通用動力 (GD) 2001 Q1 法說會逐字稿

1 GENERAL DYNAMICS CORP. CONFERENCE CALL

Good day ladies and gentlemen and welcome to the General Dynamics Corporation first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press * and 0 on your touch-tone telephone. As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference Mr. Ray Lewis. Mr. Lewis, you may begin your conference.

Thank you very much Denise. I would like to remind everyone as always that there will be some forward-looking statements made today. These represent our best thinking as of right now, but of course anything that we say is subject to the normal risks of business and would recommend that you take a look at our 10-Q and annual report for a more fulsome discussion of those issues. I also want to remind everyone that there are press in listen-only mode listening to your questions and comments as well 2 as ours, and with that I would like to turn it over to Michael Mancuso, our Chief Financial Officer.

Thank you Ray, and good morning ladies and gentlemen. I will try and keep my remarks brief, comment only on the significant variances from our first quarter of 2000, provide some detail on Gulfstream's delivery and order activity, and then we will move smartly to you questions. Let's begin with Gulfstream. During this quarter, Gulfstream delivered 18 green aircrafts and 15 completed aircrafts. Last year, first quarter, they delivered the exact same number of airplanes 18 and 15 respectively. The continuing story at Gulfstream is margin expansions and backlog growth. Operating earnings this quarter are above 20% as a percent of revenue, 13% increase over 203 basis points over last year, a result of their continuous process improvement. Last year, you may recall, Gulfstream's margin rate for the first quarter was 17.9%. It grew throughout the year to a high of 21.6% in the fourth quarter and averaged 19.5% for the year. We are starting this year at 20.2%. The total backlog in the quarter grew by over 300 million to 4.7 billion. 3 That growth is in funded backlog and comes on the heels of a very strong fourth quarter 2000, and is about $700 million above first quarter of last year. Order intake activity at Gulfstream remains strong. The only other segment I want to comment on is Combat Systems. Revenue has grown by 139 million with the increase not only coming from the acquisition of the Primex business, but from growth in Land Systems and growth in Armament Systems.

Operating earnings grew accordingly, while margin rates dipped with the introduction of the Primex business at earnings rates below our historical level. With the restart of the Brigade Combat Team Program and the award of the M1 upgrade another year. The backlog in this segment of 3.3 billion should provide a bases for earnings and margin growth. Now, if you go back for a moment to the income statement, I will talk to the other significant positive variances that fall below the operating earnings line. You will note that net interest expense is lower this year by $7 million, largely the result of a lower average debt balance and lower interest rates. Other income of $8 million is 9 million above last year. During the quarter, we sold a small non-core software based product. This resulted 4 in the gain that you see reflected here. The last item is the tax reserve adjustment of 28 million. The outcome of our latest quarterly review of our overall federal tax liability resulted in a $28 million reduction in our balance sheet provision for future exposure, which then becomes a current period non-cash positive income adjustment. Cash flow from operations which is cash flow generated by our business units and includes their capital expenditures, was $149 million, that compares quite favorably with $31 million we generated in the first quarter of last year, that gives us a great start for this year. In summary, let me recap our backlog by segment. Total backlog for the corporation now stands at 21 billion, broken down as follows, Marine Systems backlog is 10.5 billion, Gulfstream's backlog is 4.7 billion as I mentioned earlier, Information Systems and Technologies Segment backlog is 2.1 billion, Combat Systems backlog is 3.3 billion, and our other segment has a backlog of 400 million for a total of 21 billion. The other important thing to note is that almost 75% of that backlog is funded. So with those remarks, I would like turn it over to Ray to pickup on the rest of our 5 program.

Thank you very much Mike, and before we go into Q&A, our Chairman and Chief Executive Officer Nicholas D. Chabraja would like to make a few comments.

Thanks Ray and Mike. I think that Mike has given you probably a good sense of the facts related to the quarter, in addition to those published with the press release. It clearly, from my perspective, was a very solid first quarter. It was better than we anticipated and planned for in at least two important respects, maybe three. First, the earnings were better than our expectations and certainly better than the guidance that I had given you. Secondly, roughly 150 million of cash flow from operations was stronger than I had anticipated relative to the first quarter a year ago, and even our own expectations, and I say that when we consider that we had very strong cash quarter in the fourth quarter of 2000, and we have a historic cash weakness in the first quarter of the year, given those two things, this was a particularly strong quarter. So that leads me to confess that I suspect I have been a touch conservative with respect to our guidance on 6 earnings and cash from operations in my earlier remarks to you that was at the quarterly call at the end of the fourth quarter of last year. You might recall that with respect to earnings, I gave you guidance in a range of 443 to 447. I have to say that I am comfortable now at 450, but I would encourage the self-side analysts not to go too bullish on me until beyond that point until we get a better read on a couple of things.

Cash, we forecasted 700 million at the beginning of the year as a result of some capital commitments that we have made, but it seems to me that we can do better. This first quarter start suggests to me that we are going to do better, but I am not quite prepared to be more precise with you until the end of the second quarter. You might remember last year, I increased the guidance at the end of the second quarter with respect to cash, and then I did it again at the end of the third quarter, and when I do it I will do it when I have a real good handle on it and you can be comfortable with the numbers. I think the last comment I would make is the other, I think real strong indicator in the quarter was the growth of backlog at Gulfstream that Mike gave you the numbers I think on deliveries you 7 can get your pencils out, and sort of come pretty close to the number of units that were in the order backlog for the quarter, even though we don't give that information other than in dollars for competitive reasons, but it came from an interesting mix of sectors of the economy, and all indications are that we will also enjoy a relatively strong second quarter order backlog. So with that being said Ray, why don't you invite questions.

Okay Denise, if you can give people the instructions for the smart polling Q&A process and we will kick that off.

Thank you Mr. Lewis. Ladies and gentlemen, if you have a question at this time please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the # key. We will pause a moment for questions. Our first question comes from Sam J. Pearlstein of First Union Securities.

Good morning. Was there any benefit in the Marine Segment from any sort of a catch up from the strike that hurt things in the fourth quarter? 8

I don't think so Sam. I think we are still getting that workforce back to work in an efficient way. The problem after a strike is not only that you lost work and revenue earnings in the period, but there is a tendency to have the workforce come back in an inefficient way, sometimes with hard feelings that need to be worked, as the shipyard and it's workforce, sort of, rediscovers their mutual interest. So, it's a along answer to your question, but the real answer is no. We are still looking to do better up there.

Okay, and then in the Information Systems and Technology business, you've talked about 10% topline growth rate this year in that sector. Where are you not seeing the growth that you expected, and really what's your assumption going forward in terms of the overall growth there?

Let's begin with the latter part of your question. I think it's fair that we might get there, but certainly the mix is changing. Remember the IS&T Group had their strongest quarter of the year, last year in the first quarter. So, we're comparing them to a 9 tremendously powerful quarter, but we're taking a step back. I would say that the weakening of the commercial telecommunications business has impacted somewhat, what was the fastest growing, but smallest portion of our IS&T business that is the commercial side. Fortunately for us, we were only 15% or 20% commercial, but it had the highest projected growth rate, and now that is ambitious in light of the current condition of that industry. On the other hand, our defense business is solidifying on the IS&T side and we're probably seeing a little better growth than we had forecasted. So at least for the moment, I am prepared to suggest that our earlier guidance continues to be accurate, but that is one of the reasons that I don't want to get more aggressive than 450 in my earnings guidance till I see how the IS&T world continues to shake out.

Okay, and last question, before I'll let someone else go. Now that you've had Primex for about 3 months or so, what can you tell us about the potential for synergies and contribution from Primex?

Well, we've had two months, but our guys are doing a great job on 10 transition, and we're pleased with the business. We will, however, continue to report Combat Systems as a segment not by individual line of business, and I think the guidance we gave you earlier, with respect to anticipated accretion, is essentially accurate. We may beat you by a penny or more, who knows, but it's going according to plan.

Okay. Thank-you.

Our next question comes from Heidi Wood of Morgan Stanley.

Good morning, nice quarter guys. A couple of questions. Mike, was there any uptake in the accrual rates at Marines?

There was a pickup in the Seawolf Program as it gets closer to conclusion, Heidi, but it wasn't significant. It's just a more gradual ramp up in our performance on the program as it further matures.

Okay, and you've mentioned in your comments that Primex wasn't the sole reason for the growth in Combat, but the results of GD Land System and Armament. But it looks 11 like Primex contributed about, by my numbers at least, assuming two months of the deal, about 100 million and maybe 6 to 8 million in operating profit. Is that about right?

Without affirming the specifics getting down into a business unit, you're certainly in the ballpark, Heidi.

Okay, and Mike, one last question before I have one for Nick. The pre-owned Gulfstream jets have risen a little bit on your website. You now have about 10 pre-owned planes, 6 of them are GIV SP and GV. Is that mostly timing related or are you having a harder time placing used jets?

We're not having any troubles selling used inventory, Heidi, it's timing related. Some of those aircrafts, sort of, we have them, may not necessarily ready to be turned immediately.

Okay, and Nick, now that you've got Santa Barbara, the IAV, and Primex, can you discuss a little bit of the potential impact you see. The combination of those three businesses can have on combat margins? 12

Let's back away from part of your question. We don't have Santa Barbara yet. The transaction is not closed.

Okay.

I think what you have read in the popular press is accurate, i.e., the Spanish Government has entered into a technology protection agreement with Krauss-Maffei Wegmann and Rheinmetall that is designed to protect their proprietary technology from Santa Barbara and it's owners, whoever they may be. But, we have not closed with this Spanish Government. We look forward, however, to that getting accomplished in the reasonable near term.

Then, Nick, let me ask the question in another way. Can I assume that your improved confidence in the 450 earnings for this year extends largely from closing Primex, and also having IAV under your belt, and could there be a small potential incremental upside if you also get Santa Barbara?

Heidi, I am comfortable with 450 without regard to Santa Barbara, and when we close Santa Barbara and I 13 have a real good opportunity to dig deep into it, I'll give everyone some guidance about it's impact on the year. But my remarks are utterly without regard to businesses that we don't own today.

Okay, great. Thanks very much.

Our next question comes from the Joseph Nadol of JP Morgan.

Good morning and great quarter. My first question is on the M1 Program. Nick, can you give a little color with regard to both the review process? How you feel about the program right now? I know you just got the new contract. And secondly, the international deals that we've all been waiting for in Greece and Turkey?

I'm very pleased with the M1A2 CEP Program as I believe the Army is. The program is doing very well. Our guys are performing very well. They are doing a good job controlling costs, and of course that led to our second multiyear, and we have continuing 14 discussions with the Army about their requirements beyond 2004. I should also tell you that I have been the Fort Owen for the wargames, and the CEP Tank performed brilliantly in the field. So, I think the Army is equally excited about it as a war fighting system. So, we're optimistic about the tank business, and I think we've told you before that we look forward to that being a thriving business through this decade. Of course, the Turkish Program appears to continue to slip to the right as a result of the economic problems that began, you remember, with devastation related to the earthquake and then came to a head when there was dispute between two government officials that led to quite an economic turmoil in that country. So, I think with respect to that one, patience is the order of the day. The Greek Program, the Government of Greece indicates it is going forward; that is slightly inconsistent with the fact that they have announced a delay in the purchase of the Euro Fighter to cover urgent domestic requirements that some associated with their responsibility for the Olympic Games. There was in the popular press in Greece, a division between the Minister of Defense and the Prime Minister over that particular decision, but 15 we are told that the Tank Program remains on track. I have to tell you, I wouldn't be surprised if it also slips down to the right.

So, you are looking at third or fourth quarter now for Greece?

What they have been saying is they try to make a decision in May or June, and try be under contract by the fall. My guess is if that schedule slips, it would well slip six months to a year.

Okay, then there is just one other one, in the other segment as opposed to below the line number, there was movement from negative 8 million in income to positive 2. I think the negative 8 last year was somewhat of an aberration, but any comment there, Mike?

Last year, we took the charge in our coal business in the other segment in the first quarter to write down some equipment and better position ourselves if you will at the time, so what you are seeing is the absence of a charge this year.

Okay, thanks. 16

Our next question comes from Steve Binder of Bear Stearns.

A good quarter, just a couple of things. First, Mike can you just repeat, because the backlog never came for Gulfstream, is that total backlog or is that firm contracted backlog?

Total backlog is 4.7 billion.

Can you just give us a firm contract backlog, which is little over 3.3 billion at the end of the year.

3.6.

3.6 billion, so it is up nearly 300 as well.

Well all the growth as I said was in funded backlog.

Okay, and secondly with respect to, can you maybe discuss the quarters cash flow because I think if you look at your change in that debt before dividends, they look like you have generated about 15 millions or so, I imagine it is corporate items, a difference 17 between the 149 and 50, if you maybe discuss or quantify where that difference is?

Debt pay down, stock buyback, etc..

How much was the buyback in the quarter?

We bought back 288,000 shares about $19 to $20 million roughly.

And can you possibly comment on what percentage of your plan delivery schedule to Gulfstream consists of firm delivery positions now?

I don't know Steve right off hand; I know that Bill likes to keep open slots in every year. If he can keep up, so that he can satisfy urgent requirements of some customers, but he pretty well chockablock this year and next year.

Steve, that backlog is essentially sold and if the implication is are they looking for orders this year to fill this years delivery, I think the answer is no.

He is asking about 18 2002, but there are opportunities if you are a buyer.

Okay, thank-you.

But we are moving ahead quite smartly. I think even the greatest of customer's sees diminished risk in the Gulfstream story and if they don't they are kind of on the slow side.

Okay, and with respect to the pre-owned inventory at the end of the quarter, do you have that number Mike?

Something like, I think, Heidi said 10 airplanes.

No, I am talking about dollar and inventory.

Yeah, $279 to $280 million.

Okay, and lastly Nick, do you want provide any thoughts with respect just top to bottom review and how it might impact you. Do you want to consider..?

No, I wouldn't 19 touch that one with a 10 foot pole. I think we are in great shape, and I spoke about it at some length in our annual report and my letter, and I think if I went beyond that I'd be engaged in grossest kind of speculation. We are obviously very comfortable with where we sit.

Okay, thanks a lot. Oh, Nick, you want to hazard a guess on how you think the overall modernization budget is going to fare this year, fiscal year or two.

I don't want a hazard guess, I, like you, will wait and see the numbers, and I think we are going to do okay.

Okay, thank-you.

Our next question comes from Cai Von Rumohr of SG Cowen.

Yeah, let me join everyone in congratulating the excellent quarter. Nick can you given us any update on the new version of the IV-SP, the IV next. When you might, kind of, announce and launch that, and when we might see the initial deliveries?

Cai, that is supposed to be close held. You don't talk either 20 about the particulars of that program, that is the performance of the aircraft that's contemplated or announcement date or deliveries, and I think that announcement, when made, will not be made by me, I think that that is a Gulfstream story and it is best made by them, but you are a little bit ahead of us on the show. I understand that people have a sense of this because there was a release at the time that we rolled out the 400th Gulfstream IV, that we have entered into a relationship with Rolls Royce on the engine for the next generation IV, but apart from that we are keeping that close.

Okay, could you give us any color on the strength in the orders on the Gulfstream in the first quarter, I mean, was that, any of that fractional, any of that military, you know, kind of, US, any kind of color, I know you don't give units.

I think it was commercial customers, largely commercial customers, if it was, not that I recall were there any orders from fractional interests. We had a large fractional order I remember in the fourth quarter, so this was a particularly 21 wholesome quarter because this growth came out of orders from this allegedly ailing economy, where we received orders from 11 different sectors of the economy. So an interest remains quite strong as we go into the second quarter.

Can you give us any color about the geography mix of the orders?

Mike, do you have something in front of you?

Geography in the sense of which airframe?

I mean which we are talking about all US, are there any pickup in Mid East or Asia, or anything like that?

We don't have the detail. We are mostly in North America.

Right, Okay. The other sector was strong and, you know, with the power situation, any chance if that coal business could give us a pick up, I realized the tire sulfur coal.

I mean, I think that there is, if you'll follow the commodities, there 22 is a modest pickup in the spot market on coal and who knows, but certainly I don't want to predict great things right at this moment.

Okay and last question. Santa Barbara, obviously you are lot closer to making that a reality. What sort of a timeframe might we be looking at and what do you think the key remaining wickets are to getting that thing completed?

Well, I think we should be looking at June, I know Deitch, our Combat System Group Executive has a trip planned soon to Spain in an effort to sit down with the Spanish Government and solve any contractual issues that remain to be discussed, and we were hopeful that we can get that done here in the near term.

Okay, excellent, thanks a lot.

Our next question comes from George Shapiro of Salomon Smith Barney.

Good morning, one followup to a question earlier on debts. Mike, 23 if you looked at the change in net debt, and took out the purchase of Primex, it was about zero and as you edge back to that 19 million from share buyback and 56 million for dividends, you are still left with 75 million difference between the 149 that you quoted. So I was just wondering where that $75 million differential is?

George, we have Ray working through the numbers. We are trying to effectively get back to the FAS reported cash number and rather than trying to reconcile it for you over the phone. Let me refer you to Ray offline, and he will give you that answer.

And I am not sure if Ray will have it till about the time we are ready to publish the queue.

Okay, and then Nick, just for a clarification the 450 includes the 3 cent per share gain from the software business sale, but obviously excludes the benefit from the tax?

It excludes the benefit from the tax.

Okay. 24

We treat that as just as it was nonrecurring and non-cash. We have to report it. To us it is a nonevent.

But, you are including the 3 cent per share gain from the sale of the software business.

You are in the [midst]. I think we are going to probably make it either way but.

Okay, and then Mike, just a comment you made earlier you strongly implied that the 20.2% margin in Gulfstream this year will be the lowest margin we see for any other subsequent quarters.

All I tried to do George was reference you back to last year and show you that we started it under 18, and ended at 21.5 or so. We are starting this year with a couple of hundred basis points higher than our starting point last year. The story at Gulfstream has been the continuous margin improvements, so just trying to lead you down the path from the facts.

We are comfortable 25 that Gulfstream's earnings will be up about as we indicated to you and that they we will do that on basically similar revenue.

Okay, and then one last one Mike in the Combat Systems area, how high do you think that margin can improve during the year as you improve the performance at Primex?

I think it will be better George. I am not prepared to give you a number. Our history has been as we have acquired businesses and integrated them into our core product lines and management operations that we found a number of synergies and benefits. We believe that to be the case with Primex, but it's too early to predict what the gains might be.

George, we are also being a little bit cautious here because remember we are starting the Interim Armored Vehicle contract. We are just starting it now after having been delayed. There will be enormous pressure for speed, and we want to see how all that shakes out before we want to give you increased guidance or additional guidance on margins, we are optimistic here, but hopefully we can as we always have been, be conservative and 26 exceed your expectations rather than fall behind them.

Okay, and Mike, in terms of the goodwill of the [________________] people are expecting this summer. I mean a lot of your intangible and goodwill, like the 81 million you showed at the end of 2000, a good part of that is tax deductible. So, what would be the net benefit overall in terms of your EPS?

If you have in hand George, some of the data that Ray provided you, it's the backup data you will see that goodwill amortization in the quarter was about $16 million. You can annualize that at about 60 to 65 million, and assuming the convention as adopted midyear you would be talking about $32 million of pretax earnings, improvement by not amortizing goodwill. As far as intangibles are concerned, intangible amortization will continue under our revised set of guidelines, i.e., [________________] due to intangibles, so until we thoroughly understand the rule in its final form. I think you pretty much assume that goodwill amortization goes away, and intangible pretty much stays intact plus or minus a little 27 bit as we refine it.

Okay, thanks a lot.

Our next question comes from Todd Ernst of Prudential Securities.

Yes good morning. I just had a quick question here on capital allocation for the year. Where or how much do you think that you will be allocating towards the share buyback or is the primary focus on doing additional acquisitions?

Todd, I am really not going to give you a lot of guidance on that. It depends on the deal world. It depends on a lot of things that I manipulate almost everyday, so I am not going to lay that out for you, we have bought opportunistically. We will continue to do that, but a lot of where we allocate the capital other than to our own capital requirements in our businesses will depend on opportunity.

How would you characterize the deal environment right now?

It's just fine. It is robust, and there's a lot of opportunity. 28

Okay, for the quarter what was the used aircraft revenue? Used aircraft sales revenue?

$20 million. We sold one airplane.

Okay. Thank-you.

Our next question comes from Bryan [_______________] of US Trust.

Hi guys, I wanted to ask you in the Chairman's letter, in your annual report, Nick, you said that for the past five years free cash flow to net income was 93%, and you expect that to improve in the next five years. I was wondering if you could tell us how much faster you expect cash flow to grow than net income over that period, and maybe where it is coming from, either certain business line where free cash flow is going to be better than net income or whether you can give us some color on current working capital and capex trends?

All I can tell you is that our operating plan demonstrates to me 29 that cash over the period free cash from operations, I have to find it for you, before will about 95% of net income. That's insufficient in my view. I will try very hard to see that it is better, but from a historic point of view the last three years were 93% if I remember it correctly, some years better than that figure, obviously and some years worse. I think we are looking towards the Marine Group making a significant contribution, once we get through this year, because their significant or extraordinary capital expenditures will largely be behind them. So they will do very well. Gulfstream will continue to perform as it has, and we are improving the cash performance in the IS&T Group on a regular basis. So I think what we are talking about our businesses that are going to require slightly less capital expenditures for property, plant, and equipment, and also businesses that are going to work harder on squeezing operating working capital. So I feel that that estimate is conservative guidance.

Thank-you.

Our next question comes from Chris Mecray of Deutsche 30 Bank.

Hi there, I was wondering if you could comment at all on the businesses in IS&T. You had an about flat revenue performance, I was wondering if there is any substantial volatility that led to that relatively flat result with up slide in certain areas and vice versa?

Pretty much business as usual.

How about the cable laying business that you do Tyco, is the outlook there something that you view as moderating, and didn't you add a couple of ships last year into those areas?

It is with Tyco and others, that's not moderating. We are going along pretty well in the cable laying business. What I mentioned that isn't growing as rapidly as we had anticipated earlier, and I think no large surprise to anybody is we service the telecommunications industry in terms of sophisticated installation and integration work, but that is of course going to soften and has, and from the manufacturing we're doing in those 31 areas as well, but the defense end of that businesses is stronger, so it takes a long half it does in the other.

Okay. I also want to ask about possibly getting you to derive free cash flow for us, just if you can give us the components of cash flow from operations, and dividends in capex?

Our free cash from operations as we define and as I've expressed this to you many times is after tax effect and after capital expenditure, but before corporate items were discretionary items, it is a classical definition of cash flow from operations.

Chris, to repeat what I had said earlier, we've spent about roughly $20 million in share repurchase, and dividends for the quarter were $52 million, which is standard if you will or consistent with our record about $200 million a year. So, beyond that cash in and out for corporate items, option exercises, cats and dogs, interest expense, I mean it's all over a lot, we could be here forever trying to reconcile cash flow. 32

Okay, so basically I will just back up capex, and that's what you're talking about.

The important message we're trying to give you of course is that the business units themselves generated almost $150 million of free cash flow, being that the issue, what we do with it here in terms of serving the corporate needs is left to us, if you will, in terms of administering, but the message is that the business units came out of blocks very strongly in cash this year, much stronger than last year, and we're optimistic that we'll continue that trend.

The other important thing is that the number we give you is the same one we always give you quarterly. It is not the Q-number. It's not the FASB number. It is the pure full from operating units.

As then it is often hard to keep track of company by company, how you guys reported since everybody does it differently. Primex, is there a point at which we can expect some kind of comment on saving, synergies, or the progress there independent of the Combat Systems 33 operation, perhaps the next quarter?

Let's talk about our practice. Our practice is to make an acquisition to give you some guidance about whether the acquisition is accretive, and if so by how much. We go out to make that better. When that happens, we increase our guidance, but we don't tell you from which little bucket it's coming and that's the way we behave with respect to this one. I may make a general comment in passing, but that has now become part of our Combat Systems Group, and its operations will be reported together with Land Systems and Armament Systems.

Fair enough. It would be nice to get some kind of read though on whether you're on track to meet the original guidance that you gave, perhaps later in the year?

That's fair and I think I've said that we're on track. We are on track if not a little bit ahead, and we've done a little bit to increase our guidance. If I were you, I would feel reasonably comfortable with that guidance because I wouldn't give it to you if I wasn't. 34

Yeah, I understand. Thank-you. The last thing is you mentioned the IAV ramp up. Would you anticipate the margins from that contract, starting out at a conservative low level and building or just theoretically given a contract like that? How would you expect margins to ..?

I don't think I want to talk about program revenues, particularly in one that has been as sensitive as this one as been.

In the general sense, I would think that when you're starting out a contract..

Everything we do or we've ever done gets better over time.

Right.

I expect this to be any different.

Okay, good thanks.

Our next question comes from Joseph San Pietro of DRKW. 35

Good morning. A couple of questions. One, just the last question, I hope on the [IAD] program. Your working capital needs, over the course of 2001, have they changed given the delay in the program or have they pushed out into 2002, are we going to see it. Could you just give a little bit of color on that? And, I have couple other questions.

I think it's unrelated. No, is the answer.

Okay. Secondly, what is the profile of the used aircraft sales that you expect for the remainder of the year? Last, I think it was in the second quarter that we saw a bit of a non-expected spike, and do you know sort of what the environment is right now.

The environment is good for the kind of aircraft we have in inventory, that is, IV SP's and V's, and its adequate for the IV's. It is, I think, softer for III's and II's, but we don't have any of those, and you will always see us with some inventory because we have uses for it, and we turn it regularly, and it has tended to be in the 36 $250 to $300 million range over a very long period of time. So if you're looking at this inventory for growth figures, it's not there.

I was just making sure that we're not going to see some sort of unexpected spike in sales since obviously that has a depressive effect on your margins?

No, I don't think so. I think you're going to see inventory levels at about this level throughout time.

Okay.

If it swells beyond this then we are beginning to accumulate some inventory, but we don't expect that to happen. The market for these aircrafts remains good. Some are easier to sell than others depending on how they've been configured. I have been out chasing a used 4SP and have been unable to find one that I wanted.

Okay. So in general the used aircraft pricing is holding?

Yes.

Okay, and then my 37 last question Nick, can you give a little bit of color as to where you see the excess cash generation coming from like which of the businesses seem to be over performing?

Let me have that one again.

In terms of your cash flow that you've generated this quarter, you said that you were surprised by how strong it was. Can you give us some color as to was it across the board, or were they very specific businesses that we're generating are responsible for the cash?

Everybody got a little better than planned. It's really where we are. If you know much about generating cash out of businesses, it's not on a homerun business. It's ones and single and stolen basis that generate cash.

All right. Thanks very much.

Our next question comes from Byron Callan of Merrill Lynch. 38

Okay Denise, after this, I think we can only take one more and then we'll have to roll it up.

Okay, no problem Sir.

Thanks, and congratulations on a great quarter gentlemen. Couple of very quick things, can we just quickly review what some of the upcoming defense opportunities are for you guys, you got BOWMAN I guess, later this year, and there is still this navy air support ship program [_______________]. Is there anything else that I'm missing on the kind of bigger than a bread box category?

ED21.

Okay, good and the second thing, just generally Nick, are you surprised at how well Gulfstream is held up, I mean, you could argue. We have really had a lot of signs of a weak economy back since October. Your orders have held up very well during this period. I'm curious, again, first are you surprised by this and just generically are there any reasons you could cite why you think this end of the business 39 aircraft market is held up as well as it has.

Byron, I'm not surprised in a large part because I've had more information, I mean, as we compared Gulfstream's performance with at least some indications of weakening in the economy, it was clear to me that they had a full pipeline of the [________________] that was maturing quite rapidly and some of it had manifested itself into letters of intent going in the quarters that needed to be converted to contracts. So, all along I've been advised by Gulfstream, on a regular basis of the strength of the sales activity, so I wasn't surprised. Can I explain the apparent disconnect between some softness in the economy and Gulfstream. I am not so certain that I can, but one thing is clear, that not all sectors of our economy have softened together and some of them are still doing quite nicely, and Gulfstream is one of them, and I noticed, by the way, that Cessna did quite handsomely from a press report that I saw the other day. I can't remember the exact details, but they reported quite robust order backlog and sales activity with no softness reported, and the same is true here. Now others may be experiencing other kinds 40 of activity, but it looks good for us. It continues to look good. We are having good qualified customary interest in Gulfstream Aircraft.

Good, good. Thanks a lot.

Our last question comes from Ted Chow of Bank of America Securities.

Hi, good morning. Just had a question on Gulfstream, given the fact that the backlog continues to grow are there any plans or has there been any consideration given to increasing the production rate from its current 70 to 72 aircraft a year.

We ordinarily don't discuss our planning activity with respect to production. We'll kind of let you know as we do think like that either increase or decrease production. Right at the moment it's preceding the pace.

Okay. Thank-you.

Mr. Lewis, this concludes the question and answer session. 41 Please continue with any closing comments.

Gentlemen, thank you all for being on our call today. I'm going to go grab a quick bite to eat and then I'll be available to give you some additional color answering to your [_______________] in the leads questions this afternoon. My number is 703-876-3195.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Thank you and have a great day.