通用動力 (GD) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the fourth quarter earnings conference call.

At this time, all participants are in the listen-only mode.

Later we'll conduct a question and answer session and instructions will follow at that time.

If anyone should require assistance please press star zero.

As a reminder this conference call is being recorded.

I would now like to introduce your host Mr. Ray Lewis staff vice president of investor ring laces.

Mr. Lewis you may begin your question.

Thank you very much JJ and I want to well could welcome all of you and the investment community as well as the members of the press that are listening to the General Dynamics fourth quarter earnings conference call today.

I would also like to remind that you during the course of this call, we will almost certainly be making some forward-looking statements.

These are -- will represent our best estimates as to how things will work out going forward.

But they are as always subject to the same risks and uncertainties that are before just any business that you might follow.

With that said, I would like to introduce our Chairman and Chief Executive Officer, Nick Chabraja.

Thanks, Ray.

Good morning.

I'd like to begin today by first sharing with you my perspective on the quarter and the year.

And following that, I will want to discuss in some considerable detail, the results of Gulf stream and carry that to what we think next year looks like in light of market conditions and where we are today.

I'll close by offering some guidance as to what you should expect from us over the next several years from both a revenue and earnings-per-share basis and then I'll ask our Chief Financial Officer, Mike Mancuso to provide some additional detail and insight into the performances of the three defense businesses.

But specifically, to address an issue that there seems to be a great deal of confusion about in the marketplace.

That is, the pension accounting, particularly insofar as it impacts defense companies.

And Mike will also engage you in a discussion of the loss we took in the quarter in discontinued operations and see if we can't shed additional light, and then we'll move on to your questions.

So with that format in mind, as far as 2002 is concerned, all things considered, we had a good year.

We strengthened our business in a number of material ways, while really weathering a very difficult economic environment.

And in particular, its effect on business aviation.

Our cash generation, particularly in the fourth quarter, was superb and our funded backlog in each of the major segments has grown substantially in the year.

We strengthened the business with key acquisitions, smaller ones closed, the large one still pending that we hope to close first quarter this year.

Our core defense programs are wonderfully supported in the Congress, and it would appear robustly supported in the administration's budget as well.

Now, for some specifics.

We had $3.1b of new orders in the quarter.

Almost $17b for the year.

Funded backlog stands at $21b an increase of 10% for the year.

Total backlog is now $29 billion, an 8% increase over a year ago this time.

Sales in the quarter are obvious to you if from the press release at $3.9b, it's 13% above last year.

Interestingly, almost all of that growth was organic.

Sales for this year total of approximately $13.8b, are 15% above a prior year.

Earnings per share from continuing operations have increased for the quarter, 8%, and the year, 15%.

As I indicated earlier, cash generation which, in some respects, has been our haul mark was better than the guidance that I have provided to you.

As you frequently hear me use the term, the term that we manage to, we call cash generation from our business units, was $915m.

In Mike's remarks, he will talk to the FAS 95 figure, GAAP accounting figure, and also identify total capital expenditures as well, so that you can manipulate those cash numbers as you see fit.

But in fact, the number that I tend to rely on, cash generation from business units, is very close to the number that you get when you take FAS 95 cash, less capital expenditures.

Let me turn my attention from those general remarks to Gulfstream in particular.

Gulfstream as you all know was beset with a difficult market all year.

We talked about it a lot, the investment community.

But look, there's an awful lot of good news here.

And I want to tell you about it.

Let's start with orders.

We had 23 orders in the quarter. 133 for the year.

For the year, we had 126 brand-new orders, and seven options that converted to make that 133 total.

We also took 50 new options in the year.

That's unfunded backlog.

Let me give you the order breakdown by aircraft type.

We had 30 orders for ultra long range aircraft, that would be the G 5, the 5 SP or the new G550.

We had 32 orders for long-range aircraft, that's the G 4 SP, the 400, and the new 300.

So a total of 62.

For comparison purposes, we had 60 in '01.

So pretty good performance on the order front with respect to the large cabin aircraft.

Mid-sized, we had 11 G 200 orders, 10 G 100 orders, and of course well publicized 50 orders for the G 150, which is a plane that begins to deliver in '05.

Give you a little bit of breakdown for the quarter, and I'm prepared to do it in each of the quarters.

But I will leave that be No. you indicate interest by your questions.

Of the 23 orders in the fourth quarter, 18 were for the large cabin aircraft, and five for the mid-size aircraft.

And frankly, it was the mid-size aircraft business that bedeviled us all year, both from a margin and a volume point of view, the large cabin business held up very well.

And looks good going into next year.

Deliveries, that made their way into revenue, for the year, we delivered 85 green aircraft. 32 of the ultra long range craft, 29 long range, 15 G 200, and nine G 100.

In the quarter, we delivered 14 green large cabin aircraft and three of the mid sized.

So once again, you see the theme repeating, the mid size were the disappointment.

The large cabin business was steady, and if you look at it by quarter over the year, we were 15, 18, 14, and 14.

We had sort of hoped to deliver about four more at the end of the year, and didn't quite get the job done.

But I'll speak to that a little later.

Completions in the quarter, we had 94.

Excuse me, completions for the year, 94, 21 in the quarter. 34 of the completions were the ultra long range, 34 long range, and 26 mid-sized.

In the quarter, we completed 15 of the large cabin aircraft, and six of the mid-size.

So once again you see the theme repeating itself.

Backlog.

The orders, together, less the deliveries, resulted in a funded backlog at the end of the year of 173 aircraft for green delivery, 211 for completion.

This is a total funded backlog of $4.5b.

That compares with $4.2b at this time last year.

The unfunded backlog, even though seven options converted to firm orders, we have 103 options, that is $2.3b in unfunded backlog compared to $2.1b at this time this year.

So overall, the backlog grew from $6.3b last year to $6.8b this year.

Pretty nice in a tough economy.

Let's address the subject of pre-owned aircraft.

It was the subject of the greatest amount of consternation in the second half.

We were sort of initially optimistic that the pre-owned bug that bedeviled us in the third quarter was behind us, only to have it bite us again in the fourth.

But I want to give you a lot of detail, and analysis, so you can make some sense of where that might be going forward.

In the fourth quarter, we sold 21 aircraft.

Pre-owned aircraft.

And incurred a $30m loss on those transactions.

We also took a $7m write-down against the remaining inventory for a $37m pre-owned loss in the quarter for the For the year, we had $435m of pre-owned sales and incurred a total $81m loss between loss on transactions and write-down of inventory.

Let me, if I can, sort of set the stage for you as we went into the fourth quarter, so you can see the environment, the business problem, and what led to this write-down.

We went into a -- to the fourth quarter with a pre-owned inventory of $417m But of that inventory, $146m, six airplanes, were not available immediately for sale.

They're carried in inventory, but they were put to other uses.

Two of them were used as demonstrators, three were on interim lift agreements to customers, and one being utilized in the business as a test aircraft.

So while I'll sell any of those to anyone who would like one, they're otherwise deployed.

So the net of that is, we had an inventory of $271m available for sale.

In addition, we knew, as we were going through the quarter, that we would receive in trade in the quarter aircraft with a book value of $167m.

So in total, we had $438m available for immediate sale.

Given the condition of the pre-owned market, the size of our inventory, we made a strategic decision to be very aggressive with respect to the disposition of this inventory.

Even though it appeared that the pre-owned market was firming somewhat, you know, you're at your point of maximum vulnerability when price is deteriorating rapidly.

The pundits would suggest that in the quarter, the market was firming, and we had evidence of that as well.

But we also had evidence of the fact of the size of our inventory, and some evidence of the size of the inventory of some of our competitors.

And we thought it was prudent to move ahead very aggressively.

And we did that.

By the end of the quarter, we only had 12 aircraft valued at $230m left in inventory, and of course, the same six aircraft that we had going into the quarter, at $146m remained unavailable for immediate sale.

So that leaves six aircraft for $80m going into the new year and the new quarter.

So what does all that say about next year on pre-owned?

Well, we go in with six aircraft for sale.

And we have some existing obligations for trade.

And we should take additional aircraft during the year.

But given a firming market in our view, and the absence of a high beginning inventory, the problem from our perspective seems much more manageable.

We are also pleased with the way we have our sales department organized and incentive to deal with the pre-owned, and we're cautiously optimistic that that won't be a problem of the magnitude that it was in 2002.

But let's look forward for Gulfstream and we can talk a little bit about how we're planning projection and projecting deliveries.

For these purposes, they're exactly the same.

We intend to produce 56 of the large cabin aircraft, 34 of the ultra long range G 550 and 500, and 22 of the G 400 and G 300.

Mid size, 29 will be produced.

So the total is 85, which is the same number as last year.

But a slightly less favorable mix from a margin point of view.

Of the large cabin aircraft, that's the 500 series and the 400 series, a planned production of 56, 66% of which, 2/3, have been sold.

Overall, of the entire mix, 55% of the planned delivery positions are sold.

Our forecast for Gulfstream from an operating earnings point of view is essentially the same as we incurred this year.

They will do about $450m.

How do we get there?

Same number of deliveries, slightly less favorable mix, offset by improved performance on pre-owned activity.

Frankly, there's upside here.

We have -- we went -- we go into the year with four large cabin aircraft unsold from the prior year.

And a number of mid-size that I can't recall exactly.

But these are delta to the plan.

They're upside opportunities, if market conditions permit.

And we suspect they do.

We have the ability to be better than we're planning.

Let me move from Gulfstream to the entire company, for the entire company, we expect a relatively flat year in '03 from an earnings per share perspective.

Around $5.15.

Gulfstream, as I indicated, will be reasonably flat to last year, up marginally.

And operating earnings on the defense side of the house will continue to grow, you know, even relatively robustly in two of the segments.

However, that operating earning growth will be offset by somewhat higher tax rate, and the absence of a gain we recognized in the other income line upon the sale of assets we had acquired in the Primex transaction.

And maybe somewhat less earnings in the resources businesses, all that blended together should get us into the $5.15 neighborhood with some potential for upside there, as I've indicated coming from Gulfstream.

So we're looking at a target of $5.15 in '03, $5.65 in '04, and $6.15 in '05.

Revenue, revenue in '03 will grow to somewhat more than $15 billion.

Almost $17b in '04, and slightly over $18b in '05, all of that growth supported by backlog, and by program wins in '02 that have yet to be reduced to backlog, but most certainly will be during this year.

Some of the rapid growth is really driven by IS & T and combat systems.

They both will overtake Gulfstream in terms of operating earnings in '05 and it will be a horserace this year.

So we expect cash from business units, the way I use that term, up over $1b in 2003.

I have an opportunity to speak at a couple of conferences in the next week or so, and we intend to show charts that will show folks that guidance broken down by business units.

But we go forward looking forward to a strong '03.

Mike, you want to give us a little more?

Thanks, Nick.

Good morning, ladies and gentlemen.

Let me begin by providing some background and the detail surrounding the charge in discontinued operations.

As noted in the press release, this business was part of IS & T. The technology was rooted in a business we acquired back in 1997.

In 1998, we made another small acquisition that included two cable-laying vessels for shall owe water applications.

In 2000 we added two deep water leased vessels, and two more in 2001.

As most of you know from following Ticom Alcatel and Global Crossing, there is a large surplus of cable laying ships driven by the fact that only a small fraction of the installed submarine fiber optic capacity is currently being utilized, and absorption of that excess capacity is several years away.

After experiencing $38m of operating losses in 2002 we made the strategic decision to exit the business.

The $112m after-tax charge in the quarter and the $134m charge for the full year reflects the reclassification of those losses, the recognition of future lease liabilities, and the write-down of the assets to their realizable value.

The next subject I want subject I want to pick up on is cash flow.

Nick mentioned the $915m from our business units, $400m of which came in the fourth quart.

Net from the FAS 95 is $530m in the quarter and $1,122,000,000 for the year.

This is the fourth year of in a row that it has exceeded $1 billion.

Free cash flow from operations which subtracts CAPEX of $264m from the $1,122,000,000, resulting $858b.

The next subject is pension accounting.

Historically we have been very conservative relative to recognizing pension earnings from our government plans.

Most of you know that FAS 87 sets the rules from P&L, while CAS sets the funding from government contracts.

CAS funds in excess of any FAS 87 expense.

Over the years, pension and earnings from planned assets have exceeded FAS 87 expense generating a reserve of $210m through 12-31-01.

Before we would see pension expense in our P&L we would have to absorb that reserve.

As a matter of fact, at the end of November of this year, our total pension plan surplus estimate was $313m.

The bottom line here is that we have a surplus.

And we also have a reserve for the government plan.

Our estimated contributions to the government plans in 2003 is $60m.

Which is an allowable cost.

So we do not anticipate any cash impact in 2003.

Also, for FAS 87 purposes, our return on assets rate assumption has been the most conservative in our industry.

Let me move on to segment operating results.

You can see that the sales and earnings have increased substantially in the quarter and the year paced by the organic growth in IS & T and combat systems.

Operating earnings and margin rates for these segments has also grown.

Marine systems sales and earnings have also increased in the quarter, on the higher volume on electric boat.

Marine system sales for the year are up slightly while earnings have declined modestly as a result of the design to production transition issues at Nasco that we have discussed in detail on the third quarter call.

Aerospace revenue and earnings are lower in the quarter on somewhat fewer deliveries and the loss on aircraft sales that Nick discussed in detail earlier.

Excluding the pre-owned sales margin rates at gulf stream year over year have held up despite pricing pressure and the effect of more mid sized aircraft deliveries in 2002 carrying somewhat lower margins.

Significant improvements in completions, productivity, is the big factor.

Nick mentioned a growth in our backlog.

Here's the breakdown of backlog by segment so get your pencils out.

For IS and T funded backlog is $5.1 billion, unfunded is $200m, the total is $5.3b.

Combat systems has a funded backlog of $4.2b, unfunded of $700m for a total of $4.9b.

Marine systems has a funded backlog of $7.3b, $4.4b of unfunded backlog for a very robust backlog of $11.6b.

Aerospace as Nick pointed out has $4.5b, unfunded of $2.3, for a total of $6.8b.

And our other segment, which is a relative amount of short term contracts funded backlog of $200m unfunded $100m for a total backlog of $300m.

That should total $21.3b of funded backlog, $7.7b of up funded backlog, should total $29b.

And for comparison purposes, to restate again, our funded backlog a year ago was $19.4b so the $21.3 represents a 10% increase.

Our unfunded backlog this year is 7.7, it was 7.4 a year ago, that's a 4% increase, the total backlog this year at $29 billion as compared to 26.8 last year is 8% higher.

To summarize, as Nick said we had a good year.

We had a very good cash flow that will even be better in 2003.

We have grown the backlog and strengthened the businesses through major program wins and key acquisitions and we look forward to further improvement in 2003 and beyond.

With that said I'll turn it back to Ray to begin the questions.

Thank you Mike and JJ if you would once again instruct folks as to how they can get into the process most and let's start taking questions.

If you have a question at this time please press the 1 on your touch tone Telephone.

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

One moment, please.

First question, George Shapiro from Salomon Smith Barney.

Good morning.

Good morning George.

Nick, on your Gulfstream projection, last year at this time you would see the profits would be flat this year with last year which was somewhere around $600m and we wound up at $450.

Now again you're saying this year will be flat at the $450 level.

I guess what gives you the confidence that this year's forecast won't turn out as erroneous as last year's forecast?

George, I think that's a good question.

And I know you've always been skeptical on the Gulfstream story so I'm glad you're the one that asked this.

We anticipated a couple of things at Gulfstream occurred as some of which occurred and some of which didn't.

We believed we would deliver about 62 green aircraft large cabin variety.

We in fact did that.

Margin interestingly enough held up very well on those despite some price concessions that were rampant in the market.

Our guys did a pretty good job on price.

They had to make some concession.

But they largely offset those with efficiency.

Where we missed was in two important respects.

The first was, I confess.

I absolutely did not anticipate the pre-owned loss.

It was hard for me to anticipate that that market would deteriorate as rapidly as it did.

And we also did not sell the volume of the mid-sized aircraft that we were counting on.

We were counting on improved sales of the mid-sized to offset reduced sales of the larger.

And that didn't happen.

Didn't happen in the economy.

Now, we believe, going into this year, that we have the business sized appropriately.

Our large cabin forecast is probably conservative, 56 aircraft.

And as I indicated to you, two-thirds of those aircraft are sold.

So we have relatively little exposure to market condition, we have 19 of those to sell.

If you take a look at last year, we were able to get some 60 orders plus of those aircraft.

So I think we should be creating backlog during the year.

And we have a little bit of insurance.

We have four aircraft that we don't have to produce that could be a plus to that plan.

We also believe that we have the G 200 program stabilized.

And a pipeline and market interest there.

So we don't -- so we feel pretty comfortable, George, about that outlook.

If you're -- if you're asking me, is there any risk to it, of course there is.

And if I had to put my finger on where that risk is, even though I feel a lot better about it, it would be again in the pre-owned activity.

But right now, we see that marketplace firming.

I think our view of it is compatible with the view of those who write on the subject, analysts who cover that part of the market.

And the evidence that we see.

But you know, what are the wild cards?

The economy in general, a war in particular.

So we can't give any assurances.

But I think that we're not naive this year.

We may have been naive a year ago.

We understand our new market a lot better.

We understand where we're going.

And throughout the large cabin business has been stable, stable and quite good.

You remember at our high year, 2001, we produced and delivered 71 green large cabin aircraft and last year we were at 62.

So this is not the kind of market collapse that those who think poorly of this business segment would suggest and anticipated.

And it's not going to happen this year either.

So you know, maybe I'm misguided, George, but I'm still a bull on this business.

Okay.

I guess the issue I have with it yet, and Nick, you're right, that your deliveries haven't gone down that much.

And if you look back at say the cycle, the last cycle, I mean the deliveries out that Gulfstream had.

So your argument that this cycle despite, you know, the economic downturn is going to be far less severe than what we've seen in the past.

And I guess I don't buy it at this point.

But that's what makes horse races on it.

I mean, don't you have this year, with the net jets now, Gulfstream is coming back because they've been in service for five years and the growth rates in that business has slowed, so -- I mean, that's another potential issue with the used market, or no?

George, I don't really wish to speak to Net jet’s business.

We can discuss the pre-owned market in great detail.

I would say in a broader, economic sense, when you compare this economic downturn to the last one, you're dealing with a much more mature general aviation marketplace.

You're dealing with fewer competitors.

And there are winners and losers in this market.

And that happens in a down cycle.

It shakes things out.

It's in many respects for us, it will be a market position enhancing time.

We will growth share in this market.

And we are the low-cost producer at the large aircraft end of things.

And we will continue to be, that efficiency being actually forced in part by our lower production, and we think we're going to get through this just fine.

And we might disappoint you George, but we'll be okay.

Let me make one more comment and I'll turn it over.

Ask questions don't make comments, George.

The question is you make a statement that there's less competition.

But certainly at the high end there's more competition.

I mean, ten years ago Gulfstream had no competition.

Today you've got global express in addition to the Boeing and Airbus offerings.

George, again you're making argument instead of asking questions but let's set the record straight.

Let me set the record straight.

Ten years ago Gulfstream had a competitor, direct competitor for the for market, Desau.

A very fine competitor and they remain so today.

There was no ultra long range market.

We created it together with Bombardier and we were the first to market with the product and I think you'd recognize that we're winning that market share battle and quite decidedly.

My understanding is that right now our competitor is not producing that aircraft at the moment.

The factory is not in production.

So George, you and I can see this differently but I think you ought to save your views for your writing on the subject, and let someone else ask a question.

Okay, that's fine, thanks very much.

Thank you.

Once again if you have a question please press the 1 key on your touch tone telephone.

Our next question comes from Eric Hugel of Stephens, Inc.

You may proceed.

Good morning, guys.

Good morning Eric.

Can you give us more detail about the margin performance at marine?

It is my understanding from the previous conference call that the problems at Nasco were pretty much behind us now.

Is this decline in -- significant decline in margins, is that a separate issue, or is this still with the tote ships?

It's the tote ships.

We, of course believe, as we have to believe at every quarter that we report on our results on a shipbuilding program, our estimate at completion indicated that we had absorbed the punishment that there was to absorb at Nasco on that program.

Unfortunately during the quarter, we had a loss that we had to recognize there.

What would I say about that, and what does it mean for us next year?

Again, you know, there's no guarantees.

But we are close to the end of building both of those ships.

So to the extent that anything additional, any existing risk crops up, it will be in the test of the ship and the sea trial, sort of repair work warranty kinds of things.

We're not anticipating problems in that area.

Several of the dock side tests have taken place of systems.

And I think that our auditors fully agreed with the -- with our positions, the position of the shipyard, with respect to their foreseeable losses across the program.

So we believe that Nasco will return to profitability next year.

And that this kind of thing is behind us.

Can you give us an estimate as to sort of percentage that you are completed with both ships?

I think 90%.

Okay.

Moving on --

90, 80, something like that.

Okay.

They're quite far along.

I mean, if you saw the first ship, you'd think it's ready to drive away.

Moving over to Gulfstream, the numbers I'm looking at on margin ex pre-owned sales for this quarter was around 14%, versus about 18.4 last year, and that's about -- compared to about 18 or 20% for the first three quarters of the year.

Which leads me to believe that there are possibly production issues. .

I mean why are pre-owned margins so low in this quarter?

Pre-owned margins or --

I'm sorry, aircraft margins ex pre-owned.

Mike, is the figure for the quarter of 14% correct?

Yes, it is.

There are no production problems.

The problems are relatively identifiable.

Margins were hurt, I can give it to you exactly.

The production margins, green delivery, 5s were right on budget, completion margins for 4s and 5s were on or ahead of budget.

The mid-size were below.

Mid-size below, as a result of pricing pressure.

And in the quarter, we had some 4s that were below budget on margin for green delivery as a result of pricing pressure.

But the 5 held up throughout, as did completion activity.

So no productivity problems at all.

Were there any aircraft being run through the production line that don't have owners attaching them basically producing white tails?

Because that margin is just too low.

Eric, if you listen to what I said earlier, we ended the year with four large aircraft in inventory but we ended last year with three.

So it's not unusual that we get caught at the end of a quarter or the end of a year with few aircraft.

We do not have a large inventory of white tails of any kind.

My final question is with regards to IS & T. Moving the discontinued operations out of the business, I would have expected higher margins, if you look at historically, it looks like $11m around $10, $11m loss per quarter.

Sort of backing that out on the revenues, I would have expected margins to be significantly higher than the 10.8 that was delivered.

Is there something pushing it down or is it just lumpy?

Eric, I can't quite, you know, I don't know how to relate to your expectations.

But IS & T business at or about 11% is a pretty exciting business.

So I don't know how much higher you would expect them to be, or what you have as a Comparator that would suggest they should be.

To me, that's strong performance.

Okay, thank you.

Thank you.

Our next question comes from Steve Binder of Bear, Stearns & Company.

You may proceed.

Good morning.

Before we go to Gulfstream, if you could touch on margins for the fourth quarter compared to the third quarter, were they down as well or stable?

No, stable.

You remember I think if the third quarter that we modestly raised the booking rate on the DDG performance, and that held constant in the fourth quarter and they'll probably go up as we go into the year.

All right.

With respect to '03, and your profit forecast for gulf stream, you talked about the risk on the pre-owned activity side as well, the risk beyond the macro issues.

Just wondering, I suspect bigger unsold planes, the sold positions on the high end cabin planes are the G 550 if you launched it.

I'm wondering, the G 400s, unsold positions good deal.

Are you assuming right now better pricing for the G 400 deliveries in '03 than you experienced in the fourth quarter some, essentially a pickup in pricing or about the same?

Yes, we're experiencing a firming, in part as a result of the -- of a product differentiation, right, Steve?

I mean, the G 400 is a slightly different product with sort of arms-around support packaged in with it and it's offered at a different price.

Part of what we're attempting to accomplish here with -- we could have produced more aircraft this year, and I think not had a lot of risk in doing so.

But we're attempting to create some scarcity here, and build backlog for the following years.

So we understand our market, we understand the dynamics a little better, and we're working very hard to preserve price in the quarter.

So therefore, just to make sure, you're assuming not only is the product differentiation of the 400 but you're saying better pricing on that overall product in '03 than you experienced in the fourth quarter, is that true?

Than we experienced in the fourth quarter.

Is there any lumpiness in the four quarters that we should be concerned about?

You won't see much lumpiness in the large aircraft.

The mid size tend to be short cycle kinds of activity.

You don't sell those positions on a large backlog.

At least we haven't with new aircraft programs.

And they could be lumpy.

They were lumpy last year.

All right.

And last, for '04 you mentioned an EPS target.

Actually I would like to know what are your assumptions on Gulfstream's profit embedded in the 550 number?

In '04?

Yeah, just to kind of --

All right, I'll tell you in a minute, let me thumb to the plan.

They go up about $50m.

Because you know, you look at the G 550 product line in '04, right, you know right now, I imagine the firm positions are fewer than 15 right now on that product, and obviously you got a healthy backlog for '03.

And you do have the trade-in issue where you've got some of those completed planes have some trade-ins attached to them pretty good recent vintage 4s and 5 55s.

Do you view that to be a risk at all in light of those two issues?

I think it's always a risk.

But if you think about what we're up to, let's assume that last year was a fair year, a fair indicator, because we sure had a tough market each year.

And we managed to get orders for 60 of the large cabin aircraft.

If we have any kind of repeat of that sort of order performance, and only 19 required to fill our sales consist it, we've created a fair amount of backlog going into the following year.

That's the plan.

and last --

If you want to hypothesize that we go dead in the water from an order perspective, then there's a lot of risk in the world.

But that has not happened and the order book has been reasonably steady even by quarter.

Do you know offhand, the G 5 50s do you have any orders in the fourth quarter?

Yes.

You did?

Yes.

Do you know how many you finished for the year on the G 550 line?

One, one was green delivered I think.

That was delivery.

I meant orders.

Oh, how many were for the year?

Yeah.

I can't tell you right now the breakdown of the large can cabin.

The guys will give that to you offline.

That's fine.

Would you give an update on the A 12?

What?

The A 12, would you care to given an update?

Steve, you know that the government's effort to collect money was enjoined by the court, court indicated in its order that there were very serious and close questions to be decided by the Court of Appeals.

Court of Appeals has heard argument on that subject.

It was an interesting argument.

I will not comment on that argument.

But for those of you who were there, you can form your own opinions.

We anxiously await the opinion of the court.

But there's not much traction as far as settlement with the government?

I think it would be pretty hard to settle this case right now, having heard the questions that the court asked and where -- where they appeared to be, I'd think the parties have pulled away from each other.

Okay, thank you.

Thank you.

Our next question comes from Cai von Rumohr of S.G.Cowen Securities Corporation.

You may proceed.

Not to beat a dead horse but the fourth quarter margin of 14% looks like it's down by my numbers of 18 to 20 plus in the first three quarters.

You mentioned the first two areas not being on budget.

Did the results include any severance cost or restructuring that would kind of abnormally have impacted it on the negative side and if so how big were those?

No, no Kai.

The margin differential were sales of mid sized aircraft and completion of mid sized aircraft, and some green margin deterioration in the four, having to do with pricing.

The 5 was on budget throughout the year, and the completions of the 4 and the 5, the margins were on budget, ahead of budget all year.

So I've identified the areas where we took -- took the heat.

Okay.

I think you mentioned that you know, of the large planes, you have 19 of the 56 to sell.

Yes.

…and presumably, those are all, you know, the G 400s, 300s.

No, they're not all.

Not all?

There's a mix.

But presumably given the very large backlog you have for the 550, I guess the gist of my question is, you know, it looks like a good part of that will be G 300, 400, and you mention you had pricing pressure here in the fourth quarter and you have a pretty large portion of the mid size to sell, and while the order rates have been good it looks like to get that that the pricing certainly in the fourth quarter based on deliveries was weaker than in the third.

So I guess what I'm asking is was that kind of to fill those out that that was kind of a one-time deal?

Let me help you a little bit Kai, I understand where you're coming from.

Let's see if I can help you.

You might recall that I talked about 56 large cabin aircraft, but remember, this -- you'll see that the book is balanced and that some of your assumptions aren't correct.

We plan to build and deliver 34 of the ultra long range and 22 of the large cabin.

So I think you should assume that that book is fairly well balanced, and the risk is reasonably well balanced.

Part of the discounting, if you will, that occurred in the fourth quarter was a little bit self-induced.

We had four SPs to sell.

We didn't want white tails.

We were trying hard to make our plan, and we did what we needed to do to sell inventory.

We don't intend to repeat that going into the new year.

So I think it was driven in -- less by market and more by our own -- our own circumstances.

Okay, great.

Could you -- you mentioned that you're seeing signs of firming.

Could you be a little more specific, in terms of what signs of firming you're seeing?

The reports that we're getting for example, the 5, we don't have any pre-owned 5s to sell.

There may be some available in the marketplace, but we don't have them.

They're not creating price competition at the moment for the 5 aircraft.

There is some firming in the G 200 for us, in the used market.

It's becoming increasingly predictable.

We were able to sell an awful lot of aircraft.

There was a -- quite a robust demand for the pre-owned.

I think if we had been more patient, we probably could have escaped without the loss.

But that would have taken several quarters.

And our judgment was, on balance, let's get out of inventory and into cash.

And if you know us we tend to make that kind of a call.

So we hated to disappoint in the quarter on the pre-owned loss.

On the other hand, I'm glad to have only six aircraft for sale as we go into the new year instead of having a bunch like some of our competitors do.

Okay.

If we turn to the marine sector, obviously, you've got still an issue here on the tote ship.

Is the outlook a bath and electric boat and on the TAKE program, are those programs still looking as strong as they looked a couple of weeks ago, couple of months ago?

Cai, absolutely.

Electric boat is a high performance organization.

They continue to perform beautifully.

They have the -- only problem they have is the one we've previously identified many times; they're coming off or they're reducing the volume of highly profitable sea wolf work, the last sea wolf delivers in '04 and the volume of engineering work, and Virginia class, which is cost-plus, albeit at a fair margin, is increasing.

So they're having a modest mix shift, but great performance.

Bath had troubled performance, stabilized and is clearly improving against that very, very large DDG 51 backlog.

So we expect bath to mine that backlog, and they will.

They have a -- they had a new facility to deal with, and they kind of lost their way for a little while.

This was not a tragedy, they did not, however, meet my expectations, but margins are good and getting better.

Nasco had a design-to- production issue and a major one.

You know, it was a bloodbath but they worked their way through that now.

Those ships will deliver, and they are doing a very good job on the design of both the DP Amoco tankers and the Take ships.

And we have the tools and the support for them now throughout the marine group to ensure that the design is ready to go, and that it's producible.

So we have a lot of confidence in Nasco going forward.

How large was the write-off of the reserve on the tote ships at Nasco and were there any other adjustments either positive or negative in the marine sector in the quarter?

The tote reserve or loss in the year was about $80m.

There was no other in the marine group.

and how big was it in the quarter?

17, I think.

Excellent.

Excellent.

Thanks so much.

Thank you.

Our next question comes from Howard Rubel.

You may proceed.

Good afternoon.

A couple questions.

First, just do a little bit of outlook, Nick.

You had a terrific first quarter.

I can barely hear you.

Is that better?

Thanks.

Only one Gulfstream question and then I had a couple on the other segments.

You had a terrific first quarter in gulf stream last year.

And sort of the enemy of the good is the better, and with that kind of tough comparison, is it possible that earnings in the first quarter for the whole corporation will be flat or down? '03 versus '02?

Mike, what were we in the first quarter EPS

Bear with me inning and I'll tell you.

First quarter of '02?

Yeah.

Howard, I'd be looking for about a buck and a nickel and that's rough justice, okay?

Okay.

Because I think you did around a buck-13.

That sounds about right.

So we'll be down a little bit in the first quarter.

Again, that's rough justice.

But if I were spreading it today, I'd be about a dollar five, a dollar 25, $1.35 and then the balance.

You had terrific performance in combat systems.

Can you -- sounds like some of it was probably Santa Barbara, can you address that and how successful has that integration been?

It looks pretty impressive.

Santa Barbara is just coming on line really now.

And beginning to provide us with some earnings.

They will continue to get better as time goes by, and their margins will improve.

And then just two small items.

One is, could you remind us where you are, in terms of your share repurchase authorization?

I thought it was around 10 million shares and how far --

That was the -- that was the original authorization but we've chewed a bunch of it up.

We're down to about 3 million shares remaining in that authorization.

We purchased about one million 3 in the year.

So we're down to just about, oh, 3 million 2 remaining authorization.

And can you -- you continue to have a very low debt-to-cap ratio.

Are you thinking about adjusting that in any fashion, taking advantage of low interest rates and leveraging the balance sheet at all, or using this opportunity to buy stock?

We continue to be active in the acquisition area.

We're, as you know, we have to close the GM of Canada transaction, but we still will be -- have an unlevered, essentially unlevered balance sheet.

We will continue to be aggressive in the acquisition market but not imprudent.

We'll continue to repurchase our shares.

I don't think that I probably ought to comment about our specific intention in the quarter, but it should be reasonably obvious.

And in the spring, at our board of directors meeting in March, we annually reconsider our dividend policy and we'll do that again this year.

Thank you very much for your time.

Thank you.

Our next question comes from Nick Fothergill of Banc of America Securities.

You may proceed.

Couple of quick once ones on Gulfstream.

Aiming for 56 large cabin aircraft in 2003 and you have sold 37 so far.

I imagine a bunch of these will be five SP.

How many of these will be trade- ins do you think?

Is it still 16 for '03?

Nick, you may remember in our quarterly filings with the Securities & Exchange Commission, we have identified our commitments to receive trades.

And that identification was $87m.

So of a larger commitment, only $87m of aircraft was scheduled to be received by us in the next year, in this year, excuse me.

However, I would expect that to shift some as our production shifts around, as we move positions among the people we have under contract.

So I would expect that number to enlarge somewhat by the next time we file.

Okay?

So it will be larger.

But on balance, and we'll of course, during the year, accept some trades that we don't have committed now.

But on balance, I think it will be more manageable than what we ran into in the third and fourth quarter.

Nick Fothergill Okay, great.

And in the past you've been very good at giving us some color or visibility of what the customers are actually saying.

Are these Gulfstream, more in the large end that you were saying kind of temporarily had their wall et cetera in their pockets and these guys put their wallets in their pockets and walked out the door or still in dialogue with you or do you get the impression that there is pent-up demand?

The pipeline is adequate.

I think Bill Boyster had the best description of this market.

He said the demand is tentative.

And by that he meant there are plenty of shoppers, but they're slow from initial introduction to contract.

That remains the same.

But you can see that our demand for the aircraft has been relatively consistency, even over this down time for another large cabin aircraft.

The mid size has been more episodic.

However, the buyer has been quite sophisticated.

I mean, these are not unsophisticated folks.

And they usually have flight departments that have up to date information on competitive offerings.

So the pressure from us on price hasn't come from an absence of demand, but from an excess of supply.

Some of that supply has been pre-owned.

And we'll watch that very carefully.

We think that the picture that has cleared quite markedly, on our ultra long range product, the 5.

That was a time when there was quite a number of those on the market.

That has cleaned up considerably.

So we're cautiously optimistic in the pre-owned area.

Okay, Nick.

That's great and two more very quick ones.

Looking at your operations from 30,000 feet, Gulfstream you're saying should be around stable this coming year.

Defense a little bit up yet EPS is flat to down.

Have you got a rising tax charge and obviously interest will be going up because of the recent acquisition.

I tried to get that from 30,000,000 feet but let me get it again.

The defense businesses are going to go up fairly well.

And even Gulfstream is a couple of million up in the plan.

All in all operating earnings are up and would be up in a satisfactory way.

That will be offset by a higher tax rate, somewhat increased interest charge that's probably almost too insignificant to mention.

But we won't have the other income that we had this year.

Remember, we had an item from the sale of a -- of some assets, and our resources grew, won't do quite as well as they did this year.

There was included in their results this year kind of a one-timer.

But they'll do okay.

So all in all, when you put all of that in a hat and shake it up, it comes out about the same.

If you want to even go 5,000 feet higher, and take a look at it, if you go back to the curves in the charts that I gave the investors a year ago, on how these businesses would perform, the defense business, three defense businesses are going to be spot-on that chart for 2003.

But as you look at it, they outperformed in 2002.

So their growth rate isn't quite sufficient to sustain an EPS growth.

But they're right on the chart for '04 and '05 as well, if not slightly ahead.

And they really -- the defense businesses really did a great job trying to help us get to where we needed to be, when gulf stream faltered.

So it would be fair to say that you squeezed a lot of juice out of the defense businesses last year and this year it might be a little bit nor pedestrian but better growth projected in '04 and '05?

Yes, they will do exactly for '03 where we had them a year ago when we talked to you about it.

They are right on that forecast line, but the growth rate doesn't seem to be quite as significant because they out performed so handsomely this year.

The last one is on IS & T. You've always been looking very hungrily there for other deals.

Do you see opportunities, or are those businesses proving to be rather expensive in this market?

We're looking at a number of things, Nick, and I think that there's been a little more realistic pricing in this segment as well.

There was a while that, for a while, people were looking at commercial kinds of pricing, you know, sort of in the go-go days.

I think that people have been disabused of that.

There seems to be a large number of fairly-priced smaller opportunities.

Fewer of the pieces that could really move a needle in a given accounting period.

So one needs to calibrate how you want to approach this market.

Are you kind of an assembler of several properties, and take a little more integration risk?

Or do you sit and wait for the larger properties, and see if you can make a deal?

But kind of typical consolidator's problem.

This is a market that is fragmented.

We've been doing a pretty good job just from a program win perspective of creating significant critical mass.

But I suspect that the market itself will consolidate over the next year or two.

So look for us to be -- to be in there.

Great, Nick.

Thank you very much indeed.

Okay, JJ, I think we'll need to wrap this up.

We will take one more question and then I will be available once a grab a little lunch to talk to people off line.

Our final question is from Joe Nadol from J.P.

Morgan Chase.

You may proceed.

Quick one here, most of the issues have been hashed over.

Is the is it fair to say the rollout of that new product is on schedule and your operational risk is zero on the G 4?

We -- yes, Joe, thank you, and good afternoon.

We had a green delivery, the FAA had given us our air worthiness certificate.

It’s provisional.

We still have some software updates coming from Honeywell, but we don't see any production risk in that aircraft.

And we fully anticipate that that program is moving quite nicely.

The same is true with respect to the G 500 and the G 300 program.

Okay.

Nick, I know you don't want to really address net jet's core business, obviously that's for them to deal with.

But from a disclosure standpoint, last quarter, 52% of your funded backlog at Gulfstream was net jet's.

Can you give us A what that will be and B if there are any deferrals.

I don't know the number as I sit here.

But I think it's less, Joe, because we took in orders, and they weren't from net jet's.

We delivered against some of those orders, and how all that shakes out, I can't tell you.

And I don't -- I'm not aware, let me put it that way, I'm not aware of any broad-based deferral effort with respect to net jet's.

They are always rearranging with Bill.

That is, they pull some planes forward, and ask for deferrals on others, to suit their requirements.

But they have been relatively predictable, and stable, insofar as we can see it.

Okay.

Just a couple more.

I guess for Mike, first of all, on residual value guarantees, under of Q2 you were slightly north of $500m and most of that was in '04.

You mentioned some of that is going to be coming forward a little bit but what is the gross number as of the end of the year?

Mike, you've got that number there?

Yes, Joe, the gross value of the commitments is $550m .

That is Nick indicated we'll know obviously by the time of our K filing what -- what portion of that is '03, for '03 receipt if you will, as he indicated the production schedules are moving around.

So the number will fluctuate.

Anything I tell you today will be inaccurate by the time we file our Q. But it's, you know, roughly balanced, I think, but you know, some of the '04 things will move in and some of the '03 things may move out so it is a wait and see.

Some may be in '05 too.

Fair enough.

The last one is on the discontinued Opps, could you give us the restated numbers for the first three quarters?

Because you took 11 cents of loss from continuing operations, put it into Disc Opps.

Is it 4 cents a quarter and what are the adjusted numbers?

I don't have that, let me ask Ray to provide that to you off line.

Thank you.

There will be a modest restatement with respect to prior year.

Maybe two.

Relatively insignificant restatement for '01 as we indicated in the comparison, and almost nothing in 00.

We had a modest gain in '00, a modest loss in '01 and then it started to deteriorate on us this year, got worse as the year went on.

So I wouldn't -- I'd be surprised if it was the same number of pennies each --

It's about -- I think we average maybe seven or $8m of loss in 2002 by quarter.

That's the ballpark number.

So even after tax effect that and divide by average shares and you're going to get a couple two three cents.

I will be able to give everyone what the offerings are restated if you want to give me a call.

I'm at 703-876-3195.

Give me about ten minutes to grab a bite to eat and I'll be available to talk to you all, and thank you very much for joining us today.

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

This concludes the program.

You may now disconnect.

Have a good day.