通用動力 (GD) 2002 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the General Dynamics first quarter earnings 2002 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 star, then zero 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, Staff Vice President - Investor Relations. Mr. Lewis, you may begin.

Thank you very much,

, and I'd like to welcome members of the investment community and members of the press that are listening today on the call.

Let me remind you that we may well make some forward-looking statements during the course of this conference call and that these are the best estimates that we can make at this time, but that they are always subject to the normal risks of any business.

And with that having been said, I'll turn this over to our CEO,

Chabraja.

Thanks, Ray, and good morning ladies and gentlemen.

I think I'm pleased to report to you that we had a very good quarter. It was a couple of cents better than consensus and, certainly, that much, or more, better than our initial guidance to you.

I think - I think the important thing about this quarter is that it provides a solid foundation and leaves us well positioned for the year to deliver on our guidance to you for the entire year, which I can, with some confidence, reaffirm today.

In the quarter, we had 17 percent overall revenue growth over the same quarter last year. And that includes significant organic sales growth, particularly in the Information Systems and Technology and Combat Systems group. In the quarter, IS and T was the sales leader for the first time among our four groups.

And their margins were up as well. They've cracked the 10 percent barrier for the first time. They grew their total revenues by 42 percent, of course, with the addition of Decision Systems that we acquired from Motorola.

But 18 percent is organic sales growth, and the biggest single item would be the BOWMAN program in England, but there were a wide variety of contributors to that organic growth. And we certainly have to be very pleased about the maturation of that business and the ability of our group executive,

Dahlberg, to fully integrate all of our new activities and to reorganize the group and continue to fire on all cylinders.

Combat Systems also had significant sales increase, about 31 percent above the same quarter a year ago, and 23 percent of that was organic growth. The largest single item would by the Striker program, but there was a wide variety of growth.

I think they've done a wonderful job under

Veitch, and they're going to have to do a little work, I think, on margin improvement over the course of the year, and I have some degree of confidence that they will, in fact, achieve that.

Marine group - margins are pretty consistent with last year's overall margin, but you'll notice, much improved over the fourth quarter.

Gulfstream Aerospace - this is, in my mind, a good one. It's good in a number of respects. It sort of fulfills our promise to you when I said look for us, on reduced volumes, to have earnings very similar to last year.

They did that in the first quarter, which is evidence, I think, of the success of that management team's very aggressive cost-cutting activities, resulting in more efficient production of their fine products.

But maybe the biggest story out of - out of Gulfstream is the very market itself. They had a very good quarter on new orders. They took in a billion dollars in firm orders, and that actually grew their backlog.

So we're pleased. The company as a whole had about three billion of new orders in the quarter, and about a third of that was from Gulfstream.

Of course, during the quarter, Gulfstream had some wonderful successes and then some bumps in the road. Our recently-filed 10-K restated our year end 2001 backlog to reflect the United Airlines termination of their Avolar business jet venture and the resultant default on their contracts with us.

That is something that our team is in the process of overcoming rather handsomely. We had a significant deposit there, which we have retained.

may have more comments about that as he speaks.

But our first quarter total backlog stands at a healthy $27 billion, $21 billion of which is funded. And included in that number is the Gulfstream total backlog of 6.4 billion, of which four and a half is firm business.

Cash flow - a brief comment. Negative $52 million - that's cash flow from our business units after cap ex and tax effect, but before corporate use of cash. That is about $60 million better than our internal plan and runs pretty close to what we expect annually where first quarter cash flow tends to be weak with progressive improvement over the subsequent quarters. 2002 will follow that pattern and I think, here again, I feel very comfortable repeating my previous guidance.

We expect to generate between $900 billion of cash from business operations as I defined that term this year. We remain very upbeat about 2002. We're seeing signs of recovery in the overall economy. I think that found it's way into Gulfstream's order book. Activity looks good there. The defense budget as a whole, and our programs in particular, seem to be well supported. Our backlog, cash flow and balance sheet that provide the tools to enable us to take advantage of business goals opportunities that we know will come our way and we look forward in the next several months to capturing at least our fair share of several soon to be awarded programs across all of our businesses. And, as I indicated earlier, we're pretty comfortable with all of our acquisitions. And pretty well integrated and found their way into the General Dynamics way of doing things. Maybe the toughest one, our biggest challenge, in part because of distance and in part because of a slightly different business culture would be Santa Barbara and Spain but we're doing okay there too.

So, in summary, I am very please with our performance and expect another solid year for General Dynamics. With that said, I'll turn it over to Mike to give you some further detail and color on the quarter in each of the business segments.

Thanks Nick and good morning again ladies and gentlemen. As Nick indicated, I'll add some detail to what he shared with you and then we'll get right to your questions. Let's begin with the Information Systems and Technology segment or IS&T as we refer to it. Sales increased $259 million or 42 percent. The $2 billion Bowman program which is the secured digital voice and data communications system for the UK armed forces that we won competitively last year, is the largest single program contributor to the 18 percent growth. The acquisition of Decision Systems from Motorola late in September of last year, is the other growth driver. Operating earnings have also increased both in volume and rate. Margins were also helped by the elimination of good will amortization but somewhat negatively impacted by conservative bookkeeping on new programs like Bowman.

IS&T backlog is $4.9 billion. Essentially all of that is funded. It's pretty much unchanged from the end of the year, and it's $2.8 billion above what it was one year ago.

Moving on to Combat Systems, sales have increased $135 million. The Striker program, along with increases in the Marine Corps Triple AV program, have led to a 23 percent organic growth, while Santa Barbara, the Spanish armored vehicle and munitions business acquired in July of last year, generates the balance of the revenue growth.

Operating earnings in this segment have also increased, benefiting from the absence of goodwill and amortization, but offset by a lower margin rate contribution from the Striker start-up program and the Santa Barbara acquisition.

Combat Systems backlog is $5.5 billion, of which four billion is funded. Total backlog at year-end was $5.2 billion, of which 3.4 was funded. One year ago the backlog was 3.3, so the bottom line in Combat Systems is, obviously, a significant increase in backlog over the last 12 months or so.

Marine Systems revenue of 864 million is essentially unchanged from the first quarter last year and relatively constant in each of the three shipbuilding businesses that dominate this segment.

Margins are lower than last, year as work on mature programs with higher earnings rates, like Seawolf and

Sealift program - that work declines and is replaced by design development and initial construction on new programs like the Virginia-class submarine and Electric Boat, the LPD program at Bath the T-AKE, TOTE and BP tanker work at NASSCO.

Having said that, you may recall that our margins dipped into the seven percent range in fourth quarter of '01 for several reasons, including significant award delays and bid and proposal activity.

In response to one of your questions, I indicated that I expected '02 margins to get back into the eight-percent range, and this quarter we are at 8.4.

Marine backlog is 9.4 billion, of which 7.1 is funded. One year ago, total backlog was 10.5 billion. At year-end - to 2001, the backlog was 10.1 billion. I need to remind you that in shipbuilding, the orders come in very large blocks and spike the backlog intermittently.

The Aerospace segment - the revenue growth is primarily the result of the G100 and G200 deliveries that occurred in the quarter. And for those of you that track deliveries by airframe, I'll break down the details.

In this quarter, deliveries are as follows: green aircraft - GIV-SP - eight, GV - seven, G100 - four, and G200 - eight for a total of 27. Completed aircraft - nine GIV-SPs, six GVs, three G100s and seven G200s for a total of 25.

Operating earnings - I'm sorry. I did - no, I'm sorry. I just skipped a place there. Operating earning have been constant in the segment quarter-over-quarter as

indicated.

With regard to pre-owned inventory, Gulfstream had six available for sale, all taken in trade during the quarter. As

said, their backlog stands at 6.4 billion, of which 4.5 is firm. And backlog at the end of December, after adjusting for the Avolar termination, was 6.2 billion.

Firm backlog has increased in the quarter and is $900 million higher than it was a year ago.

So, in summary, we had a good quarter. We are where we said we would be, and all indications are that we're on plan for the year. With that, I'll turn it back to Ray.

Thank you,

, and,

, we're now ready for you to instruct folks as to how to - they can answer - ask questions.

Thank you, gentlemen. If you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the pound key.

If you're using a speakerphone, please lift the handset.

Our first question comes from Steve Binder of Bear Stearns.

Steve, are you there?

Mr. Binder, your line is open.

Sounds like you should move on.

OK. I'm going to go to our next question. Our next question comes from Sam Pearlstein of Wachovia Securities.

Good morning.

Good morning, Sam.

I was wondering if you could talk about, in the aerospace business, the deposits you've received from Avolar. How was that treated? Does it still just sit on the balance sheet, or did any of that go through the income statement in the quarter?

Sam, we're reluctant to get very deeply into that. I think, pretty much, the investment community understands that we have 51 million of deposits.

None of it has been returned. I can tell you that a portion of it was run through the income and expense statement, and a portion has been reserved. Beyond that I do not wish to go.

OK, but is it something we should see on an ongoing basis, or is this kind of the one period where we see that?

Well, look. I think if we have success in remarketing the aircraft, which I have every reason to believe we will, this becomes a non-issue as we go through the year. All right?

It sorts itself out. Contractual disputes go away. Results are what they are. I don't want to talk about it until it's solved itself between the parties. But I don't think it will be an issue with respect to our earnings.

OK. And then in terms of - you said you're still comfortable in terms of where things are for the year, and I guess I'm just trying to think about how the quarters flow through the year with the deliveries, in terms of, you know, some of these deliveries and having to remarket the plans. Does that push some of the earnings further into Q3 and Q4?

It has no impact on Gulfstream's activities. I think they pretty much came out where I'd hoped that would come out.

They covered fairly nicely, considering the short notice. You know, I mean, we're selling airplanes. You could see that by the order book. So I think you're trying to micromanage the Avolar situation. I don't think it's an issue.

OK. And then a couple other questions. On the Triple AV program, there's been talk about that program being restructured. What does that mean for you?

Nobody's talked to me about it.

OK. I guess in the press I've read that.

I've read all kinds of things in the press, but there's been no conversation between us and the United States Marine Corps about any restructure of the Triple AV program. It's fully funded in the budget, fully supported on the Hill. You may know more than I do, but I haven't had any discussions with anybody about restructure of the Triple AV program.

OK.

I can't imagine a more transformational program for the Marine Corps than the Triple AV program, so I ...

OK. And the Future Combat system - in the - in your debriefing, was there anything that kind of indicated what might have gone on in that competition and what might - what you might have done a little bit better?

I think the

liked our proposal very much. Beyond that I don't think I want to go.

OK. And then the last question is from a lot of the activity that's been going on so far, have you see any benefit in the Primex businesses - the munitions? Has that helped at all?

Primex is doing a very good job, but what we now have named Ordinance and Tactical Systems.

I think it shouldn't be surprising that with depletion of stores in the conflict that we get orders out of a munitions business. And I think I've been particularly pleased with the foreign orders that they have experienced.

So I think that business is coming along quite nicely, and I think their margins are working their way up as well. So I think, as the year plays out, that that will be a very good addition to our Combat Systems group, and it'll work out very nicely.

OK. Thank you very much.

Thank you. Our next question comes from Steve Binder of Bear Stearns. Mr. Binder your line is open.

I think he's gone on to other business.

I'm sorry. Our next question comes from

of

.

Good morning gentlemen.

Good morning Byron.

Just on Avolar and the Gulfstream Margins in general, was there anything else unusual in Gulfstream during the quarter? Cause if you even start making some reasonable assumptions, it looked like the underlying margin in the rest of the business took a hit.

No, I don't think so Byron. There was, I think, some unusual things. For example, there was a reasonably significant charge with respect to closure facility that depressed the margin by as much as $9 million. But mostly you're seeing a product

. I've compared quarter over quarter with respect to manufacturing margin. We fine there, improving. Particularly improving on completion. In the year ago quarter, we made a small touch of money on used aircraft. This quarter we didn't. We may have lost a million dollars but relatively insignificant variance and the margins in the service business are relatively comparable within basis points of each other. So, if you look at it by product line and the way we manage it, our margins are improving. What you're seeing here is a combination of mixed ship and a charge.

OK. So, in the quarters going forward in the absence of this, you expect that mix shift kind of normalizes back to a level that you should be able this type of margin in the first quarter, maybe even improve on it.

Yes, I think so. I think the margins.. the only caution we've ever given with respect to margin because I'm very, very satisfied with the great job their doing in addition to

Gulfstream across the line is we had indicated to the investment community in the fourth quarter. And in the first quarter as we signed up new business, we experienced some pricing pressure. Particularly with respect to the

product. As a result of preowned inventory availability and some new inventory buildup at our competitors. But apart from that, and we don't expect that condition to be permanent, we'll speak to that a little later. But apart from that, I think you'll see very good margin performance out of Gulfstream.

OK. Nick, there's been a lot of speculation about your DOD customer wanting to increase profit margins really kind of across the board for the entire industry and some pretty dramatic numbers have been thrown around. Do you have any views on that subject?

I'd be pleased to say

.

OK.

When that

is handed to me. I appreciate very, very much Pete Aldridge's approach on this subject. He's been working at he's a thoughtful man who would like to see more commercial terms be applied in our industry and I think industry is trying hard to work with him to get there. I don't know that it's something the investment community needs

on right at this moment. But we certainly like that thought and the colloquy that's being developed on the subject right now.

What do you think needs to happen for us literally start dialing in substantially higher margin expectations and to.. it's not an issue this year but is it something that really could have an impact on 2003 and 2004?

Well, sure. I mean I, look, I think the conversation itself, just the very conversation itself gives program managers and contracting officers a little bit of a green light to set better terms and conditions as they negotiate with their contractors on major matters. All of constrained, of course, by the budget itself.

Right.

ON the other hand, I'm less, if I wanted to seize on something, Byron, I'm.. I suppose I'm less optimistic from a timing standpoint to when do we actually get the commercial margins in our industry. I am, however, very intrigued and look forward to working with the administration on the question of setting appropriate incentives for the contractors to reduce costs and keep an increasingly large portion of those efficiencies. I think that's real in this environment and could really happen and lead to an enormous opportunity for us if we act appropriately given the opportunity. So that's a piece of it that I can get awful excited about. The margin thing is going to take time.

Yes. OK. I'll turn it over to someone else. Thanks.

Our next question comes from

of

van ruemore: Hi. It's

. Could you follow-up a little bit on the services at Gulfstream? You said that the margins were within one point of prior year. Where was the volume and are you seeing a build in backlog as people come back in that sector?

Kai, I'm gonna do something for you here that gives you a little bit of an unusual opportunity. We were having some meetings here this morning with

and he's just walked into the room. He heard your question. I'm gonna

this one over to Bill. And also make him available as the questioning proceeds to answer questions particular to his aerospace group.

Thank you Nick. Kai, good morning. The service business is beginning to firm up in comparison to where we were last fall in the third and fourth quarter and our visibility going forward, while it's not as far out as we would like it, of course, it is improving to where we are beginning to firm our 30 to 60 day view of that business. You may remember that we talked in our cost reduction efforts about having people in that area of our business last fall working a partial work week. We have returned the entire work force to a 40 hour week at this point and we are optimistic about continuing to be able to deliver improving volume out of that part of the business and sustaining margin.

Bill, volume, as I recall, is about what it was quarter one a year ago.

Yes.

Or close.

It's fairly level with what it was and we have an expectation that some things have been deferred that

start to flow through that business as people get more confidence in the economy.

van reumore: OK. ON the used aircraft, you had 6 in inventory. Can you tell us, did you make money on any? How many did you sell in the quarter? Did you make money and could you give us some color on where you see the used market going for your product?

Yes. We sold a couple in the quarter. We, I think Nick mentioned, probably operated that business at a very slight negative margin for the quarter. The pre-owned markets, I would, you need a segmented view of it. At the upper end, in the

market, Nick commented earlier, we've seen a slightly elevated inventory on the G5 side but that's, I think, very manageable. The G4 SP market pre-owned has remained very strong and there is not an inventory level available for sale there that gives us concern going forward. When you get into some of the older stage two aircraft products, you are beginning to see an increasing awareness of the environmental concerns regarding those products and, consequently, some price softness. There is a elevated level of pre-owned inventory at the lower price points in business aviation that's of concern to not only Gulfstream but the other participants as well. So healthy in the new stage three, new aircraft pre-owned market and some price adjustment because of increased inventories and environmental concerns at the lower price points.

van reumore: OK. Last on for Nick. You've got a couple of program competitions coming up. Could you tell us anything about DBX

? When might we expect awards and how do you feel about that? Any color you care to give?

I can help you with dates Kai. The DBX program is supposed to be awarded in April and we hear that the Navy is on track with respect to that and I don't think how I feel is relevant right now. We'll have an award soon and we'll know. And joint tactical radio system is in May and, once again, we're in a dog fight. A couple of good teams. We're paired with Raytheon in that one. I've gotta like our position but we'll see soon enough.

van reumore: OK. And do you, last one, do you see any opportunities in homeland security that are new?

Well, Kai, I think, we, like everyone else are working business development questions related to homeland security and trying to fathom where the money is going for that important topic. And we are beginning to see opportunities emerge that we are working. But it's always hard when you're getting new orders, and we did. We got several billion in defense related orders in the quarter, to have someone, even internally, sort of apportion what of that order book relates to homeland security and what relates to the traditional defense of the nation because they begin to blur in our minds. So, do I think that that is in the long-term presents opportunities to the contractors, including General Dynamics? Certainly. We are going to live here in a society that more carefully protects itself and it's borders and our activities domestically. And that will result, in fact, in some additional business for the contractors.

van reumore: Great. Thank you very much.

Our next question comes from

of Bank of America.

Nick, hello. Two quick questions here from London. Really on the naval side. First of all, what is the potential with the in fighting going on with regard to the naval aviation programs for an increase in the U.S. Navy shipbuilding budget? And do you think that's realistic by the end of the year? And the second question is

, is there still an opportunity for production swap between you and Northrup in that area?

OK Nick. Good questions from London. Thanks for being with us. Your first question is about the Navy budget and, of course, the administration's budget, '03 budget, is what it is. It has five ships in it. That plan supports our plan. The question really is can we entice the Congress of the United States to plus up that budget and add a ship. I don't want to handicap that but I can tell you I'm spending a lot of time working the problem. So, we're trying hard. And it may well relate to the second question you asked and that is the swap of LPD's for DDG's that's been reported in the press. And when people have asked me about it, I've said it's probably difficult to do. Interestingly enough, our partner in the LPD program and our

competitor on the DDG 51 program has indicated that it's not so hard from their perspective. So, but nevertheless, I think it's clear and the public knows that conversations have occurred with the United States Navy and they've been three sided. And I'm unwilling to handicap those because I don't think it matters what I think until they mature into agreements and we won't sign an agreement unless it's for the benefit of General Dynamics. And I think that won't happen unless it's win win win for all three parties to the agreement. And I think the folks that are talking to each other are working it in that spirit and so I hope that it gets done but I don't want to make any kind of predictions until we get there.

Great Nick. Thanks for that and just one quick one for Bill if you're still there.

Bill is still here.

Bill, the six aircraft that remain from the Avolar business, is there a chance that those were obviously, you sold them wholesale I imagine because it was quite a sizeable order. If you were to place those in one's and two's into the market, first of all, how easy do you think you can get those away, and secondly, could you even get them away at a premium so the wholesale prices you achieved with Avolar.

We will resell those airplanes and relatively quickly, some already. And we would anticipate in single aircraft transactions to achieve a higher margin per unit than we had in our pricing

.

Great. Thank you very much indeed.

Our next question comes from

of

.

Good morning. My question just relates to some noise I've been hearing from the

community, the

community with respect to TRW and I don't know how much you're willing to comment. You have commented in the past that you guys weren't interested in adding another leg to General Dynamics businesses. I wonder if that's at all changed given the actions that TRW has announced in terms of putting up the various pieces of their business up for sale.

Phil I don't have any comment at all with respect to that matter. I think that it's probably more speculation about that in the press than I care to be involved in. So, no comment.

Okay, thanks.

Our next question comes from

of Bear Sterns. Mr. Binder?

He's probably listening to two conference calls at the same time. Why don't we keep moving on. He'll come back.

Thank you. Our next question comes from

of

. Mr. Church your line is open.

Yes, my question has been answered. Thank you.

Thank you sir. Our next question comes from

of

.

Hi Nick. How are you doing?

Good Tom. How are you?

I'm doing well. Thank you. I have some questions, a couple of questions for Bill. I was wondering if he had seen a difference in the market share of new orders of the G200's versus the citation 10 which seems to have a pretty large backlog at this time?

Tom, I would offer that, I would answer that by saying we're pleased with the rate at which we're taking new G200 orders. It's meeting or slightly exceeding our expectations for where we thought we'd be at this stage. It's difficult to tell how that really in a quarter to quarter ballgame compares to the Citation 10. So I don't think I want to comment on that.

OK. The other question I had is what sort of demand are you seeing from fractional share ownership programs? Is more of your demand coming from that area or from single aircraft purchases of a individual nature?

Well, as far as regarding new order intake in the first quarter, predominantly, it was the single aircraft purchaser in their traditional commercial markets along with one government sale and we see strong confidence in the fractional sector itself going forward. And part of what we did in the first quarter was to firm up in our backlog some additional orders for executive jets.

So, their demand is tracking with their orders pretty closely.

That's correct.

Tom, to put it in slightly different words, something over 80 percent of the business that Bill wrote in the quarter was the commercial business and the one government order, 80 plus. Something less than 20 percent was the exercise of a number of options by the executive jet making those options firm. So I'm assuming that because they are an extremely rational customer that they firmed up those options because of their sales activity and their need for the aircraft. So, all in all, it was a pretty well balanced order for Bill that pretty well fits his profile.

Both by model, Tom, and then also a fairly predictable split between North American business and international that tracks to our historical market share.

Have you been able to move to the it looked like an automated riveting system that looked like you were going to be developing into your operating process this year? And does that factor into a better margin improvement going forward as your order rates return to, I shouldn't say return, they continue along the same path?

Well, we do bring that

on-line mid year this year. When we made that investment Tom, the primary rationale was that while it would help our margins very slightly, it would improve our the quality of our manufactured article very significantly. And so the margin improvement that Nick talked about, our being on track for has that baked into it.

OK. And Nick, I was just wondering, in the information systems area, there seem to be a lot of smaller shops that are in this area. Do you still see a pretty full table of acquisition candidates in the information systems area to fill out other niches of your market?

Tom this is a marketplace, at least the way I see it, that's kind of at an inflection point. There has been a wide and diverse number of competitors filling different niches. Some small, private companies, others somewhat larger but still small publicly held companies and, yet others that are appended to large commercial companies, in addition to the traditional defense companies. And it's clear to me that a consolidation is occurring. So, we're constantly looking at opportunities and having conversations with folks. How quickly they mature in the transaction sometimes is hard to say but I'm comfortable with the deal flow in that area.

And just one last question for Bill. It seemed like during the quarter, while we had the Avolar business going away, that there was a large major government contract that was signed. Did that help you with your flow of business given Avolar's demise?

Actually Tom, you're referring to the large contract that we have with

and we did do that during the quarter. We had anticipated that in our planning and that the Avolar, really look at Avolar, and I think Nick's characterized it just the way we're looking at it and that is, it is at this point a contractual dispute between the parties and operationally, and from a financial performance point of view, our view is we'll maintain our production plan as we had set it for the year. We'll sell those airplanes as has been discussed commercially and the impact of that on our financial performance will be very short lived and we're on about our business.

Tom, I'd like to reinforce that. I think from a financial point of view, given the sales activity in the fourth quarter and in the first quarter of the order intake, we see no risk to the production rate that Bill had previously set out at Gulfstream intends to fully produce those aircraft and don't feel exposed at all. By what you might call the Avolar overhang. It's within the sales plan. In fact, we don't even talk about them here as Avolar aircraft anymore. They're Gulfstream's. The

available and customers, I think, readily available.

Tom, I think the other characteristic of that, just to sort of close that discussion, is the profile of - when we looked at the Avolar opportunity in total, it represented fairly substantial future business. It occurred very slowly over a 5 to 6 year time period and therefore we're able to deal with this change early in the program in the ways that we've discussed.

No, I'd seen their schedule and they were your deliveries. Nick, I was very impressed by your comment that you felt business activity was improving. Is that because of the actions you're seeing at Gulfstream?

Well, in part. IN part, we're also seeing if you look at our IS&T group, we have a commercial component there and most of the communications world commercial end suffered, we're seeing a return of business there. I wouldn't call it robust but it had really been dormant and the guys are getting orders there. They're being asked to infrastructure work again. So, opportunities are beginning to pop up. So at least as far as we have an insight into the market and we look at it both through Gulfstream's eyes and then through principally our IS&T group, we're seeing some renewed activity that's healthy.

Well, another great job at managing the business. Thanks a lot.

Thanks Tom.

Our next question comes from

of

.

Good morning and hopefully I'm not repeating anything Nick but one of these quarters, I hope you and Boeing will stop overlapping by a half hour.

Hey George, it's their fault.

I know and that's what they say. I figure you guys are big enough that somebody ought to be man enough to move it the half an hour.

We'll try to honor your request

.

Nick did you comment earlier about how many open slots you had for this year. If I remember from the fourth quarter, you were saying that there were four or five G4 and G5 slots and now Avolar was gonna be another 7 out of the 12 this year. So, by my calculations you would have 11 or 12 slots. Obviously you got some orders in the first quarter. So, at this point, how many would you have yet to fill?

George, I'm gonna - you might have missed this but Bill Boyster is here in the room and we've tried to shy away from counting the belly buttons on these planes for the investment community. But to speak in terms of percentages of

production available for sale and I'll turn this one over to Bill and he can give you some recalibration here.

George, I think the last comment we made had indicated we had about 30 percent of our available production this year was for sale and we're at a point now where, without changing the production rate, we've got slightly below 20 percent now available for sale. So, we made good progress on that in the first quarter and that includes what had been planned for the business with Avolar so I think we're in pretty good shape there.

And Bill if you go to next year, I know Nick had commented that next year was a stronger year. I mean at this point, what percentage of next year would be available?

Well, actually, George we'll work through our wager this year before we actually set a rate for next year and we've got the G5 SP coming online beginning right at the end of this year and then we convert the G5 line fully to G5 SP in the in 2003. So, we have a good strong backlog for G5 SP throughout 2003 and we - so we're very comfortable with that and we'll handle our G4 G200 G100 rate decisions later this year.

And just to follow-up Bill, the below 20 percent this year, would that be about equal with the G200 and the 4's and the 5's

Yes, it's not a predominant - there's no predominant disparity between those. That's right.

OK and one last one for you Nick. You commented that you took in some of the deposits in the Gulfstream profit this quarter. My guessing would be that that had to be somewhere benefit of 5 to 10 cents a share for earnings.

George, if I were you, I wouldn't guess but the word I used was portioned and portioned to me suggests a conservation approach but I don't think I wanted to get into that publicly. I think it will be a contract matter between us and Avolar and, in any event, it goes away with the passage of time.

And then on last one Nick. I don't know whether you or maybe Mike had commented earlier that the

margin this quarter was somewhat above what I was expecting given comments relative to the fourth quarter margin. Does that suggest that this year Marine will do somewhat better than what your guidance is because the first quarter was somewhere already at the guidance?

You know George last year when - in the fourth quarter when we were down close to 7.5 percent, I don't really recall the figure,

indicated that he thought the quarter was unusual and that we would return in '02 to 8 percent and in excess of 8 and that's kind of the way the quarter came out. So, we don't see the margin rate getting back down to that fourth quarter level.

But usually Nick the fourth quarter margin tends to be better than the first quarter. So, given that this quarter was already north of 8, I'm just wondering whether you're gonna be somewhat higher for the year than what you were suggesting at the end of the fourth quarter.

Well, I don't want to bet tendencies but we prayerfully want that to happen. And we've worked towards that goal and, given a break or two, we're working hard on improving our Marine earnings here. There's a couple of things

George right including that someone else eluded to the DDG for LPD swap. Some of those things happen then we can make some promises but right now I think Mike's guidance is pretty much steady as she goes here.

And the combat area, the margin was down a little bit. Kinda guess Santa Barbara was somewhat worse than the fourth quarter. Can you just kind of update what's going on with Santa Barbara.

Well, you're correct in the sense that we Santa Barbara is at the moment a drag to the overall margin but will get better as the year progresses and I have a high degree of confidence in this team. They have the volume now going through their facilities and they'll work on efficiency throughout the course of the year.

But any reason why, Nick, the fourth quarter I thought was profitable you had said on the call and this quarter wasn't as to what happened sequentially?

I didn't say it wasn't profitable but there is a little bit of a score at the end of the year on units of delivery, right?

Right.

And you don't have that in the first quarter. So that hurt margins a little bit. It's a whole complex series and takes here George and you're just focusing on one unit and that's not the only reason. We'll get better is what I really want to promise.

OK. Very good Nick. Thanks a lot.

And Patty, I think we have time for one more question and then we'll need to wrap it up.

Thank you. Our final question comes from

of

.

Thanks. Thanks again. It's just some follow-up and really some nits. The tax rate going forward Mike, we're kind of first quarter rate is what we should be thinking about for the balance of the year or should be step it up a bit?

I think you should assume that we'll be about where we have been in the quarter Byron.

OK. Cash flow during the quarter, did you guys buyback any stock during the quarter?

Yes. We bought 130,000 shares in the quarter.

And, the final thing, it's probably more a question for Bill if he's still there. But, I'm just curious, on the G100 and G200, given all the stuff that's going on in Israel, is there any fallback or kind of contingency plan if there's any sort of disruption? The reserve call-ups don't look like they're having that big an impact on the economy but can you give us any sense, is that something you're even concerned about at this time.

Well, obviously, we're very much aware of what's going on. We talk to our friends at

regularly about it. They expressed some strong confidence Byron and it goes about like this: In 34 years in business over there in that environment, they've not missed scheduled deliveries and they're not in a position to miss it at this point. So they product flow is coming from the factory. The quality is good. As respects to the reserve call ups, I'll just share a little bengeit with you.

who's the chairman of IAI, I asked him that question Byron and he got a twinkle in his eye. And he said the good news is is it's not a problem but I had to ask myself why that was and he said it has to do with the average age of my workforce.

OK.

And so it is something that's on our mind but I think it's in hand the immediate technical support and spares for the in-service products are here in North America and flow through the same system that supports the G4 and the G5 in service and I'm confident that we can sustain the product.

Great. And last thing Bill, is there anything new or different in kind of a look or feel of customers that you're seeing? I think we kind of went through the fractional programs but geographically, even kind of broad industry

, brand new buyers. Are these people stepping up from other people's airplanes? Any color your could provide would be helpful.

Well, I think, first of all, we are just beginning to see the Fortune 500 companies get off the bench. And so we will welcome their return to our business flow and I think that has to do with their confidence and where they're going. We have developed a substantial number of new customers for Gulfstream inverting from other models. About the normal level of what we would call the concept customer Byron. So I think that would characterize it.

And geographically, no real change in different parts of the world

.

No, we did have a couple of noteable successes in the past quarter though we did sell the first Gulfstream 200 into South America and Brazil and we think that's a good airplane for the South American market because of it's range in size. And we also had, I think as you know, an order in China for the Gulfstream 200.

Right. Right.

And that's the first Gulfstream sale in China.

Gentlemen thank you.

Thank you Byron and thank all of you for being on the call. And if you have any additional questions, I'm Ray Lewis. My number is 703-876-3195 and I'll be returning your calls as soon as I have a quick bite to eat. Thank you again, and good afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program; you may all disconnect. Everyone have agreat day.