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General Dynamics (NYSE:GD)
Q4 2017 Earnings Conference Call
Jan. 24, 2018 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the General Dynamics Fourth-Quarter and Full-Year 2017 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the * key followed by 0. After today's presentation, there will be an opportunity to ask questions.

To ask a question, you may press *, then 1 on your telephone keypad. To withdraw your question, please press *, then 2. Please note this event is being recorded. At this time, I would like to turn the conference over to Mr. Howard Rubel, vice president of investor relations. Sir, please go ahead.

Howard Rubel -- Vice President, Investor Relations

Thank you, Denise, and good morning to everyone. Welcome to the General Dynamics Fourth-Quarter and Full-Year 2017 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.

Phebe Novakovic -- Chairman and Chief Executive Officer

Good morning. We are very pleased to have Howard join our senior leadership team. Thank you, Howard. Earlier today we reported fourth-quarter earnings from continuing operations of $2.10 per fully diluted share on revenue of $8.28 billion earnings from continuing operations of $636 million.

This result was impacted by a charge arising from the 2017 Tax Cuts and Jobs Act. The adverse impact was $119 million and is reflected in an increased tax provision. Adjusting to exclude the impact of this one-time event, we had earnings from continuing operations of $755 million and adjusted EPS per fully diluted share of $2.50. Adjusted earnings from continuing operations are up $175 million over the year-ago quarter.

Similarly, adjusted earnings per diluted share from continuing operations were $0.61. You can find a more fulsome explanation of this in exhibits A and B of our press release. As expected, you'll see a lot more of this as other aerospace and defense companies report as you have already seen in other market segments. Revenue and operating earnings were up significantly against the year-ago quarter by 8.1% and 34.6% respectively.

So, all in all, a solid quarter. It's good performance all around.For the year, we had fully diluted earnings per share from continuing operations of $9.56 on revenue of $38.97 billion and earnings from continuing operations of $2.9 billion. On an adjusted basis, excluding the impact of tax reform, we had fully diluted earnings per share of $9.95 and earnings from continuing operations of $3.03 billion. Revenue from the year was up over 2016 by $412 million or 1.3%.

Operating earnings were up $443 million, or 11.9% on a 130-basis-point improvement in operating margins. Earnings from continuing operations were up $233 million, or 8.7% as reported. Adjusted for the impact of the tax reform act charge, earnings from continuing operations were up $352 million, a double-digit increase of 13.1%. All in all, 2017 was a very good year, leaving us well-positioned for 2018.

Perhaps the most important story in the quarter was the cash performance. Free cash flow from operations was $1.84 billion in the quarter. For the year we had free cash flow of $3.45 billion. We advised you at the beginning of the year the free cash flow is going to be approximately 100% in net earnings.

In fact, it was significantly better than that. Further, we enjoyed a $1 billion reduction in operating working capital on the quarter as milestone payments were received at Land Systems and cash deposits were received at Gulfstream. Of note, the cash performance throughout our planning horizon should be very strong.

There's a lot to cover this morning including guidance. So, I'll review the year and the quarter as adjusted on a year-over-year basis for the groups without reference to the sequential comparisons. On a sequential basis, suffice it to say that we had more revenue and lower operating margin. This resulted in operating earnings and earnings from continuing operations that were very similar across all four quarters.

Let me discuss each group and provide some color where appropriate. First, aerospace. Revenue was up against the year-ago quarter by $157 million, or 8.6%, and operating earnings were up $66 million, or 24.1%, the result of a 220-basis-point improvement in operating margin. For the full year, revenue of $8.13 billion was up $314 million, or 4%.

Operating earnings of $1.59 billion were up $186 million, a strong 13.2% advance on a 160-point improvement in operating margins. In sum, an outstanding year at aerospace with strong operating leverage and very good order intake, particularly in the fourth quarter. This time last year we told you to expect revenue between $8.3 billion to $8.4 billion with a margin rate between 19.1% to 19.2%. At year-end, we had higher margins on somewhat lower revenue driven entirely by negligible pre-owned aircraft sales.

By the way, we work really hard to avoid pre-owned sales because they carry no margin. On the order front, activity in the quarter was very good and pipeline activity was robust. The book to bill at aerospace in the fourth quarter was $1.3 to $1.00 denominated and $1.4 to $1.00 in the unit.

Let me give you some additional data on this subject, as it relates to the quarter and the year. At Gulfstream, net orders were up over 20% year over year. Within that increase, midsize orders were exactly the same as last year. Net large cabin orders were up almost 30%.

Most importantly, on a gross basis, G650 and 650 ER orders were up 78% year over year. This is the best G650 and 650 ER order quarter since 2014, when we had a quarter with a number of multi-aircraft customers. It is also the second-best quarter for the G650 and 650 ER in orders terms since the launch in 2008. So, we had a nice increase in large cabin orders led by the 650 and the 650 ER.

As we speak, there are over 280 of these aircrafts in service with many early customers returning to buy another. During the quarter we also announced an increase in the range of the G500 and G600 by 200 and 300 nautical miles respectively at long-range cruise of 0.8 Mach. At 0.9 mach we increased the G500 range by 600 nautical miles and the G600 by 300 miles. The increased ranges were proven during flight test and can be attributed to very successful control of the weight of these aircraft.

By the way, we announce increases only when we are certain that it can be delivered. We also enjoyed both record sales and earnings for the Gulfstream service business in 2017, which leads me to another subject. I rarely speak to you about the overall market. I usually speak to our own demand, which has held up very well in a slow market.

We have clearly gained share from others in this market. Furthermore, my sense is that order activity and customer interest are picking up across the industry. I will look forward to the reports of other OEMs on this subject as they become available.

Next, combat systems. At combat, revenue was $1.75 billion, up $87 million, or 5.2%, and operating earnings are up $30 million, or 13% on a quarter-over-quarter basis on the strength of a 110-basis-point improvement in operating margins. For the full year, sales were up $419 million, or 7.6%. Operating earnings were up $106 million, or 12.8% on an 80-basis-point improvement in operating margin, very strong operating leverage here.

By the way, this performance is reasonably consistent with the guidance we provided at this time last year. We actually achieved a better result on somewhat higher revenue, and operating margins were 20 basis points better than guidance. We continued to see nice order activity in this group, with Q4 orders of $1.7 billion, tank orders in the quarter were $975 million, part of a $2.4-billion IDIQ-type contract that we were awarded in the quarter. Internationally, demand remains good.

We signed a $1 billion contract for combat vehicles with Romania earlier this month and the pipeline remains robust, particularly in Europe and the Middle East. In our U.S. market, our U.S. Army customer is modernizing, generating demand across our combat vehicle and munitions businesses, fueling 0.9 to 1 book to bill for the year.

This is particularly impressive in a year of nice revenue growth. In short, this group had quite positive revenue growth and continued its history of strong operating leverage.

For Marine, revenue of $2.1 billion was up $163 million, or 8.6%, compared to the year-ago quarter. Operating earnings of $167 million were up $125 million against the year-ago quarter, which included a charge at Bath Iron Works, which we discussed with you last quarter. Revenue for the full year was down $68 million, less than 1%, on lower commercial ship revenue at NASSCO. Growth will resume in our planning horizon.

Operating earnings for the year of $685 million were up $90 million on a 120-basis-point improvement in operating margin. So, better margins in 2016 but still not where we need it to be. At this time last year, we told you to expect revenue of $7.9 billion and operating earnings of $680 million to $685 million. So, our revenue was $104 million higher than forecast but operating earnings of $685 million were consistent with the upper end of the target range.

In response to the significant increased demand from our navy customer across all three of our shipyards, we're investing in each of our yards. We will spend $1.7 in CAPEX at electric boat over the next several years in anticipation of increased production on the Block 5 Virginia Submarine and the New Columbia ballistic missile submarine. As you may recall, Block 5 is a significant upgrade in size and performance, requiring additional manufacturing capacity. We also have increased our internal training programs as well as our public-private partnerships with Connecticut and Rhode Island to meet our need for skilled trades.

Over the last two years alone, we have hired and trained 4,600 highly capable employees. We are also investing over $200 million in CAPEX at Bath and NASSCO to meet the navy's demand for more destroyers and auxiliary ships. Suffice it to say we are poised to support our navy customer as they increase the size of the fleet.

In the information systems and technology group, revenue in the quarter of $2.49 billion was up $216 million, or 9.5%, against the year-ago quarter. Operating earnings of $282 million in the quarter were 22.1% better than the fourth quarter a year ago on a 110-basis-point improvement in operating margin. For the year, revenue of $8.9 billion was down $253 million, or 2.8%, but operating earnings of $1.01 billion were up $70 million, or 7.4%, on the strength of a 110-basis-point improvement in operating margins, very good operating performance. Recall that at this time last year we forecast a modest increase in revenue for the year with operating earnings of $1 billion to $1.05 billion and a margin rate of 11%.

So the operating earnings came in as guided with lower revenue on a 40-basis-point higher margin rate. As we have frequently pointed out, IS&T book to bill has been at or in excess of 1 to 1 for each of the past four years resulting in a healthy backlog. That said, the transition of that backlog into revenue has been slower than we originally anticipated. The combination of the CR and a new administration slowed the pace of awards, particularly in our fed civ business.

While both defense and fed civ picked up during the second half of the year, we simply did not have enough time before year-end to recover fully. This leads me to be confident that the growth in this business will materialize beginning in 2018.

On this call a year ago, on a companywide basis, our guidance for 2017 was to expect revenue of $31.35 billion to $31.4 billion and an operating margin of around 13.3%. We wound up the year with revenue of $31 billion but we're at the high end of our operating earnings expectations because the operating margin of 13.5% was better than anticipated. Most of the revenue shortfall came in the short-cycle IS&T segment that we just discussed. Last year at this time we provided EPS guidance of $9.50 to $9.55.

Without regard to the $119-million-charge related tax reform, we wound up at $9.95, $0.40 to $0.45 better.

So let me provide some guidance for 2018 and some out-year commentary on 2019 through 2021 initially by business group and then a companywide roll-up. In aerospace, we expect 2018 revenue to be $8.35 billion to $8.4 billion, up $220 million to $270 million. Operating earnings will be slightly in excess of $1.5 billion with an operating margin rate of 18%. The margin rate is lower than 2017 as a result of mix shift and increased R&D spending as well as a modest increase in pre-owned sales which, again, carry no margin.

In aerospace, for the five-year period of 2017 through 2021, we expect the sales CAGR of slightly more than 7%. That CAGR rolls up a modest sales increase in 2018 with more significant growth in 2019 and beyond. While it is difficult to predict with fidelity our earnings rate as a result of significant mix shift, we see our earnings grow at a 3.5% to 5% CAGR. We see 2018 as the low point in earnings during the transition to our new model, with modest earnings increases in 2019 and 2020 and significant earnings traction in 2021.

In combat systems, we expect revenue to be between $6.15 billion to $6.2 billion, a $200 million to $250 million increase over 2017 with operating earnings of $970 million, a $33 million increase. This implies a margin rate of around 15.7%, very similar to the last year. For the period of 2017 to 2021, the expected sales CAGR should be in excess of 7% and the earnings CAGR in the low 6% range. The marine group is expected to have revenues between $8.4 billion and $8.5 billion, a $400 million to $500 million increase over 2017.

Operating earnings in 2018 are anticipated to be between $735 million to $745 million with an operating margin rate of about 8.7%. The 2017 to 2021 sales CAGR is expected to be 5.6% with very strong growth in 2019 and 2020 and gradually improving operating margins. The expected earnings CAGR for the marine group from 2017 to 2021 is about 6.7%. Finally, in IS&T we expect revenue in 2018 of $9.3 billion to $9.4 billion, an increase of $400 million to 500 million.

We expect operating earnings to be up $20 million to $30 million over the last year with a margin rate of around 11%. For this group, we see a sales CAGR of 5.5% and an earnings CAGR of 5%.

Let me turn this call over to Jason for additional commentary and then we'll take your questions.

Thank you, Phebe, and good morning. I'll start with the subject that's getting a lot of attention and impacted both our 2017 results and our outlook going forward, and that's the recently enacted tax reform and effective tax rate. Our tax rate was 36.9% for the quarter and 28.6% for the full year. Removing the effective tax reform, our effective tax rate was 25.1% for the quarter and 25.7% for the full year.

The unfavorable impact on our tax provision that Phebe discussed is due primarily to the remeasurement of our net deferred-tax assets at the new lower statutory rate as required under generally accepted accounting principles. Looking ahead to 2018, we expect a full-year effective tax rate of approximately 19%. This rate reflects the lower statutory rate on domestic income, the elimination of historic tax benefits, such as the domestic production credit, and the fact that the tax rate applicable to our international operations are now essentially at parity with our U.S. operations, if not slightly higher.

This contrasts with our history where the relatively lower taxes on our international operations had a beneficial impact on our consolidated effective tax rate relative to the previous 35% U.S. statutory rate. As a reminder, we generally forecast minimal tax benefits from equity-based compensation in our tax rate. This benefit was the primary driver of the steady improvement in our tax rate throughout 2016 and 2017 but we have not reflected a similar level of benefit in 2018, as any impact will be driven by future option exercises.

So we'll update our tax rate as they occur.

Our net-interest expense in the quarter was $27 million, versus $23 million in the fourth quarter of 2016. That brings net-interest expense for the year to $103 million, versus $91 million for 2016. The increase in 2017 was due primarily to a $500 million increase in our outstanding debt in the third quarter of 2016. As you'll recall, we issued $1 billion of debt in the third quarter of this past year to replace $900 million of notes maturing in the fourth quarter at a slightly higher interest rate.

As a result, we expect 2018 interest expense to increase to approximately $115 million. We ended the year with $3 billion of cash on our balance sheet and a net debt position, debt less cash and equivalents, of $1 billion. That's down from approximately $1.6 billion at the end of 2016. As Phebe mentioned, our free cash flow was $1.8 billion in the fourth quarter and we received significant deposits on new aircraft orders and scheduled progress payments on our large international combat vehicle program.

Cash from operations was $2 billion in the quarter and $3.9 billion for the full year. For 2018, we anticipate cash from operations of approximately $3.7 billion. On the capital deployment front, in the fourth quarter, we purchased $1.9 million shares, bringing us to 7.8 million shares for $1.5 billion for all of 2017. In total, when combined with the dividends paid, we returned $2.5 billion to shareholders in 2017 and we've also made several acquisitions in our aerospace and IS&T groups this year totaling $400 million.

Moving on to our pension plans, we contributed about $200 million to our plans in 2017 as forecast. For 2018, our minimum contribution is approximately $300 million to be paid mostly during the second quarter. We'll examine potentially increasing our contributions somewhat as the year progresses in light of the opportunity provided by the recent tax reform.Howard, that concludes my remarks. I'll turn it back over to you for the Q&A.

Howard Rubel -- Vice President, Investor Relations

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 into the queue. Denise, could you please remind participants how to enter the queue?

Questions and Answers:

Operator

Certainly, sir. To ask a question, you may press *, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If your question has been addressed, you may withdraw from the queue by pressing *, then 2.

And, again, we do ask that you limit your question to one but reenter the queue for any follow-up questions. The first question will come from Robert Stallard of Vertical Research. Please go ahead.

Robert Stallard -- Vertical Research -- Analyst

Thanks so much. Good morning. Phebe, a quick question on capital deployment. I was wondering if your plans for future cash deployment have changed as a result of the U.S.

tax reform and you obviously ended the year with a very strong balance sheet and cash flow.

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, let me just reiterate what our capital deployment strategy has been. First, we invest in our business where we believe that we can get a good return. We're in a period right now of growth that needs to be supported by investments, and happily and propitiously, we have a tax bill that gives us more free cash flow. So it's a nice marrying of objective and reality.

We also look for transactions, acquisitions, that are accretive and in our core, and you saw some of that this past year in 2017. And we've talked about this for many years. The only long-term steady reliable repeatable elements of capital deployment are dividends. Share repurchases, we cover dilution and then all of our other share repurchases have been tactical.

So I don't see a particular change in the strategy. The tactics, of course, are driven by the needs of the business and in the case of tax reform provide us additional free cash flow. So, a happy event.

Robert Stallard -- Vertical Research -- Analyst

OK, thank you.

Operator

The next question will come from Rob Spingarn of Credit Suisse. Please go ahead.

Rob Spingarn -- Credit Suisse -- Analyst

Good morning. I wanted to go back to your aero margin guidance for '18 and the small contraction there on the mix shift and the higher R&D and the slightly higher pre-owned, I guess. Phebe, with the timing on the 500 and 600 wrapping up, would've thought R&D might have tracked down a little bit. Maybe there's something else you're developing there.

And how is pricing on the aircraft that will deliver in '18 versus '17?

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, first of all, we never discuss price, but suffice it to say that is not driving any margin changes or compression. So, I think it might be appropriate just to remind ourselves where we've been for the last couple of years and where the next two years -- this year and '19 -- are. So, we've been in a transition period and think about the transition in two pieces. One, that we've been living through for the last two years where we're bringing down 450 and 550 production and to offset any earnings decline as a result of that, we committed to attempt to keep earnings flat by increasing somewhat 650 production, which we have done, in addition to cutting costs and improved operating efficiency and good planning.

All of that has happened. Now as we move into the full-throttled transition where the 450 is out production this year, the 550 is coming down to low rate and ultimately very low rate production, we're feathering back from 650 as appropriate and as we told we would, and the advent of the 600 comes on board, 500 and then the 600. So, we're pretty much on track, very much on track [Inaudible] the progression, the magnitude, and the duration of this transition period that we have been in. We never discuss our R&D but, again, suffice it to say that it has been robust and it will continue to be robust going forward.

Rob Spingarn -- Credit Suisse -- Analyst

So, Phebe, if I might, are you saying it's just a bit of learning curve on the new platforms?

Phebe Novakovic -- Chairman and Chief Executive Officer

Sure. So, let's talk about -- new platforms always a -- they start out at a lower margin rate and improve over time as we come down our learning curve. In addition, the first lot of any new airplanes tend to carry with them lower margins. So as we get the first lot of the 500 and 600 out of the production line and we improve our learning, which we have done historically and I'm confident we'll do it again, and we will eventually see margin expansion and that's the kind of earnings growth I'm talking about in the latter end of our planning period.

Rob Spingarn -- Credit Suisse -- Analyst

Thank you very much.

Operator

The next question will be from Sam Pearlstein of Wells Fargo. Please go ahead.

Sam Pearlstein -- Wells Fargo -- Analyst

Good morning. Can you talk a little bit about how we should think about the net income conversion to free cash flow in 2018 just given the tax change, the additional pension contribution and then just the capital spending plan? And just overall as CAPEX continue to grow from this level into even next year, just how do we think about that?

Jason Aiken --

Sure. So, we gave you some figures on operating cash flow in remarks, around, call it $3.7 billion, and I think to your point with the tax reform and, as Phebe alluded to, that increases net income and by like amount increases free cash flow. So, tax reform didn't have an impact on our free cash conversion rate. What it does provide us is additional free cash flow that we can then deploy.

And as Phebe mentioned, we have opportunities, including in our shipyards as well as additional R&D and product-development opportunities across the business to invest in the growth of the company, and that is something we intend to continue to do. So, between those opportunities that we'll notch up or down over the course of the year and beyond as well as, as I alluded to, the opportunity to perhaps take advantage of tax reform to fund a little bit more into our pension plans. The free cash flow conversion could end up approaching 100%, if not 100%. We continue to target that range but call it still in the 90s.

We well exceeded 100% in 2017, even beyond our original expectations but we're back structurally in that range. So I think that's how you need to think of it, but we'll probably focus more on operating cash flow as a number that's more directly targetable because some of those other levers will move up and down -- CAPEX, R&D, and so on -- to support the growth of the business, and they can move the cash conversion rate from the mid-90s to the 100% range depending on where those ultimately end up. All opportunities for growth in the business.

Sam Pearlstein -- Wells Fargo -- Analyst

You mentioned $1.7 billion being spent at [Inaudible]. What is the absolute level of CAPEX we should expect in 2018?

Jason Aiken -- Senior Vice President and Chief Financial Officer

So, we typically target around 2% of sales. We've come in a little lower than that in the past. So, I'd expect to see us toward the higher end of that this year. And I think you asked a question about how does that plan over time.

Some of that is still in play, it's a longer-term plan but I think you'll see it come up a little bit over the next few years and then back down as we go through that facility master plan.

Sam Pearlstein -- Wells Fargo -- Analyst

OK, thank you.

Operator

The next question will come from Doug Harned of Bernstein. Please go ahead.

Doug Harned -- Bernstein -- Analyst

Good morning. Phebe, when you talked about the guidance for this year and also the five-year guidance, how are you thinking about the budget situation? In other words, the continuing resolution, we're in the fourth one now, it's not completely clear where this is going to go. You mentioned IS&T before but where do you see the biggest issues in your portfolio if we have a further extension of CRs and how have dealt with this in your guidance short and long term?

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, the budgets have been very supportive of our program of records and our new programs and I haven't seen any surprises there. Typically, we can cover a relatively short-term CR rather wholesomely and this year was a little bit different and I can get into that if you wish, but what we've done is appropriately hedge our guidance with some expectations around varying lengths of the CR. So, we'll be in, I believe, better shape and we're comfortable that we're in better shape this year with an extended CR than we were last year. Just to give you a little bit of color what happened last year particularly with the IS&T and let's talk about -- the short-cycle businesses tend to be more affected by a CR but typically we can cover that.

In '17, we had a couple of other things happen and lemme restate that, or reinforce, that the vast preponderance of the '17 revenues that we didn't get in '17 and moved into '18, but in additional to the CR, we had a number of the new army start-ups which had a disproportionate effect on the impact in both GDIT and mission systems. You may also recall that the army stopped funding WIN-T and some other related comms programs until they completed their network and battlefield reviews. So that drove a couple of months of revenue from 2017 to 2018. And then we had a new administration with some unanticipated civil agency cuts that we had not forecasted but that's been addressed by our customers in fed civ as they modified their plans.

So, I think our ability to manage a CR is significantly better this year because I don't see any of those other factors contributing to perturbation in the IS&T field.

Doug Harned -- Bernstein -- Analyst

And presumably also in your outlook like in combat, for example, you've got a lot of international in there as well and I'm assuming that's an important part of that growth rate.

Phebe Novakovic -- Chairman and Chief Executive Officer

It is, but don't underestimate the increase and modernization funding coming from the army. That becomes an increasingly large component of our backlog throughout our planning period.

Doug Harned -- Bernstein -- Analyst

OK, great. Thank you.

Operator

The next question will be from Pete Skibitski of Drexel Hamilton. Please go ahead.

Pete Skibitski -- Drexel Hamilton -- Analyst

Good morning, Phebe, Jason, and Howard. Phebe, we've had the new national defense strategy released last week and there's a lot of strategy shift, I think, more sort of to peer conflict and various areas of modernization needed. How do you think GD's capabilities match up with that new strategy given at some point I think the money will follow the strategy?

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, I think, very well. I have long said that I like the positioning of our defense platform businesses because they tend to be somewhat countercyclical. In a hot war, the tactical forces receive the preponderance of the funding, and that was true certainly in the hot wars of Iraq and Afghanistan. When we wind down from active intense conflict, then the strategic forces, which in our case is the navy, tend to receive more funding.

In this instance, what we have is a little bit of a combination of both as we need to grow the fleet for the obvious threats that we have in the North Atlantic and Pacific, and the army needs to recapitalize based on a number of years or over a decade of consumption of its material but it needs to not only replace and upgrade that material and they put the money behind it. So, I think we're well-balanced. I don't know of any particular surprises in any of the studies that have come out recently and now we have factored all of that into our thinking [Inaudible].

Pete Skibitski -- Drexel Hamilton -- Analyst

Just to further on ground vehicles, Congress added an awful lot of money in its markups for fiscal 18. Is there maybe even some room for upside to your combat forecast if that money comes through?

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, let's put it this way. We are mindful that there can be an appetite for increasing a particular program and ours have been very heavily supported, particularly in the authorization process, but the appropriations have to follow. We're very comfortable that the programs that we have, our core programs of record and appropriations bill will fully fund it and, frankly, this is true across our portfolio. The more money is available, the higher our revenue and opportunities can be.

So, I'm comfortable with where we are in the moment on our projections given what we believe to be the likely outcome of at least the near-term budget cycle.

Pete Skibitski -- Drexel Hamilton -- Analyst

Fair enough. Thank you.

Operator

The next question will be from Ron Epstein of Bank of America. Please go ahead.

Ron Epstein -- Bank of America -- Analyst

Good morning, guys. Phebe, you gave us some pretty good detail already on the sales drop for Gulfstream. Can you give us some more color on kind of who's buying these jets? Is it Fortune 500s? Is it across the board? Is it U.S.? Is it Europe? Is it Asia? And then I'll follow on to that with what's your sense now on JSTARS program because that could have an impact for 550 production.

Phebe Novakovic -- Chairman and Chief Executive Officer

So, our order activity and, frankly, our backlog are heavily United States, Canada, and Europe, Far East, lesser extent Mideast. And let me tell you something about our backlog and what you need to think about it. We understand every single buyer in our backlog. We know them.

They're sound financially. It's a sticky backlog. And we have very few fleet customers. So it's a very steady, sturdy backlog.

And the mix between public companies, private companies, and individuals varies, usually about a third, a third, a third. In any given quarter that can go up a little bit among those three categories. So, no material difference in the last few years in what we're seeing in terms of the INCU and geographical location of our customer base. JSTARS, I'd refer you to Northrop because they're our prime, but the 550 will be in low- to very low-rate production for the foreseeable future and we will support the plan that Northrop has for us.

Ron Epstein -- Bank of America -- Analyst

OK, great. Thank you very much.

Operator

The next question will be from Jon Raviv of Citi. Please go ahead.

Jon Raviv --

Hey, good morning, everyone. Just a slight follow-up on that capital allocation question. Can you talk, Phebe and Jason, a little bit more about the M&A outlook? You brought up some of the acquisition activities you had in 2017. Any kind of shift in the market that you're detecting heading into 2018 and where you might be interested and to what extent, from a bite-sized perspective?

Phebe Novakovic --

We never comment on the environment for acquisitions. So, I think I'll pass on that. Do you have another question?

Jon Raviv -- Citi -- Analyst

Sure, I appreciate that. When it comes to the CAPEX plans that you made at your shipyards, how do you think about the returns on that CAPEX? Is that associated with plans that you know are in place that the navy is going to be able to afford or is there a little bit of assumption or intention that improving the shipyards will help the navy afford their larger shipbuilding plan?

Phebe Novakovic -- Chairman and Chief Executive Officer

Look, we have always been very disciplined about our capital deployment, and you can expect in this instance that we have planned our investments as close in time to the returns as possible. The navy understands that. There are contractual provisions in all of our contracts that provide for harmonizing across to better optimize the investments with the return. We're not speculative.

The nation needs to fund the submarine force in particular. And our investments are twofold. One, it clearly makes us more efficient but it also helps affordability for the navy. So, it's a win-win for both us and the navy and we're in very close contact and have been and completely aligned with the navy with respect to the quantum and the timing of our investment and they fully understand the need for a reasonable return.

Jon Raviv -- Citi -- Analyst

Got it. Thanks for the second swing at the ball there.

Operator

The next question will be from Carter Copeland of Melius Research. Please go ahead.

Carter Copeland -- Melius Research -- Analyst

Hey, good morning, Phebe, Jason and Howard. Phebe, just a quick clarification on a comment you made earlier and then just a question on demand. The initial production lot on new programs comment that you made before, if you could just clarify what is the size of a typical initial early production lot for new airplanes? And then with respect to the demand outlook and I know kind of hinted at this with the industrywide comment on expanding orders, lemme get the words wrong here, across the industry but when you look at the plan that you laid out through 2021, I'm just trying to get a sense of what the underpinnings are there and if there's any expectation that tax reform has a material impact on buying decisions? I realize we're only a couple of weeks into the year but any chance you can help us understand how to quantify what those sorts of impacts might be or what you expect or where you may have been conservative, anything that would be helpful? Thanks.

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, let me just say one thing here about tax reform. It can't hurt, right? We'll see how that plays out but it frankly didn't factor into our projections. The demand -- we based our plan on the demand that we see in both of the, what I've called now for many, many for quarters, a robust pipeline. The pipeline remains robust.

And we are a big believer, because history actually supports the view, and experience supports the view, that new product generates additional incremental demand. We've got new products coming out. So, I'm comfortable that our demand projections, that then are manifest in our deliveries, are reasonable. So, I hope that gives you a little bit of color but let me have Jason address the lot.

Jason Aiken -- Senior Vice President and Chief Financial Officer

Sure yeah. And without getting into specifics of our inventory numbering system, suffice it to say a lot of aircraft at Gulfstream, we would burn through within a year in terms of delivery. So, when you think about the 500 or any airplane that's entering into service, it's going to be a natural production ramp. So, we won't quite get through the first full lot in this year but there'll be a handful of units that will deliver in the early part of next year.

So, we'll be through that first production lot by early next year.

Carter Copeland -- Melius Research -- Analyst

So, we're talking not a handful but a dozen or dozens, something like that.

Jason Aiken -- Senior Vice President and Chief Financial Officer

Exactly. It's more than a handful.

Carter Copeland -- Melius Research -- Analyst

Great, thanks for the color.

Jason Aiken -- Senior Vice President and Chief Financial Officer

And thank you, Carter. And we have time for one more question.

Operator

Thank you. And that will be from Hunter Keay of Wolfe Research. Please go ahead.

Hunter Keay -- Wolfe Research -- Analyst

Hey, thanks for squeezing me in. I appreciate it. If you could, to the extent possible, Phebe, talk about any incremental interest you maybe saw with the effective push-out of Falcon 5X and maybe a broader question around that. So, it's a two-part question.

How often do you see business jet customers generally switching brands? Does most competition come from competitors or is it really yourselves as always kind of competing against each other with new product offerings? How often you see switching, broadly speaking?

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, historically, and this is historically, our customers have been pretty loyal to their particular brand. I think over the last three, four, five years we've seen changes in that prior behavior and we have gained share. We now have our customers in our backlog and delivering airplanes to customers that were in other airplane manufacturers' historically customer sets. So I don't really think about it and I don't really know how much is from any particular, how much of our incremental increases in our order box and in our backlog has been the result of others but, frankly, we're the only ones really out there in the moment with a lot of new airplanes.

We got the 650, we got the 500 and 600 coming right in behind it, and then, frankly, the 280. So, that I believe is the single largest reasons for the increase in our backlog and more importantly in our orders and deliveries in the moment.

Hunter Keay -- Wolfe Research -- Analyst

So, would you say loyalty is more a function of sort of capabilities or do you sometimes see that opportunity to take share if there's, say, manufacturing or production delays with some of your competitors? Thanks so much.

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, I'm really not going to talk about our strategy. Now, I don't worry too much about what the others are doing. I think we just have to focus on doing what we do well and what we do well is we are the low-cost, high-quality producer across all of our fleet of airplanes and we have also funded and are executing a robust R&D program that has allowed us to bring in consistently new product. I focus on that.

I believe that is what ultimately drives success and that is what you're seeing in the Gulfstream performance.

Howard Rubel -- Vice President, Investor Relations

Thank you for joining our call today. If you have additional questions, I can be reached at (703)876-3117. Again, thanks for your time. You may disconnect.

Duration: 53 minutes

Call Participants:

Howard Rubel -- Vice President, Investor Relations

Phebe Novakovic -- Chairman and Chief Executive Officer

Robert Stallard -- Vertical Research -- Analyst

Rob Spingarn -- Credit Suisse -- Analyst

Sam Pearlstein -- Wells Fargo -- Analyst

Jason Aiken -- Senior Vice President and Chief Financial Officer

Doug Harned -- Bernstein -- Analyst

Pete Skibitski -- Drexel Hamilton -- Analyst

Ron Epstein -- Bank of America -- Analyst

Jon Raviv -- Citi -- Analyst

Carter Copeland -- Melius Research -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

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