Erin Linnihan - Director, IR Phebe Novakovic - Chairman and CEO Jason Aiken - SVP and CFO.

Jason Gursky - Citigroup Peter Arment - Sterne, Agee Sam Pearlstein - Wells Fargo Securities Robert Stallard - Royal Bank of Canada Doug Harned - Sanford Bernstein Joe Nadol - JPMorgan Cai von Rumohr - Cowen and Company Hunter Keay - Wolfe Research Robert Spingarn - Credit Suisse John Gordon - Morgan Stanley Myles Walton - Deutsche Bank George Shapiro - Shapiro Research Pete Skibitski - Drexel Hamilton Howard Rubel - Jefferies David Strauss - UBS Carter Copeland - Barclays Capital.

Good day ladies and gentlemen and welcome to the Third Quarter 2014 General Dynamics Earnings Conference Call. My name is Tihisha and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct the question-and-answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Erin Linnihan, Director of IR, Investor Relations. Please proceed..

Thank you Tihisha and good morning everyone. Welcome to the General Dynamics' third quarter conference call. As always, 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..

Good morning. As you can observe from our earnings report, we enjoyed a particularly compelling quarter.

We reported EPS from continuing operations of $2.05 per fully diluted share on revenues of 7.75 billion, and income from continuing operations of 694 million, this is $0.21 per share better than the year ago quarter and $0.14 per share better than consensus.

Revenue was up 60 million against the year ago quarter, operating earnings were up 38 million or 4%, and income from continuing operations was $42 million higher. Operating earnings of 999 million reflect 12.9% operating margins, a 50 basis point improvement over the third quarter of 2013.

Sequentially the news is much the same, revenue was up 277 million, 3.7%. Operating earnings were up 50 million on a 20 basis point improvement in operating margins and earnings from continuing operations were up 48 million. Finally, EPS was $0.17 better than last quarter.

In short, we experienced the highest revenues so far this year, had the highest operating earnings in four years, the highest margins in six years, and the highest earnings from continuing operations on my watch.

This led quite naturally to the strongest quarterly EPS we have ever had, all pretty powerful and the strong indication that our focus on operations is paying dividends. With respect to cash, we had 2.33 billion of free cash flow from operations in the quarter. That is 330% of net income from continuing operations.

We have 3.46 billion year-to-date, 179% of net income from continuing operations. However a word of caution here, some of this cash is from advanced payments on international orders and will be deployed in future quarter for pragmatic purposes and leans the balance sheet.

That having been said, it was still a very powerful quarter from a cash perspective. With respect to share repurchases, in the quarter we repurchased slightly less than 3.8 million shares for approximately 468.5 million. We have purchased somewhat in excess of 28.8 million year-to-date for about 3.2 billion.

We plan for modest share repurchase activity in the final quarter of the year with a resumption of increased activity early next year. As you can see from the backlog charts that we attached to the press release, this quarter is also a story of continuing growth in the backlog.

Once again there was a substantial intake of orders resulting in significant increases to backlog. We ended the quarter with the total backlog at an all-time APEX of 74.4 billion up from 71.1 billion at the end of the last quarter. All of this growth occurred in Combat Systems Group largely the result of international orders.

You may recall that at the end of the third quarter of 2013 Combat Systems had a backlog of almost 7.8 billion. It now stands at 21.6 billion, more than a three-fold increase. If we look back over the last year for the entire Company, you will see a similar story.

Our backlog has grown from 47.8 billion a year ago to 74.4 billion today, from my perspective, pretty impressive.

Looking forward towards the fourth quarter, we would expect the Aerospace Group to enjoy very strong order intake as the result of the introduction of the two new aircraft announced this month, along with a growing interest in existing products, impart precipitated by the new product announcements.

In other words, customers can now choose between the near-term availability of G450 and G550 and no longer wait for new products, with different speeds, ranges and price points. The clarity of these options for customers is helping drive decision-making.

Before I turn this cal over to Jason Aiken to give you some segment details, I will note that I was particularly pleased by the revenue and earnings growth of the Aerospace Group, the continued excellent margin performance of Combat Systems, the revenue growth in the Marine Group, and the steadily improving margins at IS&T.

We’re not where we want to be at IS&T but we’re improving.

Jason?.

Thank you, Phebe. As Phebe indicated, the quarter was marked by very strong operating results from each of our business groups. I’ll start with Aerospace. Aerospace had another very good quarter. Revenues, earnings and margins were all up from the year ago quarter, as well as for the first nine months of the year.

The Group reported sales just shy of $2.3 billion up from the third quarter of 2013 by 6.4%. Operating earnings increased 11.4% over 2013 to $411 million, the highest level of quarterly earnings the Aerospace Group has ever seen.

Operating margins were up 90 basis points to 18% on improved performance in G650 and G280 manufacturing and outfitting, as well as another good contribution from Jet Aviation. On a sequential basis, the Group experienced some margin compression from the first half consistent with our expectations.

This is attributable to a variety of factors but primarily to the mix of aircraft deliveries and an increase in pre-owned aircraft activity. Of course the aircraft’s mix is more than just large versus mid cabin, keep in mind it includes the variety of models within those categories. Next, Combat Systems.

Combat Systems revenues and operating earnings were also up compared with third quarter 2013. In the quarter, sales were up 6.8% to $1.4 billion, while earnings were up 1.8% to $232 million. Taking with the second quarter that was essentially flat year-over-year, it would appear that we found the bottom with respect to sales for the Group.

As expected the Group’s margin rate while exceptionally strong was down from a year ago when the Group posted its highest margins in its history. In fact barring the third quarter of last year the Group’s margin this quarter were the highest they’ve ever been.

So far this year the Combat Systems Group has experienced very strong performance with an operating margin rate of 14.4% year-to-date. When we look sequentially, revenues were down $70 million from the second quarter, but operating earnings and operating margins were both up, $12 million and 160 basis points respectively.

This reflects the impact of the various restructuring actions taken in the past 18 months across the Group’s businesses, including a significant reduction in our European cost base and last year’s combination of two of our U.S.-based businesses.

With the last of the European restructuring charges taken in the first quarter of this year, the Group’s margins have expanded significantly from the first quarter to the second, to the third. The cost reduction efforts position the Group well to execute on their strong backlog. Moving onto Marine Systems.

The Marine Group’s revenues were higher than 2013 both in the third quarter and the first nine months. Revenues in the quarter were up by 7.2% to over $1.8 billion, while year-to-date revenues increased by 3.7% to nearly $5.3 billion.

The growth in both periods is attributable to the Group’s submarine programs and commercial ship construction activities. The Group has started construction on the fourth block of Virginia-class submarines which was awarded in the second quarter and is continuing development activities on the Ohio-class submarine replacement program.

Construction is also underway on the first three of 10 Jones Act ships under contract at our NASSCO shipyard. Operating earnings were steady compared with this point last year to $170 million and the Group’s operating margins were down 70 basis points in the quarter and 30 basis points year-to-date as a result of mix shift.

The Group is transitioning from Block-3 to Block-4 of the Virginia-class program and from the Mobile Landing Platform program to the new commercial ship contracts at NASSCO. However, margins for the first nine months of the year remained very respectable 9.7%. And finally IS&T.

You may recall that we had expected a 20% decline in revenues this year for IS&T, but based on the strength of the first half of the year we adjusted that expectation on last quarter’s call to a 15% decline. The Group continues to outperform our top-line expectation through nine months, with operating earnings following suite.

Revenue of $2.25 billion in the quarter was off by about 13% compared to the prior year’s third quarter. And on the other hand, operating earnings declined just 6.5%, roughly half the decline in sales to $202 million. As a result, operating margins increased by 60 basis points to 9% in the quarter.

This is the Group’s highest margin rate in the last three years, and marks the third consecutive quarter of margin expansion. All three of the Group’s businesses contributed to this improved performance in the quarter. The story for the first nine months is similar. Revenues were approximately $6.7 billion down only 11.7% versus the expected 15%.

However, operating earnings were down only 4.3% resulting in 70 basis points of margin improvement. When we look sequentially, revenues and earnings were both up $84 million and $14 million respectively.

And as I noted earlier, the Group has expanded margins sequentially since the fourth quarter of last year demonstrating good operating leverage and the Group’s ongoing efforts to take cost out of the business. On that front during the quarter, we announced the decision to combine Advanced Information Systems and C4 systems effective January 1, 2015.

We expect this combination in resulting restructuring efforts to make the combined organization General Dynamics Mission Systems more efficient, profitable and responsive to our customers. I’d like to cover just a few miscellaneous financial items before I turn it back over to Phebe to wrap it up and begin the question-and-answer period.

The net interest expense in the quarter was $21 million versus $22 million in the third quarter of 2013. For the full year, we continue to expect interest expense to be approximately $90 million.

At the end of the quarter our balance sheet reflects a cash balance of $5.1 billion and the net cash position that’s cash and equivalence in excess of debt of $1.7 billion. In this regard you should reflect on the cautionary note Phebe introduced on this subject in her earlier comments.

Our effective tax rate was 29.1% for the quarter, slightly lower than expected due to the resolution of some open matters related to our 2013 tax returns. For the full year now reflecting on our experience to-date in the tax rate of 29.8% for the first nine months, we now expect an effective tax rate around 30%.

We funded our pension plans in the quarter as anticipated bringing our contributions through the first nine months to just over $500 million. And I’ll turn it back over now to Phebe to give you some wrap-up thoughts..

All right. As we turn to guidance, I will be brief. Somewhat higher revenue, higher than anticipated operating earnings and a modestly lower tax rate combined to permit us to increase our guidance for EPS from continuing operations to $7.60 to $7.70, approximately $0.25 up from our last discussion with you. Now, let’s get on to your questions.

Erin?.

Thanks Phebe. As a quick reminder, we ask participants to ask only one question, so that everyone has the chance to participate. If you have additional questions please get back into the queue. Tihisha, could you please remind participants how to enter the queue..

Question:.

and:.

No problem. (Operator Instructions) Your first question will come from Jason Gursky from Citi. Please proceed..

Good morning everyone.

Phebe I was wondering if you could just talk a little bit about this backlog at Combat Systems and what it pertains for margins out in the future, would you just offer your view on how profitable that increased book of business might be and the sustainability of margins in Combat Systems?.

Good morning everyone.

Phebe I was wondering if you could just talk a little bit about this backlog at Combat Systems and what it pertains for margins out in the future, would you just offer your view on how profitable that increased book of business might be and the sustainability of margins in Combat Systems?.

If we look into next year margins ought to look about the same as they do this year, because we really expect the ramp-ups in ’16 and ’17 and beyond. As we go through come down our learning curves, we’re going to improve our operating earnings and margins. These will be very profitable programs because they’re in our core we know how to produce them.

And so we have strong expectations for Combat Systems’ margin performance..

Okay, great.

And then at IS&T, can you talk a little bit about the contracting environment that’s going on there today? And whether you feel like things are getting markedly better, staying the same on the margin, getting a little worst just kind of contract terms as well as the cadence of bookings and the size of bookings?.

Okay, great.

And then at IS&T, can you talk a little bit about the contracting environment that’s going on there today? And whether you feel like things are getting markedly better, staying the same on the margin, getting a little worst just kind of contract terms as well as the cadence of bookings and the size of bookings?.

We’re not seeing much of a change in our contract terms and conditions. And still as a result for us margin expansion is all about performance. And we’ve seen some of that improved operating performance throughout that Group. Just give you an example we had a book-to-bill of one for the quarter in IS&T so nice order activity.

And I really haven’t seen any material change in the contracting..

Okay, great. Thank you..

Okay, great. Thank you..

Your next question will come from the line of Peter Arment from Sterne, Agee. Please proceed..

Thank you. Good morning Phebe. Just a question is on IS&T, you’ve talked about the combination here creating this Mission Systems business, and you just mentioned the contracting environment.

Do you think this business ultimately can continue to see margin expansion or is there something structural that keeps it below 10% for the long-term?.

Thank you. Good morning Phebe. Just a question is on IS&T, you’ve talked about the combination here creating this Mission Systems business, and you just mentioned the contracting environment.

Do you think this business ultimately can continue to see margin expansion or is there something structural that keeps it below 10% for the long-term?.

I see no reason why this business can’t get into the double-digits. We undertook this consolidation but the markets are changing so it was an opportune time for us to take a fresh look at our entire portfolio. And it became pretty clear to us that we were going to benefit from a consolidation.

So from my perspective, the consolidation is going to result in additional cost savings going forward. So that is margin expansion opportunity..

Okay, I’ll stick to the one. Thank you..

Okay, I’ll stick to the one. Thank you..

Your next question will come from the line of Sam Pearlstein from Wells Fargo. Please proceed..

Good morning.

Phebe can you talk a little bit about the $0.25 improvement in terms of the guidance, in terms of where that’s changing, which are the different segments? Because I know, like as an example, IS&T, down 15%, is certainly down a lot less than that year-to-date so we’d imply a pretty weak fourth quarter unless there is some changes amongst those?.

Good morning.

Phebe can you talk a little bit about the $0.25 improvement in terms of the guidance, in terms of where that’s changing, which are the different segments? Because I know, like as an example, IS&T, down 15%, is certainly down a lot less than that year-to-date so we’d imply a pretty weak fourth quarter unless there is some changes amongst those?.

No, I think our guidance reflects our year-to-date performance and the fourth quarter is going to look very much like what we are leading, we’re guiding to on the overall Company. So Marine will be a little bit up. And everybody -- all the other Groups are pretty much steady. There is some margin compression in IS&T but not much.

So, I think when we’ve increased our guidance really to reflect where we’ve been and where we see going forward for the remainder of the year. So this is uncomfortable with our guidance..

But in terms at least for the four segments, did the outlook changed relative to what you talked about? I am trying to just understand where you’re moving that increase of $0.25 from?.

But in terms at least for the four segments, did the outlook changed relative to what you talked about? I am trying to just understand where you’re moving that increase of $0.25 from?.

Well, it’s really kind of across the board. We’ve got higher earnings and we anticipate higher earnings in Aerospace, higher earnings in the Marine Systems and well and higher earnings in Combat. So a little bit margin compression as I said in IS&T in the fourth quarter.

But when you roll it all up where we’ve been and what we see for the fourth quarter 7.60 to 7.70 is we’re very comfortable with that..

Okay. Thank you..

Okay. Thank you..

Your next question will come from the line of Robert Stallard from Royal Bank of Canada. Please proceed..

Thanks so much. Good morning.

Just a couple of things on cash, and Phebe mentioned that the conversion rate would obviously be above average of the first nine months, where do you expect us to go in the future, are we going to get back to 100% or below that as you burn through these advances?.

Thanks so much. Good morning.

Just a couple of things on cash, and Phebe mentioned that the conversion rate would obviously be above average of the first nine months, where do you expect us to go in the future, are we going to get back to 100% or below that as you burn through these advances?.

We’ll be at about at 100% as we begin to take that cash of the balance sheet and send it upon its way to our suppliers. So, we’ve target about 100%..

Okay. And….

Okay. And….

Still very good cash generation..

Yes, on the [buying] is there any reason why you are easing off in the fourth quarter?.

Yes, on the [buying] is there any reason why you are easing off in the fourth quarter?.

We’ve told you all and our investors that we would deploy all of, most if not all of our free cash flow to share repurchases and dividends and we’re about at that point. So, we’ll go a little bit slower in the fourth quarter, but I expect to pick that activity back up in the beginning of the year..

Great, thanks so much..

Great, thanks so much..

Your next question will come from the line of Doug Harned from Sanford Bernstein. Please proceed..

Yes, good morning. When you talked earlier about the G500 and G600 and then the G450 and G550 and how this gives customers the opportunity for a lot of different decisions.

But when you look forward on the 450 and the 550, what’s the level of backlog that in terms of months that you’re comfortable with to make sure that you can continue to keep production at the levels you’re at today until the 500 and 600 come out.

I am just curious where you stand today in terms of that and how you get confidence that you’re going to be in a good position?.

Yes, good morning. When you talked earlier about the G500 and G600 and then the G450 and G550 and how this gives customers the opportunity for a lot of different decisions.

But when you look forward on the 450 and the 550, what’s the level of backlog that in terms of months that you’re comfortable with to make sure that you can continue to keep production at the levels you’re at today until the 500 and 600 come out.

I am just curious where you stand today in terms of that and how you get confidence that you’re going to be in a good position?.

Let me give you a little bit of color on that. In the quarter our backlog increased by a quarter for almost all of our models 650, 650/ER third quarter of ’17, 550 first quarter of ’16, 450 about the same, 280 third quarter of ’15 and the 150 frankly the largest increase at the first quarter of 2016.

So that provides us pretty steady production rate as we go forward to plan for the next at least 12 month period. And you recall we set our production rates at the end of the prior year and then we’ll give you some details about those rates as we go forward.

But it’s too soon to predict, I think it's just too soon to project when we have any material changes in productions as a result of the new airplane. And when we get to that, get closer to that point we’ll give you a little bit more clarity..

So is it fair to say you are looking at having some flexibility there as you see how demand rolls out for each of the different models overtime?.

So is it fair to say you are looking at having some flexibility there as you see how demand rolls out for each of the different models overtime?.

Yes, we always have flexibility. I think that agility helps us keep our profitability high and as we balance resources against demand.

So, I am comfortable that as we stand here today we’ve got an executable plan going forward and as I said as we get closer to the entry into service of the 500 and then the 600, we’ll give you a little bit more color on to, into the relative production rates..

Okay, very good, thank you..

Okay, very good, thank you..

Your next question will come from the line of Joe Nadol from JPMorgan. Please proceed. .

Thanks. Good morning, good results. Phebe, just on Marine, the margins have come down a little bit the last couple of quarters and you have indicated that it’s transitioning on the multi-years for Virginia-class plus the MLP over to the new commercial ships.

How are the ships coming, I mean this is your, this was your business before with your current position and so as you look at the early stages of the curves in the ships, how are they coming and where do you think the margins kind of bottom out before we start seeing an uptick as they mature?.

Thanks. Good morning, good results. Phebe, just on Marine, the margins have come down a little bit the last couple of quarters and you have indicated that it’s transitioning on the multi-years for Virginia-class plus the MLP over to the new commercial ships.

How are the ships coming, I mean this is your, this was your business before with your current position and so as you look at the early stages of the curves in the ships, how are they coming and where do you think the margins kind of bottom out before we start seeing an uptick as they mature?.

You pretty much got it right on the mix shift, we’ve got mix shift from Block-3 to Block-4 and then the transition from the MLP to the Jones Act ships.

It's an interesting, when you think about what NASSCO has been able to do, they have demonstrated that they can build these ships and meet the customer’s needs competitively and profitably while they are continuing to deliver Navy ships. So the current work we have in-house at NASSCO provides us nice revenue and earnings for the foreseeable future.

We’ve got three ships in production they are all performing on or above plan.

So I would -- now one thing one caution here is that think about commercial ship building as providing nice strong earnings but the margin are going to be a touch lumpier as we move from one ship class to the next ship class because these are shorter cycles and maybe ship building.

So I suspect we’ll see continued margin improvement at NASSCO and have elected photos as we work through some of these mix shifts. And I would suspect to see some of that next year and certainly going into ’16 and beyond..

Just to be specific, so, next year you expect to see margins start to perk up?.

Just to be specific, so, next year you expect to see margins start to perk up?.

Yes, they ought to be, it ought to -- I expect we haven’t done our detailed planning yet but I anticipate that they will somewhat near this year..

Okay, thank you..

Okay, thank you..

Your next question will come from the line of Cai von Rumohr from Cowen and Company. Please proceed..

Yes, thanks so much Phebe. So if you could give us maybe a little bit more color on Gulfstream, are the 650 margins kind of above, you said they’re above the 450.

Where are they relative to the 550? And in terms of cash, when do you expect to get initial signed contracts for the G500 and what kind of impact is that going to have? That should have a positive impact on cash. Thanks..

Yes, thanks so much Phebe. So if you could give us maybe a little bit more color on Gulfstream, are the 650 margins kind of above, you said they’re above the 450.

Where are they relative to the 550? And in terms of cash, when do you expect to get initial signed contracts for the G500 and what kind of impact is that going to have? That should have a positive impact on cash. Thanks..

Yes, so the 650, and 650/ER margins are beginning to approach the 550 and I suspect sometime next year we may have the crossing point on that. We haven’t yet planned out our cash in any detail with respect to the 500s and 600s. We expect to see some this year but more going into next year.

And by the way, we’ll give you a lot of color in the fourth quarter call in January about the order activity on both of those airplanes..

Can you give us some additional color on that, on that order activity, or just the reception? And, whether you….

Can you give us some additional color on that, on that order activity, or just the reception? And, whether you….

Yes. So we announced at the rollout that we had several orders, large orders. And the order activity has been very positive since then. But I don’t really want to give you a battlefield update and we’re just barely end of this quarter. So we’ll be able to give you some confirm color and details in the fourth quarter call..

Okay, thank you..

Okay, thank you..

Your next question will come from the line of Hunter Keay from Wolfe Research. Please proceed..

Thank you very much. Phebe, can you give us a couple of updates on a couple of ground vehicle programs, I think we are in a bit of a state of flux for you guys; one is AMPV and the other is JLTV.

On JLTV, could you confirm, have you guys excluded yourself from bidding on the LRIP contract next year? Are you officially going to, are you officially out of that program at this point? And on….

Thank you very much. Phebe, can you give us a couple of updates on a couple of ground vehicle programs, I think we are in a bit of a state of flux for you guys; one is AMPV and the other is JLTV.

On JLTV, could you confirm, have you guys excluded yourself from bidding on the LRIP contract next year? Are you officially going to, are you officially out of that program at this point? And on….

Yes..

Yes, I was going to also ask on AMPV. So if you give me an update on that, that’d be great. Thank you..

Yes, I was going to also ask on AMPV. So if you give me an update on that, that’d be great. Thank you..

Yes, we haven’t played in the JLTV market and on AMPV. We’re continuing to work with our customer on options for where our vehicles may make some sense. But our mature programs and our tanks and strikers are doing exactly what we thought they did would do and very good margin performance and good earnings.

So, we have a lot of stability on those as of today on our Ground Systems’ domestic markets..

Okay, and just one quick follow-up. I missed it. How long was the wait for G650 right now? Thank you..

Okay, and just one quick follow-up. I missed it. How long was the wait for G650 right now? Thank you..

It is just for 650 the third quarter of ’17..

Thank you..

Thank you..

Your next question will come from the line of Robert Spingarn from Credit Suisse. Please proceed..

Good morning. Phebe I was going to ask for some more help on Aerospace backlog, and just reconciling the book-to-bill with the extension of the backlogs for the models you talked about earlier. I suspect a lot of what’s happening is you’ve been working off a very strong 650 bookings back in 2011. So there is distortion.

Is there a point at which we start to get current on bookings and deliveries’ orders, the introduction of these two new aircraft create new distortion in the next couple of quarters as these orders come in?.

Good morning. Phebe I was going to ask for some more help on Aerospace backlog, and just reconciling the book-to-bill with the extension of the backlogs for the models you talked about earlier. I suspect a lot of what’s happening is you’ve been working off a very strong 650 bookings back in 2011. So there is distortion.

Is there a point at which we start to get current on bookings and deliveries’ orders, the introduction of these two new aircraft create new distortion in the next couple of quarters as these orders come in?.

So, you would aptly and correctly pointed out the, for the 650 order book. And given the length of time between order today and a delivery of that aircraft, is has some distortion in our book-to-bill. And we’ve talked about that I think for the last five or six quarters. As we move into the new airplane orders, we expect something very similar.

So, I think that we used to watch book-to-bill with great, in the Aerospace Group, with great, I wouldn’t say consternation but detail. And I think that’s what’s apt now. So what we watch for is the mix of the airplanes and so far our in-service models are doing very-very well..

Okay.

And then just switching topics a quick one if I could on a potential additional striker bridge, could you talk about any upside there in timing?.

Okay.

And then just switching topics a quick one if I could on a potential additional striker bridge, could you talk about any upside there in timing?.

That kind of depends on when we get an appropriations bill passed. As we’ve got money in 2015 appropriations for the striker bridge, the customer is very anxious to get those vehicles. So, it was pretty much inline of what we planned for in ’15 and ’16. But as I said we don’t have our detailed plans done, but there were no surprises..

Okay. Thank you very much..

Your next question will come from the line of John Gordon from General Dynamics. Please proceed. .

It's John Gordon from Morgan Stanley, but thank you for taking my question..

It's John Gordon from Morgan Stanley, but thank you for taking my question..

So you got a battlefield promotion here..

That is right, Phebe, I wanted to follow-up on Aerospace margins a bit. When I think about sort of the progression throughout the year, I think it's safe to say that they have exceeded expectations.

Earlier in the year you had highlighted a number of puts and takes, so when we think about your full year guidance now it seems like those aren’t I guess the downside risk isn’t coming to, I was hoping if you could just kind of give us a bit of color and maybe a play-by-play on what exactly drove the beats versus earlier concerns in the year and what that means as we look out into 2015 at risks and opportunities to improve margins from here?.

That is right, Phebe, I wanted to follow-up on Aerospace margins a bit. When I think about sort of the progression throughout the year, I think it's safe to say that they have exceeded expectations.

Earlier in the year you had highlighted a number of puts and takes, so when we think about your full year guidance now it seems like those aren’t I guess the downside risk isn’t coming to, I was hoping if you could just kind of give us a bit of color and maybe a play-by-play on what exactly drove the beats versus earlier concerns in the year and what that means as we look out into 2015 at risks and opportunities to improve margins from here?.

So, the single largest factor particularly for this quarter in margins was pre-owned and we’ve talked I think for the last couple of quarters about with a business of this level of complexity there are a lot of puts and takes, aircraft mix, the mix of service both in terms of volume and types of service, what, some service jobs come in with a lot more high content work, R&D is lumpy, G&A can be lumpy, the pre-owned in this quarter was significant and we didn’t have much pre-owned in the first couple of quarters of this in fact zero in the first half of this year and we had three this quarter.

So that is sort of I think well that is what affected our margins this year or this quarter. And then for the fourth quarter we’re looking for a pretty much the same, unless some margin compression but not a whole lot, again we anticipate a couple of pre-owned that carry no margin with it.

Going forward, we believe that we’re going to see some margin expansions particularly as the 650 comes down its learning curve or not done improvement from the 650 in fact and production in fact are never really done.

And then in the out years when we start to ramp-up 550 or 500 and 600 production we’ll see some compression in margin as we come down our learning curves. But again nothing that is remarkable or particularly out there..

Got it, thanks..

Got it, thanks..

Your next question comes from the line of Myles Walton from Deutsche Bank. Please proceed..

Maybe first a clarification, the cash conversion that you expect in the fourth quarter and then usually it's seasonally strong you just don’t know how much of an influence this pull forward will have and if you’ll extend supplier’s cash here from the events in the fourth quarter.

But the real question Phebe is given the breadth of growth in the defense backlogs I mean it seems like you would in a place to I don’t want to say declare a bottom for your defense business, but certainly look toward a potential for growth in 2015 is that across the defense portfolio in aggregate, is that an accurate statement?.

Maybe first a clarification, the cash conversion that you expect in the fourth quarter and then usually it's seasonally strong you just don’t know how much of an influence this pull forward will have and if you’ll extend supplier’s cash here from the events in the fourth quarter.

But the real question Phebe is given the breadth of growth in the defense backlogs I mean it seems like you would in a place to I don’t want to say declare a bottom for your defense business, but certainly look toward a potential for growth in 2015 is that across the defense portfolio in aggregate, is that an accurate statement?.

Yes, let me talk about growth and let’s go by Groups in the Marine Group you ought to see steady low single-digit growth year-over-year and we’ve been predicting that and that’s in fact what has happened.

Combat Systems given the considerable backlog it has when we start ramping up production and that is largely going to be in’16 and ’17, and I think you’re going to see good bottom-line and top-line growth. And IS&T, we believe we’re at the bottom and we do at least had a good order book in this last quarter. So, we see some good potential there.

So on cash conversion thus far fourth quarter will be lighter obviously because we’re beginning to disperse some of that cash to our suppliers..

Will it be positive free cash flow?.

Will it be positive free cash flow?.

Yes..

Okay. Thanks..

Okay. Thanks..

Your next question will come from the line of George Shapiro from Shapiro Research. Please proceed..

Yes, good morning. Phebe I wanted to explore a little bit the Aerospace margins in a different way. And if you just look at the incremental margin, this quarter it was 31%. The second quarter you couldn’t calculate because the margin was up on down revenues. And the first quarter was also close to 30%.

So I know you’ll say there is a lot of moving parts in everything in there. But it does seem like the incrementals still come out to around 30%.

Now, is there any reason why that shouldn’t continue as we going forward? And then also if you could just update us on what your expected large cabin deliveries are for the year, if that’s changed any from the second quarter?.

Yes, good morning. Phebe I wanted to explore a little bit the Aerospace margins in a different way. And if you just look at the incremental margin, this quarter it was 31%. The second quarter you couldn’t calculate because the margin was up on down revenues. And the first quarter was also close to 30%.

So I know you’ll say there is a lot of moving parts in everything in there. But it does seem like the incrementals still come out to around 30%.

Now, is there any reason why that shouldn’t continue as we going forward? And then also if you could just update us on what your expected large cabin deliveries are for the year, if that’s changed any from the second quarter?.

No, we’re at 116 large cabin and 32 mid cabin and that’s on green deliveries..

Okay..

Okay..

And basically the same for completions, so, look margins are going to be, and I think you’ve seen, they are somewhat lumpy. They will -- earnings are going to follow revenue growth. But we will have lumpy margins for a whole series of reasons that we’ve talked about at some length.

R&D will fluctuate, net R&D will fluctuate, G&A will fluctuate, mix is going to fluctuate, pre-owned. It’s a complex business with a lot of moving parts that you’ve got a lot of puts and takes, right..

Right, and that’s why to me it’s still surprising that when you look at the incremental margins. They don’t seem to vary all that much. It seems to be up around that 30% level..

Right, and that’s why to me it’s still surprising that when you look at the incremental margins. They don’t seem to vary all that much. It seems to be up around that 30% level..

Well, our performance continues to pay if it’s just that you’ve got in any given quarter there are things that are affecting it and activities that are affecting it. So we have on our gross margins on our airplanes continue to be very-very strong and we see improvement across the board, quarter-over-quarter. So, go ahead….

Okay, but -- one quick one maybe for Jason.

How much were the revenues in the quarter associated with the three pre-owned aircraft?.

Okay, but -- one quick one maybe for Jason.

How much were the revenues in the quarter associated with the three pre-owned aircraft?.

Yes, one second. That….

I think it’s over 100 million..

Yes, it’s -- it’s actually closer to about 70 million, or so..

Okay, thanks very much Phebe and good performance..

Okay, thanks very much Phebe and good performance..

Your next question will come from the line of Pete Skibitski from Drexel Hamilton. Please proceed..

Good morning guys, nice quarter. And Phebe I was just wondering if you could give us some color on what’s going on with Russia and China with the sanction, but I think the corruption crackdown in China.

Are any of those issues particularly the sanctions holding up any Gulfstream deliveries? And overall for both countries, are you seeing any orders being deferred or just slowing in general because of what’s going on in those regions?.

Good morning guys, nice quarter. And Phebe I was just wondering if you could give us some color on what’s going on with Russia and China with the sanction, but I think the corruption crackdown in China.

Are any of those issues particularly the sanctions holding up any Gulfstream deliveries? And overall for both countries, are you seeing any orders being deferred or just slowing in general because of what’s going on in those regions?.

Not yet. The sanctions have only impacted us at very-very far margin, and more at Jet Aviation than in Gulfstream. And China, China has a history of variability in its order activity. So, I don’t see anything abnormal there..

Okay, got it. And then just you touched on pre-owned market a little bit.

Can you talk about the pricing that pre-owned market maybe by mid cabins and large cabins? Is it fairly stable year-over-year, not really improving? Or can you shed some color there?.

Okay, got it. And then just you touched on pre-owned market a little bit.

Can you talk about the pricing that pre-owned market maybe by mid cabins and large cabins? Is it fairly stable year-over-year, not really improving? Or can you shed some color there?.

Yes, it’s stable. And we’re seeing some improvements, particularly in the larger cabins. Price is affirming up in the pre-owned..

Thank you..

Thank you..

Your next question will come from the line of Howard Rubel from Jefferies. Please proceed..

Thank you very much. Phebe it seems as if you’re continuing to go through the businesses and find opportunities for either sell things or reposition them. And obviously you’ve done one in Combat and then you have a small sale to MDA.

Could you elaborate a little bit on some of the longer term objectives that you’re looking for, for each of the businesses? I mean, you’ve sort hinted at some of them and in the earlier questions.

Could you provide a little granularity please?.

Thank you very much. Phebe it seems as if you’re continuing to go through the businesses and find opportunities for either sell things or reposition them. And obviously you’ve done one in Combat and then you have a small sale to MDA.

Could you elaborate a little bit on some of the longer term objectives that you’re looking for, for each of the businesses? I mean, you’ve sort hinted at some of them and in the earlier questions.

Could you provide a little granularity please?.

Yes. So, in the case of Combat Systems, and by the way all of our internal reorganizations have been in response to changes in our market. So, as we looked at last year, our ATP and OTS business, it made eminent sense to go ahead and combine those two. Primarily some for scale but primarily to our cost reduction and that has executed beautifully.

So, we’ve got nice-nice margin activity at now the new OTS. The IS&T was something we’ve thought about for a while. But again as our markets have contracted, it made sense now to integrate those two businesses primarily again for cost reductions. And we ought to see that, the margin benefit from that starting next year and going into the future.

But also it provides us some scale which is helpful too in this down market. Look what we want to do in the down market is manage what you can manage and keep our margins as high as possible. So, we’ve had a long road of recovery on IS&T margins, but I anticipate that they will continue to improve..

And then just I don’t know, you said the other thing that you’ve done is you currently took work in-house for Gulfstream and you've hinted at some exciting manufacturing changes, could you just elaborate a little bit more on what you’ve done there to sort of take productivity and to a new level and what does that sort of imply for, what you are sort of setting a standard for other parts of the organization to look at these options?.

And then just I don’t know, you said the other thing that you’ve done is you currently took work in-house for Gulfstream and you've hinted at some exciting manufacturing changes, could you just elaborate a little bit more on what you’ve done there to sort of take productivity and to a new level and what does that sort of imply for, what you are sort of setting a standard for other parts of the organization to look at these options?.

Well, it’s an interesting question now let’s go to the, what we have done in anticipation of the new airplane. We learned a very important lesson with the 650 that a purpose build facility provides much greater margin expansion overtime, that plus the way these airplanes were designed if they were designed for producibility.

So fewer parts and cleaner and clear build paper, work paper that get’s out on the shop floor, so given that we have these purpose build facilities and the way these planes were manufactured or designed, I think we’ve got very-very good earnings potential in the future.

We’ve taken some work in-house that we previously had outsourced so largely just as a matter of control and efficiency for some of these parts that we are now manufacturing at Gulfstream, the transportation costs are significantly less when you move it from one building right over to the next building.

So that was a factor and how we thought about optimizing earnings potential going forward for these new airplanes. I don’t believe that this is necessarily a model for the defense businesses, not something that they look at. The Marine Group is not a vertically integrated Group neither is our Land Systems.

So they have a very robust and disciplined supply chain network and I don’t see them bringing more work in-house..

Thank you very much..

Thank you very much..

Your next question will come from the line of David Strauss from UBS. Please proceed..

Good morning.

Phebe where are you in the process of selling AxleTech?.

Good morning.

Phebe where are you in the process of selling AxleTech?.

As you know we moved AxleTech into discontinued operations and we are selling at and I think it’s not appropriate to comment any further than that..

Okay.

As a follow-up Jason, on the pension legislation half the legislation I know you guys deal with cash differently than everyone else, but how does that impact you from a mandatory contribution standpoint going forward does that help you?.

Okay.

As a follow-up Jason, on the pension legislation half the legislation I know you guys deal with cash differently than everyone else, but how does that impact you from a mandatory contribution standpoint going forward does that help you?.

It does, I think like just about everybody else it brings down pretty meaningfully the mandatory contributions that we’re projecting. That said, I think as you are aware of those contributions that we had in the past and are forecasting aren’t necessarily potentially as significant to us as it maybe to others.

So the reduction isn’t something that we material, focused on as a material item that will change our cash flow outlook or anything else like that in a significant way..

Okay, great. Thank you..

Okay, great. Thank you..

Tihisha, I think we have time for one more question..

Operator:.

:.

Good morning, Phebe, Jason and Erin and good quarter.

Just a couple of quick clarifications, Jason you said that the contribution from Jet was good in the quarter, I wondered if you could characterize whether that was better than what you have seen in maybe the past couple of quarters? And then with respect to the Mission Systems’ creation, I wondered if there were any restructuring or other expenses associated with the combination that are non-repeating for next year and if you could help us think about what that might contribute to next year’s margin? Thank you very much..

Good morning, Phebe, Jason and Erin and good quarter.

Just a couple of quick clarifications, Jason you said that the contribution from Jet was good in the quarter, I wondered if you could characterize whether that was better than what you have seen in maybe the past couple of quarters? And then with respect to the Mission Systems’ creation, I wondered if there were any restructuring or other expenses associated with the combination that are non-repeating for next year and if you could help us think about what that might contribute to next year’s margin? Thank you very much..

I think with respect to the Jet Aviation question, we continue to see steady improvement in the business and year-over-year each quarter we’re seeing improvement, second quarter to second, third quarter to third and so on. So we expect to continue to see that slowly and steadily improve in our operations..

Any charges with respect to restructuring will be taken in the quarter in which they are incurred and more than offset by the cost saving. So we don’t see any material headwinds as a result..

Okay, great. Thanks for the color..

Okay, great. Thanks for the color..

Thank you for joining our call today. If you have any additional questions I can be reached at 703-876-3583. Have a great day..

Ladies and gentlemen, that will conclude today’s conference. Thank you for your participation. You may now disconnect. Have a great day..