Logo of jester cap with thought bubble.

Image source: The Motley Fool.

General Dynamics Corp  (NYSE:GD)
Q3 2018 Earnings Conference Call
Oct. 24, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the General Dynamics Third quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (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.

Howard Rubel -- Vice President of Investor Relations

Thank you, Gary, and good morning, everyone. Welcome to the General Dynamics third quarter 2018 conference call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K and 10-Q filings.

With that, I would like to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Phebe Novakovic -- Chairman and Chief Executive Officer

Thanks, Howard, and good morning. As is apparent from our press release, we enjoyed another solid quarter. We reported EPS from continuing operations of $2.89 cents per fully diluted share on revenue of $9.1 billion, operating earnings of $1.14 billion and income from continuing operations of $864 million. The EPS performance was $0.37 better than the year-ago quarter and $0.13 better than consensus. With respect to consensus, it would appear that our revenue was somewhat lower, margin somewhat higher and operating earnings essentially in line, most of the beat occurred on the tax line.

Against the year-ago quarter, revenue was up $1.5 billion, a 20% attributable in large part to the CSRA acquisition. However, revenue was up 4.6% excluding the impact of CSRA. All five reporting segments grew quarter-over-quarter.

Operating earnings were up $72 million, a 6.8% increase and income from continuing operations was up $100 million, a 13.1% increase. The quarter's operating margin at 12.5% is a 150 basis points lower than third quarter 2017, largely attributable to the amortization expense of the CSRA transaction.

In terms of economic earnings, the operating earnings absent the amortization expense related to the transaction were $1.2 billion with an operating margin of 13.2%. Sequentially, revenue was down $92 million or 1% and operating earnings were up $47 million. The two quarters were very much alike. On a year-to-date basis, revenue of $25.8 billion is up $3.12 billion or 13.7%. Operating earnings were up $55 million or 1.7%. Importantly, earnings from continuing operations were up $173 million, 7.6%, and diluted earnings per share from continuing operations were up $0.71 cents or 9.5% better year-to-date. With respect to cash, we had net cash provided by operating activities of $719 million (ph) and free cash flow from operations of $622 million after a discretionary pension payment in the quarter of $255 million.

We continue to invest appropriately for the future. Capital spending at the Marine Group has more than doubled to $147 million year-to-date and expenditures at aerospace have totaled $142 million for the nine months. As the business units continue to invest at a level necessary to expand facilities to support our customers' requirements.

As you can see from the charts attached to the press release, we enjoyed a very healthy backlog increase in the quarter. The total backlog of $69.53 billion is a $3.24 billion increase, roughly 5% over the second quarter of this year and $5.6 billion increase over the year-ago quarter. While there was very good contract activity in all groups, there was particularly strong order intake at the Marine Group, information technology and mission systems. Mission systems enjoyed a book to bill of 1.2 times and a sharp increase in estimated potential contract value as a result of several IDIQ contracts. GDIT's book to bill was a sterling 1.4 (ph) .

Let me say a few words about each of our business groups starting with aerospace. Aerospace had another solid quarter. Revenue was up $36 million or 1.8% compared to the third quarter of 2017 and operating earnings were nearly flat of $5 million or 1.3% to $376 million on an operating margin of 18.5%. On a sequential basis, revenue was up $136 million or 7.2% with a $10 million reduction in operating earnings on lower margins as expected. On a year-to-date basis, revenue was down $396 million or 6.4% and operating earnings were off $133 million or 10.7% on a 90 basis point reduction in operating margin.

The revenue picture will be stronger in the fourth quarter with the delivery of 8 to 10 G500. By the way, the first G500 was delivered in September and the second several days ago. We had a good order intake in the quarter for the Group, a 0.9 to 1 book to bill measured in dollar values of orders. Gulfstream alone was 0.9 to 1 on the same basis.

While order intake was certainly satisfactory in the Group, it was not as good as we had anticipated. It was hampered by the contretemps surrounding more than financial issues and its inability to deliver missiles to prowler on schedule. This caused numerous G500 and G600 prospects to hold fire until we could provide more reliable delivery times. That I am pleased to say is behind us and should help fourth quarter intake.

Gulfstream has taken over the production of missiles and is making very good progress on both cost and schedule. Deliveries of missiles are in line to support the 8 to 10 G500s next quarter. I can also tell you that our pipeline in sales discussions are quite active. We are again reasonably optimistic about order intake in the fourth quarter and expect it to look better than the third quarter, even accounting for the increased delivery in Q4. On a trailing 12-month basis, the book-to-bill was slightly in excess of 1 to 1. Our certification plan continues to progress well on the G600 and we anticipate certification shortly before year-end with delivery commencing next year.

The G600 has profited from the work done on the G500. So those -- first delivery lot will carry better gross margins. The G500 with 5,200 nautical miles of range at 0.85 can travel 4,400 nautical miles at 0.9. Just to put that in some context, 4,400 nautical miles was the approximate range of its predecessor to G450 at 0.8 mach, cutting nearly an hour from long-range flight. The G600 with 6,500 nautical miles of range at 0.85 mach has now also demonstrated 5,500 nautical miles of range at 0.9 mach, actually quite stunning. If you recall when we announced the G500 and G600 in 2014, our plan was to deliver in 2018 and 2019 respectively. We have done so with the G500 and will do so with the G600.

Next combat systems. Combat had a solid quarter with revenue of $1,52 billion, operating earnings of $241 million and 15.8% operating margin. Compared to the third quarter in 2017, revenue was up $23 million or 1.5%, but earnings were down $6 million or 2.4% on a 70 basis point decline in margin. On a sequential basis, the second and third quarters were very much alike with no material difference in volume or profit. Year-to-date revenue was up over 2017 by $296 million or 7%, operating earnings are up $24 million or 3.5% despite a 50 basis point decline in operating margin. I should point out the combat systems is now reported quarter over a year ago quarter increases in revenue for eight consecutive quarters.

All of our major programs are performing well. We continue to see opportunities for growth both internationally and domestically. Importantly, our work with the US Army has increased nicely. In addition to fully supporting the Abrams main battle tank, the Army has recently placed a $383 million order to upgrade 173 Strykers to the A1 configuration, the newest, most powerful and capable version of the vehicle. The order will complete the fourth brigade and begin the process of modernizing the fifth, part of a process to modernize all nine brigades. We are also actively involved with the Army's longer-term modernization efforts and have developed innovative and cost-effective solutions to meet their requirements.

For Marine, the Group reported revenue of $2 billion, a $72 million or 3.7% increase compared to the year-ago quarter. In contrast, revenue was down sequentially by $165 million or 7.6% . Operating earnings in the third quarter at $169 million were down $10 million compared to last year's quarter. As expected, there was a sequential decline in profit margins due to mix. Year-to-date revenue of $6.2 billion was higher by $261 million or 4.4% and operating earnings of $548 million were up $30 million or 5.8% over 2017.

Revenue across the year has been driven by construction of the Virginia class Block IV, Block V design and Columbia design work. Offsetting this was timing related to ship repair and other naval construction work. With four recent awards for repair work, we should expect to step up in volume for that category. Just prior to the close of the quarter, we received a multi-year contract from the Navy for four DDG-51 Flight III ships. The $3.9 billion contract affords by the opportunity to move down the learning curve and improve its performance. The ships are scheduled as part of the FY '19 through 22 time (ph).

We told you last quarter that we would report IS and TM2 (ph) segments. mission systems, a large C4ISR business and GDIT, one of the leading providers of IT services to the Department of Defense, Intelligence Agency and Federal Civil Agency. Let's start with mission systems. Mission systems revenue at $1,23 billion was $144 million or 13.3% higher than last year's quarter. Year-to-date revenue of $3.48 billion was higher by $249 million or 7.7% over last year.

Operating earnings of $179 million were up $27 million or 17.8% compared to the third quarter last year, with the mix and the benefit of operating leverage generating the better performance. Similarly, year-to-date operating earnings were up $27 million or 6% increase. I've already commented upon mission systems' very strong order intake in the quarter with -- which further supports their anticipated organic and future growth.

Moving to information technology. The business-generated revenue of $2.3 billion in the quarter, up $1.2 billion or 116% over the year-ago quarter. The revenue for GDIT was up 7.1% excluding CSRA. By the way, we're not going to be able to break out CSRA revenue for you after this year. Operating profits were $1.57 million, up $56 million or 55%. Reported margins were 6.8%, down from 9.5% in the year-ago quarter, but excluding the acquisition-related amortization of $64 million, margins were 9.6%.

CSRA was modestly accretive in the quarter. It is $0.05 accretive year-to-date excluding transition costs. This is really quite remarkable this early in an acquisition. The integration plan is sound and continues to deliver early results. Finally, we've announced the divestiture of our call centers to Maximus (ph) as part of a portfolio-shaping strategy. This transaction creates focus on enterprise IT solutions and high-end professional services. We are business-to-business focused and this shifts us away from the more public-facing markets. These assets are well placed with Maximus for home, it is core. By the way, this transaction left no material impact to 2018 results.

So what does all this mean is, as far as the next quarter and the year are concerned, we fully expect fourth quarter revenue in excess of $10 billion and operating margins consistent with the last quarter. However, we expect higher effective tax rate of around 21% in the quarter. For the year, stronger-than-expected operating results year-to-date offset in part by the $75 million of CSRA transactions costs. And a lower-than-planned tax rate enabled us to increase guidance for the year from a range of $11 to $11.05 to a range of $11.10 to $11.15 for the year. This late in the year, we anticipate our end of year guidance to be pretty close to actual performance for the ranges now.

As tempting as it may be this time of year to ask us about next year, let me remind you that we have our planning process later this fall when the businesses get better insight in the upcoming year. The guidance we gave you last January is grounded in that process and as a result was full and thorough. So I don't want to prematurely piecemeal next year at this juncture. You'll hear from me in January with more detail as has been our custom for many years.

So let me spend a minute telling you how I see this year in perspective. We are growing 4.9% without CSRA. We have double-digit EPS growth, Gulfstream is growing at 4.5% and that's particularly impressive during the year of transition. The CSRA integration is ahead of schedule. The US Army is recapitalizing, the Marine Group is steady as she goes and Mission Systems is performing beautifully. And finally, our backlog is large and growing which puts us in very good stead for next year.

Now I'd like to turn the call over to our Chief Financial Officer, Jason Aiken.

Jason Aiken -- Senior Vice President and Chief Financial Officer

Thank you, Phebe, and good morning. Our net interest expense in the quarter was $114 million, bringing the year-to-date expense to $244 million. That compares to $27 million and $76 million in the comparable periods of 2017. The increase in 2018 is due to the roughly $10 billion of debt we issued to finance the acquisition of CSRA. For the year, we expect interest expense to be approximately $355 million. Our effective tax rate was 15.5% for the quarter and 17.1% year-to-date. This is lower than our previous expectation and is attributable to the finalization during the quarter of our 2017 tax return. As a result, we're lowering our target for the full year tax rate from our previous estimate of 19% to a rate in the low 18% range. This implies the fourth quarter tax rate of approximately 21%.

One more point on the income statement. We had a discontinued operations charge in the quarter of $13 million or $0.04 per share. You'll recall we sold a piece of the CSRA business due to an organizational conflict of interest issue. Under the accounting rules, this sale resulted in a break even pre-tax GAAP P&L outcome. However, there was a gain on the sale for tax purposes and the tax expense on that gain is reported in discontinued operations.

Turning to capital deployment. We paid $275 million in dividends in the third quarter and purchased 450,000 shares of our stock, bringing us to 2.5 million shares year-to-date for $522 million dollars. This is consistent with our plan to acquire enough shares in 2018 to hold our share count steady. In addition, as Phebe discussed, in light of the benefits associated with the recent tax reform, we made a $255 million discretionary contribution to our pension plan in the quarter and have ramped up our capital expenditures, which we expect to be in excess of 2% of sales for the year.

We also repaid $1.1 billion of commercial paper in the quarter, consistent with our priority of rapidly repaying the debt issued to finance the CSRA acquisition. To that end, we expect to fully repay our CP balance by the end of the year, which will retire over a quarter of the borrowings from the acquisition. Our free cash flow conversion rate for the quarter was over 90% excluding the discretionary pension contribution, and for the year, we expect our free cash flow to be in the low-to-mid 90% range, reflecting our typical 100% conversion target, less the additional pension contribution.

Finally, one more followup to Phebe's comments about our order activity in the quarter. The total company book-to-bill was 1.4 times in the quarter, resulting in a 5% increase in the total backlog to $69.5 billion. And when you include options in IDIQ contracts, the total potential contract value increased to an all-time high of $104.2 billion at the end of the quarter. This backlog growth is all the more impressive given the ongoing headwind presented by foreign exchange rate fluctuations, which impact our Combat Systems segment in particular given its significant international footprint.

Specifically over the first nine months of the year, FX rate changes driven by the strong dollar reduced the segments' backlog by $600 million. Of course, this is an accounting translation effect with no economic value implication, but a headwind to the reported numbers nonetheless.

Howard, that concludes my remarks and I'll turn it back over to you for the Q&A.

Howard Rubel -- Vice President of 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 in the queue.

Gary, could you please remind the participants how to enter the queue.

Questions and Answers:

Operator

(Operator Instructions) The first question comes from Sam Pearlstein with Wells Fargo. Please go ahead.

Sam Pearlstein -- Wells Fargo -- Analyst

Good morning.

Phebe Novakovic -- Chairman and Chief Executive Officer

Hi Sam.

Sam Pearlstein -- Wells Fargo -- Analyst

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

Phebe Novakovic -- Chairman and Chief Executive Officer

There were no material adjustments to revenue or earnings as a result of the settlement. That said, the details of the settlement are subject to a nondisclosure agreement. So that's all we can say.

Sam Pearlstein -- Wells Fargo -- Analyst

Okay. Thank you.

Operator

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

David Strauss -- Barclays -- Analyst

Good morning.

Phebe Novakovic -- Chairman and Chief Executive Officer

Hi, David.

David Strauss -- Barclays -- Analyst

Phebe, I wanted to ask about a couple-part question on Gulfstream. So I know you say you didn't want to talk about 2019, but I think this is fair game since you've talked about before, just the operating income cadence from here in '19 and '20 relative to the $1.5 billion for Gulfstream, I think you talked about a slight increase in '19 and slight increase off of that in '20. How you feel about that now? And then NBAA, we heard comments about G550 orders coming through pretty well and the rate going up there, but we also heard about maybe a little bit nearer term availability on 650 if you could tell us where that stands today? Thank you.

Phebe Novakovic -- Chairman and Chief Executive Officer

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

David Strauss -- Barclays -- Analyst

Yes, so previously I believe you talked about a $1.5 billion in EBIT (ph) at Gulfstream and 2018 and then a slight increase in '19 and a slight increase off of that in '20, if that still holds, how you feel about that? Thanks.

Phebe Novakovic -- Chairman and Chief Executive Officer

So, I don't want to get into '19, but think about it this way. We have 8 to 10 of the 500s delivering the share really -- relatively very low margins. The remainder of that lot delivering in '19 and then as we move into the 600 production, those margins are going to be higher since the G500 carried a disproportionate burden of the test program. So all in all, we're comfortable with the implied guidance that we gave you back in January this year and that's about all I can go into at the moment until we set all of our production rate. So that's with respect to that. On the 550, we adjust that rate accordingly, we haven't made that decision yet, but there is a very nice demand for that platform particularly in the ISR space. So as long as there continue to be government customers who see this as a powerful ISR system and then we will continue to produce those at fairly low level and the availabilities of 650 are still out there. I'm not aware of any near-term availabilities whatsoever.

Operator

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

Carter Copeland -- Melius -- Analyst

Hey, good morning, all.

Phebe Novakovic -- Chairman and Chief Executive Officer

Hi, Carter.

Carter Copeland -- Melius -- Analyst

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

Phebe Novakovic -- Chairman and Chief Executive Officer

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

Carter Copeland -- Melius -- Analyst

Okay. Thank you.

Operator

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

Robert Stallard -- Vertical Research -- Analyst

Thanks so much. Good morning.

Phebe Novakovic -- Chairman and Chief Executive Officer

Good morning.

Robert Stallard -- Vertical Research -- Analyst

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

Phebe Novakovic -- Chairman and Chief Executive Officer

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

Operator

The next question comes from Peter Arment with Baird. Please go ahead.

Peter Arment -- Baird -- Analyst

Yes, good morning, Phebe. Quick question just I guess on Marine Systems -- I mean, Mission Systems. The margin performance continues to be really impressive there 14.6% and 13 .8% year-to-date. I mean is there a natural ceiling here for margins when you look at the contract mix or what's the kind of cadence, I guess, when you think about mission systems?

Phebe Novakovic -- Chairman and Chief Executive Officer

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

Operator

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

Hunter Keay -- Wolfe Research -- Analyst

Thanks, good morning. Phebe, can you just do me a favor and parse back that comment you made around the margin differential between the G500 or 600, particularly on the test flight. Is it fair to assume that the margins on 600 should probably hit a double-digit rate before 500 despite the 500 deliveries ramping a little bit quicker?

Phebe Novakovic -- Chairman and Chief Executive Officer

I'm not going to parse that. I don't think I know that in the moment. And frankly I start to get nervous about giving specificity of margins by airplane that becomes highly competitive. But the fact is as they will carry better gross margins because they do not have the larger share of the test program and if you recall there was a fair amount of commonality between the 500 and the 600 test program. So we'll come down quickly or go up where margins will increase nicely on the 500 once we get through the first lot. And they will continue to perform well once we -- that is an analogous performance on the 600. Think about it that way. But just at a higher start rate.

Hunter Keay -- Wolfe Research -- Analyst

Thank you.

Operator

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

Myles Walton -- UBS -- Analyst

Good morning.

Phebe Novakovic -- Chairman and Chief Executive Officer

Good morning.

Myles Walton -- UBS -- Analyst

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

Phebe Novakovic -- Chairman and Chief Executive Officer

Yes.

Myles Walton -- UBS -- Analyst

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

Phebe Novakovic -- Chairman and Chief Executive Officer

Yes, we gave you, you'll be able to discern all of the particular puts and takes in the queue. We had laid all that out for you, OK. So that should help you.

Myles Walton -- UBS -- Analyst

Is there a particular segment. I imagine it's aerospace on the 500 deliveries, is that right?

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, there is aerospace in two regards, one looks like we're going to have considerably lower pre-owned sales than we had anticipated, which frankly is a good thing from a bottom line perspective. And as you quite accurately point out, we've had fewer 500 deliveries than we had originally anticipated. And then on the other defense groups, it's really just a question of timing when the contracts get executed. So nothing, of note, across any of its defense (ph) units.

Myles Walton -- UBS -- Analyst

Alright, thanks.

Operator

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

George Shapiro -- Shapiro Research -- Analyst

Good morning. On your comment, Phebe, about the book to bill of being 0.9 and you didn't have a 500, 600 orders delayed. But you didn't deliver any 500, so the fact that the book to bill was 0.9, does that imply 650 orders or 550 book to bill were less than 1. And also what's the number of months now that she is sold out to on each of those planes? Thanks.

Phebe Novakovic -- Chairman and Chief Executive Officer

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

George Shapiro -- Shapiro Research -- Analyst

So was the book to bill less than 1 for the 650 and/or the 550?

Phebe Novakovic -- Chairman and Chief Executive Officer

We don't track that.

George Shapiro -- Shapiro Research -- Analyst

Okay, I'll stick with my 1, thanks.

Phebe Novakovic -- Chairman and Chief Executive Officer

Painful as it is, yes.

George Shapiro -- Shapiro Research -- Analyst

That's right.

Operator

The next question comes from Robert Spingarn with Credit Suisse. Please go ahead.

Robert Spingarn -- Credit Suisse -- Analyst

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

Phebe Novakovic -- Chairman and Chief Executive Officer

So we were very pleased with the outcome of that competition with four ships, because it gives back a nice opportunity to improve its profitability. And if you think about that performance, the DDG-1000, we've had terrific ship-over-ship learning. We have delivered the first of the restart, I think we get the second of the restart shipped on the DDG-51 and the third is under construction and we're seeing some nice ship-over-ship learning there. So from my point of view, this is a wholesome development for Bob and gives us really the opportunity to get where they need to be. With respect to margins, we are large I think in Marine. Right now, our margin performance in the Marine Group is driven almost entirely by timing and mix at Electric Boat. You've got higher Block IV and Columbia class engineering volumes and lower margins offset by the lower Virginia class Block III, a very mature contract that is close to like I think we delivered our final ship. So if you recall, you've been with us now through the three of these Block transitions and remember that we bid the ships on a continuous learning curve. So it's incumbent upon us to ensure that we've got the operating excellence and move down our learning curve and we've done that with all three ships, our all three blocks and you are going to see some of that again on Block IV. There are, however, opportunities to improve those margins on Block IV obviously as we have in the past and we've got improvements coming at BASS (ph) and NASCO, ultimately margins can benefit as we -- if you think about Columbia's, we decrease our engineering work and move more toward construction of Columbia, but none of that will be clear until we get a contract in place on Colombia and we don't think we're going to see that for the next year or so.

Robert Spingarn -- Credit Suisse -- Analyst

Should we think about those as the -- your mix of business going to a less mature phase though. So overall margins could drift down a little bit.

Phebe Novakovic -- Chairman and Chief Executive Officer

I don't want to get out there too much on margins. I said something, I think, inadvisably the last time, I think, on this call and the way I think about these margins is, look, we've got quarter variability, but the trend in there and there's a lot of moving parts as we move into Colombia, because the decrease in the cost plus decrease in the engineering work which carries lower margins and the advent of construction, that offers some opportunities. So I think that at the moment, it's too soon to tell, but there is potential to get better.

Robert Spingarn -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

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

Jon Raviv -- Citi -- Analyst

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

Phebe Novakovic -- Chairman and Chief Executive Officer

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

Jon Raviv -- Citi -- Analyst

Thank you.

Operator

The next question comes from Cai von Rumohr with Cowen and Company. Please go ahead.

Cai von Rumohr -- Cowen and Company -- Analyst

Yes, thank you very much. So Phebe, Nordam, you took over the plant in early September and you said that basically the orders were hurt because of uncertainty about delivery positions. Is it fully on track now and therefore I assume you can offer firm delivery positions and have we seen any pickup in orders and what is the extent of the delay from the fact that they were kind of down for what 50 days or something without any production? Should we look for the first quarter to be a lot weaker than the rest of the year?

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, look, you quite rightly point out that we now own the line and I'm always more comfortable when I can control my own destiny, particularly when it's in our sweet spot of operating excellence. So as you can well imagine, Gulfstream has started up that line, stabilized the supply chain and we're in the process of sending the South to Gulfstream to support our 500 and 600 deliveries this year. We don't have a -- we're not at full rate production. It takes a while on the missile line, it takes a while to get that up, as you can be best assured, we will get there and then have real clarity around -- and specificity around delivery times, and yes, we've seen customers who are increasingly comforted and interested, because we can now give them the greater assurity. You're going to get your airplane on date certain. So I consider that all very wholesome. Can you repeat the last part of your question.

Cai von Rumohr -- Cowen and Company -- Analyst

I think so. We've heard that it's like a one-month delay -- excuse me, a one-quarter delay. So should we expect the Q1 -- you're kind of going to be up or we're going to see Q1 still being very, very depressed because of the recovery from North issues?

Phebe Novakovic -- Chairman and Chief Executive Officer

Okay, I understand now. So the way to think about this is that we are reducing the impact in terms of shortening the time span as we increase our production on the missiles. So it's really too soon to tell that I think we'll be well positioned to support pretty robust manufacturing of the 500 in Q1.

Cai von Rumohr -- Cowen and Company -- Analyst

Thank you.

Operator

The next question comes from Doug Harned with Bernstein. Please go ahead.

Doug Harned -- Bernstein -- Analyst

Thank you. Good morning.

Phebe Novakovic -- Chairman and Chief Executive Officer

Hi, Doug.

Doug Harned -- Bernstein -- Analyst

Hi, on Marine, there's been a lot of discussion around the Navy about the need for a larger fleet, but also certainly the ability to fund the growth and history has shown these growth plan is going to have a lot of uncertainty. Can you describe how you think about your capital investment plans for Marine, Huntington Ingalls has raised there is even more. I mean when do you decide to invest and when do you wait?

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, the key in any capital deployment investment is to as quickly as possible marrying in terms of time the capital expenditure with the return and so the Navy understands that and it was worked very closely through contract provisions to ensure that that happens. We've got $1.7 billion in our facility master plan not exclusively, but -- actually exclusively at electric boat and there is another couple hundred million at the other two yards in order to support this increase in Navy ship building. So I'm quite comfortable that are particularly at electric boat where the preponderance of the funding is deployed and will be deployed is appropriate and timed well to support the Navy's construction. This is all pretty wholesome. We've got to prepare for the construction of this very, very large and important Columbia class missile boat. And that's what we're doing right now.

Doug Harned -- Bernstein -- Analyst

Would that be the main focus then. I guess what I'm getting at is Columbia class is we've said is very secure trajectory. Some other programs may be less so.

Phebe Novakovic -- Chairman and Chief Executive Officer

Well, look, I am capitalizing for the ships and I know that I'm going to compete and we do not capitalize for programs that have yet to become programs of record and fully funded and supported by the US Congress. That's not a wholesome business decision.

Doug Harned -- Bernstein -- Analyst

Okay, thank you.

Operator

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

Seth Seifman -- JP Morgan -- Analyst

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

Phebe Novakovic -- Chairman and Chief Executive Officer

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

Howard Rubel -- Vice President of Investor Relations

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

Operator

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

Pete Skibitski -- Alembic Global -- Analyst

Thanks. Good morning. Hey, Phebe, just a followup on Marine, there were some news over the summer about Missile II production, it choose from at least one of the suppliers and I think some people on DC fear that could negatively impact the whole program from a cost and schedule standpoint. So I just was wondering if you could maybe talk about that and if you think it will impact the program if it's a problem may be easily resolved.

Phebe Novakovic -- Chairman and Chief Executive Officer

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

Pete Skibitski -- Alembic Global -- Analyst

Great color.

Operator

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

Howard Rubel -- Vice President of Investor Relations

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

Operator

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

Duration: 47 minutes

Call participants:

Howard Rubel -- Vice President of Investor Relations

Phebe Novakovic -- Chairman and Chief Executive Officer

Jason Aiken -- Senior Vice President and Chief Financial Officer

Sam Pearlstein -- Wells Fargo -- Analyst

David Strauss -- Barclays -- Analyst

Carter Copeland -- Melius -- Analyst

Robert Stallard -- Vertical Research -- Analyst

Peter Arment -- Baird -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

Myles Walton -- UBS -- Analyst

George Shapiro -- Shapiro Research -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Jon Raviv -- Citi -- Analyst

Cai von Rumohr -- Cowen and Company -- Analyst

Doug Harned -- Bernstein -- Analyst

Seth Seifman -- JP Morgan -- Analyst

Pete Skibitski -- Alembic Global -- Analyst

More GD analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.