that everyone has a chance to participate. Nicole, could you please remind participants how to enter the queue.

Thank you. [Operator Instructions] Our first question comes from David Strauss of Barclays. Please go ahead.

Thanks. Good morning.

Morning David.

Phebe, can you, can you give us a little bit more detail on the on the IT guide. I understand, with the divestitures, you know that’s a headwind on the top line, but you have one additional quarter of CSRA and in terms of the margin guide, I would have thought, we would have seen some margin improvement here given what’s going on with intangible, amortization and additional synergies? Thanks.

So let’s talk a little bit about this business. In a growing environment last year, they had a one-to-one book-to-bill. They also have a 75% win rate and a $26 billion pipeline. This management team is performing the cost synergies beautifully, and frankly is a bit of ahead of schedule. By the way, this is a very energetic, innovative, management team that is really making GDIT into a workplace of preference. And in this market, people are absolutely critical and important across the board. But, people here truly matter. I might also add the cash performance on this business is outstanding. Last year, they generated over 100% percent of net income in cash and we’ll continue that this year and for the years to come. So, so what we see this year? Despite that large backlog -- despite the large win rate and book-to-bill is this is simply a question of timing, when the contracts move from the backlog into sales. And you’ll see the growth rate increase in the third quarter, fourth quarter and then significantly next year. This is just a question of the timing of several hundred contracts moving from backlog, into our sale. That also is impacting the margin rate. So I’m very confident in the ability of this business to perform than outperform their cost synergy. They are growing great cash performance, so in the instance right now, it’s simply a question of timing.

And Dave, if you want me to, I’ll add a little bit of additional color around your influence on margin rates. If you look at the 7.4% margin rate that we reported for the year for the group. If you normalize that for the amortization burden that came with the CSRA acquisition and take that out, you actually end up with a margin rate of 9.6% for the year. So that’s a couple of hundred basis points better than we reported and about 110 basis points better than the year ago 2017 full year rate. That’s really driven by the CSRA contribution from an operations perspective if you will. So they actually contributed approximately 10.9% incremental margins on the core business, excluding at amortization benefit. Now when you look ahead to next year, when you take the puts and takes on the revenue side between the additional quarter of CSRA volume offset by the divestitures were nominally up, let’s just call it notionally flat, but nominally up. So even though we do have because of the accelerating amortization schedule that we have for this business, even though we do have a somewhat declining quarterly amortization burden, the fact that we have four full quarters of amortization versus a flattish to slightly nose knows up total top line is actually perhaps counter intuitively a little bit of a margin drag for next year. It will start to accelerate for the following year once we have a full up year-on-year comparison. So if you think about amortization, is really call it a 20 – I’ll call the 20ish basis point drag. The other part of it is -- is we do have synergies as Phebe mentioned that are accelerating, so I’d call that maybe an 80 basis point to 90 basis point assist, as we go forward and we’ll continue to accelerate after that. And then from a mix perspective issue alluded to, when we talked about this for some time after the acquisition, we did forecast, call it 100 basis point to 150 basis point contraction overall in the incremental CSRA margins over the next 3, 4 years. So call it 50 basis points or so from that. So, if you take the 20ish basis points on amortization, if you call it 50 basis points on mix offset by a positive 80 basis point to 90 basis point improvement from synergies, you get call it 10 basis point to 20 basis point that improvement for the year, and we would see it accelerating after that. So, hopefully that color is helpful.

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

Thanks so much. Good morning.

Good morning.

Phebe, I was wondering if you could comment on the Aerospace demand environment. This was the basing concerns out there about the global economy and whether that's had any flow-through to customer demand for your product in the last three months. Thank you.

So I may pass that for you. Our North American demand is robust and growing. Western Europe is been -- it’s been very active for us translating into addition to orders as well as considerable activity in our pipeline. I would say some of the emerging markets are a little bit more cautious. They tend to be focused on the 650 and on new products, but overall very very nice, very nice demand and interest in North America and Western Europe.

Our next question comes from Ronald Epstein of Bank of America Merrill Lynch. Please go ahead.

Yes. Good morning. Another maybe follow up question quickly on Aerospace. When you compare this release to your last release last quarter, and you’ll get the estimated potential contract value, it went up by almost a billion. Can you help us understand what that means and what gets thrown in that pile and why it would go up by a billion?

Well let me ask Jason, to give you a little color on that.

So Ron, one of the last comments that I made was around this area and it typically in the estimated potential contract value bucket for the defense businesses. That’s clearly contract options and IDIQ potential value. For Aerospace, it holds a number of items to include options for aircraft as well as longer term arrangements that we have with individual customers. So where deliveries may be further out in the delivery queue and spread out in the backlog. So as I mentioned, we did have in the fourth quarter, a fairly large contract signed up with an existing commercial customer it was valued at just over a billion dollars. It’s a multi aircraft, multi-year arrangement that spans out over several years that did not go into the firm backlog because that order is actually subject to that customer’s board approval coming up later this quarter. So we expect that to happen this quarter, and we’ll move into the firm backlog, and be counted as traditional orders at the time. But given the maturity of that and where it was in the quarter, that’s why we put it in the as we typically are conservative on these notions, we put it in the potential contract value bucket versus in the firm backlog till we till we get to that firm order.

Okay great. And if I may do one follow up for Phebe. When you think about the current political environment and what that means for defense spending, and then how do you pass through that? It seems like there’s just a lot of uncertainty and volatility going on. So you know in your experience, how do you think about it?

Well, some of the political contretemps haven’t necessarily affected their defense spending if and in fact, defense spending has been increasing in this environment. So we are quite comfortable that we’re going to see through our at least initial planning horizon, very nice funding for all of our key programs. So I haven’t seen too much perturbation as a result of some of the extant issues with respect to the overall budget impacting defense.

Our next question comes from Robert Spingarn of Credit Suisse. Please go ahead.

Good morning Phebe or Jason. I wanted to see if we could dig a little bit more into the margin pressure you expect in the front end of 2019 and what you saw on the back end of 2018. How do we pass the pressure between the completion issues Phebe that you cited at Jet Aviation, just the general learning curve and conversions you’re doing on five hundreds and six hundreds, and specifically NORDAM. Where does NORDAM factor into this, and how quickly do you get a lift as that problem diminishes?

So let’s take it in reverse order. We’ve got on Nacelle line well under control, the cost performance has been quite good. And as I mentioned in my remarks, we’ve had to spool back up the supply chain. That is the pacing item with respect to our timing of our deliveries, but the supply chain is doing well and it’s just going to take them a while to begin to have the capacity and the throughput and product to feed our demand. So I will see a little bit of slowness on that on the delivery in the south. But as we get into the second half, that will have completely resolved and we will be in full rate production throughout the supply chain. So we’re quite pleased with that. The margin compression it has been something we’ve been talking to you all for some time about. As you all know, the first lot of airplanes in this case, we’re talking about the G500 carried very little margin. Those airplanes will ramp up, continue to ramp up that production and first quarter, second quarter as we move from that initial lot to carry those lower margins and you’ll see some, we will see some margin expansion on that line. The 600 will come in at slightly higher entry margins, simply because of the disproportionate amount of test cost and on deep costs borne by the 500. And then we’ll nicely come down its learning curve. So those are some of the issues that we would see with respect to the margins. The completion business, the jet we had a problem this year on really on the operating side. We have fixed that, and going forward, we’re comfortable that they will do better this year.

So Jet is not really not part of the 2019 pressure?

No, [Indiscernible]. No they’re not. They will do better this year because of the affirmative and proactive steps they took in 2018. So you think -- much about mix.

Once you’re through this year, do you recover to the old margins at Aerospace?

We’ll have, as we continue to come down on a learning curve. We finish up a lot of the 500, the first lot of 500 airplanes, the first flight of 600 airplanes; you can expect us to come quickly down our learning curve. And I mentioned in my remarks, we’ll see some earnings and margin expansion in 2020 and then really quite nice expansion and considerable earnings growth thereafter, as we have completed all of those two transitions. So I’m not going to predict exactly where we end up on new airplanes with respect to terminal margins here. But, you should expect us to continue the strong operating performance you have seen from us. We know how to build these airplanes, low cost high, quality provider. We're good at that.

Our next question comes from Myles Walton of UBS. Please go ahead.

Thanks. Good morning. I was hoping we could get some color on that Canadian Lab program that was weighing on the conversion this year, and you probably had maybe a billion of revenue on that program. I’m curious, are you getting, are you getting any cash on the program an ongoing basis, and what would the conversion have looked like if not for the progress delays?

So let me give you some context here Myles. This is a valid contract that all parties to that contract have repeatedly and recently attested to their commitment to honor that contract. The Canadian government fully understands the importance of our high end manufacturing and engineering talent in London, Ontario and the robust supply chain that we have throughout the country. Our payment issue got caught up in a larger international political issue diplomatic issue. That's why we got some payment last year. Those diplomatic contretemps affected, that slowed the payment that they would otherwise have anticipated. So that will resolve. It’s a timing issue, and we’re quite comfortable and quite confident that that will resolve just at a slower rate than we had anticipated.

In just about a breadbox around it, Jason would you have been above 90% adjusted for pension conversion if you get this?

That’s correct. We would have then call it net 95%, 200% range we’ve been targeting.

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

Yes. Phebe, I wanted to ask on Gulfstream. I thought, you’d implied in the third quarter that the book-to-bill would get close to one. So if you just comment on what might have happened, so since we wound up somewhat less than that?

I believe George what I said was that the orders would be better in the fourth quarter than they were in the third quarter. In fact, they were. And you know the book-to-bill was nice particularly I think. But when you look at the addition of delivery, a considerable number of additional deliveries that we added in the fourth quarter. But you know the quarterly book-to-bill, if you go back and looked at Gulfstream, Aerospace tends to have some lumpiness that we had very nice order activity last year, and the fourth quarter was about what we anticipated the orders would be better than the third quarter. And I would also point out that we’ve got a, Jason talked about at some length, a billion dollar order with a customer that once it gets cleared by its board, moves into backlog. So I consider that, we had a good -- we had a good order quarter.

Okay. And then just could you quantify at all how much the incremental costs at NORDAM may have impacted the margin in the quarter?

Now that’s almost impossible to deconstruct. I’m very pleased with how quickly we’ve got some really good operators in Tulsa. And I’m really pleased at how quickly they were able to stabilize the line. We’ve got good performance, good cost control. And frankly, we’ve got now aligned supply chain. Though, I don’t know the any particular impact of that in with any specificity.

Our next question comes from Carter Copeland of Melius Research. Please go ahead.

Hey, good morning all.

Hi, Carter.

Phebe, just given where we are in the life cycle of the 650, I know historically you’ve given us sort of a framework and how you think about products and their lifecycle and we just got the seventh anniversary of entry and a service on the 650. So I think we’ll be halfway through that kind of 15 year life cycle that you usually reference in the next couple of quarters, and I wondered if you could just kind of update us on how you think about the lifecycle of that particular product as we look forward in this year.

So I am -- as you can well imagine, not about comment on what our thinking is about new product introductions, but you can imagine that our pea-shooter is full, that’s the way you ought to think about it.

Okay, then I’ll try another one. Jason, the comment on CapEx, just as we think about cash flow. When -- when do you see the Marine? I’m not – I’m not sure if you can answer this yeah just based on the planning. But, when should we think that the CapEx build in Marine sort of levels off from a longer term standpoint. Is that still a couple of years away?

It is, its call it over the next couple of years two, between two and three years and then you’ll see that tail back to a more normal level. So as I mentioned, over the more intermediate planning horizon, we do continue to see that. I think more reliable 90 to 90% to 100% cash conversion rate as a result.

Our next question comes from Cai von Rumohr of Cowen and Company. Please go ahead.

Yes thank you very much. So, Phebe, I believe Mark Burns who runs a Gulfstream has said at some point you’ll have a competitor to the global 70 500 in the market. And you obviously have an opportunity back where the 450 was. And, you obviously have probably taken a little bit longer than you expected on certifying the G600. So if we think about R&D, was that high in the fourth quarter -- higher -- high relatively high in the fourth quarter, and you know what, what comment can you give us in terms of what sort of a drag that will be on 2019?

So let me just gently tease you a bit about not trafficking in what I call rumor intelligence or not. So with that cautionary note, our certification has come along quite nicely. As I told you, it’s a little slower than we anticipated. You know this is a -- this is a detailed and appropriately robust process that unfortunately got impacted by the shut down and I apologize for my early optimism, but originally, in plan, our internal plan was first quarter and we think that, that because of that perturbations of the shutdown that’s going to move into the second quarter. Jason will talk about the R&D.

Yeah. Cai, the R&D for the quarter was essentially flat year-over-year. It was up a little bit sequentially from the third quarter if you go back and look at that data, call it by a roughly $20 million or so. I think for the year we ended up right around 1.5% of sales for total Company-sponsored R&D. So I don’t think high or low in any anomalous way, and I think we expect to see, as we have in the past, a continued steady drip, and Phebe alluded to it on R&D, as we continue to -- the pipeline of new product introductions and technology introductions. So I don’t think anything anomalous up or down.

Got it. Thank you. Just a last quick one. Congratulations on your aggressive share repurchase in the fourth quarter. Should we assume that you carry your comparable opportunistic approach into this year? And would you legally have been able to buy any shares early in this quarter?

You wisely have assumed that we will continue our opportunistic buying. And you -- I think you well know about the mechanism for share buybacks during the blackout. So I think we’ll leave a comment around that later. But we were very active in the fourth quarter, I think that's the way to think about it.

Operator, we have time for two more questions.

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

Yeah. Thanks. Good morning, Phebe. Phebe, just thinking about some of the good news that’s going on in Marine, and just thinking back to your kind of your longer-term targets there, you’ve had some really nice contract wins since those projections. So is this volume falling outside of that kind of scope for the 2020 targets? Or is this delivering you some additional upside, because it seems like you are tracking ahead of that. Just some additional color there would be great.

So the proponents of the growth we are going to see is, is at Electric Boat and submarines. We’ve gotten some nice wins at past. I think they’ve got 11 DDG-51s in their backlog now, and they will continue to turn through those. NASSCO started its first containership Matson about two months early. They’re working on the next oiler, and they’ve got that extraordinarily versatile platform in the ESB. So they have done nicely with slow steady growth, but the real growth driver is Electric Boat. And you see that in two respects. Both on the – we’ve got the Virginia class two-year volume in Block IV, and then Block V is a -- as I noted in my remarks, really a significant upgrade into the performance, and it is a let me just leave it at that. It is -- it will drive additional revenue, incremental revenue. And then the advent of the Columbia, which will begin early construction in next year. So this is a steady growth engine for us as we’ve been saying for some time. I’m very pleased with them.

Our next question and our last question comes from Hunter Keay of Wolfe Research. Please go ahead.

Thank you for squeezing me on. Phebe, just another question on sort of product development. As you think about sort of the long-term and some lessons learned on the G650. You talked a lot about speed before as being an important value proposition to your new customers for these high-end products. Is there any sort of evolving sort of appetite for new capabilities beyond just speed, as you think about product development in the next 5 to 10 years? Is it like runway access, access to remote regions, anything like that? Or is it really just sort of like a speed concept to sort of the next value proposition?

Speed is important, but as you can well imagine, we continue to upgrade and innovate around the avionics, cabin comfort, and the engines, both in fuel efficiency, decibel levels, and -- and look, these airplanes are getting better and better and better across the spectrum. Speed, for us, is an important commodity, because people’s time is precious, so you’re quite right, deposit, but that has been our focus, but it is by no means the single and exclusive focus.

Thank you.

Thank you, operator. With that we will end our call. If you -- if anybody has follow-up questions, please don't hesitate to reach out and call me. My number is 703-876-3117. Thank you all again, and you can sign off.

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