Morning, and welcome to the General Dynamics Second Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. 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, everyone. Welcome to the General Dynamics' 2nd 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.
Thank you, Howard, and good morning, everyone. As you can discern from our press release, we enjoyed a very good second quarter with revenue of $9,560,000,000 and net earnings of $806,000,000 We reported EPS at $2.77 per diluted share, $0.15 a share better than the year ago quarter and $0.09 per share better than consensus. Compared to the year ago quarter, revenue was up $369,000,000 or 4%. This is as reported, but organic growth was higher after taking into account of divestitures at GDIT and the acquisition of Hawker Pacific. Remember that divestitures at GDIT provided somewhat more than $250,000,000 per quarter in revenue.
Net earnings of $806,000,000 were up $20,000,000 or 2.5 percent on a modest improvement in operating earnings and a lower effective tax rate, offset in part by higher interest expense. Sequentially, revenue was up $294,000,000 or 3.2 percent and operating earnings were up $76,000,000 or 7.5 percent on higher operating margins. With respect to consensus, revenue in the quarter was about $200,000,000 more and the operating margin rate was 10 basis points higher than forecasted by the sell side. In short, 0 point 0 $8 of the $0.09 beat was provided by stronger operating earnings. Let me turn very briefly to the first half of twenty nineteen compared to the first half of twenty eighteen.
Revenue was up $2,100,000,000 or 12.5 percent against the first half of twenty eighteen, driven by strong organic growth plus the acquisition of CSRA at the beginning of the Q2 last year. In other words, CSRA revenue was not reflected in the Q1's results last year. On the other hand, operating earnings were up only $8,000,000 burdened by the amortization related to the CSRA acquisition. EPS was $0.06 better. In short, we had a very good second quarter, good sequential improvement and a good first half.
We are somewhat ahead of both our internal operating plan and external expectations. So let me give you some perspective on the segment reporting for the quarter and for the half. I'll then ask Jason for some comments before I give you some insight into our outlook for the business and each segment for the remainder of the year. First, Aerospace. Aerospace had a very good quarter in most important respects.
Revenue of $2,140,000,000 and operating earnings of $331,000,000 or $241,000,000 higher and $55,000,000 lower respectively. Both numbers were consistent with our outlook and the production plan for the year. Operating margin was down 4.90 basis points as anticipated. Let me give you a little color here with the quarter over quarter comparisons concerning earnings and operating margins. You may recall that the Aerospace segment had a banner quarter in the Q2 of last year with 20.4% operating margin against 15.5% this quarter.
This delta is driven only in part by mix. No G500s were in the Q2 2018 results. More importantly, the Q2 of 2018 had an unusually large launch assistance payments from a supplier. The result is higher year over year R and D expense. These two items were the significant difference between the quarters.
Looking at things sequentially, revenue was down $104,000,000 but operating earnings were up $3,000,000 on a 90 basis point improvement in operating margin. We enjoyed good order activity in the quarter. The dollar based book to bill was 1:1. This brings the book to bill to 1.2 to 1 for the first half. The numbers for Gulfstream alone were somewhat higher.
We have had very good operating performance for 2 order performance for 2 years now. As you know, the G500 was certified on July 20, 2018, and we have delivered 21 of them to customers and one to ourselves as a demonstrator through the end of the Q2. The G600 earned both its type and production certification on June 28, 2019. This now paves the way for G600 pilot training and deliveries commencing in early August. This will help both revenue and earnings in the second half and do much to reduce the operating working capital buildup related to producing the early G600s.
Finally, EASA validation for the G500 is planned for Q3 and for the G600 in Q4. Let's now turn to the defense side of the house. Combat Systems had a good quarter as the relevant comparisons clearly indicate. Revenue of $1,660,000,000 was up 125,000,000 dollars over the Q2 last year or 8.1%. Similarly, operating earnings of $242,000,000 were up $6,000,000 or 2.5 percent over the Q2 of 2018.
I should remind everyone that the Q2 of 2018 represented an 8.5% improvement in revenue over Q2 2017 and a 5% increase in operating earnings. In short, we have experienced strong quarter over quarter growth for the last 3 years. On a sequential basis, the story is similar. Revenue was up $23,000,000 and operating earnings were up $36,000,000 For the first half, revenue was up $321,000,000 or 10.8% against the first half of twenty eighteen. However, operating earnings were down $12,000,000 with a one time settlement of lease litigation in the Q1 more than accounting for the year over year decline.
However, as my outlook remarks will indicate, we expect to catch up in the second half. Our U. S. Based programs continue to perform well with Abrams volumes up and nice growth in the ordinance and munitions portfolio. In the aggregate, our U.
S. Government volume accounted for 57% of revenue in the first half as compared with 48% in the first half of twenty eighteen. Army demand to upgrade platforms in the upcoming years is manifesting itself in explicit program direction for the tank and Stryker, which puts us in good stead for continued growth. 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 expect to enter reliability testing in Q3 of this year. Backlog in this segment is lumpy and the 2nd quarter is no exception. Major orders for the fiscal year were captured in the 4th quarter of 2018.
As a consequence, we have very good line of sight for production planning and for driving continuous improvement. We are trending in the right direction at combat. It is a very nice growth story. With respect to the Marine Group, revenue of $2,330,000,000 was $157,000,000 or 7.2 percent higher than Q2 a year ago. Operating earnings were up only $2,000,000 against the year ago quarter on a 50 basis point traction in margin.
On a sequential basis, revenue was up $267,000,000 and operating earnings were up $17,000,000 13% and 9.4% respectively. For the first half, revenue of $4,380,000,000 was up $181,000,000 or 4.3 percent against the first half of twenty eighteen. Operating earnings were down $2,000,000 on a 40 basis point contraction in margin rate. Work on our submarine programs, the Virginia class construction and engineering on the Columbia Ballistic Missile Submarine continues to make good progress. We are building Virginia Class Block IV boats and have begun to purchase long lead material for Block V.
We expect the 10 Boat Block V contract to be awarded later this year. It will result in a considerable addition to backlog. With respect to BaaS, the challenges on the first DDG-one thousand ship and the DDG-fifty one restart ships are behind us with nice performance on DDG 1,000 and 1,000 and 2 on the follow on DDG 51 ships. We have 11 DDG 51s in backlog with very good opportunity to improve performance steadily across this large backlog. Finally, revenue at NASSCO for the quarter year to date was up due to higher volumes related to the TAO Lewis class oiler program.
In all, Marine Systems has been a compelling growth story for us and will continue to be so for a long time to come. Mission Systems. Mission Systems had revenue of $1,280,000,000 in the quarter, an increase of $130,000,000 or 11.3 percent over the year ago quarter. Earnings of $162,000,000 were up $9,000,000 against the Q2 last year. On a sequential basis, revenue was up $119,000,000 and earnings were up $14,000,000 On a year to date basis, Mission Systems revenue was up $190,000,000 or 8.5 percent.
First half earnings were up $11,000,000 against the first half 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 one to 1 in 2016, 2017 2018, while the first half of twenty nineteen, the book to bill is slightly below one time, so we expect that to remedy in the second half. Information Technology reported revenue of $2,160,000,000 in the 2nd quarter, down $284,000,000 against the year ago quarter. This is largely the result of the divestitures made in this segment through the course of last year, as I mentioned earlier in my remarks.
However, operating earnings were only $2,000,000 down as a result of improved margin rate. On a sequential basis, the results were also quite solid. Revenue was essentially stable at $2,200,000,000 for each quarter. Operating profits were also quite similar with 2Q at $154,000,000 versus $156,000,000 in Q1. We are experiencing good program mix and synergies.
Our industry leading EBITDA was 12.4% in the quarter, matching Q1's results. Our integration of CSRA and the GDIT has gone very well and is ahead of our internal schedule. Our management team pulled from both businesses jelled very nicely. We are meeting cost synergy targets and are working to exceed this year's goals. To that end, we have continued to generate good bookings.
In the quarter, we had orders of $2,670,000,000 for a book to bill of 1.2 to 1. For the first half, our book to bill is also 1.2:one. On a trailing 12 month basis, book to bill also tops one time. Our total backlog of $8,850,000,000 is up 5% after excluding the backlog related to divested businesses. So in summary, we've delivered solid operating results across the business.
The comparisons quarter over quarter, sequentially and year to date are all wholesome. I'm now going to turn the call over to Jason and then come back to you with our outlook for the rest of the year.
Thank you, Phebe, and good morning. Our net interest expense in the quarter was $119,000,000 versus $103,000,000 in the Q2 of 2018. That brings the interest expense for the first half of the year to $236,000,000 versus $130,000,000 for the same period last year. The increase in 2019 is due to the debt we issued to finance the acquisition of CSRA. We're also carrying more commercial paper than anticipated due to delayed payments related to one of our large international vehicle programs in Canada.
At this point, we expect interest expense for 2019 to be approximately 4 $60,000,000 Our cash from operations of $291,000,000 in the quarter was also impacted by these payment delays. As we've discussed previously, this is a timing item. With respect to the outstanding receivable balance, we were recently told by the customer that we will receive considerable funding next month. We continue to expect to resolve the balance of the arrears by the end of the year. Assuming these outstanding payments come in this year, we still expect full year free cash flow conversion will be well in excess of 100% of net income.
On the capital deployment front, capital expenditures were $181,000,000 in the quarter or approximately 2% of revenues. Assuming receipt of the outstanding payments I just noted consistent with the timing I described, we still expect our capital expenditures to reach approximately 3% of revenues for the year, reflecting the investment in our shipyards to support the significant growth that's on the horizon. Our effective tax rate in the quarter was 18%, bringing the rate for the first half to 18.3% consistent with our expectations for the full year. In the quarter, we paid $295,000,000 in dividends and we spent approximately $100,000,000 on the repurchase of 575,000 of our shares. That brings the total for the first half to 1,100,000 shares for $184,000,000 We plan to acquire enough shares in 2019 to ensure there is no dilution from the exercise of employee stock options.
Otherwise, we anticipate deploying the balance of our free cash flow this year to pay down our short term borrowings. We ended the quarter with a cash balance of $702,000,000 on the balance sheet and a net debt position of $13,200,000,000 We expect to repay our outstanding commercial paper balance by the end of this year and our first tranche of fixed and floating rate notes matures in the Q2 of next year. I'll wrap up with a few points of color on the backlog and our order activity in the quarter. We had another solid quarter with respect to orders. We finished the quarter with a total backlog of $67,700,000,000 that's up 2% over this time a year ago and the total potential contract value including options and IDIQ contracts was $102,000,000,000 up 3% over a year ago.
As Phoebe mentioned, GDIT posted a particularly strong quarter with a book to bill of 1.24 times and I'll remind you that that does not include over $2,500,000,000 in IDIQ awards in the quarter, which as you know we don't include in backlog or our book to bill calculation. And the last item I'll note is the ongoing impact of foreign exchange rate fluctuations on the backlog at Combat Systems, which has experienced a $250,000,000 reduction in backlog in the 1st 6 months of the year due to this issue. With that, I'll turn it back over to Phoebe.
Thanks, Jason. So turning to our outlook for the year. Let me provide our forecast for the year for each segment, compare it it expect revenue of $9,700,000,000 up $1,200,000,000 from 20.18, operating earnings around 1 point $5,000,000,000 and an operating margin around 15.5 percent. We now expect revenue of $9,950,000,000 with earnings of $1,525,000,000 with an operating margin of 15.3%. The increased revenue comes largely from increased pre owned sales and modest mix shift.
Earnings will be up on improved operating performance, but the margin rate will be diluted by pre owned aircraft sales. For Combat Systems, our previous guidance was to expect revenue of $6,500,000,000 to $6,600,000,000 up $260,000,000 to $360,000,000 from 20.18 with operating earnings in the range of $965,000,000 to $975,000,000 We now expect revenue of $6,800,000,000 and operating earnings of approximately $1,000,000,000 The more revenue drives $25,000,000 to $35,000,000 in more operating earnings. For the Marine Group, we previously guided to a revenue of $9,000,000,000 margins of around 8.5 percent and operating earnings of $770,000,000 We see no reason to change that guidance, although my bias would be very normally lower. For Mission Systems, we previously provided an outlook for this year of $4,800,000,000 to $4,900,000,000 with margins in the mid to high 13% range. This implied operating earnings of around $660,000,000 We now anticipate revenue of $5,000,000,000 operating earnings around $690,000,000 with operating margins around 13.8%.
For Information Technology, we guided to revenue of 8 point $3,000,000,000 with an operating margin of 7.5%. We now expect revenue of $8,500,000,000 and operating earnings of $630,000,000 but an operating margin of 7.4%, only 10 basis points lower. So all of this sums to revenue for General Dynamics of about $39,200,000,000 and operating earnings of around $4,600,000,000 Compared to our initial guidance, we will have both higher revenue and operating earnings. This permits us to increase our EPS outlook from a range of $11.60 to $11.70 to a range of $11.85 to 11.90 As for the quarterly progression, it appears to us that the 3rd quarter will be $0.30 better than the 2nd quarter. Howard, we can now take some questions.
Thanks, Phoebe. As a reminder, we ask participants to ask one question and one follow-up so that everyone has a chance to participate. Rocco, could you please remind participants how to enter the queue?
Today's first question comes from Robert Stallard of Vertical Research. Please go ahead.
Thanks so much. Good morning.
Good morning.
Phebe, it's the Aerospace division. One of your peers noted that their customers took a bit of a strike in May June with concerns of the economy and tariffs. And I was wondering if you saw anything like that at Gulfstream?
No.
That was pretty straightforward.
Look, we have continued to have nice order activity. Our pipeline remains robust. As I think I've explained to many of you before, you need to look at the business aviation market, not only by cabin size, but really by OEM because our experience in the marketplace is very different from others. So we continue to have good order activity throughout each of the months in the quarter.
That's great. That's very helpful. Thank you.
And our next question comes from Ronald Epstein of Bank of America Merrill Lynch. Please go ahead.
Yes. Hey, good morning.
Hi, Rob.
Just a follow on to Rob's question. I mean, can you kind of walk through the demand environment you're seeing across the different products you have at Gulfstream, 650, 600, 50280?
Sure. So the 650 continues to have very solid demand. It I think by the end of this quarter, we had 370 in service. It continues to have performance characteristics unmatched by anyone else, any other aircraft, and it continues to enjoy some very nice solid demand. The 600 has had very good demand.
We suspect, as we saw with the 500 that when we start delivering these airplanes, that is a catalyst for incremental demand increases and I have every confidence that that will also increase 500 continues nicely and the 280 has had good sales, but a little bit more episodic. That end of the market tends to be that way. But on our big key platforms, airplanes, we've continued to have good activity.
And then as the follow on question, have you seen any blowback in the Chinese market regarding the potential sale of the Abrams to Taiwan? Because there were some stuff in the Chinese press about it. And I was just curious if it's just kind of press noise or if there's some reality there?
As far as I know, no tank sales have actually occurred. But let me remind everyone how this works. This is an FMS case or any FMS case. The U. S.
Army buys our tanks and sells them to other foreign nations in this case potentially to Taiwan. I'd say that we've had fairly muted demand in that market for a while now. And I suspect that tariffs have had some dampening effect, but the pipeline is increasingly active. And we've been quite comfortable in where we are.
Great. Thank you very much.
And our next question comes from David Strauss of Barclays. Please go ahead.
Thanks. Good morning.
Hi, David.
Hey. Phebe, so on the G500, it looks like deliveries in the quarter based on the 21 that you said have been delivered so far, it looks like deliveries were pretty light in the quarter on G500. Maybe would have expected the margin to be better because of that. Can you just talk about that? And if you're through the first block that's the low margin G500 deliveries at this point?
So we had a bit of catch up in Q1 right after after the 2018 certification. And frankly, this is simply a timing issue. And we're continuing to come down our learning curves. Our margin performance is better on each and every airplane that comes down that and down our line. So this is simply in the moment a timing issue.
As we said, we had a bit of a backlog in Q1 and we're through that and we're entering into really steady state.
Okay. And as my follow-up on GDI, it looks like based on your updated guidance, you're still expecting organically ex the divestitures relatively flat in the second half of the year. When do we start to see this strong booking rate that you've highlighted come through in terms of actual organic growth out of that business? Thanks.
2020, as we said before, this is sort of a transition year for us and a positioning for growth here and all of the indicators of growth are there. So we're pretty confident that next year is going to realize some of those that increased backlog.
And our next question today comes from Seth Seifman of JPMorgan. Please go ahead.
Thanks very much and good morning. Good morning. Just want to ask a little bit about the cadence of EPS. Not that it matters that much, I mean the guidance is up. But just in terms of what you had thought in January, had kind of a very heavy 4th quarter.
And it seems like the EPS that had been in the second half cadence back in January, did some of that show up in the first half?
Somewhat, but our guidance is really so if you think about it, the real story undergirding the update in the guidance is we've got more revenue with similar margin performance leading to higher earnings. So when we give you our update mid year, we that is the result of careful ops reviews and we have very considered guidance that looks at all the and considers all the risks and opportunities. And we tend to narrow our range and have a certain amount of precision. But I'd say the overarching story is more revenue, higher earnings.
Okay, great. And then just in Combat, in terms of if there were kind of specific platforms that drove the increase in the guide and kind of was there a meaningful amount of FX that you had to offset on the P and L just to be able to raise the guide by that $30,000,000
Not on the P and L with respect to FX. This is simply continuing to come down our learning curve on the domestic programs that we now have and are increasing and then it's the velocity of the domestic program vehicles as we increase our manufacturing capacity. So that's really the undergirding. It's all a story about domestic right now and the U. S.
Army.
Thank you very much.
And our next question today comes from Noah Poponak of Goldman Sachs. Please go ahead.
Hey, good morning everyone.
Hi, Noah.
Jason, on the free cash flow, I was wondering if it's maybe kind of worthwhile to bridge from this year to next year just on the bigger pieces just because I think I heard you say the Canadian lab payments coming into the back half of this year take you to 100% free cash to net income conversion this year. So it would imply still below 100% conversion without those payments. Assuming I know CapEx is still elevated. I'm assuming there's other working capital headwinds. So can we kind of bridge can you help us bridge 2019 to 2020?
Or is it actually just as simple as it starts clipping 100% conversion pretty clean beyond this year?
Yes. I think if you isolate the catching up on the arrears on the international program this year, we had previously indicated and still are of the position that this year and frankly the years looking forward are in the 90% -ninety five percent -one hundred percent conversion range on a pretty steady basis, fluctuating in that range based on CapEx investments and things like that. So really this one timing item and the resolution of that item is what causes the anomaly. It caused the anomaly last year. And I think to put a little bit more precision on the outlook for this year is if we get fully caught up this year, we would expect to be nicely in excess of 100%.
So I think that maybe reconciles a little bit of the math you were thinking about. But to your point beyond this year, we're really we expect to be consistently in the range of 90% to 100% conversion year on year subject to some fluctuations with CapEx and other investments like that.
Got it. And then, Phoebe, just going back to Gulfstream, can you speak to what pricing has been like in your recent order activity better, worse or the same and what that means for margin improvement in the business going forward?
Well, as you can imagine, we're very sensitive about discussing pricing, but you can well imagine that we continue to enjoy the pricing that we've seen recently in our business and on each of our platforms.
And our next question today comes from Peter Arment of Baird. Please go ahead.
Yes, thanks. Good morning, Phebe and Jason.
Hi. Good morning.
Phebe, on GD IT, it sounds it's great, sounds like the integration is tracking ahead of your plan. And given we're seeing the 1.2 book to bill you saw this quarter, are you characterize this as kind of you're picking up share gains or is it just the environment with all the spending? Just maybe some color of what you're seeing there. Thanks.
So, for those of you who've known us for a while, we never track share. That can be a fool's errand. You can have an awful lot of share and go broke. So what we're really looking for is how we have built our pipeline, our win rates, which since the acquisition have been about 75% 74% to 75 percent on recompetes about 90%, very strong at least 1 to 1 book to bill since the acquisition and we've been building that backlog with programs that we think we can execute quite effectively and quite efficiently. So let's talk a little bit about what GDIT is.
This is a people business. And the way you attract people is by establishing a superior culture with very clear career development opportunities and some very interesting work. We have done quite well on that side to my mind. And that I think undergirds this really quite impressive performance that this management team has exhibited since the acquisition. And again, just to give you a size and scope and complexity of this business.
In the first half, we submitted almost $24,000,000,000 in proposals, and that was more than the entire submittals in 2018. And for the remainder of the year in the second half, we're looking at about $27,000,000,000 proposals. We submitted about 3.50 proposals just in terms of numerically in the 2nd quarter and in about $506,000,000 or $650,000,000 in the first half. So that tells you that what you need to undergird that kind of execution in proposals and velocity in submittals. And the result in win rate, you need a very, very strong management team undergirded by culture and the people that I just talked about and I'm very pleased with where we are right now.
We're doing very well at GDIT.
Appreciate all the color. Thanks, Phebe.
And our next question comes from Cai von Rumohr of Cowen and Company. Please go ahead.
Yes. Thank you very much. So Phebe, could you give us some color in terms of the lead times at Gulfstream, particularly for the G650 and 2 80?
So as we've been transitioning to new aircraft. We are no longer following individual plane wait times. But let me tell you all of our wait times are comfortably within the range of 1 year to 18 months and that's across our portfolio. So I'm good with that. I think that's the way you think about it.
And we've continued to perform quite nicely and hit our hit comfortable and wait times in each of our legacy airplanes as well as our new ones. So we're really just managing to the orders and the demand and doing quite well, I think.
Great. Thank you. And then at GDIT, you've given us the bid submit. Can you tell us at midyear, how much what's the number for bids awaiting decision over the remainder of the year? And maybe give us some color, some of the potential pursuits like GSMO and NextGen?
So I don't actually know. The timing of the war decisions given all the input, that is really idiosyncratic to the individual customer. But I think one of the reasons I wanted to share with you the velocity of contracts and then enormity of the velocity proposal and the enormity of the proposals is to give you a sense that we do not track, and I don't think about this business in terms of any particular pursuits. And many of the pursuits you happen to mention are in a competitive space. So we're certainly not going to talk about that.
But I think that both the size, the velocity of the submissions give you a real sense of this is a big business with a lot of moving parts and frankly I don't worry about any one particular
program. Terrific. Thank you very much.
And our next question comes from Myles Walton of UBS. Please go ahead.
Myles?
Hello, Myles. Your line is open.
Sorry about that. Good morning. Jason, I was wondering if you could first maybe clarify on the payment you expected next month just to kind of give a rough size of the burden in the hand you have there. Would you get to full conversion for the year if that one came through?
I think, listen, these are very I think we've said all we're going to say about, where we are right now on that program. As you can well imagine, these are sensitive tripartite conversations and we've told you where we are. We're making nice progress and let's just leave it at that.
Okay. Maybe as a follow-up then. The Marine Group, maybe you mentioned on the Marine Group that you weren't changing the guidance, but your bias was nominally lower. Just wanted to clarify, was that lower on the margin or on the top line?
I think I said very, nominally lower. So listen, I'm in a big business that has a number of moving parts. I'm very sensitive, particularly when we have new starts and we have a number of new starts, primarily at our West Coast Shipyard. And that plus we may see, depending on the Navy needs, we may see additional material come in this year and that tends to carry a lower margin. So I'm just at the absolute, as I say, very nominally, I want to condition that there's those two things that we don't have as much clarity about as we typically do in any given quarter.
And so that's why I gave you that ever so mild caveat.
Yes. No, I was just clarifying, because it looked like revenue you're running ahead, so that makes sense on the margin. Thanks, Phoebe.
And our next question today comes from Pete Skibitski of Alembic Global. Please go ahead.
Hey, good morning, guys. Phebe, what's your view as you look at this 2 year budget deal that's kind of shaped up this week for 2020 2021? How do you think about the Navy's ability to afford the Columbia class or for the potential for that program to crowd out other ship priorities or other programs if we're going to go into a flattening kind of environment?
Well, it was certainly very good news that it looks like we've got some clarity and our political landscape at the moment. Listen, let's talk about Colombia for a moment. Colombia is a national priority and I have no doubt that as a national priority funding will be made available for it. There are a lot of different ways to do that from a budget perspective. And I think that the U.
S. Congress and our customer is talking about various avenues, ways to ensure healthy budgeting. I'll tell you back when we did the Ohio in the 80s, a separate account was set up. That's a potential option. So I don't worry too much about Columbia crowding other programs out.
There's an imperative for the Navy to recapitalize its ships and build more ships. There is a consensus in Washington across political spectrum, at least political party leadership in the major political parties that understands that we need ships and we need to replace the undersea leg of the deterrent. And so I'm comfortable that the Department of Defense working with the Congress will find appropriate funding mechanisms to address what you have raised.
Got it. Just as a follow-up, what's the reason behind the higher pre owned volumes this year at Gulfstream? Is it just a really active market or maybe this year is just an anomaly in terms of initial 600 customers or something like that?
There's nothing in particular. On occasion, we'll have a bit more pre owned, but it signifies nothing.
Okay. Thanks guys.
Our next question comes from Carter Copeland of Melius Research. Please go ahead.
Hey, good morning guys.
Hi, Carter. Good morning.
Just a quick clarification and question. I had in my notes that MAXIMUS was like a $900,000,000 impact on the organic calculation. But I think you said $250,000,000 plus, Phoebe. So I just wondered if you could clarify that for us. And then just wondering, now that we've gotten certification at Aerospace on the 2 new airplanes, if you expect R and D to be a little bit more stable.
I know you had the comparison in the quarter that caused a little bit of year over year variability. But should we expect that to be a little bit more steady in the future than we've seen in the last several quarters?
So let's answer that in the inverse order. As we move the test airplanes from the test program in the customer set, you'll see some reduction in R and D. And then as you well know, we keep a nice level loaded amount of R and D in our business and we think that that's appropriate. And so I think we'll see some decline, but we continue to have an active R and D series of active R and D activities in that in Gulfstream.
And then Carter on your first half of your question, I think your inference was correct on the scale of the business that we divested to MAXIMUS. There were however in the last 12 months or so a couple of other smaller divestitures we did in the IT portfolio. We had a small commercial healthcare divestiture. We had a next generation 9 11 supportive business. When you add all those up, the total annualized revenues were somewhere slightly in excess of $1,000,000,000 So that was to Phebe's point of roughly $250,000,000 a quarter impact.
Okay, that's great. Thanks for the clarification.
And Rocco, this will be our last question coming up now, please.
Absolutely. Our final question today comes from Jonathan Raviv of Citigroup. Please go ahead.
Hey, thank you for the time and good morning.
Good morning.
Hey, Stevie, in terms of supporting that GDIT ramp into 2020, can you give us some color on how the personnel recruiting side is going? I know that's a very important part of the people business.
So those management teams have gelled. We took leaders from both legacy businesses and they have really jelled into 1 team, 1 fight Throughout the 1st 3 quarters and then a year into this acquisition and integration, we have kept almost every single key leader that we wanted to keep. In fact, I believe every leader we wanted to keep. And we are reducing our staff turnover. So all of that to me is very wholesome signs, but we are building a cohesive team that is at GDIT up and down their leadership chain that can maintain a very long term robust and successful business.
I'm very pleased with what I've seen there both in terms of the energy level, the cohesion and the culture that they have established. It's really quite impressive.
Great. Thanks. And then just thinking about that pickup, I mean, some peers in the market tend to talk about mid single digit organic growth. I know market share is not as important to you guys, but is that how we should think about the pickup potential and should EBITDA growth accelerate in line with sales growth into 2020?
Well, I think we're growing about 3% this year and we'll see some nice growth in 2020. But beyond that, we're not going to piecemeal 2020 at this point. We'll give you our 2020 estimate and outlook and detailed view of the business as we always do on the Q4 call after our fall review or we do in-depth analyses and bottom up operations reviews of each one of our businesses and we'll let you know then.
Fair enough? I tried. Thank you.
You did. Thank you.
And thank you for joining our call today. As a reminder, please refer to the General Dynamics website for the Q2 earnings release and highlights presentation, which will now contain our earnings outlook for the balance of the year. If you have any additional questions, I can be reached at 703-876 3117. Thank you very much.
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