Good morning, and welcome to the General Dynamics Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Alison Harbrecht, Staff Vice President of Investor Relations. Please go ahead.

Thank you, Amy, and good morning, everyone. Welcome to the General Dynamics second quarter 2017 conference call. Any forward-looking statements made today represent our estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K and 10-Q filings. With that, I would like to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Good morning. As you can discern from our press release, we enjoyed a solid second quarter, with revenue of $7.68 billion and net earnings of $749 million. We reported EPS of $2.45 per diluted share, $0.15 a share better than the year ago quarter and $0.02 per share better than consensus. With respect to consensus, it would appear that the sell side anticipated somewhat more revenue, but lower margins and a somewhat higher tax rate. Operating earnings were about as forecast by the sell side. All in all, pretty close. Compared to the year ago quarter, revenue of $7.68 billion was $99 million or 1.3% lower. However, net earnings of $749 million were up $35 million or 4.9%, on a 60 basis point improvement in operating margins and 160 basis point lower effective tax rate. This led to EPS that was 6.5% better than the year ago quarter. Sequentially, revenue was up $234 million or 3.1% and operating earnings were up $21 million or 2%, on a 10 basis point lower operating margin, still very respectable 13.8%. Let me turn briefly to the first half of 2017 compared to the first half of 2016. Revenue was down $134 million, less than 1% against the first half of 2016. On the other hand, operating earnings were up $140 million or 7.2% on lower cost. Operating margins were 100 basis points better. Earnings from continuing operations were up $144 million or 10.5%. EPS was $0.55 better. In short, we had a very good first half, somewhat ahead of both our internal plan and external expectations, and well ahead of last year. This leads quite naturally to the guidance increase reflected in the press release. I'll provide additional color on that guidance in a minute. But first, let me give you some perspective…

Thank you, Phebe, and good morning. Our net interest expense in the quarter was $24 million versus $23 million in the second quarter of 2016. That brings the interest expense for the first half of the year to $49 million versus $45 million for the same period in 2016. The increase in 2017 is due to a $500 million increase in our outstanding debt last year. For 2017, we expect interest expense to be approximately $105 million. Our effective tax rate was 27.4% for the quarter and 26% year-to-date. As Phebe mentioned, we're lowering our target for the full year to a rate of 27.5%. That reflects a greater benefit associated with employee stock option exercises than originally anticipated. On the capital deployment front, in the second quarter, we repurchased 2.7 million shares, bringing us to 4.6 million shares in the first half of the year for $900 million. In total, when combined with the dividends we paid, through the first six months of 2017, we've spent $1.4 billion in shareholder-friendly capital deployment, more than 1.5 times our $857 million of free cash flow for the first half. This left us at the end of the quarter with a cash balance of $1.9 billion and a net debt position of $2.1 billion. We continue to anticipate free cash flow this year to approximate 100% of net earnings and, in turn, deploying 100% of that free cash flow to share repurchases and dividends. Alison, that concludes my remarks, and I'll turn it back over to you for the Q&A.

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

Certainly. The first question comes from Ronald Epstein, Bank of America Merrill Lynch.

Hi, good morning, Phebe and Jason.

Hi, Ron.

Good morning.

Maybe just a big picture question for you, Phebe, in terms of the Land Systems business. We've seen a lot more press lately on the Russian T-14 Armata tank. When you look at the Land Systems business and you kind of look into the tea leaves, is there an opportunity there for you guys in terms of some sort of equipment response from the U.S. in terms of either yet another upgrade to the Abrams or something new, if you can add any color there.

Yes. So the U.S. Army is anticipating upgrading the Abrams to the next version, in part to meet the changing and evolving threat, frankly, worldwide. So we have factored a lot of that into our thinking. And if you think about it, we went from one tank production a month for several years, just keeping that plant on my support and we're now looking at nice, nice improvement and throughput for that plant. So we see demand increasing for the Abrams in various configurations, both domestically and outside the U.S. as well. So the Abrams is, I think, positioned quite well to do – to continue to grow.

Okay. Great. Thank you.

The next question is from Samuel Pearlstein, Wells Fargo.

Good morning.

Hi, Sam.

I was wondering if you could talk a little bit about, IS&T has been running down for the first half of the year, if I just look last year, it's little bit of a tough comparison, you're still expecting to get to flat. I mean, how do you get there? What do you need to win or what's happening with IS&T in terms of being able to get to growth in the second half of the year?

So let's talk about that in two respects. First, both of these businesses are shorter-cycle businesses and they're more affected by an extended CR. Recall, we had a seven-month extended CR, which had a impact on our products business and the execution of obligated funds, execution of appropriated funds in terms of obligation. So that's pretty much a question of timing as the military services gear back up on their execution. The second side is on our services business. We had very slow execution on programs in several civilian agencies, primarily driven by uncertainty and, in some cases, reduction in funding levels. I suspect some of that we'll obtain through the course of the year until the administration sorts out some of the funding for some of the civilian agencies. But that said, we believe that our products business is poised for growth for the remainder of the year. Recall, we have a very nice backlog in this business, so it's simply a question of timing, when our customers execute programs.

Thank you.

The next question is from David Strauss at UBS.

Hey, good morning, Phebe, Jason, Alison.

Hi.

Wanted to ask on cash flow. I think, Jason, you comment that you're still targeting 100% free cash flow conversion for the year, through the first half a little weaker than I expected. Can you just talk about what's going on there? The billed and unbilled receivables, and does that stabilize through the rest of the year or partially reverse, and what exactly is driving that? Thanks.

Sure. I guess at a macro level, what we've seen through the first half of the year is really on par with what we planned for the year, so nothing out of the ordinary. We expected a bit of a ramp to the second half. So as I mentioned, still targeting at or around 100% conversion. The build-up in working capital, you mentioned was actually anticipated in connection with the Land Systems' international programs. Really what we're seeing there is as we're moving from what we experienced in the past couple of years with large advance payments and then the burn down of those advance payments, which we've talked about ad nauseam at this point. As we move into production, you're seeing a more typical build-up of the unbilled receivables prior to delivery. And as we then move into a ramp up of deliveries, we'll begin to liquidate that unbilled receivables and we expect to see that to start to turn in the second half, and hence, a bit more of the ramp in the cash flow in the second half. So all part and parcel of moving from the development phase of that contract into production and a subsequent ramp in deliveries. So we'll see that unwind beginning in the second half.

Thank you.

The next question is from Doug Harned at Bernstein. Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC: Good morning. Thank you.

Good morning. Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC: On Gulfstream, Phebe, you've talked in the past about your pipeline being very strong, and I think you're reiterating that today. But one of the things that you've raised is the fact that it's been a little slower converting interest into firm orders. Could you give us a sense from the discussions you're having, and I would say both in the U.S. and abroad, with customers, are there things that are slowing them down, in other words, are they looking for signals, economic signals, you had mentioned Brexit a while back when that happened, what are you seeing holding people back?

Nothing. Actually, no substantive issue in particular, simply more rigor as they move into the contracting process. So I don't see any macro reasons. We have identified none that we've got potential customers who are waiting on the sidelines, it's simply just taking longer for a whole series of reasons. Everything from the introduction of brokers to additional board approvals, so for fleet aircraft purchases. Those are constant, but there's nothing in particular that's driving this other than I think this is just a new regular order. It's going to just take longer from the time you enter the pipeline to the time you sign the contract. Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC: And presumably, your transition to the new models, I would think would be a part of this too?

Yes. I don't think that there's anything particular about those new models that would change the length of time that we're experiencing. I think that's a structural change. It's simply around timing. It's taking a bit longer, and we've learned to adjust to it. Douglas Stuart Harned - Sanford C. Bernstein & Co. LLC: Okay, very good. Thank you.

The next question is from Myles Walton at Deutsche Bank.

Thanks, good morning.

Hi.

I was hoping to follow-up on Gulfstream. I think, Phebe, you mentioned that there'd be no G500 deliveries in 2017. I thought there was going to be one. And then also the sales guidance ticking down, is that the slippage of a few deliveries, or is that just the G500 and maybe used aircraft in isolation?

Well, there are a couple of things that are affecting the revenue. We anticipate lower – now, we anticipate lower pre-owned, that carries with it, with a lower pre-owned sales that reduces revenue, but increases margin. We have a few – fewer G450 deliveries and then just lots of other puts and takes.

Nothing on the certification, EIS (27:01)?

No, no, we're good with that. We're on track. The certification and flight test program is proceeding very, very well. And Jason can give you just a little bit more color on the – this really is the essence of the change of the impact of revenue recognition.

Sure. I mean, we had talked about for a while dating back entry into service this year, and that's still, as Phebe pointed out in her remarks, the demonstrator aircraft will enter service this year. So we'll complete certification, get type certification, enter that aircraft into service, but that, of course, won't have a revenue implication, that's what she was referring to in her remarks. But nothing otherwise off-schedule or off-plan from what we had anticipated this year.

Got it. Thank you.

The next question is from Robert Spingarn at Credit Suisse. Robert M. Spingarn - Credit Suisse Securities (USA) LLC: Hi. Good morning.

Good morning. Robert M. Spingarn - Credit Suisse Securities (USA) LLC: Just sticking with Aerospace and Gulfstream, you still – despite the sequential downtick, the margins are still excellent, and I would think that mix is trending away from some of the more mature programs, and so how – Phebe, where would you say the G650 margins are today relative to G450, G550 at peak maturity? How much more runway do you have there to offset the mix of the new aircraft as they come in? And then will there be any margin support at some point from reduced R&D or you're going to keep that level?

So the G650 margins have exceeded the G450 and G550 at their peak. And you ask a question that I ask Gulfstream frequently, how much better can we do? And we will do better, the quantum of which we'll have to see. But we've come down our learning curve. That purpose-built facility has turned out to be an operating mix-up (29:10) for us. It's been really nice fit for our guys to be able to get sequential airplane-over-airplane improvement. So I suspect we have more to go. You're never done in the continuous improvement. The R&D, you can anticipate our R&D spending to be about the same level. We have a very robust R&D pipeline, product pipeline, so obviously, that is that (29:38). Robert M. Spingarn - Credit Suisse Securities (USA) LLC: Thank you.

The next question is from Cai von Rumohr at Cowen. Cai von Rumohr - Cowen & Co. LLC: Yes. Thank you very much, Phebe. So GD always has kind of prided itself on focus on return of capital. With stock prices moving up and your own moving up, reducing the leverage of stock repurchase, at what point does it make sense to shift the focus from repurchase to M&A?

Well, when attractive, accretive and strategically important target cross our path. So that heretofore has yet to happen. But nonetheless, we don't really comment on this as you well know, but we're certainly not – we're certainly predisposed to be interested should our criteria be met. Cai von Rumohr - Cowen & Co. LLC: Thank you.

The next question is from Jason Gursky at Citi.

Hey, good morning, everyone. Phebe, I was wondering if we could spend a few minutes back on Marine and have you talk a little bit about your view of the world on undersea unmanned, kind of what that market looks like and what do you think GD's strategy might be and maybe what some of the challenges are in that market? And then maybe just to add on some comments here at the end about the demand out at NASSCO with Jones Act and the LNG products that you can produce out there, kind of what the pipeline looks like for those ships? Thank you.

Sure, sure. So as you well know, we are fully embedded in the undersea warfare element of the Navy's shipbuilding budget. We are – we've been very encouraged to see the Navy's interest in additional SSN Virginia-class. I think they increased recently their shipbuilding plan by 18 SSNs, that's about a 38% increase from 48 to 66, consist of Virginia-class. So that would be very, very encouraging, if that comes to pass. We will see. We're positioning ourselves, as you all know, for the Columbia ballistic missile submarine. The design is going extremely well, and we're on track to begin the build process exactly when we thought we would. So we see the undersea deterrent and the undersea war-fighting capability of the U.S. Navy as a key national security imperative as clearly evidenced by the Navy's interest in increasing subs. With respect to NASSCO, interesting to speculate for a moment, NASSCO has continued to perform very, very well. We have the potential for an additional ESB, I think that would be ESB 6. That's a program formerly known as MLP. And we'll see if that comes to pass. We also have – the Navy's given us long-lead funding for the second oiler, and there's an opportunity to accelerate that program to two ships a year, should the Navy so choose. But frankly, all of this takes money, so we're going to have to see how the budget process shakes out and what programs receive what funding and when.

The next question comes from Howard Rubel at Jefferies. Howard A. Rubel - Jefferies & Co.: Hi, thank you very much.

Hi, Howard. Howard A. Rubel - Jefferies & Co.: So you've got a whole host of opportunities in front of you, Phebe, and two sort of stand out. One is there's a lot of FMS deals that have been announced, but not yet contracted, and then the G550 platform clearly has a number of military applications that range from domestic to international. Could you put a fence around it or bracket some of this and help us a little bit with timing?

So on the FMS, for those programs that flow through FMS, we expect Kuwaiti tanks and tanks for the Kingdom in the fourth quarter. The tanks for the Kingdom have already received Congressional approval. Primarily, we see the FMS used for tanks, less so on the wheeled vehicle side. We also see FMS for our munitions and armaments business, and that has been proceeding quite nicely, not in the big ticket items that the tanks represent, but nonetheless nice steady volume. With respect to the G550, the G550 is, as I'm sure you know, in service in a number of non-U.S. Air Forces in the ISR mission. And by the way, when we talk about special mission, we mean the ISR mission and we mean Medevac primarily. So – but on the ISR front, the G550 has been in service in some cases for many years in a couple of countries and performed extremely well. To the extent that there are opportunities for the G550 in the U.S. Air Force market, the Air Force will tell you – tell us if they want our airplane. They don't, they don't. We're – Air Force programs, we're not that intimate with the Air Force, so I tend to defer any questions on the big Air Force programs to the prime. But with respect to the G550, I think it stands on its own merit. I think there are also some opportunities moving away from the ISR front if you look at the U.S. Air Force and some potential opportunities to refresh some of the executive transport airplanes. But that is a longer-term potential program. I would note that a number of the airplanes are getting a little old in the Air Force executive transportation fleet. So that's again their call and we'll be prepared to respond to whatever their requirements are of us. Howard A. Rubel - Jefferies & Co.: Thank you very much.

The next question is from Seth Seifman at JPMorgan.

Thanks very much and good morning. Phebe, I wondered if you could talk to us about the review of WIN-T that General Milley is undertaking and the decision by Senate authorizers to reduce funding and kind of how you see the future of the program from here?

Sure. The Army, as it's been widely reported, reviewing its networking and communication strategy, including, but not limited to, WIN-T. And as you can well imagine, we're working very closely with our customers to respond to any changing requirements. And those will play out over time to the extent that there are any. We don't see any significant risk, by the way, in this year to our WIN-T estimate. To give you just a little bit more color, we have a long-standing, 20-year, networking expertise in land forces – tactical land forces network, and we think that positions us very well to work with our Army customer now and in the future.

Great. Thank you.

The next question is from Peter Arment at Baird. Peter J. Arment - Robert W. Baird & Co., Inc.: Yes, good morning, Phebe, Jason.

Good morning. Peter J. Arment - Robert W. Baird & Co., Inc.: Phebe, on Aerospace in particular, I guess, it's been a while since we've talked about Jet Aviation. Maybe you could just give us an update on how that business is doing and is it growing, and what are the prospects you're seeing out there for that?

Yes. So Jet Aviation is doing quite well. Their services businesses are up, again, primarily driven by increased flying hours. And their completion revenue and earnings are down a bit due in part to reduced inductions from Bombardier and St. Louis, but we're doing very well in Basel on our completions programs as we transition from engineering to production on several airplanes. So Jet Aviation, both on its services side and its completions side, continues to perform very nicely.

The next question is from Robert Stallard at Vertical Research.

Thanks very much. Good morning.

Good morning.

Phebe, in your commentary, you mentioned that the margin in IS&T was exceptional in the quarter. Does this imply that you don't expect this level of return to be sustained over the medium to long term?

No, I think I meant exceptional in the sense that it was noteworthy, not that it was rare. As I think we're guiding you to margins in the 11.3% to 11.4% range. I anticipate that we will have no trouble in meeting that spot on. I don't expect any upside beyond that. But these businesses have performed very, very well. Our attention to cost, schedule and performance has really driven the bottom line in both those services business and the products business and communications networking and Intel.

That's great, thank you.

The next question is from Hunter Keay at Wolfe Research.

Hi, thank you. Can you hear me?

Yes.

Great, thanks. Phebe, a little more on G650, can you comment on how you're thinking about rate there in the next year given the comment on strong demand and how the sales effort for the ER conversions are progressing? And then maybe to that a little more, can you talk about the margin profile on the ER variant, is that really a whole lot different than the non-ER model? Thank you so much.

Well, I'll take the questions in inverse order. I'm not going to parse the differences in margins between the G650 and the G650ER. But as we've been talking about for some time, G650 production is going to come down somewhat in each of the next three years. We increased the production to help us in this transition period as we move from the G450 to the G500 in particular. And so our expectation, the balancing that we've been doing this year and into next is that as the G650 revenue begins to decline, the G500 and G600 will offset that decline. I might note that the interest in the G650 and G650ER continue to be quite robust. In this quarter, we had the highest number of orders that we've had in the last six quarters for the G650 and G650ER. So that airplane continues to generate an awful lot of interest in the marketplace.

So there's no thoughts in maybe pushing out the rate cut?

Pushing up the rate?

No, pushing out the rate cut, putting it off?

No. I think that as we look at where the G500 is in terms of orders and our production schedule on the G500, we're comfortable that we can offset the somewhat reduced G650 sales. But I think that's just prudent business.

Okay. Thank you so much.

Thanks.

The next question is from Peter Skibitski at Drexel Hamilton.

Good morning, guys. Hey, Phebe, I was wondering if you can go further on your thoughts on the fiscal 2018 defense budget just in terms of the markups and the signals you're getting out of Congress, it still seems a bit muddled over there, especially on the Senate side. And I'm wondering if you see a good path to getting – to eventually getting a budget that's above the President's request or it's just too fuzzy right now?

Well, if you go back a number of years, I think we used to have insights into the defense budget process, both within any given administration and on Capitol Hill that weren't necessarily widely shared or available. But given the ubiquitous amount of information that flows today, I think you all know as much as I do in terms of specificity. But the President's budget exceeded – the budget request exceeded the budget caps by $54 billion; OCO, the Overseas Contingency fund has often acted as a relief valve for the caps. So perhaps, Congress will consider doing something like that in addition to being able to can never (43:56) adjust those caps. Both the Senate and House Authorization Bills are significantly in excess of the President's budget. And the House Defense Appropriations Committee is about $135 billion, I think, over the President's request. So look, what does all that mean? Right now, it's a giant fur ball and we're going to have to work through the process and see what comes out the other side. As I noted, I believe that there is real interest and desire in additional defense spending which will manifest itself in some more additional funding and budget for defense. It's just a question of how much and what accounts and when. So we still have ways to work through this process.

Thank you very much.

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

The final question is from George Shapiro at Shapiro Research.

Hi, George.

Hi, Phebe. Typical question for you. If you look at the Gulfstream margin in Q3 and assume it's like it was maybe this quarter, it implies the fourth quarter has got to really drop to 16% or so to get to your guidance. And if you're not going to deliver a G500 in the fourth quarter, so what happens in Q4 to get that big contraction in the margin?

I'll let Jason attack that one.

George, I mean, obviously, we can try to reconcile the math, I don't think ours is worked out exactly as yours is suggesting. That's probably not totally unusual. But I think the two bigger issues are a little bit of a downtick in the number of deliveries in the fourth quarter. We've talked about that as it relates to outfitted deliveries under the new standard versus our old revenue recognition model. So that is baked into plan. And then it's somewhat bit of a mix there. So more significantly the volume of deliveries, there's a little bit of mix issue affecting the margin. But I don't think it's down quite as dramatically as you're suggesting. It is definitely off as implied in Phebe's guidance.

But let me follow-up, Jason, I mean, you said deliveries for this year would be about equal to last year and the first half is pretty close to the first half of last year. So the Q3 delivery is then going to be a lot bigger and the Q4 one is down, or how does deliveries going to spread out over Q3 and Q4?

Yeah. I don't have the Q3 in front of me, directly, I do know that Q4 is off a little bit. I also know that last year was particularly lumpy. The second quarter was a bit of a spike. So we can parse through the quarterly deliveries, but 4Q is definitely off slightly and that's what's the largest impact driving the margin difference.

Okay. Thanks a lot.

You're welcome.

Thank you for joining our call today. If you have additional questions, I can be reached at 703-876-3311. Have a great day.