通用動力 (GD) 2002 Q2 法說會逐字稿

Welcome to the General Dynamics second quarter financial results 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 you to your host for today's conference, Mr. Ray Lewis, staff vice-president, investor relations.

Mr. Lewis, you may begin your conference.

Thank you very much, and I'd like to welcome all the people in the investment community as well as members of the press who are listening today.

I would remind you that should we make any forward looking statements today, they are, as one would expect, our best estimates of what may happen in the future, but are, of course, subject to the risks that are in front of any business.

And with that said, I would like to turn this over to our chairman and chief executive officer, Nick Chabraja.

Thanks, Ray.

Given the uncertain and somewhat unsettle economic environment, at least as it impacts our commercial businesses, I believe we had a very strong quarter in the second quarter.

Our revenue grew 19 percent year over year, earnings per share increased 15 percent, consistent with our target, and our business units generated 300 million in cash.

In terms of segment performance, again, this quarter as in the first quarter, information systems and technology and combat systems led the way.

They each reported very significant sales and earnings increases over the prior year.

And our aerospace segment turned in a really solid quarter given the overall uncertain business climate.

Their operating earnings are flat compared to last year, but on track with their operating plan and consistent with the guidance we have been giving.

In addition, in terms of orders, revenue and deliveries, they're on plan at mid year and in every operating metric.

Candidly, if there is a segment where we under performed, it would be marine systems, program delays at Bath, and design to production transition problems at [NASSCO] on the tote ships negatively impacted revenue and, of course, their earnings margins.

But un guard I'm guardedly optimistic that we have things at hand and should see some improvement by early fourth quarter and that most of the issues in the marine segment will be resolved by year-end and we look forward to a strong improvement next year.

Looking ahead to the balance of this year, all of our core defense programs, including shipbuilding, continue to be well supported and funded.

In this third quarter we expect to conclude the definitization of contracts with the Navy for the ships coming to us from the swap of LPD's or DDG's, and the concurrent award for addition of four additional DDG's as part of the new multi-year contract award.

So, you should see, we believe, a considerable bulge in our backlog up at Bath iron works and in the marine segment to give us hopefully a very fine opportunity going forward to improve margins.

We also remain optimistic that the Navy and the Congress will find the money to fund the award of at least the five boat Virginia class submarine multi-year contract for electric boat.

Both of these actions would add significant backlog to the marine group in the second half, as well as stabilize production at the shipyards for several years, and continue to provide opportunity for productivity gains.

Combat systems and IS and T with their very strong core franchises will continue their growth throughout the rest of this year when compared to last year's performance.

Gulfstream, while performing well with their production processes, will continue to face the challenge of selling into a soft economy.

So, in summary, we had another good quarter.

Our fundamental business model continues to be viable.

Our strategy is clear, and our focus on execution continues to add value for our investors.

I'd like Mike Mancuso, our chief financial officer, to provide you with some additional insight into these numbers.

Thanks, Nick, and good morning, ladies and gentlemen.

I'll comment on the financial information attached to the press release, give you some detail on the backlog in each segment, talk a little bit about deliveries at Gulfstream, and then ask Ray to kick off the Q and A process.

First off, if you will focus on the sales and earnings by segment, you'll note that information systems and technology and combat systems, both sales and earnings have increased substantially for the quarter and for the half year.

Both segments ' earnings rates have also increased.

This revenue growth in both segments is a product of significant organic gains as well as benefiting from acquisitions made during the third and fourth quarters of last year.

Funded backlog in IS and T is $5 million and the total backlog is [5/1].

That is an increase of $3 billion from this time last year.

Backlog is 4.1 billion.

Their total backlog is 5.2 billion.

This is 2 billion higher than last year.

Marine systems sales and earnings are lower than last year for the reasons Nick noted in his remarks.

Funded backlog in the marine segment is 6.9 billion and total backlog is 8.8 billion.

This is 1.4 billion lower than last year, but as Nick said, it's likely to grow substantially in the third quarter.

The aerospace revenue gross is driven by the galaxy acquisition.

Earnings are just about even with last year.

Pricing pressure, marginal losses in pre-owned aircraft sales, and higher R and D are the primary reasons for the lower margins as well as some timing issues.

During the quarter Gulfstream delivered 24 green and 29 completed aircraft.

This compares to 17 green and 21 completed deliveries last year.

This year's increase is all in the G-100 and G-200 midsize categories.

They sold four pre-owned aircraft this quarter versus one last year.

And the funded back log in aerospace is $4.3 billion, and that's down marginally from first quarter of this year.

Having said that, I'm going to turn it back to Ray to begin the Q and A process.

Thank you, Mike.

Operator, if you would, explain to the folks how they can get into the queue for the Q and A and we'll take it from there. 00:38:18

Thank you, sir.

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 pound key.

Once again, if you have a question, please press the 1 key.

One moment for our first question.

[Pause]

Our first question comes from Cai von Rumohr of SG Cowen.

You may proceed.

Yes.

Could you give us a little color on the orders at Gulfstream?

You said the funded backlog was down.

Any color on kind of what the orders were, how many remaining slots you have to fill for the balance of this year?

And maybe, Nick, if you have some kind of color on the town of demand.

Cai, you will recall that Mike gave you the number of deliveries that we made in the quarter which were relatively significant.

He also mentioned that backlog was down modestly.

From that one could conclude quite reasonably that Gulfstream had a good quarter in terms of the receipt of orders, and that is true.

We are doing particularly well receiving orders on Gulfstream 4 and 5s.

I would say we had a disappointing quarter on the G-200 and an adequate result consistent with plan on the G-100, but for the half we are on or ahead of the orders budget as is apparent from the state of the backlog.

The pipeline is adequate, but there is pricing pressure that probably derives from available inventory, both new and pre-owned in the marketplace.

I think the guys are dealing with that fairly well.

Maybe that addresses your question, Cai.

If not, maybe you can make it more specific.

Okay.

I guess just a follow-up.

Could you comment, give us any color on the number of remaining slots open for this year, and the pricing pressures I think, you know, there's been substantial pressure on the lower end of the market.

Is that pricing pressure uniform across the product line?

Obviously I'd expect it on getting rid of the last G 5's, but how are the G 4 S P?

That's almost a month to month question.

Interestingly enough, I think on the 5 product and the 4 product, we had a good margin month in June which would indicate confirming - some firming, but there has been softness at the G-200 and 100 price point.

All in all, our guys seem to plot their way through and had a pretty good quarter.

And they're pretty much where I had planned and hoped they would be at the mid point of the year.

In terms of what remains to be sold, I'm not sure I have the exact - we had about 20 percent of the production slots available for sale.

We had a pretty good quarter to quarter, so that number is less, but I don't have the specific detail on that.

We don't anticipate problem selling out our 5's and the 4 production slots.

We may not do as well on the G-200 as we had planned, and may do a little better on the G-100.

But, remember with respect to the smaller aircraft, the production risk is with our revenue share part.

A last question.

Could you give us a little more color on the issues at Bath and NASSCO and kind of, you know, the path to kind of recovering from those issues?

Well, the Bath issue, let's get this one straight, was sometime I think towards the end of last year - I can't remember the quarter, Mike, we lowered our booking rate on the DDG program at Bath as a result of a wide variety of factors, including the major construction project we've had out there.

But the team is real focused on getting productivity out of the new land level facility.

They're doing better.

The metrics are trending favorable and the swap will give them a splendid opportunity now to run that productivity through a much larger backlog.

So Bath is stable to improving, and we're looking forward to a particularly good 2003 at Bath iron works.

NASSCO had a little problem with the tote ships.

It was really an incomplete design using some new design tools, and we had to start construction of that ship really before our design was perfected that led to considerable inefficiency on the first ship, most of which will be cured for the second boat.

Well, that's both the good news and the bad news.

There's only two boats.

If we had a dozen of them, we'd make an awful lot of money on the last ten, but we only have two.

So but the good news is they'll be out of the yard in about January or February.

So that problem will be behind us.

And the lessons learned from the problem it left us in a very attractive position to deal with larger runs of ships which will be the four - be a couple tankers and the 12 ship, T-AKE program.

So I'm confident that NASSCO will do their job.

I'm particularly pleased with the new panel line we've put in there, steel processing facility that's quite sophisticated, and I think will lead them to very healthy margins when employed together with really good processes they have.

So I'm not pleased with what we did in the quarter there, but I understand it.

I understand the root of it, and I understand the fix, and I'm very comfortable.

We take no special charges today, nor have we.

We're just running it through the P and L and taking our medicine.

And all in all, pretty much on track.

Thank you very much.

Thank you.

Our next question comes from Chris Mecray of Deutsche Banc.

You may proceed.

Hi, there.

I was wondering, it's slightly boring, but if you could run through the mix of aircraft from the production side.

Yeah.

What we've delivered, Mike, you've got that, don't you?

Chris, do you have a pencil?

It's a little hard to hear, may.

Green 4 deliveries, these are G4;

SP green deliveries, nine;

G5's, nine;

G-100s, two; and G-200s four.

That's your total, 24 green deliveries.

Completed aircraft eight G4's; 13 G5's; two G-100's; six G-200s.

That should total 29.

Okay, great.

Probably the first guy to ask a question on the aggregates business in a while, but you did have a nice boost there in the margin.

Can you give us a read on that?

Last year, Chris, you may recall we were in the throes of disputes with central Illinois power company.

We had taken a reserve this time last year which depressed earnings.

Obviously that reserve has not repeated itself this year, so we're higher this year as a result of the absence of the charge we took.

And our material service company or aggregates business in the Chicago area is doing a little better this year, too.

So the combination of those two has resulted in improved earnings in our other segment.

Okay, great.

And on the marine side with Virginia class multi-year, you're still presumably linking that to a settlement on the A 12 and are you actively negotiating that and any timing sense on that.

Chris, I think that there's two ways to get there.

The A 12 is one avenue, because as you have learned from the popular press reports, that's part of the discussions in A-12, and I'm hopeful that I remain - I remain hopeful that that case can be resolved on some intelligent basis.

Does it wind up helping Virginia class program, but there is a considerable amount of pressure, I think, within the Congress to help that program and the pressure is building.

So if it doesn't happen this year, I have a high degree of confidence that by next year it will be in FY04 we will have a multi-year and it will probably be bigger than a five-year, five-ship.

May well get up to seven ships.

So I'm very optimistic about that.

What I can't tell you is the timing.

Okay.

Lastly, on the marine side, the swap agreement now, Don, can you walk us through the next year or two?

Does it really change your view of results, give you any up side or simply affirm your view on where you stand from a failed and margin standpoint at Bath?

It gives Bath a considerable up side.

If you think about the task that they had before, they were going to build LPD 19.

And in order to build it, they needed to create and time a hole in their production schedule.

That was part of the productivity problem they were having because the design kept slipping to the right.

We planned the production.

It wouldn't show up, and this was constant, right.

And it was depressing the opportunity to be productive up there, together with a few other problems that they had.

So instead we substituted a measured predictable large backlog of the same kind of unit on a fixed price incentive fee contract that gives us the opportunity, if we perform, to make a handsome profit, and at the same time (handsome) (Mark) provide a return for our Navy customer because they'll share with us on the share line on any under runs of that contract.

So, it looks to us like Bath has an opportunity to do a good job, and also to have a very happy customer.

The situation at NASSCO simply gets better as they also have improved their productivity with capital.

But as they move into ship production in contracts where they really have an opportunity to do much better than on the two-ship commercial program that was bid.

You might recall this.

It was bid a little tight because they needed to fill up the time in the business program they needed to fill a little bathtub between the LMSR program and the T-AKE program.

So they bid a tight, ran into a little problem and it's depressing margin there.

But I expect them to do very well, and I expect this year and I've said this all along, I've been saying this to investors all year long, that we will struggle in the marine group this year.

We'll probably meet our plan or at least come close to it, the marine group, and that this will be the worst year in terms of margin that you will see from us.

And I will step it up next year.

In fact, Mike, is it fair to say we should start to improve this year?

Given the final negotiations or concluded on DG swap, we can have that backlog and factor that into our production, yes.

So I guess what Mike is saying put another way is probably in the fourth quarter an E A C valuation at Bath may well result in improved booking rates, but we'll have to wait till we get there.

But I'm optimistic, you know, this has been the year where I S and P and combat systems have had to shoulder the load, and they've done it.

And next year we're going to look to marine systems to step it up.

Can you wrap that up into the top line, guidance picture?

For the year?

This and next year maybe.

Oh , I don't know.

This year I've been saying all year, so I don't see any reason it should change.

I began by saying (Mark) our guidance for revenue was going to be in the 13 and a half to 14 billion-dollar range, and I think our current estimate is closer to 14 than it is to 13 and a half.

I'm sorry, I was referring to marine.

Oh , marine.

Mike, what do we look like revenue for the year here?

Somewhere in the neighborhood of 3.6, 3.7 billion.

But IS and T group will be the revenue leader for the corporation for the year, as they were in the quarter.

Great.

Thank you, gentlemen.

Thank you.

Our next question comes from Steve binder of Bear Stearns.

Please proceed, sir.

Yes.

Nick, I hate to harp on this, but on the marine side, the plan in the annual report reflects sales and flat earnings and you said you think you'll come close to meeting the plan this year.

So your plan is essentially the same plan that's outlined in the annual report is that a fair characterization?

No, I don't think so.

I think we're going to be a little below last year.

You do?

Both in terms of margins and in terms of raw earnings.

Okay.

Secondly, over Gulfstream, would you say when you look at your bookings in the quarter, you know, you talked about overall price weakness.

Would you say, do you feel from a pricing standpoint are you doing better?

Is the price decline you're seeing on balance less than the productivity improvement you're getting so that from a new booking standpoint, you know, is that what's essential happening, pricing is offsetting productivity improvement?

In part, yes.

And we're hanging in there.

You'll remember that the guidance, the beginning of the year was we were going to do about what we did a year ago in terms of operating earnings.

To get there and we were going to reduce volume and get there.

In addition to that reduced volume, we've run into pricing [inaudible] and we're still hanging in there.

So the guys have obviously been doing some pretty nifty things on the productivity side.

Because, I mean, to some degree what we have here you figure the market kind of - is certainly weakened post 9/11, right, so in a sense what we have here in the second quarter similar to the delivery positions being filled obviously being filled in a weaker environment, and it continues to transition next couple of quarters.

You get a sense when margins you think will bottom for Gulfstream?

You know, the margin is a complex question for us.

We give you an average margin of a number of different product results, and they move about, but if you want to look at margins in a fair way at Gulfstream, the first half of this year, you would take a blend of the first two quarters.

You'll remember that in the first quarter we booked some earnings on revenue of our aircraft and didn't book the revenue.

We took the revenue when we re-marketed the positions in the second quarter, but not the earnings. (Mark) so Mike mentioned in his remarks I think almost euphemistically, timing question.

There is your timing.

So if you really want to look at that in a fair way, blend the margins in the first and second quarters and let's see if we can't do that in the third quarter.

And then you'll have a fair something to shoot against. (Mark)

But, if you look at that, at the margin in the second quarter and accept it as a fact, I would say that looks like a low water line.

Two last questions on Gulfstream.

If you look at the market environment, I mean you touched on it before, but is the weaker dollar helping your international sales activity, do you believe?

Can you maybe touch on fractional share demand out of executive jet and how would you characterize those Fortune 500 customer base in North America, any improvement there, any weakening trends?

The dollar is helping our sales activity in Europe and other places.

There's more interest today.

Fortune 500 companies are at least back in the market.

The best way to describe it is the time between expression of interest and receipt of order is much larger today than it was same time last year.

You mentioned 9/11.

I think 9/11 was a shock to the economic system, but it is not the root cause of the market, it's the general economy, the large macroeconomic circumstances that make life slightly unpredictable.

If Alan green span is right that we begin to experience the kind of growth rate in the second half that we're looking for, then Gulfstream will be a direct beneficiary of that.

Our corporate customers will feel more robust about capital spending and we'll see more of it and here is a place where it will happen.

We feel the [ inaudible ] demand.

They're interest in new aircraft.

And they're paying more attention to their mission and they're looking for aircraft that applies to a particular mission, and they talk to us about that.

So we have the interest.

What we need is some CEO's who don't scratch their brow and say, oh , my lord, I can't go to my board with this just right now.

We need that condition, a little market confidence to sort of breakthrough for us.

But, that having been said, I think we're suffering less than most and we continue to sell airplanes, and we had a good quarter from an order perspective.

Not outstanding, but a good one.

More than held our own.

Okay.

I'll let somebody ask the question, but would you characterize what you feel confident that you're going to generate profit growth at Gulfstream next year?

Well, we'll deal with next year in the fall.

We're in good shape in the sense that our G5 production slots are spoken for, but I think I'd rather hold that crystal ball until I see later in the year what the economic circumstances are, because it's going to depend on whether we can sell G-100s and G two hundreds and we feel pretty good about the big airplane.

Okay.

Thanks very much, Nick.

Thank you.

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

Please proceed, sir.

Yes, good morning.

First, Nick, thanks for switching the time of the call.

Okay, George.

And second, in Gulfstream, were there any reversals or anything else associated with [Avalar]?

I mean in the first quarter you booked some profits and you said if you could sell some of those aircraft that you might reverse some of the profits of the first quarter.

Did you do anything either way this quarter?

I don't think that's quite what I said, but no, we feel like we're adequately reserved, George.

Let me put it that way.

Okay.

And is the plan this year to still deliver around 65 G4s and 5s?

In that neighborhood.

I can't remember the specific number, but it was down from the prior year.

It's in the low 60s, Mike ; is that right?

Yeah, we've delivered roughly 33 green airplanes through that first half of the year.

Yeah.

And similar amount the second half.

I'd be surprised if we got to 66, George, but we'll certainly go over 60.

Okay.

And can you tell us - tell me, how much cash you got from selling these four pre-owned aircraft?

I don't know.

Not significant, 20, $25 million worth of revenue, George.

These are - they were G-100s predominantly.

I think there was a G two in the pile, very old airplane that sold at a low price.

So it was in the 27 million, thereabouts.

Okay.

And did you buy any stock in the quarter?

No.

Okay.

And you had the one acquisition of A TB X that closed in the quarter.

There wasn't anything else, right?

That's correct, George.

Okay.

And then if you could just go through I S and T, kind of ballpark for us how much of the growth was organic and how much was acquisition and then do the same for combat?

I'm not sure we can give you that, George at this time.

Maybe combat is a little easier.

Combat was mostly organic.

Let's deal with that first.

There was about roughly $50 million of sales in the quarter from Santa Barbara was the Spanish Army's company that we closed on I think in July of last year.

So of the 100 almost $10,080 million growth in combat systems, only 50 of it came from the acquisition.

So it's mostly organic growth in the striker program, the something vehicle as it was formerly known as at land systems, growth in our arithmetic amounts and munitions business.

Also modest growth in the triple A V.

Add 160 million in revenues in the quarter? [ inaudible ]

Added or realized?

Realized.

George, we don't want to get into the detail of the absolute revenues by each business within the segment.

Okay.

Mike, what caused the big jump in the margin in combat systems?

I'm not sure if jump is - when you say jump, the margin rate - about seven or 800 basis points higher.

It's obviously more production volume in there from the I A V program which is bringing a richer mix into the sales line, but it's 800 basis points.

I don't want to sneeze at it, but it's progressive improvement in the business.

It's mixed.

It's certainly a lot from the first quarter was only nine.6 percent.

Uh-huh.

As you get more volume in there from the fixed price programs, you tend to get the benefit.

Okay.

Every now and then, George, we have to tell you that our margins have gone down because of products mix ship.

Here we get the glory of it.

We're moving some programs into production and it works to our benefit.

And, Mike, you want to try and give a crack at organic growth at IS and T?

I was hoping you were going to forget that, George.

I figured that.

IS and T sales grew about 280 million or thereabouts.

The Motorola acquisition added about 185 million of that, so the rest of it is organic.

Okay, yeah.

Actually I had a little bit more than I thought.

I was figuring a little less than that, but that's okay.

And in terms of the materials, the aggregates business, that was just a clean number?

That's about the highest profits I've ever seen you make in the aggregates business, if you go back for a couple years.

Well, remember last year, as I mentioned I think to Cai's question or Chris Mecray's question.

We had a charge in the quarter last year of 5 or 6 million for reserve we took because we were in dispute with central Illinois power at the time, and they were threatening to walk away from the contract.

We took a charge.

This year that charge is not there, so obviously the earnings aren't depressed.

Material service volume is up a little bit.

Remember, again, second quarter and third quarter in those aggregates businesses, particularly material service, are the good quarters.

That's ag are the he [inaudible] patriot ships.

Patriots is relatively [inaudible] absence and reserve and volume and performance in material service.

Okay.

I just have like the second quarter results here for like 15 years, and you never made this kind of margin, and I realize some of it you had pieces that you sold and had lost money before, but still it just seemed like a big number.

That's all.

You're exaggerating, George.

Fifteen years ago the resources division was in one of our largest, and it had enormous profitability.

So you better shorten that a little bit.

No, I'll give you the data from 15 years ago.

Certainly in the modern era we had a good quarter, and we expect that - we expect to do well in the other segment.

George, we're not old enough to answer 15-year old questions.

Okay, that's fine.

But even if you look like last year, you added back the charge, you would have made maybe 20 million on 70 million in revenues and now you've got 77 million, you're making 25 million.

I mean it still seems like a pretty big number.

That's all I was trying to get ought.

Two, $3 million improve in service.

That's all.

Okay.

Thanks a lot.

Thank you.

Our next question comes from buy Byron Callan from Merrill Lynch.

Please proceed.

Good afternoon, gentlemen.

Nick, can you just address this broader issue about the competitors of the company in light of DDX and future combat system and jeers?

Is this kind of just the normal cycles, you win some, you lose some?

Is there is there anything broader that has changed or that we should be concerned about?

Could you also just give us a sense as to what's coming up, what's still in the pipeline, when T A is later this summer, what are some of the other opportunities you're looking at?

You know, this is kind of interesting.

We lost legitimaters as a subto raight I don't know.

We were (Mark) a supplier.

I would like to have won it.

We will still provide the encryption, both the algorithms and the chip.

With respect to DDX, I think you and others understand that program, shipyards were serving as a platform, in essence, for competition between the integrators, and most of the money in the award goes to the integrators.

We will continue to build the ships.

DDX or whatever results from that program.

So I don't feel less competitive as a result.

Future combat system was $150 million award where [DRPA] was the award authority for research awards.

It appears to us that, you know, it was bid pretty tight by the winner, but I'm not crying about that one, for sure.

So we feel highly competitive and we've won some, too.

And, look, the real proof of the pudding isn't what the newspaper says about who wins and loses these.

It's what the backlog does.

And we have a sound and stable backlog that I believe is growing.

I'm certainly not worried about IS and T. They do 100 contracts a quarter.

Some large, but mostly small.

Little T as you identified will be a significant opportunity for us.

So we feel highly competitive.

We're not changing the way we approach bids and proposals.

Our approach to this has been broad delegation of authority to the operating units, not setting up large supervisory teams here at corporate headquarters.

We'll continue with that operating philosophy.

We believe that we've given our customers superb performance from a price, quality and schedule point of view.

We see no reason for us not to be a favored supplier to our military customers.

It's very rare when I'm asked to come over to the Pentagon to explain myself on a program.

Good, okay.

I guess the other question, Nick, just to get a big picture, attitudes towards defense acquisitions and valuations have come in a bit, at least with the publicly traded companies, but I mean are you more optimistic, less optimistic, is it just kind of things really haven't come in enough to make them not attractive?

How generically do you see the acquisition pipeline?

Look, I think it's okay.

I mean, it works for our strategy, you know, which is reasonably obvious has been an incremental strategy, right?

It's been driven by our desire to improve our earnings per share rather than going out looking for large transactions, but something we have to repeat annually.

It's less of a burden today.

We don't have to acquire as much because of the organic growth that's now available to us in the defense businesses.

So if indeed your defense properties can grow in the nine, 10 percent area, I don't have as much to do with the balance sheet.

But, look, all and all there's some opportunities available to us, and I think some of the run up after September the 11th did, in fact, enrich greater expectations from a value point of view in some quarters and some small companies, but all in all I remain balanced about that.

Stock prices move around.

Okay, good.

Thanks a lot, Nick.

Thank you.

Our next question comes from Lloyd [inaudible] of [inaudible] Investments.

Please proceed, sir.

My question has been answered, thank you.

Thank you.

Our next question comes from Sam Pearlstein of Wachovia Securities.

Please proceed.

Good morning.

Can you talk a little bit about the pricing issue you mentioned in terms of Gulfstream?

I just wanted to get a sense because if you are seeing pressure from that now knelt new plains, wouldn't that mean that the pricing that the plains went into backlog already had the issue and it wouldn't this affect really future deliveries?

Sam, do you mind repeating yourself?

I guess I'm just trying to understand, you know, the pricing issue from over capacity would seem, in my mind, to impact orders and therefore it would start slowing through your P and L at some later day date. (flowing through)

It is already, Sam.

As you're well aware, we had open positions in the first and second quarters that we sold, and it will continue in the third and fourth quarters.

It is already, and will continue to do so.

Okay.

So it's not a reflection of the backlog pricing as much as filling these empty slots?

Much more.

Your backlog is there already.

Okay.

On marine and in terms of the LPD and the DDG swap, are there any costs for you to actually accomplish that?

No.

Okay.

And then in some of the I guess the palm for the Navy seems to indicate next year we might see seven ships as opposed to five, and I guess I'm wondering, in your mind, is that dependent on any 12 settlement, so you're financing that on your own or what's your view on the ability for the Navy to actually fund more ships?

I think if the Navy planned ships predicated on potential settlements of lawsuits, they'd be in large trouble with the office of the secretary of defense.

I think they have to have the money or the reasonable expectation that the Congress will give them the money if they're palming ships.

But, look, I wouldn't over think this problem if I were you.

Read today's news reports on the activity of the Senate appropriations committee for defense, and their language on shipbuilding and the money that they put in their mark for prior year shipbuilding bills and the encouragement that they're giving the Navy to get on with shipbuilding.

So I think the climate for next year for the Navy is very good.

I'd be staggered if they didn't palm a considerable number of ships.

Okay.

Thank you.

Thank you.

Our next question comes from Brian [inaudible] of U.S. trust.

Please proceed.

My question has been answered.

Thank you.

Thank you.

Our next question comes from Howard [Rubble] of Goldman Sachs.

Boy, we're all getting abused here.

See what your name would be like, next.

Good morning, Mr. Ruble.

Be careful what you ask for.

You're down almost $6, but in any event, two things.

One is to go back to marine one more time.

If we think about the events here or the the weak profitability, if we go forward and we look at the absence of this on a core basis, would it be fair to think that next year you could be very close to double digit profitability?

In the marine segment?

Yes, sir.

I'm not going there Howard.

We're going to improvement.

Okay.

I'll give you guidance with respect to that in the fall when we approve the marine group's plan, operating plan.

Right now it's too early for me to say.

We're going to do better whether I predict double digits or 150 basis points, I have no basis right now.

All right.

We're going through a lot of change right now, a lot of fundamental improvement in that business, and I want to calibrate it during the operating plan cycle and not make guesstimates for investors today.

I understand.

And one last question on information systems and technology.

As you look at your opportunity set, it's a probabilistic outcome for a number of programs because of the multitudes that are out there.

How would you characterize the environment?

Is it still sort of one that's unbalanced - on balance, probably even stronger than the revenue growth numbers you're seeing?

Well, it's a very good environment, Howard.

If you think about our business in terms of its components, network systems, the infrastructure company is experiencing very, very solid growth and a lot of demand.

And not a lot of high-profile competitions, so you don't read about them very much, but they steadily churn out new orders.

AIS is our largely classified business.

They also are growing quite rapidly and have some reasonable visibility competitions, but more often than not you don't get to see their competitive environment either.

Those pieces of the business where the public gets to see contract awards and competitions are the C4 S and the piece that we got from Motorola decision systems business.

Those are the high visibility ones.

Q: You recently got a 260 million-dollar contract from Motorola - I mean for precision systems, I'm sorry, and most of it's ID IQ.

They're doing very, very well.

And in England where we have the bow man program, that's growing by adding work.

Decision systems, of course, is in the hunt for the coast guard communications systems.

You know, dwine P has been mentioned but that's right in the C4 S sweet spot.

So we're - there's plenty of opportunity on this side of the business and we've however forecast today quite reasonable growth rate for that.

This is a business we didn't even have in 1997.

It's now our largest, and probably the most rapid grower in the long term.

So we're real comfortable with where we are here.

Last question I have as to Gulfstream with the market focused on civil opportunities, I wonder for a moment if you might talk about what sort of military opportunities you continue to see on G4s or 5s.

Our government business is growing, and the demands are growing.

We have some interesting programs, some of which I don't want to get into.

They're international in character, but we're doing well on the government front, and that promises to be a growing market for Gulfstream.

So there are negotiations for orders that have not yet been concluded?

That's true.

Thank you.

Thank you.

Our next question comes from Phil Marriott of [inaudible].

You may proceed, sir.

Actually, my question was asked and answered.

Thank you.

Thanks, operator.

We're getting close to the end of the hour.

I think maybe we can take one more question and then we'll need to wrap it up.

Our final question comes from Elliott [ Delainer ] of [ inaudible ] and Company.

You may proceed.

Yes.

Nick, whatever happened to the plan from six months ago by Secretary of Defense Pete Aldridge to raise defense company margins by giving them a portion of core savings?

Has that been delayed to the end of the year or next year?

Just what is the status of that plan?

I don't know where that is.

I think the Secretary of Defense Aldridge -

Yeah, Pete Aldridge came up with this.

Well, yeah.

He's committed to trying to raise the opportunity for industry to make money if they perform.

And I think that his leadership together with John young assistant secretary of the Navy, led to the LPD for DDT 51 swap -

Correct.

- that gives us that kind of an opportunity to enjoy increased profitability as a result of saving.

So I think there is an example of where the government has the incentives all in the right place where they'll enjoy the benefit of performance and so will we.

But you really have no update on the actual plan to give a company like John a percentage of core savings?

No, we have that.

On share lines, on contracts.

We bear the risk if we overrun, and we enjoy on a percentage basis the up side if we underrun.

So, we already have those kinds of contracting vehicles.

Okay.

Thanks a lot.

Okay.

I want to thank everyone for joining us today.

As always, I will be available for any further questions people may have.

My direct line is (703) 876-3195.

And good day.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may now disconnect.

Everyone have a great day.