通用動力 (GD) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to General Dynamics' third quarter earnings conference call.

At this time, all participants are on 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 keypad.

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.

Thank you, Stephanie (ph).

I'd like to welcome the members of the investment community, as well as the news media who are with us today.

Let me remind you once again that any forward-looking statements that are made today are best estimates of future potential.

They are obviously subject to the basic risks that any business would be subject to.

And you can always look in our 10-Qs, 10-Ks for a more wholesome discussion of those potential risks.

With that said, let me turn it over to our Chief Executive Officer, Nick Chabraja.

Thanks.

I thought I might sort of offer to you my perspective on the quarter maybe from 10,000 feet and maybe make a few comments, and then talk a little bit about the climate in all of our markets, and then turn it over to Mike Mancuso, who will share with you some of the details that I allude to in my remarks.

But first, with respect to the financial performance, revenue growth of 9%, when compared to the same quarter last year.

I'm pleased with that, particularly in light of the fact that we had lighter revenue at Gulfstream than we had anticipated.

I can share with you we had anticipated delivering several larger aircraft right at the end of the quarter and it didn't occur.

Two of them delivered immediately after the quarter closed.

So in my view, the revenue picture out of Gulfstream was a little aberrationally low, should be much stronger in the fourth quarter.

Turning to earnings per share, the growth of 13 percent after excluding a 4-cent benefit on the FAS 142 accounting change year over year was once again the result of an extremely strong performance by all of the defense units -- three defense units -- against what we anticipated would be weakness in the Gulfstream picture.

Gulfstream had about 100 million of operating earnings.

That was less maybe than we anticipated, and it was driven by two things.

One was the volume shortfall that I mentioned to you a moment ago, and the other was a write-off in connection with pre-owned aircraft sales in the quarter and then some with respect to existing inventory that Mike will give you more insight into that should not recur in the fourth quarter.

I might point out that I was particularly pleased with the marine group because we'd struggled with their margins.

We had in the quarter actually a brilliant performance at Electric Boat, and markedly improved performance at Bath Ironworks, in part helped by a multiyear contract that they were awarded.

We struggled at Nasco (ph), still in the quarter, so all in all I'm very pleased with marine and, of course, the performance at IS&T and combat systems is obviously strong and Mike will tell you a little more about that.

We had solid cash flow from our business units.

I think GAAP will report 248 million on a GAAP basis.

The way I like to talk about it, about 279 million, and that is the cash flow purely from the business units after cap ex and after tax, but before corporate discretionary items.

I think we've gone to giving you the GAAP figures as soon as we can, so I didn't have to explain myself every quarter, principally to Binder (ph), who does it a different way than I do it.

But nevertheless there's both figures for you.

The cash resulted in a $229 million reduction in total debt, and I'll remind you that in the quarter we paid 60 million in dividends, closed a $68 million acquisition, and repurchased about $70.5 million worth of our own stock in the quarter -- 903,300 shares to be exact -- and we've continued to acquire our stock here in the early days of this quarter.

Finally, and maybe most importantly, I'd like to point to the $4 billion increase in backlog in the quarter that comes as a result of the capture of several competitively awarded strategically important new contracts.

Let me go over that in some detail.

First, in the marine group, Bath was awarded a contract modification of $3.6 billion for the construction of 7 additional DDG destroyers, bringing its total backlog to 14 ships, with the last delivery out to the year 2010.

And Nasco (ph), the Navy exercise and option for the construction of the third 12-plan (ph) TAKE (ph) ships with a value of 290 million on that third option.

And finally Electric Boat was awarded a $443 million contract for the design of the Trident conversion known as SSGN.

These new construction awards total 4.3 billion and brings the marine group's total backlog to 12.2 billion.

And at the risk of stating the obvious, this provides an absolutely stable foundation for margin expansion.

Combat systems received several strategically important awards to us, including their selection by Lockheed Martin as the gun system integrator on the Joint Strike Fighter, a major coup, selection by the navy to provide the F-18EF gun systems, and selection by the army as one of the two technology integrators for the Objective Force (inaudible).

Over in our information systems and technology segment, Decision Systems, which came to us from Motorola you might recall, was competitively selected by the Coast Guard to modernize its 30-year-old search and rescue communication systems.

The initial award is valued at over 600 million, but this program is expected to grow very substantially as it's a lengthy program.

C4 Systems received one of the two contracts (inaudible) phased development of the WinT (ph), the army's next generation war fighting communication system.

This two phased development contract has a value of up to 72 million, but it is only the first contract in a program estimated to be worth $6 billion.

So a major win in that down (ph) select from several competitors, now down to two.

In September, as most of you know, Gulfstream introduced its expanded product offerings.

That's generating an awful lot of interest in expanding our sales pipeline.

But during the quarter, they recorded $1.5 billion of new orders, including a launch order from EJI (ph) for 50 firm G-150 aircraft with another 50 options.

All of our major programs seem to be very well supported and funded in the FY 2003 appropriations bill that has passed the House.

It is before the Senate today, has come out of joint conference.

It's expected to clear the Senate sometime this evening, and it's not anticipated that there will be any problem obtaining the president's signature.

I thought I might spend a moment or two with you on that bill, both as it pertains to the entire industry, the entire sector, and then maybe a little bit on General Dynamics in particular.

With respect to procurement dollars, there is a 15 percent increase over fiscal year 2002 budget, and the joint conference approved $71.5 billion, which was about a $5.3 billion up from the administration request.

So, very good news for the industry.

The same thing is true in R&D dollars.

There was 5 million -- 5 billion added by the joint conferees, and that represents an 18 percent increase over the FY '02 budget, so good news for the industry in those portions of the defense budget where it lives.

With respect to us, the marine group did very well.

The action by the conferees and the anticipated final bill certainly solidifies the LTD (ph) DDG 51 swap with ample money for each.

The DDG 51 line received close to $2.6 billion.

There was money for prior year shipbuilding costs in reasonably generous amounts and full support for the TAKE (ph) and all of the submarine programs.

So all in all we did very, very well on the marine side.

Combat systems group, about which people frequently ask me, all of our core platform programs were fully funded.

Multiyear build-out on the M1-A2, the M1-A2 (inaudible) retrofit received a total of 500 million in funds.

The M1-A AIM (ph) program, which is funded out of the O&M budget, received $135 million.

Triple AV (ph) had a modest plus up.

Striker (ph) received just shy of $1 billion,.

Maybe more importantly, there was very strong language in support of the Striker (ph) program in the bill, stronger than in last year's bill, really directing the build-out of that program, the 4 through 6 per gaze (ph) about which, from time to time, there is considerable controversy in the press.

Over on our armament side, there was increased funding for the Hydra (ph) rocket, together with 25-millimeter munitions, so we did quite well.

On the IS&T side, where things are a little harder to follow, I can tell you that all of our major programs were fully funded, some with selected increase.

We've received an increase in funding for several of our classified programs, some as a result of overall increase in intelligence spending, but we have seen specifically an increase in spending on our signals intelligence business areas and increased funding for what some people call fusion programs at the National Imagery and Mapping Agency and the National Security Agency.

So, all in all, we had a really good quarter in a difficult climate.

The order book nourished congressional action leaves us in good shape going forward.

We had a good quarter.

I look forward to a strong fourth quarter with a pickup from Gulfstream in both revenue and earnings in the quarter, and of course we appear to me to be right on track, if not a little bit ahead of the pace we had planned for ourself with respect to cash flow.

That having been said, let me give this over to Mike and he can give you additional insight into the numbers - Mike.

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

I'll keep my remarks brief so we can devote adequate time for your questions.

Let me start off with some comments on our sales.

Sales increased in the quarter by 279 million, a 9 percent increase over third quarter last year.

IS&T, or information systems and technology segment and combat systems segment are responsible for that growth.

Both segments experienced significant organic growth and benefited from revenue contributed by acquisitions.

As Nick said, aerospace revenues are lower on fewer aircraft deliveries.

In the quarter, Gulfstream delivered 17 Green (ph) aircraft, 7 less than last year.

Completed aircraft deliveries numbered 19 in the quarter, and that's five fewer than last year.

Segment operating earnings also increased 9 percent on the strength of the IS&T and combat systems revenue growth.

Year over year margin rates improved in both of these segments, largely performance-driven, with some help from timing and quantity of fixed price deliveries, particularly security-related communications equipment and components from our C4 systems and decision systems organizations in IS&T.

Marine systems margin rates match last year's performance, but are 200 basis points above second quarter - excuse me, 2002.

The bulk of the design to construction problems we experienced at Nasco (ph) are behind us now.

Aerospace earnings and margin rate is significantly lower than last year based on the lower volume, and as Nick said, we recorded a loss of $10 million on the sale of nine pre-owned aircraft in the quarter, and we took a write-down of $25 million of the carrying value of our remaining pre-owned inventory.

At the end of the quarter there were 18 pre-owned aircraft for sale, of which five are under (inaudible).

By year-end we expect pre-owned inventory to drop below 10 as a result of fourth quarter sales activities.

Now shifting over to backlog, let me give you a breakdown of our $29.5 billion backlog by segment, and I'll split it between funded and unfunded.

In IS&T the funded backlog is $5 billion.

Unfunded is just about $100 million for a total of 5.1 billion.

Combat systems has a $4 billion funded backlog, $1 billion unfunded backlog for a total of 5 billion.

Marine systems has a funded backlog of 7.8 billion, 4.4 billion unfunded for a total of 12.2 billion.

In aerospace there's a $4.6 billion funded backlog, 2.3 billion unfunded for a total of 6.9.

And in our other segments, roughly $200 million funded, 100 million unfunded for a total of 300 million.

So that should total out to 21.5 billion or 21.6 billion of funded backlog and 7.9 billion of unfunded backlog for a total of 29.5.

This represents an increase of 4 billion in the quarter as compared to last quarter and 2.1 billion higher than last year.

Operating cash flow from our business units which as Nick described includes business unit (inaudible) income and balance sheet changes, including their capital expenditures, was 279 million and totals 522 million through nine months.

We still expect to reach $900 million by year-end.

One final comment on our pension fund status.

As you know, if you follow us, we've embraced a conservative policy with regard to our pension accounting, in terms of both expected investment return from the assets and income recognition, particularly with our large government plan, At the end of August both our government and commercial plans were in surplus.

If equity returns continue as they have been for the next few months, there is the likelihood of us having to make very modest contributions to our government plan, which in fact are recoverable under government contracts and pose no threat to our 2003 bottom line.

That said, I'll turn it back to Ray to kick off your questions.

Thank you, Mike.

Stephanie (ph), we're ready now for the phone Q&A.

Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone keypad.

If your question has been answered or you wish to remove yourself from the queue, please press the pound sign.

One moment.

Our first question comes from Sam Perlstein (ph) from Wachovia Securities.

You may proceed.

Sam Perlstein (ph): Good morning.

I was wondering if you could add a little bit more color on the IS&T margins, why we saw such a strong increase.

Were there profit rate adjustments or anything that was behind that?

Sam, it's predominantly as I indicated.

It's mix of fixed price delivery.

We have a number of encryption products and encrypted communication devices that are very significantly, as you might expect, in demand now.

So we had a much heavier fixed price mix in the quarter, which carry with it higher margins than are typically over time.

So the margins are a little bit higher than you've seen in the past, but overall our IS&T margins have been improving quarter over quarter.

While they may not reach the level we see this quarter, we still expect them to come out strong in the fourth quarter, and overall they'll be better than last year.

Sam Perlstein (ph): Okay.

And then in the marine group, was there any change in the profit recognition on the destroyers with the new multiyear contract?

There was a slight uptick in booking rate at Bath and there was an uptick in the booking rate Electric Boat on what is the balance of the Seawolf program.

Sam Perlstein (ph): Okay.

And in terms of the losses or really the write-downs of the used aircraft that you're holding for sale, does that mean that when we look at fourth quarter and really shortly after that that we should not see losses when those planes are actually sold?

Yes, that's true, Sam (ph).

What we did was mark our inventory to market.

Some of those planes may well not be sold; even though everything is technically for sale, they may be on lift arrangements or being utilized for other purposes within the company.

But we nevertheless scrub the entire inventory and mark it to market.

So we think, going into the fourth quarter, we're not looking for any kind of abnormal either profit or loss in our pre-owned activity, which as you know ordinarily runs pretty close to break even.

We lose a little bit, make a little bit, and that's the way we see the fourth quarter.

Sam Perlstein (ph): Okay.

And then my last question, and I'll turn it over to somebody else, I guess now is the time when you're typically doing your annual planning process and I'm just wondering, at this point, how do you see next year shaping up, just kind of related to this year?

Sam, we really undertake that in the last week in October and the first week in November.

About this time Mike Mancuso and the finance organization are getting sort of preliminary information from the business units, and I haven't even seen it.

So ordinarily on this conference call I make no comment or guidance with respect to next year's earnings because it would be a little speculative.

But as soon as we complete that process in early November, the first time I get an opportunity to make a public comment, whether it is at an investor conference that's carried over the Net, or whether I have to wait for this particular event at the end of the year, I'll give you very detailed guidance as we did a year ago.

That's the way we did it and the way we'll still do it.

So I'm going to keep my powder dry for the moment.

Sam Perlstein (ph): Okay.

Thank you.

Our next question comes from Kai VonRumer (ph) from SG Cowen Securities.

You may proceed.

Kai VonRumer (ph): Yes.

Could you give us a little more granularity in terms of by model what the deliveries were in the third quarter?

And if I kind of back out the 35 million in used aircraft, the number looks bigger than I would have guessed.

How on that level of volume did you achieve it with the margins (inaudible)?

Let me have Mike give you the detail on that, but let me tell you that the key to this -- this quarter kind of turned out differently at Gulfstream than I would have guessed, and sort of as I talk to investors from time to time, and they can get some insight into my thinking, I expected margin erosion.

I did not expect the volume decline, and that didn't happen until the last week of the quarter.

We expected to deliver some airplanes that didn't get delivered.

What I did expect, however, and did not occur, was margin erosion.

Because of price softness in the marketplace, we anticipated margin erosion.

It did not occur.

Our manufacturing margins are stable.

Any price discounting in the marketplace was offset -- clearly offset by productivity gains, and in fact we had improving margins in the completion side of our business.

So all in all, from Joe Lombardo's (ph) end of the business at Gulfstream -- he runs ops -- we had really a spectacular performance.

And that will continue, I think.

But when we're in a unit (ph) to delivery business, we came up short at the end of the quarter and I feel reasonably comfortable that won't happen to us in the fourth quarter, but one never knows.

But Mike, why don't you give Kai (ph) some granularity on the deliveries if you can.

All right.

I had indicated there were 17 green (ph) deliveries in the quarter.

That breaks down as six G4s, 8 G5s, two G100s and one G200.

Completed airframes in the quarter, I said 19 were delivered, 9 G4s, 8 G5s, 1 G100 and 1 G200.

Kai VonRumer (ph): Great.

Nick, I think at one point you were expecting on this call to talk a little bit about your delivery expectations or thoughts for next year of Gulfstream.

Can you give us any sense in terms of what you might be looking for for the (inaudible) deliveries?

Let's talk about this, Kai (ph), in terms of color as opposed to guidance, because I'm not there yet.

But as you know, I don't have the luxury sometimes of time at Gulfstream, and we need to do some planning, and to ask our industrial partners to plan.

So, all in all, I would look in terms of units of delivery towards next year to be very similar to this year, and I would see that occurring as a pickup on the ultra long-range aircraft, a modest decline in the 400 series, and fewer 200s and about the same number of 100s.

And I think that mix would substantially balance itself, and at the moment my expectation will be kind of a year next year at Gulfstream with a slightly different mix that looks very much like this year in terms of number of units produced.

Kai VonRumer (ph): Okay.

Last one.

Can you comment -- you had good funding in combat, but obviously the administration is kind of considering some changes now in terms of cutting back Striker (ph), et cetera.

Can you comment in terms of what that might mean for your results next year?

Well, next year we're going to have great results on Striker (ph), utterly without regard to any of that, that's with respect to future brigades.

The third brigade's been fully funded.

I expect to receive that.

I don't think there's any debate about that that I've heard of, and our results next year will be unimpaired no matter how that comes out, and I think we're comfortable all the way out through 2004.

This issue the fourth, fifth and sixth brigade is later in time.

I think the Congress has pretty clearly spoken at least through the appropriations process -- bill language couldn't be stronger.

You could see it yourself.

The army, we believe, has asked the administration to fund brigades 4 through 6.

Widely publicized that some of the policymakers in the office of Secretary of Defense, not that they dislike the program, but they're running a budget drill of their own, have their sights on those last three brigades.

And there's been a debate very (ph) broadly in the press about whether or not these vehicles are C-130-worthy and so forth.

I think that's been put to bed today.

You'll read in the popular press tomorrow, I think, reports of transporting these vehicles by C-130 and also by C-17 to Washington.

The deployment of the Strikers (ph) very rapidly off of those vehicles -- I mean, off of those transport vehicles and reloading in the time that the army had predicted by army teams.

So I won't comment further about it.

I think the press reports will be glowing, and you'll see them yourselves.

So we feel good about Striker (ph).

The program is on time, on budget.

The vehicle is performing well.

Soldiers are excited about it.

It's the kind of program you like to support defense (ph).

Kai VonRumer (ph): Thanks a lot.

Our next question comes from Steve Binder (ph) from Bear Stearns.

You may proceed.

Steve Binder (ph): Yes, good morning.

Mike or Nick, just follow-up, you talked about expecting a much more -- bigger increase in the fourth quarter out of Gulfstream versus third quarter.

Where do we stand today?

How many open slots (ph) fronts are there with respect to the large cabin frames and the G100s (ph)?

Steve, we have very few open 4s and 5s.

We have a few to sell, but not many.

If we miss our nut in the fourth quarter, it won't be as a result of the big cabin aircraft.

Our task in the fourth quarter is to sell 200s.

And you might remember that we don't have the manufacturing risk on those, we have the depletion (ph) risk.

And so it won't be that we're building inventory, but we need to sell some of those aircraft to sort of get us to where we would like to be at the end of the year in Gulfstream.

So that will be the risk, not the big guys.

What we produce will sell, and if we miss it in either direction, it will be a unit.

Steve Binder (ph): And then if we look at the earnings - the losses experienced this quarter on the used aircraft side, I mean, when you look out to '03 and '04, is that an issue -- is that still an issue that you see in that time frame, or - I mean, obviously it's dependent on market conditions.

But basing (ph) it on the trade-in profile next year and in '04, is this a problem that could keep results at Gulfstream depressed, do you think?

No.

Steve (ph), if you have some insight into that, share it.

If you know what the used market is going to look like '03 or '04, tell me.

You know (ph) more than I know.

This is a spot market, right, it keeps moving.

And our risk, interestingly enough, because of the way we account for these aircraft - and I've indicated to the investment community and many of the sell side analysts that we have in fact provided discounts off of price by engaging in generous treatment with respect to used aircraft, and we have taken that in the form of reduced margin on the new transaction.

That having been said, our margins on the new transactions are stable, stable to improving.

So that isn't the issue.

The issue is once in inventory where they've been marked to market, they've (ph) further deterioration, and the deterioration that we experienced in the quarter is with respect to inventory that, while it is literally for sale - we'll sell anything, including a test item - it is inventory that we have kept over a period of time and have deployed in other ways, not sitting on the lot waiting to be sold.

And we've taken this opportunity to mark that to market in a dedicated, disciplined drill that we conducted together with our independent auditors so that we could annitize (ph) this situation and look good going forward.

So I don't expect to be plagued with this on a going-forward basis but, you know, spot market is a spot market (ph) .

Steve Binder (ph): And two questions, it looks like if you back out the G150 orders, I'm guessing Gulfstream had orders of $450 million, maybe $500 million in the quarter, if you want to give some color where those orders, either customer base wise where they came from, geographically, or mix of orders?

I really don't, Steve.

I'm not sure I know right now.

Steve Binder (ph): Okay.

Last question, maybe Mike, you can touch on this, since you talked about IS&T before.

Back when your Q came out you expected second half margins in IS&T to be flat versus first half, and you obviously had that strong quarter in the third quarter, and you mentioned the mix (ph) issue.

Should we expect the fourth quarter to drop below the 10 percent range now or should they stay above 10 percent?

I would expect to see them above 10 percent, Steve.

Steve Binder (ph): So the coming (ph) outlook is improved the second half of the year?

I think we averaged (ph) about 9.2% or 9.3% last year in IS&T, and I would tell you that I expect this year to be -- for the full year to be above 10, probably as much as perhaps 100 basis points above last year or more.

Steve Binder (ph): Okay.

And I think you shouldn't look for what we had this quarter, because I don't think you will see a repeat of the sale of the encryption products that were delivered in this quarter, but some of this isn't a sales bubble; it is true margin performance improvement, and that you'll continue to see reflected in the final result.

And I wouldn't be at all surprised if we didn't surprise on the up side in the IS&T group.

Steve Binder (ph): So therefore the second half margin should be considerably better than the first half, then?

Yes.

Steve Binder (ph): Okay.

Thank you very much.

That's almost a slam dunk after what we did.

Steve Binder (ph): Right.

I understand that.

Our next question comes from Heidi Wood (ph) from Morgan Stanley.

You may proceed.

Heidi Wood (ph): Thank you.

Getting back to the Gulfstream margins net (ph) to get an idea, when you back out the $35 million in this quarter, you did about 18.3 this quarter, do you think that you can match that in the fourth quarter based on what you can see?

Sure, absolutely.

Heidi Wood (ph): So consensus estimates for this year are 5.18.

Are you still comfortable with that?

5.18 is within the guidance range that I had given at the beginning of the year, which was 5.17 to 5.27.

I've never gone away from there other than to indicate at the half that I felt more comfortable in the lower half of my range.

I still think that's true.

Comfort is a word that I rarely use with respect to forecasting anymore, but let's put it this way.

The defense businesses will outperform for the year, and we will make our nut, assuming any reasonable performance at Gulfstream in the fourth quarter, and I have no reason to doubt that right now, the sales pipeline looks good.

It is a tough market by any stretch.

And as you can see by what our competitors have said, they're doing not as well as we are.

For that we feel very fortunate.

And I think that shows the strength of the brand, our sales and marketing team, and it really shows the benefit of having reengineered the business and having it go through a down cycle at the efficiency (ph).

So for all of those reasons, I'm optimistic that we, in fact, will achieve those kinds of earning per share numbers by the end of the year.

Heidi Wood (ph): Okay.

I mean, it clearly looks like the defense business is doing a little bit better and help offset what might be a lower EBIT year over year versus -- in Gulfstream.

Can you give us a little color, Nick, on Striker (ph), discuss what you're doing to address what we've read in the press about weight issues (inaudible) on the C-130J, and why you feel pretty confident about a go-ahead on the 4 through 6 lots (ph)?

You know what we're doing is performing on the program.

The program is on time, on budget and it is performing in accordance to spec.

The weight of these vehicles is in accordance with the contractual spec for lighter.

So we're helping the army illuminate the discussion and present the facts, the facts, as opposed to the speculation.

I mean, I've heard all sorts of absurd things.

I've heard the Striker (ph) doesn't fire the 105 millimeter rounds in the army inventory.

Nothing could be further from the truth.

I her that the Striker (ph) can't fly on a C-130J.

Nothing can be further from the truth.

I've heard that it takes all day to offload it.

Well, it's rolling off of these things in two and three minutes and it's ready to fight.

It is doing everything that we contractually committed to and more, and the army is in favor of it.

And in my view, the truth will ultimately prevail.

If it is not ordered fourth, fifth, and sixth brigades because the Department of Defense lacks money to buy it, there's not much I can do about that except to go to our friends in the Congress and ask them to provide the money.

And they've already indicated in the strongest possible terms that they intend to do just that.

So I feel good about the Striker (ph).

Heidi Wood (ph): Good.

Thanks very much.

Our next question comes from George Shapiro (ph) from Salomon Smith Barney.

Please proceed.

George Shapiro (ph): Good morning.

Mike, I'm trying to reconcile the cash flow number that you give of 269 - 279 million, and if I just look at the change in net debt, which is how I tend to look at it, I mean, net debt was down maybe $20 million or so.

If I add share buyback, which maybe was $70 million and cap ex and dividends, I still get a differential.

I'm just trying to figure out, you know, what else is there.

George, at the risk of not getting into trying to explain where you're going with your numbers, let me just set out a couple of numbers.

Obviously in our Q we'll break down the cash flows in the FAS required format.

The line that you would normally see on the FAS statement that says "net cash provided by operations" was 254 million.

In that is not only just business unit net income, but there are corporate net income items in there to the extent that they've occurred, and we had another 78 - and there are corporate balance sheet items that are in there that are not from our business units.

From that number, if you were to subtract 68 -- or 46 million in cap ex, you'd get pure cash flow from operations somewhere around in the 220 range, roughly speaking.

There are 2000 other adjustments.

I can't reconcile (inaudible).

George Shapiro (ph): Okay.

I was just thinking I was going to - I guess if you can't do it, then I'm not going to be able to do it so I'll just leave it at that.

I wanted to ask, the $31 million of income in material services, I know that aggregates is a pretty profitable business, but to be able to make 35 percent margins still seems extraordinarily high.

Is there anything else that goes in there or exactly what is in there?

George (ph), as we've told you on many occasions -- you seem to have forgotten -- there are at least three businesses in addition to corporate other areas.

Freeman (ph) United Coal Company, which for many years struggled and we reserved quarterly against their performance, a negative, now producing reasonable and positive figures as a result of finally settling with their large customer, Sibco (ph), over future contracts.

Material service performing very, very well.

You remember that a little while back we did an acquisition there, a modest acquisition that gave them even more product to sell, and the Patriot Ships (ph), which produces nice income is in there.

So, look for other to perform very well.

Get used to it.

It's going to happen.

George Shapiro (ph): Okay.

And then just the other one too, other income which was $8 million this quarter, that usually is somewhere between -- you know, around zero, can (ph) be a little positive a little negative, but 8 is a usual bigger than usual.

Anything unusual there?

There's about a half a dozen items in there in $1 million range.

We had a land sale at material service that's in there as other income.

We sold a business a few quarters back in IS&T and we reserved some of the selling price to make sure that we didn't have any residual issues.

Those are gone now, and we flipped another million or so of reserve in there that was no longer required.

So it's a myriad of those kinds of things, George.

No one line item more than $2 million.

George Shapiro (ph): Okay.

And the last thing kind of nitpicking things, Mike, the tax rate was lower than -- almost a percent lower than what we saw in the prior quarter.

Is this a new rate that we should expect or use the run rate now that you have for the nine months?

I'd lower the run rate that we've had for nine months but I wouldn't drop it quite as low as you're seeing in the quarter.

We'll come in a little bit lower than the 34, but not as low as the 33 percent that you see in the quarter.

George Shapiro (ph): Okay.

And I may have missed it before.

If you took out the net jets order in the quarter since deliveries there doesn't start until 2005, what would be the aerospace backlog quarter have been?

I assume it would have been down some from the 4.3 billion in the second quarter.

I can't break that down for you, George (ph).

I don't have any increment for the 50 airplanes, but if you assume they're G150s and they're somewhere between - somewhere in the neighborhood of probably $600 million or $700 million of the orders in the quarter relate to those 50 airplanes.

George Shapiro (ph): Yeah, okay.

That's what I thought.

Gulfstream had 800 million or so, so back that kind of a number out.

George Shapiro (ph): Okay.

And if you looked at right now, maybe Mike or Nick, in terms of the status of the used market for Gulfstream, has that gotten - are the used planes greater than they were second quarter at this point or where exactly are we?

A little bit higher in terms of trades taken in in the third quarter, but as I said before ...

He's asking a different question, and I don't think we have the answer to that, George (ph).

We know what we have.

We don't know at the moment the entire inventory in the marketplace at the end of third quarter, so we can't respond to that.

We know what we've taken in, and we have a unit - despite having sold nine aircraft in the quarter, we may have an inventory one more than we had at the end of the second quarter, but we don't know the status at this moment of the entire inventory out there.

What we're looking at is a relatively stable used market at the moment.

George Shapiro (ph): Okay.

I would just think, Nick, from what data I've seen, it seems like the low end of the market is maybe stabilizing a bit, but the high end of the market is still getting worse.

I mean, I don't know whether you'd agree with that.

I have no evidence of that, George, at all.

It has -- the market price for 4s and 5s has dropped but is not deteriorating at this point.

What will happen in the future I don't know, but what we are seeing is some reasonable absorption.

There is a reasonably handsome market right now for used aircraft, they are going.

I can't tell you whether the economy isn't going to drop some more on the marketplace in the next several quarters, and that would change my answer to you.

But to the extent that you're speculating on deterioration that I can identify, the answer is I cannot.

It appears not to be the case.

George Shapiro (ph): Okay.

Thanks a lot.

Our next question comes from Byron Callian (ph) from Merrill Lynch.

You may proceed.

Byron Callian (ph): Good afternoon, gentlemen.

Just a couple of quick things.

You mentioned the share buy backs.

This is kind of an options offset -- you think you'll be stepping that up to bring the share count down here?

Depends on a lot of things, Byron (ph).

We use that, as you know, tactically for the year.

As I sit here, we've purchased in excess of one million two (ph).

We intend to keep it up.

It's reasonably commensurate with the amount issued in the executive incentive program, but it's not geared to do that.

Byron Callian (ph): Okay, okay.

I'll buy more, I'll buy less depending on what we're thinking about at the time, but we will be back in the market if conditions warrant it.

And when we see opportunities, we'll be there.

We bought last year about a billion 4 - I mean a million 4, million 5 shares, and I have remaining authority slightly in excess of 3.75 million.

So we'll be active and we're not reluctant to ask for more authority.

Byron Callian (ph): Good.

I think we tend to get into the marketplace when two things occur.

If in the quarter we're not in the middle of doing a transaction, and if the marketplace presents us what we find to be extremely attractive opportunities and it's been doing that and we've been responding in kind.

Byron Callian (ph): Okay.

A couple of other things here.

Nick, can you comment on A-12 (ph)?

Has the navy followed through with any of its threats regarding collections since September 30th?

Just kind of give us some color where all that stands.

No.

They have not.

I think we're relatively typical to collect again.

You might recall that this was a contract entered into by General Dynamics Corporation that -- through its Fort Worth division.

Gone (ph).

General Dynamics does not now contract with the federal government.

It operates through wholly owned subsidiaries which it acquired later in time than the A-12 (ph) dispute.

We've notified the navy that they would be in breach if they took money on any of those contracts.

There are very few General Dynamics vehicles to set off against.

But I suspect that -- you know, I don't know what the navy's behavior is, but we haven't had anybody taking any money from our contracts, and as best I can tell, they haven't come back from our partner in this endeavor, Boeing, formerly McDonnell Douglas, either.

So I think there was a great flurry of correspondence, most of it leaked to the press, but I've seen no impact it has had on our businesses, nor that of our colleagues.

Byron Callian (ph): Okay.

Last, could we just lay out maybe some of the new program opportunities you guys are looking at in 2003; future combat system probably starting to come together, I don't know on the naval side it got (inaudible) -- if any of this could happen in the coming year, what should we watch for?

All of the above.

I mean, you picked at the big ones, but if you listen to the C&O (ph), he'd like to accelerate and (inaudible) combat ship and make acquisitions in that program well ahead of DDX (ph).

So future combat system, the acquisition plan is not yet clear from the service, from the army.

They haven't articulated it, but it will become clear, I think, in short order.

The industry is getting to know each other on this question and looking for roles and missions, and I'm very confident that General Dynamics' land (ph) systems will play an extraordinarily important role in that.

I guess it's -- my principal concern about it is comments I've seen - again, the same budget drills, the same concern talking about slowing that program down by a couple years.

We've seen the same things.

But we'll certainly play a large role in FCS, but that's not a near-term value creator, let's at put it that way.

In the out years it will provide a whole new way of life for land (ph) systems, and I'm sure it's important to us and really important to the army that we participate in a significant way, and I'm sure we will.

Byron Callian (ph): Is there anything internationally, Nick, anything going on European land systems, market, or even some international naval markets?

We all focus on the U.S. budget.

I wondered if anything has cropped up on your screen overseas, even special mission aircraft on the Gulfstream side?

We're always selling stuff.

You know, Byron, I really like to roll all of this up into our forward-looking statement and kind of trot that all out at year-end instead of piecemeal.

Byron Callian (ph): Okay.

I'm not overly preoccupied right now with international.

Only thing I know about, it always slips (ph) to the right.

Byron Callian (ph): Right.

Okay.

Well ...

Except, by the way, in England, where our Bowman (ph) program is doing wonderfully and we have a number of promising opportunities that I think we'll fill in soon.

We've really been on an extraordinary run over with our IS&T group of wins.

Some sole source selection, but others, competitive wins, some fairly significant.

So we feel very, very good about that.

Byron Callian (ph): Good.

Thanks.

Okay.

Stephanie (ph), I think we're pretty much using up our hour here.

Maybe we can take one more question and then wrap it up.

Yes, sir.

Our last question comes from Chris McCray (ph) from Deutsche Bank.

You may proceed.

Chris McCray (ph): Hi, thank you.

Do you happen to know the number that you might report in your Q - I don't want to butcher the term.

You might call them buyback guarantees on the Gulfstreams?

I don't know what the number is this quarter, Chris.

It was 648 the last - yeah, 648 last quarter, second quarter Q. Transactions that may have occurred in the third quarter would change that number, but I don't have the detail.

Chris McCray (ph): Okay.

And just lastly, any comments on the defendability of the SEP (ph) program against comments coming out of the press related to fiscal '04 (inaudible)?

The M1-A to SEP (ph) program apparently slated by some for cutback or cancellation.

No, by no one.

The SEP (ph) is scheduled to end at the end of the current multiyear, the upgrade.

So you can't cancel a program that's in the middle of a multiyear and is otherwise scheduled to come to a natural conclusion.

Chris McCray (ph): Have you seen those reports related to that program?

... a lot of stupidity in the press that can't - and I can't discern whether they're talking about the M1-A2 SEP upgrade program, the M1-A2 retrofit program or the AIM (ph) program.

So I'm not going to speculate about it until I see the administration's budget.

Chris McCray (ph): You think there is a fair amount of disinformation out there.

There's an enormous amount of disinformation out there.

Chris McCray (ph): Do you have any idea why Newt Gingrich is opposing the Striker (ph) out of the woods, if you will?

I have not a clue.

Chris McCray (ph): Okay.

Fair enough, then.

Thank you.

Okay.

Thank you all for being with us.

I'm going to go take - get a quick bite to eat and then I'll be available to answer any additional questions folks have to the extent that I know the answer. 703-876-3195.

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

This concludes the program and you may now disconnect.

Everyone have a nice day.