Jason Aiken: Yes, the major internal capex projects are done this year. We’ve got a little bit of trailing cost and activity going on in the shipyards as we finish out that capacity expansion, particularly at Electric Boat, but that will wrap up next year. The investments we’re making on the Army side from an artillery perspective, that’s being funded by the customer, and so bottom line, we ought to see our capex level trend back towards 2%. We’ll be below 2.5% this year, which is directionally headed the right way, and we’ll be back toward–if not at 2%, headed toward 2% next year.
Operator: We will take our next question from Kristine Liwag with Morgan Stanley. Your line is open.
Kristine Liwag: Hey, good morning Jason and Bill. Maybe first on the president’s $106 billion supplemental request, it includes $3.4 billion for the submarine industrial base. With this request out there now and with respect to AUKUS, can you talk more about what this means for GD? Does this change timing at all?
Jason Aiken: Bottom line, Kristine, I think the short answer is no. Obviously any additional support that can be provided in terms of that supplemental or other funding to shore up the industrial base is helpful. There’s a lot of talk around AUKUS and obviously we’re going to do everything we can to support our customer in that regard, but the fact is this supply chain still remains very fragile. We’ve got a lot of work to do to get this whole industry back to–from a submarine perspective, back to two per year. We’ve got to get to that point on Virginia while delivering Columbias, and I think we’ve got some more work to do to get there, and so any additional funding and support, whether it’s through the supplemental or other Navy support, would be extremely helpful, but that’s our focus today, is to get to that two per year plus Columbia, and then we’ll look to AUKUS beyond that.
Kristine Liwag: Following up on your comments on the fragile supply chain, has there been changes in your contracting terms with the customer to reflect this, and how do we think about long term margins?
Jason Aiken: I think the main way this has been reflected in our contracting with the customer is to recognize the impacts that we’ve had and to price that in, and accommodate what is this current state of affairs in our contracting. One example of that is the DDG multi-year that we just saw awarded in the quarter – we feel like that’s been appropriately considered there, and we’ll continue to consider the state that the industry is in as we go forward. I wouldn’t point to necessarily any other macro or overarching contract structures or other terms that have changed. In terms of margins, we expect them to get better, frankly. My expectation is that this quarter would be the trough for the group. We expect to see improvement in the fourth quarter and we expect to see modest sequential incremental improvement over time in this group.
That said, this is a challenging task. Shipbuilding is a challenging endeavor and so it’s not going to be straightforward, but our expectation, to be completely straightforward, is to have gradual increasing margins in this group over time as we march back toward that 8% to 9%-plus margin range.
Operator: We will take our next question from Seth Seifman with JP Morgan. Your line is open.
Seth Seifman: Hey, thanks very much, and good morning everyone. Maybe just a follow-up on that last topic. The Q3 margin in marine, similar to Q1. In Q1, we know there were some charges on Virginia, I believe Block 4 and Block 5. Were there significant negative EACs on Virginia in the third quarter that drove the margin that we ended up seeing, and I guess any–I know you talked about supply chain at Electric Boat, but any additional color about what assumptions have really changed there, and with the new assumptions, how that affects your ability to expand margins?
Jason Aiken: In the quarter, Seth, nothing material in terms of EACs in the quarter. What you’re seeing there, obviously we are still experiencing pressure from delayed material coming out of the supply chain that’s affecting Electric Boat’s schedule and delivery and man hour in the yard. But the other implication that you’re seeing is having reduced the margin rates through the earlier EAC adjustments, we’re now seeing the aggregate impact of that in the booking rates that we are recognizing on the programs today, so it’s sort of the aggregate confluence of all those factors are driving the margin rate that you see in the quarter. But again, as we start to continue to improve the throughput and improve the efficiency in the yards, we do expect to see incremental improvement in the margin, starting in the fourth quarter.
In terms of supply chain changes, I don’t know that it’s anything changing. I think it’s as we go to contract, we have 2020 hindsight, or full visibility if you will, into the current state of affairs, and so we’re working through that with our customer and they understand the situation we’re in, so we’re basically incorporating the current state of the supply chain, as well as the implications of increasing cost of skilled labor as you’ve seen with a lot of the labor negotiations going on out in the market. It’s those types of factors that are being incorporated, that we’re putting into the new contracts and that we feel like will put us in a good position to perform from a margin perspective as we look ahead.
Seth Seifman: Okay, okay, thanks. Then just for clarification, when you talked about at the overall company and despite some changes, the EPS outlook being unchanged, was that sort of–that was based on that new Gulfstream delivery outlook that you talked about with the 60-plus in Q4. If the G700 wasn’t to be certified this year, I assume that that’s kind of a different story, and what’s the last date roughly that you could see that certification happen and still deliver, I don’t know, double-digit G700s?
Jason Aiken: Yes, so the EPS reaffirmed at $12.65 is based on the updated Gulfstream delivery number that I mentioned earlier. As I said, that’s mostly–the reduced number from the July outlook is mostly associated with G280s, so not as significant an earnings impact to that. As you can imagine, some puts and takes, none of which are particularly material, across the rest of the portfolio, including some upward pressure across the defense businesses from a revenue perspective, as you might imagine, improved, customer service revenue at the aerospace group and so on, some below-the-line things like lower interest expense and share count, net-net kind of putting us in the same place, so that’s sort of why the guidance stays where it is.
In terms of the 700 outlook, I think the key issue is, and the question so many people around why the uncertainty, is we don’t have a date certain. This is the FAA’s process. We need to let them go through that process. We are supporting them in that process. They’re going through flying now and we’re doing the necessary paperwork and reporting to support that, and so we have a path, we have an expectation to get there in early to mid-December, but there’s not a red line or a date certain on the calendar that we’re looking at, at this point.
