Good morning, and welcome to the General Dynamics Third Quarter 2019 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 Howard Rubel, Vice President of Investor Relations. Please go ahead, sir.
Thank you, Rocco, and good morning to everyone. Welcome to the General Dynamics' 3rd quarter 2019 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 ks and 10 Q filings.
With that, it's my pleasure to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.
Thanks, Howard, and good morning. As you can discern from our press release, we delivered attractive 3rd quarter results with revenue of $9,760,000,000 operating earnings of $1,216,000,000 and net earnings from continuing operations of 913,000,000 dollars We reported EPS of $3.14 per diluted share, dollars 0.25 a share better than the year ago quarter and $0.37 per share better than the Q2 this year. Compared to the year ago quarter, revenue was up $667,000,000 or 7.3 percent. By the way, we have enjoyed top line growth every quarter for the past 12 consecutive quarters on a year over year basis. Earnings from continuing operations of $913,000,000 were up $49,000,000 or 5.7 percent on a 7.1% improvement in operating earnings, partially offset by a higher effective tax rate and lower pension income.
Operating margins returned to the 12.5% level. Sequentially, revenue was up $206,000,000 or 2.2 percent and operating earnings were up $126,000,000 dollars or 11.6 percent on higher operating margins. In short, we had significant sequential margin improvements. With respect to consensus, our margin rate was 40 basis points higher than forecasted by the South offset in part by below the line items leaving our EPS $0.07 better than consensus. The difference was provided by stronger operating earnings.
With respect to cash, we had net cash provided by operating activities of 1,901,000,000 and free cash flow of $847,000,000 As you can see from the charts attached to the press release, we enjoyed a good quarter with a one to one book to bill. Total backlog of $67,400,000,000 decreased to $158,000,000 or about a third of 1%. I'll have more to say about order intake as I discuss the separate operating segments. And Jason will give you some color about cash and backlog in his remarks. Let me turn very briefly to the year to date 2019 compared to the 1st 9 months of 2018.
Revenue was up $2,800,000,000 or 10.7 percent against the 1st 3 quarters of 2018, driven by strong organic growth plus the acquisition of CSRA at the beginning of the Q2 last year. To say it another way for clarity, CSRA attributed revenue was in every 2018 quarter but the first. Operating earnings were up $89,000,000 or 2.8 percent. EPS was $0.31 better. In short, we delivered good sequential improvement and a good 1st 9 months.
Essentially, we are on track to our internal plan and external expectations.
So let
me give you some perspective on the segment reporting for the quarter and the year to date. 1st, Aerospace. Aerospace had a very good quarter in most important respects. Revenue of $2,500,000,000 was 23% higher than the year ago quarter. Operating earnings of $393,000,000 were $17,000,000 or 4.5 percent higher on lower margins related to mix as fully expected.
Let me give you a little color here with the quarter over quarter comparisons concerning earnings and operating margin. You may recall that the Aerospace segment had a strong Q3 last year with 18.5 percent operating margin against 15.8% this quarter. This delta is driven only in part by mix. The Q3 of 2018 contained a positive non recurring settlement with the supplier. On a sequential basis, the story is even better.
Revenue was up $359,000,000 or 16.8 percent and earnings were up $62,000,000 or 18.7 percent on a 30 basis point improvement in operating margin. Excluding pre owned sales from both periods results in a 70 basis point sequential improvement in Aerospace Margin. The past quarter saw the first G600 deliveries in the quarter. Over 30% of our large cabin deliveries were comprised of new product, which is notably higher than the Q2 2019. So despite the challenges of mix, we are making good progress.
We are focused on aligning our costs with our operating cadence. The G600 earned both its type and production certification on June 28, 2019. We have commenced deliveries and expect to approach double digit total this year. This will help both revenue and earnings in the balance of the year and improve working capital turns. EASA validation for this G500 was received on October 11 and the 600 validation is targeted for December 12.
With respect to orders, we had a book to bill of 0.7:one in the quarter. Activity and interest ranged between very attractive to robust, but the process and time to closure of transactions was slower. We expect, as you would guess, a very strong order activity in the Q4. You are undoubtedly aware of the announcement of the all new G700. The materials related to this program and its specifications are publicly available.
It is an expansion of our product line that brings advances in avionics and aerodynamics to create an industry leader. The G700 incorporates new engines, new winglets and brand new avionics from the G500 and G600 series. The development of this plane is quite mature and we expect first flight in December. The announcement of the G700 has cleared up some of the mystery and has in some respects stimulated G650 discussions. All in all, we are doing quite well at Aerospace.
Turning to Combat Systems, we had a good quarter as the relative comparisons clearly indicate. Revenue of $1,740,000,000 was up $217,000,000 over the Q3 of last year or 14.2%. Similarly, operating earnings of $264,000,000 were up $23,000,000 or 9.5 percent over the Q3 of 2018. On a sequential basis, the story is similar. Revenue was up $81,000,000 or 5 percent and operating earnings were up $22,000,000 a 9.1% increase.
Combat Systems margins returned to the 15 plus neighborhood. On a year to date basis, revenue was up $538,000,000 or 12% against the same period of 2018. However, operating earnings are only $11,000,000 or 1.6% higher. Mix and a one time settlement of lease litigation in the Q1 explain why profits has expanded more slowly than revenue. We expect very good operating leverage in the final period of the year.
I think it's worth noting that Combat Systems has enjoyed a year over year growth in 11 of the past 12 quarters. Our existing U. S. Based programs continue to perform well with Abrams volumes up, strong Stryker business and nice growth in the Ordnance and Munitions portfolio. In the aggregate, our U.
S. Government volume accounted for 57% of revenue year to date compared with 49% in the first 3 quarters of 2018 underscoring the shift in mix. Army demand to upgrade our platforms in the coming year is manifesting itself explicit program direction for the tank and Stryker, which puts us in good stead for continued growth. Furthermore, we recognize the Army set a high bar for the OMSC program, and we are focused on delivering a superior solution to replace the Bradley Fighting Vehicle. Our international programs continue to progress nicely.
Work on the U. K. AJAX program is transitioning from engineering to test and then to full production. Live fire testing has been successful and we entered into reliability testing in Q3 of this year. We expect to enter steady state production this year and continue through 2024.
Combat Systems enhanced their backlog this quarter with a book to bill of 1.3:one. The Government of Canada ordered 360 armored combat support vehicles for 1,300,000,000 dollars Work has begun on the program and we expect to begin deliveries in Q1 of 2021. ELS is negotiating the contract with the Spanish government to deliver the 1st tranche of 348 Piranha V vehicles. As a consequence, we have very good line of sight for production planning and for driving continuous improvement in all businesses in this segment. We are trending in the right direction at Combat Systems.
Every one of our businesses in this segment is on the move. With respect to the Marine Group, revenue of $2,240,000,000 was $232,000,000 or 11.6 percent higher than Q3 a year ago. Operating earnings were up $40,000,000 or 23.7 percent against the year ago quarter, due in part to the progress toward closing out Virginia Class Block III and better year over year earnings at NASSCO. On a sequential basis, revenue was down $90,000,000 due to timing. Operating earnings were up $12,000,000 dollars For the 1st three quarters of the year, revenue of $6,600,000,000 was up $413,000,000 or 6.7 percent against the same three quarters of 2018.
Operating earnings were $38,000,000 better on a 10 voice basis point improvement in margin rate. Similar to Combat Systems, the Marine Group has enjoyed year over year growth in 9 of the past 10 quarters. Work on our submarine programs, the Virginia class construction and engineering on Columbia Ballistic Missile Submarine continues to make good progress. We have completed the design of Columbia and are 54% complete on the production drawings, which reflects good progress. Virginia Class Block 4 work remains steady.
Volume EB has been driven by early work on Virginia Block V in Columbia. We expect the Block V contract to be awarded this year, resulting in a considerable addition to backlog. With respect to BaaS, the challenges on the first DDG-one thousand ship and the DDG-fifty 1 restart ships are behind us with nice performance on the 1,000 and 1 and 2 and the follow on DDG 51 ships. We have 11 DDG 51 ships in backlog with a very good opportunity to improve performance steadily across this large backlog. Finally, revenue at NASSCO for the quarter was up due to higher repair volume.
Similarly, year to date volumes were up due to higher repair and work on the TAO class oiler program. We also expect the first two Matson ships in the ESP-five deliver in the Q4. In all, Marine Systems has been a compelling growth story for us and will continue to be so for a long time to come. Our focus going forward is operating efficiency and margin improvement over this very large backlog. For Mission Systems, Mission Systems had revenue of $1,200,000,000 in the quarter, flat with the year ago results.
Earnings of 187 $6,000,000 against the Q3 last year. Margins were an impressive 60 basis points higher. Sequentially, margins of 15.2% were up on even more impressive 250 basis points. On a year to date basis, Mission Systems revenue was up $180,000,000 or 5.2%. Earnings for the 9 months were up $17,000,000 versus the 1st 9 months of last year.
Mission Systems has been a high performance business for us and will continue to be so. It has enjoyed a book to bill of at least 1 to 1 in 2016, 2017 and 2018 and stands above 1 to 1 at the 3 quarter mark in 2019. Its wins have been broad based, reflect its capabilities in space, communication and sophisticated command and control solutions. Information Technology reported revenue of $2,100,000,000 in the 3rd quarter, down $236,000,000 against the year ago quarter. This is largely a result of the divestitures made in the segment.
Operating earnings were up $146,000,000 down $11,000,000 despite a modest improvement in margin rate. The results were somewhat lower than expected as the company entered into a termination settlement related to its exit of a non core line of business. Absent that charge, earnings and margin would have been more appropriately reflected would have more appropriately reflected the progress we have made in combining CSRA with GDIT. Our integration of CSRA into GDIT has gone very well and is ahead of our internal schedule. Our management team pulled from both businesses has gelled very nicely.
We are meeting cost synergies and are working to exceed this year's goals. To that end, we have continued to generate good bookings. In the quarter, we generated $2,380,000,000 for a book to bill of 1.2 to 1. For the 9 months, our book to bill was 1.2:one. Our 9 month booking for 2019 are nearly 8 percent higher than those captured during the 1st 3 quarters of 2018.
Our total backlog of $9,160,000,000 is up 15% from the start of the year. The strong order activity comes in the face of a protracted procurement cycle. GDIT has close to $1,000,000,000 in awarded contracts that have been delayed by protests and over half of the $65,000,000,000 in outstanding awards that the customer had expected has slipped to the right. The underlying metrics of this business remain solid. Cash flow continues to be strong.
GDIT generated robust free cash flow to imputed net income of over 190% this quarter despite controlled investments in customer infrastructure and restructuring expenses. So to offer a summary on the performance of all of the Defense businesses, operating earnings have grown over 8 percent in the quarter on a nearly 3% advance in revenue. Excluding the divestiture of the call centers business, the organic growth rate for revenue and operating profit are about Jason Aitken.
Thank you, Steve, and good morning. Our net interest expense in the Q3 was $114,000,000 in both 2019 2018. That brings net interest expense to $350,000,000 for the 1st 9 months of the year compared to $244,000,000 for the same period in 2018. The increase in 2019 is due primarily to the debt we issued at the end of the Q1 of 2018 to finance the acquisition of CSRA. We've also been carrying a higher than anticipated commercial paper balance through the 1st 9 months as we continue to work to resolve an outstanding receivable balance on one of our large international vehicle programs that's been outstanding since the Q4 of last year.
As Phebe mentioned, our cash from operations in quarter was $1,100,000,000 and our free cash flow was $847,000,000 a 93% conversion rate. The cash performance in the quarter reflected some progress on the international receivables I just mentioned. That said, we still have work to do to resolve the balance of the arrears. We're continuing to work this issue with the customer and expect to have the matter resolved by the end of the year. Assuming these outstanding payments come in this year, we still expect full year free cash flow conversion to be well in excess of 100% of net income.
Notwithstanding the progress made in the quarter, cash flow continued to be impacted by OWC growth at Gulfstream for reasons you now know and at Electric Boat. EB has been operating under an undefinitized contract action or UCA on the 5th Virginia Class Block as we continue to work with the Navy to get that effort under contract. Until we get that contract executed, our progress billings are temporarily limited. We expect that situation to unwind with the receipt of the Block V contract in the 4th quarter. On the capital deployment front, capital expenditures were $244,000,000 in the quarter or 2.5 percent of revenues, reflecting the investment in our shipyards to support the significant growth that's on the horizon.
We also paid $295,000,000 in dividends in the quarter. We ended the quarter with a cash balance of $974,000,000 on the balance sheet and a net debt position of $12,700,000,000 We expect to use our free cash flow to repay our outstanding commercial paper balance by the end of this year. In addition, we have a tranche of fixed and floating rate notes maturing in the Q2 of next year. So our focus in the moment beyond internal investment and the dividend will be repaying this debt. Our effective tax rate in the quarter was 16.2%, reflecting greater foreign tax benefits than previously expected driven by the strength of our international operations.
With a rate of 17.5 percent for the 1st 9 months, we are lowering our anticipated full year tax rate by 50 basis points to the mid-seventeen percent range. As a result of current market conditions, we've adjusted our assumptions for pension costs and recognized in the 3rd quarter an increase in the expense associated with our non qualified plans. The impact of the increased pension expense and the lower tax rate I just discussed offset each other relative to our full year outlook. And one last point of color on the backlog at the end of the quarter, specifically at Combat Systems. We continue to experience a drag on that group's backlog balance due to the FX impact of the strength of the U.
S. Dollar. Specifically, Combat Systems has experienced a reduction in backlog of more than $400,000,000 in the 1st 9 months of the year. Despite this headwind, the group's backlog remains very strong at more than 2 times annual sales. Howard, that concludes my remarks.
I'll turn it back over to you for the Q and A.
Thanks, Jason. As a reminder, we ask participants to ask one question and one follow-up
Absolutely, sir.
Phebe, I want to touch on the G700 and how that potentially impacts the prior guidance that you've given with regard to Gulfstream where I believe you've talked about EBIT growing a little bit in 2020, but then growing significantly in 2021 and margins approaching the high double digit range again. How is the G700 all factored into that?
So, no, because we expect the entry into service several years out. But I think it might be opportune just to remind you guys how we're really thinking about the portfolio of our airplanes in our operating strategy. So as you know, we've had a plan for the past several years to bring down the 650 production and increase 50 and we're doing that completely independently of the 700. We've been pretty valuable about the fact that G60 production and deliveries will be reduced next year and again the following year. So that will get production and delivery consistent with current demand.
And on that score, we've had a very consistent order book for the $650,000,000 over the past 3 to 4 years. And as you know, we've had the benefit of a large backlog that we've been able to work down over time. So just to be clear, this has nothing to do with the 700 launch announcement as a plan long ago. Our job is to balance the lost revenue and earnings from the planned reduction of D650 deliveries with an increased flow from $506100 to keep earnings stable. By the way, this ain't without risk, but it comes with ample opportunity.
And as I said, this has been the consistent plan and it remains our plan. And then as the G700 enters into service, that will then become another factor in our long range earnings and revenue growth.
Okay. I guess just asking a different way. That prior guidance that you've given for Gulfstream for 2020 2021, does that still hold?
Well, I don't think we've given guidance per se, but we've indicated that we'll continue to grow our top line and our bottom line as we've made that making this transition. I think the bottom line will be a little bit slower growth simply because we are managing that transition from the $650,000,000 to the $506,000,000 But look, our idea here is to stabilize earnings with this transition. And we've done that and we'll continue to do that. So I think when you think about the business going forward, this is the strategy that has driven our behavior today and driven it and will drive it on a going forward basis. So that ought to inform how you're thinking about our performance going forward.
Thank you. Our next question today comes from Peter Arment of Baird. Please go ahead.
Yes, thanks. Good morning, Phebe. Just a follow-up. Just a question on the G700. You've always talked about the kind of dedicated production for the G500, G600.
You started dedicated production facility with the G650. How should we think about that with the G700? Is that going to be feathered in? Thanks.
Well, it won't necessarily be feathered in. But to your question about do we have a dedicated production facility and line, we do. So you'd expect the type of learning that we've seen on our other platforms on the 700 as we come down our learning curve, increased production and come down our learning curves. That's all, of course, driven by the result both our operating efficiency as well as our dedicated line.
And just as a follow-up related to that. On the order front, I know you mentioned you expect healthy orders in the Q4 here, and you've had a book to bill over 1 for 9 months year to date. How are you approaching the book to bill the bookings for the G700? Is it following a similar path to G500 and G600? Thanks.
Yes. As I think you know from the announcement, we've got a nice robust backlog for the 700. And as I said, our Q4, we expect to have even better and improved order activity, increased order activity across our portfolio. By the way, we had more orders this year as against this quarter as against the quarter Q3 of 2018. But that's compared against a 23% increase in revenue.
So this is a good quarter for us.
And our next question today comes from Cai von Rumohr of Cowen and Company. Please go ahead.
Thank you very much. And Phebe, congratulations on the G700. It looks terrific.
Well, thanks, guys. Okay.
You've indicated, I guess, first delivery in 2022. Given that you're fairly close to first flight, any will your comment is the hope to be in the earlier part of the year or the latter part of the year?
So look, we've I think we're comfortable in the estimate of certification that we've given you. And we've looked to the prism as we've thought about our going forward, we look through the prism of the current regulatory environment, which you well know even better than we do. And so we have factored that into our thinking. If it happens earlier, that's great.
Got it. And then I guess some industry sources suggest that you'd been showing this plane for some time under NDAs. Were there any firm orders included in your bookings in the Q3 for the G700?
We've had some bookings on this airplane. That's about all I'm going to say on that score. This airplane is going to be very popular with that particular market segment.
Our next question today comes from Jon Raviv of Citi. Please go ahead.
Hey, thanks very much. Bigger picture question for you guys actually. Just actually on capital allocation decisions across the businesses, certainly appreciate Jason that the focus through first half of twenty twenty is on repayment of debt. Just sort of thinking about how should we think about things going forward and how you make those allocation decisions across the businesses?
John, I don't think we would really articulate any fundamental change to our long standing approach to capital deployment as those priorities stand internal investment first, where we have profitable opportunities for returns, followed by the steady and predictable dividend. And then it really is about M and A where attractive, accretive and in our core opportunities exist in share repurchase. But in between that, as you articulated for the moment, the prioritization really is all about getting that debt paid down at least through the first half of next year. Once we get to that point, we'll roughly pay down half of the incremental debt from the CSRA acquisition. We'll have the commercial paper balance behind us and we'll have a chance to look forward.
But I don't think in terms of prioritizing those various avenues for capital deployment anything on that score has changed for
us. Thank you. And then just a follow-up on GDIT perhaps. Phoebe, you had mentioned that some of the dynamics are stretching out and there's obviously a pretty heavy protest environment out there. So any thoughts about the acceleration you you previously pointed to heading into next year in the context of peers generally doing mid single digits?
Should we expect GDIT to take market share in that environment? Thank you.
So GDIT has been taking market share. I mean, if you think about their performance, the performance underlying or underlies their outcomes since the acquisition, we've got a 70% to 75% win rate for the trailing 12 months. I mean that is consistent month over month, quarter over quarter. And as you all know, the book to bill is in 1.1 percent to you for the year to date. So we are winning and more than our fair share, but we have seen a protraction.
I mean, it's a significant amount of money or contracts be tied up in protest at around $1,000,000,000 Now protests, as you all know, historically, resolved to the benefit of the winners. So we are quite comfortable that that historical precedence will remain. But we've also seen a slowing in the execution of the contract awards and we suspect that will resolve through the course of next year. And our rate of growth will be in part in no small measure driven by the increased rate in award volume. So nothing is systemic here.
It's really a question of timing.
Thank you.
And our next question today comes from Myles Walton of UBS. Please go ahead.
Thanks. Good morning. I was wondering, Jason, maybe you can give us a little bit more color on the cash flow and in particular if the Canadian advance was in the numbers this quarter? And also just give us a boundary condition if you don't make further progress on the Saudi lab, how does that play into the $3,500,000,000 implied free cash flow for Q4?
Yes, sure. So yes, in fact, the advance we received in the quarter is in the numbers that you've seen. So that's in the 93% conversion rate for the quarter. As it relates to the balance of the year, I think the way to think about it is we came into the year with just over $1,000,000,000 of arrears from the Q4 of last year. That's grown somewhat, call it another $500,000,000 through the balance of this year.
And so that's what we're after right now. That's what's currently outstanding. I think you can see in our disclosures, there's an unbilled total unbilled investment somewhere in excess of $2,000,000,000 $2,500,000,000 but that's not necessarily what's factored in here. It's really between $1,000,000,000 $1,500,000,000 that we're still working to resolve before the end of the year.
Okay. And Phebe, that marine margin, I think, is the best in a number of years. Just curious if there's anything one time? And I know you didn't update the full year projection, but maybe just give us a little color at the start of the year. I think you said that's the segment that had the most upside opportunity.
And is this it coming through?
So what you saw here was the strong and successful finish of Block III. I mean Block III is largely done. And that performance and that strong closing of that contract really drove our margins. But as you all know, margins in this business, in particular Electric electric boat have followed the same path for 18 years. We start a new block and because of the contract structure with our customer, they received some of the benefits of our prior improvements on the previous block.
And then we reset the bar and come back down our learning curves. And that's where we really are on Block 4. But Block 3 is largely behind us and we've closed out very well.
Okay, thanks.
And our next question today comes from Noah Poponak of Goldman Sachs. Please go ahead.
Hi, good morning everyone.
Hi Noah. Good morning.
Just coming back to the Gulfstream margins, I want to try to ask a question about the progression there because I know there's a lot of investor focus on it. First piece just for the last quarter of the year, if I take the guidance that you had previously provided literally it wouldn't imply it's down sequentially in the Q4. So are you expecting that? And then I had interpreted prior comments to suggest expansion, but modest expansion 2020 because you're feathering 6 50 lower and you're still early in the 500, 600 ramp, but then a larger degree of expansion in 2021 as you're further along in both of those processes. Do I have that correct?
So look, as you would imagine for a business that has demonstrated superb operating leverage year in and year out on older models and newer models, Gulfstream will continue its march on margin improvement on a going forward basis. Don't forget that pre owned carries no margin. So to the extent that you've got an implied lower margin in the 4th quarter, that's almost entirely reflected by the pre owned. Okay. Because you well know, it just has no margin and is included in revenue.
So there you have it.
And am I directionally correct on the beyond 2019 comments?
Well, I think we've been pretty consistent all along that this business is going to get better and better over time. That's about what we're going to say at this juncture.
Will the G700 be the highest margin airplane in the portfolio once it's at full rate production?
We are so not going there. So look, you can imagine that we do well on our airplanes because we don't compete on price and we have an unerring commitment to cost reduction and cost optimization every quarter. Every month, every quarter we get better.
And our next question today comes from George Shapiro of Shapiro Research.
Please go ahead. Good morning. Hi, George. Hi. Your comment about the Q4 margin being lower from higher pre owned, I mean, this quarter it looks like there was 4 pre owned for about $90,000,000 so you would have earned 16.3% margin on the 0 for pre owned.
Are you suggesting the 4th quarter is going to have higher pre owned? And I would have thought we're kind of through with the G500 block, so that the 4th quarter margin would still be above the 3rd quarter.
So George, taking your premises in reverse order, you're right about the progression on the underlying manufacturing improvements. And I think that's what Phebe was alluding to earlier. We'll continue to see that progress quarter on quarter for Gulfstream. But yes, to your first premise, based on the inputs we're seeing right now and the contracts that we'll deliver in the Q4, we would expect to see at this point, more pre owned aircraft sales in the 4th quarter.
And Jason, that'll more than offset the fact that the 500 is through its initial block, so the margin should step up some in the 4th quarter?
I mean, I don't know that I want to piecemeal it down to that level. Those are 2 of the many inputs that go into the margins at Gulfstream in any quarter. You know, and we've talked about this many times in the past. There's varying R and D levels. There's different mix of aircraft deliveries and all the different inputs, the jet aviation service margins and so on.
So I think we've articulated a couple of those discrete ones that are clear at this point. But the implied Q4 that a couple people are picking up on is, as usual, a blend of a whole myriad of factors. So I think the most important point here for the long term investor is the steady regular improvement in the operating cadence and margin of the production of the airplanes at Gulfstream.
And just a clarification for you, Jason. The advance you got this quarter for from Canada, was that just for the new Canadian contract or was there also some from the Saudi receivable?
That is strictly related to our relationship with the Canadians.
On this new program. On the new program.
On the new program. Okay. So when you commented in the 3rd quarter, you expected to get some cash in August and then the balance by the end of the year, you were really just referring to this new contract, which obviously hadn't been announced at that point?
Well, let's parse that. We had anticipated that we would get this contract award and that there would be an attendant advance along with that. That is one separate and distinct issue. As you well know, the payments on our international program out of Canada have remained slow. Let me just remind everybody, there's no dispute on Quantum.
There's no dispute on the fact that it is, owed. It's simply a question of timing and we're still hopeful that we resolve that by the end of the year. But 2 distinct elements, okay?
Our next question today comes from Hunter Keay of Wolfe Research. Please go ahead.
Hi, good morning everybody. Thank you. You've been sort of touched on this a little bit, Phebe, but can you elaborate on a comment you made when you said the G700 has stimulated G650 discussions? What do you mean by that? And then the second part, and I'm done here, is any thoughts on the tariff situation in Europe?
Have you heard any concerns from your customer? Looks like biz jets are going to be exempt, but any rumblings about that over there? Thank you.
So an inverse order, none on the tariff question on why and talk to you about what the 700 is and what it is not. The G700 is in a slightly different market space, but in the same market segment as the 650. It is not a competitor. It is an alternative. It is not a replacement for the 650.
Customers very clearly understand that. And their buying decisions are motivated by a host of factors, idiosyncratic and individual factors, including the missions they fly, the ramp size, the makeup of the rest of their fleet. So I think it has clearly in our experience, the 700 has clarified the 650 and been helpful.
Our next question today comes from Robert Spingarn of Credit Suisse. Please go ahead.
Rocco, this is Mr. Rubel. This will be our last question.
Thank you, sir.
So, Phebe, I wanted to go to GDIT and just talk about the margin progression. You talked about some of the expenses in the quarter or pressure on the margins in the quarter, but otherwise would be higher. If we go back to your prior guide, I think that indicates a pretty robust Q4. So can we talk about that and what normalized margins look like? And then just for a follow-up, Jason, I hear you on the cash deployment and retiring the debt, but given interest rates, might it not make sense to look at a share buyback here, just doing the math?
Thank you.
Look, we're comfortable with our leverage, and we're going to pay down that debt. And we historically have never taken out debt to buy stock for all sorts of reasons that we have discussed over the years. But look, GDIT margins were consistent with what we anticipated minus this one time charge as we exited a line of business that we had inherited with CSRA. I don't think I need to remind you because I know you So their margin performance will continue to improve.
Rocco?
Yes, sir.
This is Mr. Rubel. Thank you very much for the call today. And thank you everybody else for joining us. As a reminder, you should refer to the General Dynamics website for the Q3 earnings release and the highlights presentation.
If you have additional questions, I can be reached at 703-876 3117. Thank you.