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General Dynamics Corp  (NYSE:GD)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to the General Dynamics Fourth Quarter and Full Year 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Howard Rubel, Vice President of Investor Relations. Please go ahead.

Howard A. Rubel -- Vice President of Investor Relations

Thank you, Nicole, and good morning, everyone. Welcome to the General Dynamics Fourth Quarter and Full Year 2018 Conference Call.

Any forward-looking statements made today represent our estimates regarding the Company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the Company's 10-K and 10-Q filings.

With that, it's my pleasure to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Phebe N. Novakovic -- Chairman and Chief Executive Officer

Good morning, and thank you, Howard. We enjoyed a solid fourth quarter. The results and comparisons with prior periods are straightforward for the most part. As a result, I will go through them briefly to leave more time for my thoughts on the business segments, our outlook for 2019, and your questions. I also think you will find the press release and the additional presentation on our website fulsome and helpful.

So earlier today we reported fourth quarter revenue of $10 billion -- $10.38 billion, earnings from continuing operations of $909 million, and earnings of $3.07 per fully diluted share. This is a significant improvement against the fourth quarter of 2017, which was adversely impacted by a discrete $119 million increase in the tax provision as a result of the 2017 Tax Cuts and Jobs Act.

Even after adjusting for the adverse impact in Q4 2017, EPS was up $0.07 and earnings from continuing operations were up $154 million. Earnings per share at $3.07 also beat consensus by $0.09. Revenue and operating earnings were largely consistent with consensus. Most of the difference comes from a lower tax provision and a somewhat lower share count. So all in all, a solid quarter with good performance, particularly compared to the year-ago quarter as well as the third quarter of 2018.

For the year, we had fully diluted earnings per share from continuing operations of $11.22. This was also $0.09 above consensus. Revenue of $36.2 billion was up over 2017 by $5.2 billion. On an organic basics -- basis, excluding CSRA, revenue was up $1.5 billion. Revenue was up across each of our reporting segments.

Operating earnings of $4.5 billion were up $229 million (ph) -- $221 million or 5.2% over 2017. Earnings from continuing operations were up $446 million or 15.3% over 2017. Importantly, earnings per share from continuing operations were $1.66 (ph) above 2017. All in all, 2018 was a very good year, a year of growth and a year of important order intakes that left the Company well positioned for 2019.

I will review the full year and the quarters on a year-over-year basis for the Group without reference to sequential comparisons. On a sequential basis, suffice it to say that we had more revenue, higher operating earnings, higher earnings from continuing operations, and higher earnings per share than in the third quarter of 2018. So let me discuss each group and provide some color where appropriate. First, Aerospace. Aerospace revenue of $2.7 billion was up against the year-ago quarter by an impressive $722 million, that is 36.4%. This was attributable in large part to the delivery of nine G500s in the quarter, and also a strong fourth quarter in the service centers. For the full year, revenue of $8.46 billion was up $326 million or 4%. Operating earnings of $1.49 billion were down $87 million on lower operating margins. The lower operating earnings were attributable to poor performance in the completions business at Jet Aviation, the mix shift at Gulfstream, and cost attendant to the introduction of the G500. This time last year we told you to expect revenue between $8.35 billion to $8.4 billion, with a margin rate of 18%, leading to forecasted earnings of $1.5 billion. We finished the year with more than forecasted revenue at 17.6% margin, and $1.49 billion of operating earnings. All in all, very close to the forecast we gave you this time last year.

On the order front, activity in the quarter was good and the pipeline activity remains robust. The book-to-bill at Aerospace in the fourth quarter was 0.8:1 dollar-denominated. You can see more information on deliveries and orders in the Exhibit J to the press release. We expect the G600 to be certified this year, although the exact timing is hard to predict given the impact of the government shutdown on the FAA, but we fully expect certification of the G600 this half. The pacing item for deliveries of the G500 and G600 will be our ability to deliver in itself. We have that line in good order. Costs are increasingly under control and we are producing very good quality, but we had to restart the supply chain that had gone dormant with the filing of the NORDAM bankruptcy proceedings. That has impacted rate and our ability to keep schedule. We expect all schedule issues to be behind us by mid-year. As a result, you will see accelerating G500 deliveries as the year progresses, and our ability to provide nacelle to support G600 deliveries in the second half as well.

Next, Combat Systems. At combat, revenue of $1.74 billion was almost the same as the year-ago quarter. The same holds true for operating earnings of $251 million (ph), and an operating margin of 15%. For the full year, revenue of $6.24 billion was up $292 million, just short of 5%. Operating earnings of $962 million were up $25 million on a 40 basis point contraction in margin, largely related to mix shift. By the way, this performance is reasonably consistent with the forecast we provided at this time last year. We enjoyed somewhat better revenue than our initial forecast, which was an increase of $200 million to $250 million over 2017. We actually grew revenue $292 million. We forecast operating earnings of $970 million and came in at $962 million, an $8 million shortfall, largely attributable to the diplomatic issues that slowed production of the vehicle program in Canada in the fourth quarter.

We continue to see nice order activity in this group with fourth quarter orders of $2.19 billion and book-to-bill of 1.3:1 in the quarter, and 1:1 for the year. Tank orders alone are in excess of $1 billion. We also continue to have significant international opportunities, particularly in Europe. We've been negotiating the Spain with respect to a program valued at $2 billion for Piranha vehicles. And of note, we acquired FWW, a qualified maintenance and service provider to the German Army and other international customers to enhance our position in the key market. FWW will become part of European Land Systems. In our US market, our Army customer is modernizing and providing a growing demand across our combat vehicles and munitions business. In short, this group had quite positive revenue growth, continued it's shift to a strong margin performance and had very good order activity.

Next, Marine Systems. This is a really good new story across the board. Marine revenue of $2.3 billion was up $237 million, a stunning 11.5% over the year-ago quarter. Operating earnings of $213 million were up $46 million against the year ago quarter, a 27.5% increase on a 120 basis point improvement in operating margins. This is very strong operating leverage in a growth environment. By the way, the sequential comparison is equally impressive. For the full year, revenue of $8.5 billion was up $498 million, in excess of 6%. Operating earnings for the year of $751 million (ph) were up $76 million, over 11% on a 40 basis point improvement in operating margin. At this time last year we told you to expect revenue of $8.4 billion to $8.5 billion, and operating earnings of $735 million to $745 million. We came in at the higher end of the revenue range. Operating earnings of $761 million outperformed our forecast by $16 million to $26 million. In response to the significant increased demand from our Navy customer across all three of our shipyards, we continue to invest in each of our yards with particular emphasis on Electric Boat to prepare for increased production associated with the Block V of the Virginia submarine program and the new Columbia ballistic missile submarine. As you may recall, Block V is a significant upgrade in size and performance, requiring additional manufacturing capacity. As you know, we have also increased our internal training programs as well as our public-private partnerships with Connecticut and Rhode Island to meet our need for skilled trades.

At $243 million CapEx in 2018 from Marine was more than double its depreciation for the year. For 2019, we again expect the Marine segment to command a larger share of our capital budget as we work toward satisfying the nation's need for its critical malleable (ph) systems. So suffice it to say, we are poised to support our Navy customer as they increase the size of the fleet.

As you are aware, the Information Systems Technology Group has been realigned and reshaped into two separate segments: Mission Systems, a large C4ISR business; and GDIT, a leading provider of information solutions to the federal government and its agencies. That was supplemented in the second quarter of 2018 by the acquisition of CSRA.

I am going to ask Jason to interject some comparison data here that you might find relevant and helpful.

Jason W. Aiken -- Senior Vice President and Chief Financial Officer

On that note, let me make some comments about GDIT and Mission Systems performance in 2018. We originally guided to full year revenue for the former IS&T business group between $9.3 billion and $9.4 billion, and operating earnings of approximately $1.03 billion. If we look at how Mission Systems and GDIT excluding CSRA did for the year, they combined for $9.325 billion in sales, so in line with our expectations, and that includes an organic growth rate of 4.3% for GDIT, not withstanding the impact of several divestitures during the year. From an operating earnings perspective, they were actually closer to $1.05 billion (ph) on a combined basis, so somewhat better than we had expected. So all in all, a solid year for both businesses.

As I alluded to, we also completed several portfolio-shaping activities in our GDIT segment during the year. These included the sale of a commercial health products business, CSRA's CEDA (ph) business, and our public-facing call centers. These divestitures of more than $1 billion of annualized sales, enhance the Group's focus on high-end solutions and high value-added customer needs.

Phebe N. Novakovic -- Chairman and Chief Executive Officer

So let's first address Information Technology. Information Technology enjoyed revenue in the quarter of $2.38 billion, and operating earnings of $194 million with an operating margin of 8.1%. Since the numbers for the fourth quarter of 2017 did not include CSRA, comparison to the year-ago quarter are not particularly meaningful. However, sequentially, revenue was up $75 million, operating earnings up $37 million, and operating margin up 130 basis points; evidence of our continuing ability to extract cost synergies here. For the year, revenue was $8.27 billion, and operating earnings were $608 million with a 7.4% margin. Once again, annual comparisons do not offer meaningful perspective, since the prior year did not include CSRA.

Next, Mission Systems. Revenue in the quarter was essentially flat against the year-ago quarter, while operating earnings of $181 million were $6 million lower than the fourth quarter last year on a 40 basis point decrement in operating margin. For the year, revenue of $4.73 billion was up $245 million or 5.5%. Operating earnings of $659 million were up $21 million or 3.3% due to a 30 basis point decline in operating margin, driven in part by mix. Book-to-bill for the year was somewhat above one-times and we ended the year with a modestly higher backlog at $5.3 billion.

So on this call last year on a Companywide basis, our forecast for 2018 was to expect revenue of $32.35 billion to $32.45 billion. Operating earnings of $4.25 billion, and an operating margin of 13.1%. As you know, we wound up with $36.2 billion on an organic basis. But on an organic basis, revenue was up $1.5 billion, $500 million more than forecast. At the EPS line, we forecasted $10.90 to $11, and came in at $11.22, including the transaction cost related to CSRA, which were about $0.28 (ph) per share.

So let me provide our forecast for 2019 initially by business group and then on a Companywide rollup. In Aerospace, we expect 2019 revenue to be about $9.7 billion, but more than $1.2 billion on deliveries of approximately 145 Business Jets. Operating earnings will be slightly in excess of $1.5 billion with an operating margin rate of approximately 15.5%. The margin rate is lower than 2018 as a result of mix shift, as well as a modest increase in pre-owned sales, which again generally carry no margin. The revenue will be back-end loaded as well the margin rate. In general, the quarterly spread in revenue progression will look something like $2.2 billion, $2.3 billion, $2.4 billion and $2.8 billion. Operating margin in the first two quarters should be in the mid-14% area, strengthening in Q3 and moving to well over 17% in Q4. We believe that last year will be the low point in operating earnings during this transition to our new models with modest earnings increases in 2019 and 2020, and significant earnings traction thereafter.

In Combat, we expect revenue to be between $6.5 billion and $6.6 billion, a $250 million to $350 million increase over 2018, with operating earnings of $965 million to $975 million, slightly better than last year. Here again, look for both the revenue, earnings and margin rate to grow quarter-over-quarter during the year with a particularly strong fourth quarter. We continue to see solid growth for this business with orders for the Abrams and solid (ph) demand for Stryker vehicles and munitions. We see domestic volumes expanding faster than our international business.

The Marine Group is expected to have revenue of approximately $9 billion, a 6% or $500 million increase over 2018. Operating earnings in 2019 are anticipated to be about $770 million with an operating margin rate around 8.5%. We anticipate growth at each of the yards with mix being reflected in margins. We continue to see long-term growth with an expanding need for submarines, surface combatant support ships, and overhaul work. Our biggest opportunity here is around outperforming the forecasted margin rate.

We respect -- we expect Information Technology revenue in 2019 of approximately $8.3 billion, consistent with 2018, with margins in the 7.5% range, a slight improvement over 2018's performance. To the plus side, we have a full year CSRA, offset by the divestitures of the call centers and CEDA businesses, which represented just over $1 billion of prior year revenues. We see the business making excellent progress toward optimizing the acquisition as we combine teams, deeply integrate business systems, consolidate facilities and increase our value proposition to diverse defense, intel and federal civilian agencies.

Information Systems, we expect revenue in 2019 somewhere between $4.8 billion and $4.9 billion, an increase of just over $100 million, or between 2% to 3%. We see strong growth in our maritime, cyber and space-related markets with fairly steady top line in our core tactical networking competency (ph). We're anticipating operating earnings up modestly over last year with margins in the mid -- between mid- and high-13s, once again building throughout the year. So for 2019, Companywide, all of this rolls up to approximately $38.5 billion of revenue, up by 6% over 2018. Operating earnings of $4.5 billion, and operating margin of around 11.7%. This gives us an EPS forecast of $11.60 to $11.70 per fully diluted share. I may emphasize that this plan is purely from operations. It assumes a low 18% tax provision, and assumes we buy only enough shares to hold the share count steady with year-end figures, so as to avoid dilution from option exercises. So much like last year, beating our EPS guidance must come from outperforming the operating plan, achieving a lower effective tax rate, and the effective deployment of capital.

With respect to the quarterly progression for EPS, the first quarter should be seasonally low at about 20% of the full year's results. The second quarter should be more than 10% better than that, and the third quarter should account for over 25% of EPS, and the final quarter of the year could represent about one-third of our EPS.

So now let me turn this over to Jason for additional commentary around cash, backlog and other items, and then we'll take your questions.

Jason W. Aiken -- Senior Vice President and Chief Financial Officer

Thank you, Phebe. Our net interest expense in the quarter was $112 million, bringing interest expense for the year to $356 million, that compares to $27 million and $103 million in the comparable periods of 2017. The increase in 2018 is due to the roughly $10 billion of debt we issued to finance the acquisition of CSRA. We repaid approximately $1.7 billion of this debt during the year, and will continue to prioritize paying down debt consistent with our mid-A credit-rating. We ended the year with $850 million of commercial paper outstanding, and our next scheduled fixed-debt maturity is in the second quarter of 2020. For 2019, we expect interest expense to be approximately $430 million, reflecting a full year of the notes issued in 2018.

Our effective tax rate was 19.7% for the quarter and 17.8% for the year, in line with our previous guidance. Looking ahead to 2019, we expect a full year effective tax rate in the low 18% range, between 18% and 18. 5%. This is slightly higher than 2018, but recall, in 2018, we took advantage of a onetime benefit provided by tax reform and made a $255 million discretionary pension contribution, which lowered the tax rate by approximately 75 basis points.

Looking at capital deployment, we paid $274 million in dividends in the fourth quarter, bringing the full year to $1.1 billion. We also took advantage of the market decline in December by purchasing our shares to a greater degree than planned. In the quarter, we purchased 7.6 million shares of our stock for $1.3 billion, bringing the full year to 10.1 million shares for $1.8 billion. Looking ahead, while debt repayment will continue to be a priority as I mentioned, we continue to have the flexibility to adjust our capital deployment in response to changing market conditions as we did in December.

Moving on to our pension plans, we contributed approximately $570 million to our plans in 2018, including the discretionary contribution. For 2019, we expect that amount to be approximately $200 million, to be contributed mostly during the third quarter. We've also ramped up our capital expenditures, which were almost 2% of sales for the year, that's up 60% from 2017 as we invest to support the growth of our businesses, particularly Marine Systems and Aerospace. For 2019, we expect capital expenditures to rise to 3% of sales, driven by the continued investment in the Columbia-class program. Our free cash flow conversion rate for the quarter was 200%, bringing our rate for the year to 78%, excluding the discretionary pension contribution, and this is below our typical 100% conversion target.

If you're following the headlines out of Canada, you know there are discussions taking place between the Canadian government and their customer on our Armored vehicle supply contract. As a result of these discussions, we've experienced payment delays that significantly impacted the free cash flow we expected last year.To be clear, this is a timing issue, and we expect to receive the delayed payments this year. Assuming the resolution of this matter, we expect the cash conversion rate well in excess of 100% in 2019. And looking ahead, we expect cash performance throughout the planning horizon to be very strong in our typical 90% to 100% range.

Then one last point on backlog. We ended the year with total backlog of approximately $68 billion, that's up 7.5% over this time last year. That increase came in spite of a headwind from foreign currency exchange rate fluctuations, which reduced the backlog by $840 million, $700 million of which impacted the Combat Systems group. Beyond the firm backlog, our total potential contract value, which includes options and IDIQ, arrangements, increased by an impressive 17.5% over the end of last year, including the multi-billion dollar CHS-5/IDIQ award at Mission Systems. In addition, we entered into a $1.1 billion contract with an existing corporate customer for a multi-airplane multiyear order that requires their Board approval this quarter. Once approved, that order will move into the firm backlog. So these awards along with the firm backlog provide a nice foundation for the continued growth we see ahead.

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

Howard A. Rubel -- Vice President of Investor Relations

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

Questions and Answers:

Operator

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

David Strauss -- Barclays -- Analyst

Thanks. Good morning.

Phebe N. Novakovic -- Chairman and Chief Executive Officer

Good morning, David.

David Strauss -- Barclays -- Analyst

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

Phebe N. Novakovic -- Chairman and Chief Executive Officer

So let's talk a little bit about this business. In a growing environment last year, they had a one-to-one book-to-bill. They also had a 75% win rate and a $26 billion pipeline. This management team is performing the cost synergies beautifully, and frankly is a bit of ahead of schedule. By the way, this is a very energetic, innovative management team that is really making GDIT into the workplace of preference. And in this market, people are absolutely critical, they're important across the board, but people here truly matter.

I might also add the cash performance on this business is outstanding. Last year they generated over 100% in net income, in cash and will continue that this year and for the years to come. So what we see this year, despite that large backlog -- despite the large win rate and book-to-bill is, this is simply a question of timing, when the contracts move from the backlog into sales, and you'll see the growth rate increase in the third quarter, fourth quarter, and then significantly next year. This is just a question of the timing of several hundred contracts moving from backlog into sales. That also is impacting the margin rate. So I'm very confident in the ability of this business to perform. They are going to outperform their cost synergies. They are growing great cash performance, so in the instance right now it's simply a question of timing.

Jason W. Aiken -- Senior Vice President and Chief Financial Officer

And Dave, if you want to me, I'll add a little bit of additional color around your inference on margin rates. If you look at the 7.4% margin rate that we reported for the year for the Group, if you normalize that for the amortization burden that came with the CSRA acquisition and take that out, you actually end up with a margin rate of 9.6% for the year. So that's a couple of hundred basis points better than we reported and about 110 basis points better than the year ago, 2017 full-year rate. That's really driven by the CSRA contribution from an operations perspective, if you will. So they actually contributed approximately 10.9% incremental margins of the core business, excluding that amortization benefit.

Now, when you look ahead to next year, when you take the puts and takes on the revenue side between the additional quarter of CSRA volume, offset by the divestitures, we are nominally up. Let's just call it notionally flat, but nominally up. So even though we do have, because of the accelerating amortization schedule that we have for this business, even though we do have a somewhat declining quarterly amortization burden, the fact that we have four full quarters of amortization versus a flattish-to-slightly nose up total top line is actually perhaps counter intuitively a little bit of a margin drag for next year. It will start to accelerate from the following year once we have a full up year-on-year comparison. So if you think of that amortization is really, call it a 20 -- I'll call it a 20-ish basis point drag. Now the other part of it is we do have synergies, as Phebe mentioned, that are accelerating. So I'd call that maybe an 80 basis point to 90 basis point assist as we go forward and we'll continue to accelerate after that.

And then from a mix perspective, as you alluded to, when we talked about this for some time after the acquisition, we did forecast, call it 100 basis point to 150 basis point contraction overall in the incremental CSRA margins over the next three, four years. So call it 50 basis points or so from that. So if you take the 20-ish basis points on amortization, if we call a 50 basis points on mix, offset by a positive 80 basis point to 90 basis point improvement from synergies, you get, call it, 10 basis point to 20 basis point net improvement for the year, and we would see it accelerating after that. So hopefully that color is helpful.

Operator

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

Robert Stallard -- Vertical Research Partners -- Analyst

Thanks very much. Good morning.

Phebe N. Novakovic -- Chairman and Chief Executive Officer

Good morning.

Robert Stallard -- Vertical Research Partners -- Analyst

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

Phebe N. Novakovic -- Chairman and Chief Executive Officer

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

Operator

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

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

Yeah. Hi, good morning. Another maybe follow-up question quickly on Aerospace. When you compare this release to your last release last quarter and you look at the estimated potential contract value, it went up by almost $1 billion. Can you help us understand what that means? And what gets thrown in that pile and why it will go up by $1 billion?

Phebe N. Novakovic -- Chairman and Chief Executive Officer

Yeah. Let me ask Jason to give you a little color on that.

Jason W. Aiken -- Senior Vice President and Chief Financial Officer

So Ron, one of the last comments that I made was around this area, and it typically in the estimated potential contract value bucket for the Defense businesses, that's clearly contract options and IDIQ potential value. For Aerospace, it holds a number of items to include options for aircraft, as well as longer-term arrangements that we have with individual customers, so -- were deliveries may be further out in the delivery queue and spread out in the backlog. So as I mentioned, we did have in the fourth quarter a fairly large contract signed up with an existing commercial customer. It was valued at just over $1 billion. It's a multi-aircraft, multiyear arrangement that spans out over several years. That did not go into the firm backlog, because that order is actually subject to that customers' Board approval coming up later this quarter. So we expect that to happen this quarter, and will move into the firm backlog and be counted as traditional orders at the time. But given the maturity of that and where it was in the quarter, that's why we put it in the -- as we typically are conservative on these notions, we put it in the potential contract value bucket versus in a firm backlog till we get to that firm order.

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

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

Phebe N. Novakovic -- Chairman and Chief Executive Officer

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

Operator

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

Robert Spingarn -- Credit Suisse -- Analyst

Good morning. Phebe or Jason, I wanted to see if we could dig a little bit more into the margin pressure you expect in the front end of '19 and what you saw on the back end of '18. How do we parse the pressure between the completion issues, Phebe, that you cited at Jet Aviation, just the general learning curve and conversions you're doing on G500s and G600s? And specifically NORDAM, where does NORDAM factor into this, and how quickly do you get a lift as that problem diminishes?

Phebe N. Novakovic -- Chairman and Chief Executive Officer

So let's take it in a reverse order. We've got the nacelle line well under control. The cost performance has been quite good. And as I mentioned in my remarks, we had to just pull back up the supply chain, that is the pacing item with respect to our timing of our deliveries. But the supply chain is doing well, and it's just going to take them a while to begin to have the capacity and the throughput in product to feed our demand. So I will see a little bit of slowness on that -- on the delivery of nacelle. But as we get into the second half that will have completely resolved, and we will be in full-rate production throughout the supply chain. So we are quite pleased with that.

The margin compression, it has been something we've been talking to you all for some time about. As you all know, the first lot of airplanes in this case, we are talking about the G500, carry very little margins. Those airplanes will ramp up -- continue to ramp up that production in first quarter, second quarter, and as we move from that initial lot that carry those lower margins, then you'll see some -- we will see some margin expansion on that line. The G600 will come in at slightly higher entry margins, simply because of the disproportionate amount of test cost and R&D cost borne by the G500, and then will nicely come down its learning curve. So those are some of the issues that we will see with respect to the margins.

The completion business at Jet, we had a problem this year really on the operating side. We have fixed that. And going forward we are comfortable that they will do better this year.

Robert Spingarn -- Credit Suisse -- Analyst

So Jet is not really not part of the '19 pressure?

Phebe N. Novakovic -- Chairman and Chief Executive Officer

No. Well, (inaudible) no, they are not. They will do better this year, because of the affirmative and proactive steps they took in '18. So the (Multiple Speakers) about mix.

Robert Spingarn -- Credit Suisse -- Analyst

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

Phebe N. Novakovic -- Chairman and Chief Executive Officer

We'll have. As we continue to come down our learning curve, we finish up a lot of the G500, the first lot of 500 airplanes, the first lot of 600 airplanes, you can expect us to come quickly down our learning curve. And as I have mentioned in my remarks, we'll see some earnings and margin expansion in '20, and then really quite nice expansion and considerable earnings growth thereafter as we have completed all of those two transitions. So I'm not going to predict exactly where we end up on new airplanes with respect to terminal margins here, but you should expect us to continue the strong operating performance you have seen from us. We know how to build these airplanes. Low-cost, high-quality provider. We're good at that.

Operator

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

Myles Walton -- UBS -- Analyst

Thanks. Good morning. I was hoping we could get some color on the Canadian lab program that was weighing on the conversion this year. You probably had maybe a $1 billion of revenue on that program. I'm just curious are you getting -- are you getting any cash on the program on an ongoing basis, and what would the conversion have looked like if not for the progress delays?

Phebe N. Novakovic -- Chairman and Chief Executive Officer

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

Myles Walton -- UBS -- Analyst

And just to put a bread box around it, Jason, would you have been above 90% adjusted for pension and conversion if you (inaudible)?

Jason W. Aiken -- Senior Vice President and Chief Financial Officer

That's correct. We would have been, call it, net 95% to 100% range we've been targeting.

Phebe N. Novakovic -- Chairman and Chief Executive Officer

Terrific timing. Go ahead.

Operator

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

George Shapiro -- Shapiro Research -- Analyst

Yes. Phebe, I wanted to ask on Gulfstream. I thought you had implied in the third quarter that the book-to-bill would get close to 1. So could you just comment on what might have happened so -- since we wound up somewhat less than that?

Phebe N. Novakovic -- Chairman and Chief Executive Officer

I believe, George, what I said was that the orders would be better in the fourth quarter than they were in the third quarter, in fact, they were. And the book-to-bill is nice particularly, I think -- particularly when you look at the additional delivery -- considerable number of additional deliveries that we had in the fourth quarter. But the quarterly book-to-bill, if you go back and look at Gulfstream, Aerospace tends to have some lumpiness. But we had very nice order activity last year, and the fourth quarter was about what we anticipated. Orders would be better than the third quarter. And I would also point out that we've got a -- Jason talked about it at some length, a $1 billion order with a customer that once it gets cleared by its board moves into backlog. So I consider that we had a good order quarter.

George Shapiro -- Shapiro Research -- Analyst

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

Phebe N. Novakovic -- Chairman and Chief Executive Officer

No. That's almost impossible to deconstruct. I'm very pleased with how quickly -- we have got some really good operators in Tulsa, and I'm really pleased at how quickly they were able to stabilize the line. We've got good performance, good cost control, and frankly we've got a now aligned supply chain. So I don't know the -- any particular impact of that in -- with any specificity.

Operator

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

Carter Copeland -- Melius Research -- Analyst

Hey, good morning, all.

Phebe N. Novakovic -- Chairman and Chief Executive Officer

Hi, Carter.

Jason W. Aiken -- Senior Vice President and Chief Financial Officer

Good morning.

Carter Copeland -- Melius Research -- Analyst

Phebe, just given where we are in the life cycle of the G650, I know historically you've given us sort of a framework in how you think about products and their life cycle. And I know we just got the seventh anniversary of entry into service on the G650, so I think we'll be half way through that kind of 15-year life cycle that you usually reference in the next couple of quarters. And I wondered if you could just kind of update us on how you think about the life cycle of that particular product as we look forward in this year?

Phebe N. Novakovic -- Chairman and Chief Executive Officer

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

Carter Copeland -- Melius Research -- Analyst

Okay. Then I'll try another one.

Phebe N. Novakovic -- Chairman and Chief Executive Officer

Yes. Give it a shot.

Carter Copeland -- Melius Research -- Analyst

Jason, the comment on CapEx, just as we think about cash flow, when do you see the Marine, I'm not sure if you can answer this yet, just based on the planning, but when should we think that the CapEx build in Marine sort of levels off from a longer-term standpoint? Is that still a couple of years away?

Jason W. Aiken -- Senior Vice President and Chief Financial Officer

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

Operator

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

Cai von Rumohr -- Cowen & Co. LLC -- Analyst

Yes. Thank you very much. So Phebe, I believe Mark Burns, who runs Gulfstream, has said at some point you will have a competitor to the Global 7500 in the market. And you obviously have an opportunity back where the 450 was, and you obviously have probably taken a little bit longer than you expected on certifying the G600. So if we think about R&D, was that high in the fourth quarter -- high -- relatively high in the fourth quarter? And what comment can you give us in terms of what sort of a drag that will be on 2019?

Phebe N. Novakovic -- Chairman and Chief Executive Officer

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

Jason W. Aiken -- Senior Vice President and Chief Financial Officer

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

Cai von Rumohr -- Cowen & Co. LLC -- Analyst

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

Phebe N. Novakovic -- Chairman and Chief Executive Officer

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

Howard A. Rubel -- Vice President of Investor Relations

Operator, we have time for two more questions.

Operator

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

Peter Arment -- Robert W. Baird & Co. -- Analyst

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

Phebe N. Novakovic -- Chairman and Chief Executive Officer

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

Operator

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

Hunter Keay -- Wolfe Research -- Analyst

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

Phebe N. Novakovic -- Chairman and Chief Executive Officer

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

Hunter Keay -- Wolfe Research -- Analyst

Thank you.

Howard A. Rubel -- Vice President of Investor Relations

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

Operator

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

Duration: 52 minutes

Call participants:

Howard A. Rubel -- Vice President of Investor Relations

Phebe N. Novakovic -- Chairman and Chief Executive Officer

Jason W. Aiken -- Senior Vice President and Chief Financial Officer

David Strauss -- Barclays -- Analyst

Robert Stallard -- Vertical Research Partners -- Analyst

Ronald Epstein -- Bank of America Merrill Lynch -- Analyst

Robert Spingarn -- Credit Suisse -- Analyst

Myles Walton -- UBS -- Analyst

George Shapiro -- Shapiro Research -- Analyst

Carter Copeland -- Melius Research -- Analyst

Cai von Rumohr -- Cowen & Co. LLC -- Analyst

Peter Arment -- Robert W. Baird & Co. -- Analyst

Hunter Keay -- Wolfe Research -- Analyst

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