Good morning and welcome to the General Dynamics Third Quarter 2019 Earnings Conference Call. 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, sir.

Thank you, Rocco, and good morning to everyone. Welcome to the General Dynamics Third Quarter 2019 Conference Call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K and 10-Q filings.

Thanks, Howard. And good morning. As you can discern from our press release, we delivered attractive third quarter results with revenue of $9.76 billion operating earnings of $1.216 billion and net earnings from continuing operations of $913 million. We reported EPS of $3.14 per diluted share, $0.25 a share, better than the year ago quarter and $0.37 per share, better than the second quarter of this year. Compared to the year ago quarter, revenue was up $667 million or 7.3%. By the way, we have enjoyed top-line growth every quarter for the past 12 consecutive quarters on a year-over-year basis. Earnings from continuing operations of $913 million were up $49 million or 5.7% on a 7.1% improvement in operating earnings, partially offset by a higher effective tax rate and lower pension income. Operating margins return to the 12.5% level. Sequentially, revenue was up $206 million or 2.2% and operating earnings were up $126 million or 11.6% on higher operating margins. In short, we had significant sequential margin improvement. With respect to consensus, our margin rate was 40 basis points higher than forecasted by the South-side. This was offset in part by below the line items, leaving our EPS $0.07 better than consensus, the difference was provided by stronger operating earnings. With respect to cash, we had net cash provided by operating activities of $1,091 million and free cash flow of $847 million. As you can see from the charts attached to the press release, we enjoyed a good quarter with a 1 to 1 book-to-bill. Total backlog of $67.4 billion, decreased $258 million or about a third of 1%. I have more to say about order intake if I discuss the separate operating segments and Jason will give you some color about cash and backlog in his remarks. Let me…

Thank you Phebe and good morning. Our net interest expense in the third quarter was $114 million in both 2019 and 2018. That brings net interest expense to $350 million for the first 9 months of the year compared to $244 million for the same period in 2018. The increase in 2019 is due primarily to the debt we issued at the end of the first quarter of 2018 to finance the acquisition of CSRA. We've also been carrying a higher than anticipated commercial paper balance through the first 9 months as we continue to work to resolve an outstanding receivable balance on one of our large international vehicle programs, that's been outstanding since the fourth quarter of last year. As Phebe mentioned, our cash from operations in the quarter was $1.1 billion and our free cash flow was $847 million a 93% conversion rate. The cash performance in the quarter reflected some progress on the international receivables I just mentioned. That said, we still have work to do to resolve the balance of the arrears. We're continuing to work this issue with the customer and expect to have the matter resolved by the end of the year. Assuming these outstanding payments come in this year we still expect full year free cash flow conversion to be well in excess of 100% of net income. Notwithstanding the progress made in the quarter, cash flow continued to be impacted by OWC growth at Gulfstream for reasons you now know and at Electric Boat. EB has been operating under an Un-definitive Contract Action or UCA, on the fifth Virginia-class Block, as we continue to work with the Navy to get that effort under contract. Until we get that contract executed our progress billings are temporarily limited.

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

. Today's first question comes from David Strauss of Barclays. Please go ahead.

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

So in -- no, because we expect the entry into service, several years out. But, but I think it might be opportune just to remind you guys how we're really thinking about the portfolio of our airplanes in our operating strategy. So, as you know, we've had a plan for the past several years to bring down the 650 production and increased 500 and 600 and we're doing that completely independently of the 700. We've been pretty voluble about the fact that G650 production and deliveries will be reduced next year and again the following year, so that will get production and delivery consistent with current demand. And on that score, we've had a very consistent order book for the 650 over the past three to four years. And as you know, we've had the benefit of a large backlog we've been able to work down over time. So listen, to be clear, this has nothing to do with the 700 launch announcement is a planned long ago. Our job is to balance the loss revenue and earnings from the planned reduction of G650 deliveries with an increased flow from 500 to 600 to keep earnings stable. If by the way, the state with that risk but it comes with ample opportunity, and as I said, this has been the consistent plan, and it remains our plan. And then as the G700 enters into service that will then become another factor in our long-range, in our earnings and revenue growth.

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

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

Thank you.

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

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

Well, it won't necessarily be feathered in. But to your question about, do we have a dedicated production facility in line? We do! See to expect that type of learning that we've seen on our other platforms. On the 700 as we come down our learning curve increased production and come down our learning curve that's all post-driven by the result of both our operating efficiency as well as our dedicated line.

And just as a follow-up related to that on the order front, I know you mentioned you expect healthy orders in the fourth quarter here, and you've had a book-to-bill over 1 for the 9 months year-to-date. How are you approaching the book to -- the bookings for the G700 is it following a similar path to the G500 and 600? Thanks.

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

And our next question today comes from Cai von Rumohr of Cowen and Company. Please go ahead.

Thank you very much and Phebe congratulations on the G700 it looks terrific.

Thanks Cai.

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

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

Got it. And then I guess some industry sources suggest that you had been showing this plan for some time under NDAs. Were there any firm orders included in your bookings in the third quarter for the G700.

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

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

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

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

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

So GDIT has been taking market share. I mean if you think about their performance, the performance to set underlying for underlies their outcomes since the acquisition. We've got a 75% --70%, 75% win rate for the trailing 12 months. I mean, that is consistent month-over-month, quarter-over-quarter, and as you all know, the book-to-bills and 1.2, 1.1 to do you have different year-to-date. So look, we are, we are winning and more than our fair share, but we have seen a protraction. I mean that's a significant amount of money for our contracts be tied up in -- in protest at around $1 billion. Now protests as you all know historically resolved to the benefit of the winner, so we are quite comfortable that that historical precedents will remain. But we've also seen a slowing and the execution of the contract awards and we suspect that will resolve through the course of next year and our rate of growth will be in part and no small measure driven by the increased rate in award volume. So nothing is systemic here. It's really a question of timing.

Thank you.

And our next question today comes from Myles Walton of UBS, please go ahead.

Thanks Howard. I'm just wondering Jason, maybe you can give is a little bit more color on the cash flow and in particular, the Canadian advance, was in the numbers this quarter, and also just give is a boundary condition, if you don't make further progress on the Saudi lab. How does that play into the 3.5 billion implied free cash flow for the first quarter?

Yes, sure. So, yes, in fact the advanced we received in the quarter is in the numbers that you've seen. So that's in the 90% conversion rate for the quarter. As it relates to the balance of the year, I think the way to think about it is we came into the year with just over $1 billion of arrears from the fourth quarter of last year. That's grown somewhat call it another half a billion dollars through the balance of this year and so that's what we're after right now that's what's currently outstanding. I think you can see in our disclosures, there is an un-billed total, un-billed investment somewhere in excess of $2 billion, $2.5 billion. But that's not necessarily what's factored in here. It's really between $1.5 billion that we're still working to resolve before the end of the year.

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

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

Okay, thanks.

And our next question today comes from Noah Poponak of Goldman Sachs. please go ahead.

Hi, good morning everyone. I know I just coming back to the Gulfstream margins. I want to try to ask a question about the progression there because I know there's a lot of investor focus on it. First, please just further the last quarter of the year. If I take the guidance that you had previously provided. Literally, it would imply, it's down sequentially in the fourth quarter. So you're expecting that. And then I had interpreted prior comments to suggest expansion but modest expansion in 2020 because you're feathering 650 lower and you're still early in the 500, 600 ramp. But then, a larger degree of expansion in '21 as you further along in both of those processes. Do I have that correct?

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

And am I directionally correct on the beyond 2019 comments?

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

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

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

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

Good morning.

Hi, George.

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

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

And Jason that will more than offset the fact that the 500 through its initial block. So the margin should step up some in the fourth quarter?

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

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

That is strictly related to our relationship with the Canadians. On the new program.

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

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

Our next question today comes from Hunter Keay of Wolfe Research. Please go ahead.

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

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

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

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

Thank you, sir.

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

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

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

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