通用動力 (GD) 2003 Q1 法說會逐字稿

Good day, everyone and welcome to the General Dynamics first-quarter 2003 teleconference.

Today's conference is being recorded.

For opening remarks and introductions, I'd like to turn the conference over to Mr. Ray Louis (ph).

Please go ahead, sir.

Thank you, Melissa.

I'd like to welcome all the members of the investment community, as well as the press who are on our call today.

As always, you should be aware that to the extent anyone on the call makes forward-looking statements, these will represent our best estimates as to how the future will unfold, but obviously all of these estimates are subject to the normal risks any business faces.

With that said, I would like to first turn the conference over to Mike Mancuso for some comments and then after that, Nick Chabraja will give his views on the quarter -- Mike?

Thanks, Ray.

Good morning, ladies and gentlemen.

My remarks will be very brief.

If you have our press release in front of you, perhaps you will notice that we have not only attached additional schedules and information, but have embellished the standard segment operating results exhibit.

Margin rates and quarter-to-quarter variances have been added.

The additional exhibits display backlog, reconciled cash, break out Gulfstream deliveries, as well as provide general financial information.

Now, let me just offer a few quick observations on that data, principally addressing items not specifically discussed in the press release.

On the income statement, Exhibit A, you can see that the provision for income taxes is lower in this quarter by $32 million.

The effective tax rate is 28.9%, as compared to 34.5% last year.

In the quarter, having favorably settled certain disputed issues, we were able to reduce the provision.

Our rate for the remaining three quarters should approximate about 33.9%.

However, we have several audits underway that may provide additional reductions as the year unfolds.

The fully diluted weighted average share count is lower by 3 million shares, largely the result of our repurchase activity.

In the quarter, we repurchased 4.4 million shares, spending about 274 million.

On Exhibit B, you will notice that our resources segment on lower sales volume has increased operating earnings of $4 million.

Improvements at our Freeman Kohl subsidiary is the primary reason.

Exhibit C provides selected balance sheet information.

Note that debt has increased as a result of the acquisition of GM Defense, that closed at the end of February.

And finally, on Exhibit D, we have displayed backlog by segment and Gulfstream aircraft deliveries for the quarter.

That having been said, I'll turn it over to Nick for some commentary.

Good morning.

This was a very good quarter for us, marked by very strong organic revenue and earnings growth across our defense portfolio, a growing backlog, and very strong cash generation, particularly for us for a first quarter.

And I'll comment about that a little later.

On the capital deployment side of our activity, we further strengthened the business by closing a major acquisition with General Motors that promises to be accretive to us over time, and as Mike indicated, by investing significantly in the repurchase of our own shares in the quarter.

Now, let me add a little color on some of those topics.

Our three defense businesses grew their sales in comparison to this quarter a year ago, and their operating earnings, by about 500 million on the sales side and 50 million on the operating earnings side.

Of that amount, about 350 million of the sales and 32 million dollars of the earnings was organic growth.

Pretty impressive.

Backlog -- funded backlog and total backlog increased in the quarter, and now totals 30-and-a-half billion.

I'd like to point out to you that even that number, as a result of accounting conventions, doesn't fully tell the story.

There's approximately $2 billion of competitively awarded ID/IQ contracts.

That's indefinite delivery/indefinite quantity principally in our IS&P segment that represent very highly probable additional sales in the near-term reporting periods, so we're very enthusiastic about where we are on backlog.

And I should point out that it wouldn't be unusual in the first quarter for us to be a consumer of backlog rather than adding to it.

Cash flow in the quarter was strong, our best in the first quarter in my memory.

It's not unusual that we're a user of cash in the first quarter.

The figure which you have in the materials that have been provided a little bit in excess of 170 million, after capital expenditures, is almost 300 million ahead of where we were a year ago at the same time, and I think there's a reconciliation of the cash performance that's attached to the press release.

I think in summary, it's obvious that our defense franchises, paced by the IS&P group, combat systems, and of course Electric Boat, are growing and performing absolutely superbly.

NASCO (ph) is experiencing some lingering residual problems on the two tote ships that frankly hurt us significantly in the quarter, but the real financial impact is behind us.

That's the good news.

The first ship is delivered, and the second one is over 90% complete.

So we look forward to a resurgence at NASCO.

The operations part of our aerospace business continued to improve in terms of productivity and efficiency.

However, the pricing pressure on new aircraft and a very weak pre-owned market more than offset the productivity gains, as the results reflect.

But this business, Gulfstream, continues to do the right thing.

It is a very good business, performing very well in a really difficult market, and I'll leave further comment on that subject to what I'm sure will be some questions.

But in short, there is much to be encouraged about here in these results.

Ray, I'll turn it back to you or to the -- to moderate the Q&A period.

All right.

Millicent (ph), if you would, please explain the queueing process for questions and now we're ready to take them.

Today's question-and-answer session will be conducted electronically.

If you do wish to signal for a question, please press the star key, followed by the digit 1, on your touch-tone phone.

Once again, that is star 1 on your touch-tone phone to signal.

If you are using a speakerphone, please make sure that your mute function is turned off, to allow your signal to reach our equipment.

We will take as many questions as time permits, and we'll come to you in the order that you signal.

We'll pause for a moment to assemble our roster.

Our first question will come from Heidi Wood (ph) with Morgan Stanley.

Yes.

Good morning, guys.

Nick, I missed the comment about -- on the organic sales that you had.

Can you just tell us how much of the combat sales increase we saw was organic versus what was -- came from GM Defense?

Yes.

We have a number on that.

We only have one month of GM Defense in the mix.

The IS&P growth is almost pure organic, but Mike will give you the number out of his book here.

A hundred million, Heidi, of the organic growth was combat systems.

Okay.

And talking about Gulfstream, the -- can you break out for us what their sales were in terms of new aircraft sales, used, and spares and support, and how much you lost in the first quarter on used?

Heidi, we don't break out sales ever, in my memory on that line of business.

But we can tell you that the pre-owned market loss was relatively significant for us, $24 million, again, in the quarter.

That depressed their earnings and it's going to be a tough fight through the remainder of the year, we think.

Okay.

So then when you back that out, Nick, it looks like you did about 12% margins, about 11 - 11.7 on the remaining two portions of the business.

That's about right.

Right.

So then given kind of what you're seeing, even -- even just through the last month or so, you know, how comfortable are you increase -- are you feeling about the guidance you've given us for the full year on the margin?

Heidi, I think at the last time I had an opportunity to speak publicly on this subject, I made very clear that I wasn't giving guidance on margins or earnings at Gulfstream.

And I went on about this at some considerable length.

It was at a conference in New York mid-quarter that was carried publicly.

I indicated that we were in a difficult market where a number of the variables were moving -- price, supply, demand, pre-owned -- and that the best we could do wasn't to try to handicap this for the investment community, but to give you, from time to time, where we were with respect to production and anticipated deliveries, and I did that.

And I lowered expectations from what we had done at sort of year-end, and this market is difficult, at best.

We did fairly well in the quarter.

That is, we received a number of orders, and you can tell -- you know I don't go into the specific numbers of orders, but you can tell by the backlog that we did okay.

We did okay in an environment where we even experienced some cancellations, largely attributable to customers being unable to finance, ultimately, the purchase.

So it's pretty hard for us to call this one, as we go along, and if the conditions that we see now -- that is, a slow economy, further exacerbated by the after-effects of September 11th, the war in Iraq which now seems to be coming to a conclusion, the whole episode associated with corporate irresponsibility, and the chilling effect that has on all kinds of capital spending, it's very hard for me to predict the duration of that.

If the economy continues for all of those reasons to behave as it currently is, it would be highly likely that we will report again to the investment community that we are going to further reduce the number of airplanes that we produce.

But we're not there now.

We're continuing to work it.

Like all markets that are in some form of distress, you get completing signals.

There is some early evidence in March, in particular, of some strengthening.

For example, we know that the fractional shares folks, our good customer net jets, was flying in March significant hours.

We know that our service business was strengthened in the month of March, that our backlog there is larger.

We know that we are being requested to make tech appraisals, in furtherance of transactions in the pre-owned market in far greater volume than we've experienced in recent months.

All of those are harbingers of improvement.

Whether they will prove to be episodic and not harbingers of a trend, I can't tell you right now, nor will I, until I have an ability to evaluate the data.

All I can do is assure you that I'm paying a great deal of attention to it, and we want to take full advantage of whatever opportunities exist in this marketplace, Heidi.

Great.

One, actually, other question because I'm sure others want to ask you about Gulfstream, so I'll move on to another topic, but Nick, you know, Chairman -- past Chairman Hunter has talked about this renewed approach to appreciation for heavy armor following Iraq, and your SEP five-year multi year expires next week, or next -- in 2004, sorry.

Do you have any kind of an inkling or, you know, with your discussions that there is, you know, potential for maybe a re-up on that multi year?

Heidi, first, I appreciate Chairman Hunter's remarks about our product and heavy armor in general, and he was speaking from his perspective as the chair of an extremely important committee in so far as military affairs are concerned, and it's his right and privilege to express his views on lessons learned after this recent engagement.

It would be presumptuous and premature for me to make those kind of comments until our customer, those who both planned and executed this engagement, have an opportunity to conduct a disciplined evaluation of what their requirements might be.

So I will refrain from commenting about any of our products, other than to say it's relatively obvious that the tank performed very well over there, and was a significant factor, among many, including the brilliance of our young men and women in uniform in all of our services who performed courageously and brilliantly in this engagement.

Great.

Thanks very much, Nick.

Our next question will come from Chris McCray (ph) with Deutsche Banc.

Yes.

Nick, good quarter.

I wanted to ask you about the marine segment and what you regard as kind of the triggers for getting margins to move there.

You referenced the -- the mere passage of time is the critical element at NASCO.

How important is it to get the multi years for Electric Boat, and what are the prospects for that?

Okay.

Good question.

We've got three -- three shipyards, three things at work here.

In the case of NASCO, it's getting through the tote dilemma, which, you know, we are close to the end.

I can't promise anybody that we won't take any more charges, but they're not expected, Chris, so NASCO will begin to improve as it begins to increase volume on BP Amoco and ultimately our PAKE ships for the United States Navy, and I have a lot of confidence in NASCO.

This was a unique and unusual problem that didn't relate to kind of normal productivity questions.

Bath Ironworks is steady as she goes.

What we need there is continued productivity improvement on our new land-level facility, and that will happen as we mate our processes with the new capital facility, which has proven to be more difficult than we anticipated, but that having been said, I think the team is hard at it and, over time, I believe we'll see gradual improvement at Bath.

Electric Boat, high-powered, high-efficiency, high-performance organization doing very well and experienced organic revenue and earnings growth.

For them to turn it up another notch requires additional volume, and different contracting arrangements away from a cost-plus environment.

So that will happen also over time.

I have a high degree of confidence in the marine group.

It's on the right path.

I have a high degree of confidence in the group executive, Mike Toner (ph).

He's pushing for performance, and we'll see it, but these shipyards are big and they're -- they're -- they work on big projects and the improvement is gradual, over time, but it's real.

What are the actual gives and takes on the multi year?

I mean, where -- from your perspective, what's the likelihood of getting that this year?

Oh, I don't know.

You know, you'll see that in the fall, okay?

I think it will take a while for that to work its way through, and I don't -- you know, they've been in negotiations, they're relatively close.

It's complicated.

There's multi year is one contracting option.

A block buy is yet another.

And contracting for the '03 Boat currently and deferring those larger discussions to the fall is yet another.

So it will -- this will work its way through the system throughout the remainder of the year, and I'm not prepared to handicap it.

That's in the hands of competent professionals and frankly, too much has been said in the press about those negotiations.

Okay.

Could you also characterize what you might get out of the supplemental with regard to ordinance upside at all?

No, I don't -- I don't care to speculate about that.

Do you think -

I think what we like to do is report it when we get it, and I've been pretty consistent over the years at telling folks, "watch the backlog."

Would you be able to comment once you do get it, in terms of -

Sure.

Sure.

Once we get contracts, we announce the contracts as we receive them, and at the end of the quarter, we report the backlog and, I mean, it should be as obvious to you as it is to me that a lot of consumables were expended in this conflict, but what all that means at the he said of the day, I'm not prepared to tell you, nor am I prepared to preempt my customers' wishes on that and how they decide to allocate their money and priorities.

Okay.

And just could you give us the breakdown -- you or Mike, maybe -- of the aircraft deliveries among the kind of four major groups?

I know it's done in two groups in the release.

Don't we have that in the release?

I think we -

It's split between large and mid-size aircraft.

Oh, do you want to go beyond that?

Do you care by model number?

I guess we'll give it to you --

It does help our models.

I think most people do it that way.

All right.

Go ahead, Mike.

All right.

Chris, on the large airplanes, green deliveries, 15 in total, 7 G 550's, two G 300's, one G 400, one G 4 SP, one G 200, three G 100's.

Completion deliveries, five G 5's, nine G 4 SP's, two G 200's, one G 100, for a total of 17.

Great.

Thanks a lot, guys.

I'll pass it on.

Our next question will come from Sam Perlstein (ph) with Wachovia Securities.

Good morning.

Nick, just in looking at the used aircraft market, can you comment somewhat in terms of pricing?

And I guess I'm just thinking about this first quarter relative to the fourth quarter.

Were the used aircraft prices relatively stable or did you see significant weakening, and if you did, in any particular types?

Oh, Sam, there was some weakening.

You know, it's very hard for me to discern trends for you here.

It's a case-by-case, a lot of arm twisting, and it's sometimes hard for me to determine the white tails of some competitors from pre-owned activity, you know, so it's hard for me to give you anything that you could chew on and make sense of.

We are anticipating that we're shot-gunning through a swamp for the remainder of this year.

If it gets better, that will be all upside, but we want to assume that this is going to be very difficult environment and it's -- it's too complicated a subject, really, for --

Well, I guess what I was trying to do was I think one of the reasons, at least from my perspective, you saw significant margin compression last quarter was not just the used aircraft, but really on the G 4 product line, which I guess would be the G 400 now, and I guess I'm just trying to think of that, in particular.

Did that improve or did this that worsen over the course of the quarter?

I don't know that I can comment.

Okay.

I mean, I -- I'd have to be out on the point now.

There's hand-to-hand combat over sales.

Okay.

There's --

And could you talk a little bit about your relationship with IAI in terms of, you know, the minimum commitment for aircraft that you have to purchase?

When do you actually negotiate that and, you know, is there any sort of a purchase price adjustment if you're not able to sell?

No, we don't -- it doesn't work that way, Sam.

We're sort of revenue-share partners, and we agree from time to time on what the production rate ought to be, given the market conditions, and they assume the risk on -- on the final assembly of aircraft.

It's our cost for hanging the engines, some specialty avionics, and the completion of the aircraft.

But it is not number related.

Okay.

And one last -- one last question on the -- the aerospace side.

Is just the trading commitments that were referred to at the end of the year that I think was around $550 million, where does that stand at the end of the first quarter?

I think it's down some, Mike, but you want to give the specific?

It's down, Sam, to 414.

Down by 136 million from year-end '02.

And you're still assuming that half that 550 is in '03?

Actually, the larger percentage is in '04.

Okay.

And then, Mike, in terms of the shelf registration that was just filed, how should we think about what that does to your interest expense as you term out some of that debt?

Well, we'll take that down in tranches, Sam.

If you want to speculate on what the interest rate will be at the time we draw down, I think you'll see a modest increase in interest expense this year.

I think the rate, depending on the tranches we pull down but the rate will probably in the neighborhood of somewhere between 3-and-a-half and 4%, depending upon the term of the debt, but it will be a late perhaps second-quarter initial draw-down.

So second half of the year, maybe some higher interest expense, but not significant for the year.

Okay.

Thank you very much.

I'll let someone else ask.

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

Good morning.

Nick, can you maybe just follow-up on marine.

You mentioned about the tote charge in the quarter, and you clearly had spelled that out in the 10-K, and previously, but you did say in the K that you thought margins would be slightly higher in 2003, you know.

It's unclear -- you know, given what's happened on tote and given your visibility on tote in the second quarter, do you still think that's a safe assessment?

When I made that assessment, I didn't contemplate the charge on tote, so it's -- it's hard for me to tell right now, Steve.

We've -- we've got some -- the tote charge is a negative to that forecast.

There's some positives.

There's some ups.

So, you know, my view is it's going to be what it's going to be.

We're going to improve.

We're not going to be at this run rate, as we go ahead.

How good it will be, I don't know.

Is it a fair assessment that the charge in the second quarter will be less, obviously, than the first-quarter charge, right?

What charge?

On the tote program, the loss you have on the tote program in the first quarter would be less in the second quarter so I'm just --

Steve, look, I don't expect a charge.

If I could sit here in the middle of April and tell you I expect a charge, I should have taken it in the first quarter under the accounting rules.

Uh-huh.

So we're -- we're over 90% complete on this second boat.

We've got our labor hours to complete this ship dead right by now.

If we have any charges at all, any cost growth will be attributable to sort of warranty type items.

We haven't been to sea trial on the second boat.

That's why I'm not prepared to declare victory, because I don't know what will happen when they take that thing out and put it through its paces.

The first boat did fine.

But until that happens, I'm not prepared to say there won't be any further cost growth, but we sure don't expect it.

All right.

With respect to combat, you know, the expectations was a slight decrease in margins in 2003, and you started out at box very strong.

Obviously you only had a month of GM and that will probably dilute the margins going forward, but is there some upside potential with respect to margins this year?

I --

At combat?

I don't know.

I -- I really -- Steve, this is sort of something I really want to stay out of.

Okay.

We're going to go out there and perform and we're not going to adjust your expectations at the margin level each and every quarter.

There's always upside and there's always downside.

Okay.

Mike, can you maybe just touch on, was there -- mix, was there any favorable items in the combat systems group to help out the margins in the quarter?

All performance, Steve.

Okay.

And lastly, on Gulfstream, just a couple things.

You know, when you reconcile the backlog, it looks like -- and you back out the Israeli order, you know, it looks like there's only $60 million of, you know, I'm guessing 60 million of orders, just based on the funded backlog reconciliation.

Was there some cancellations in the quarter and how big were they?

I mentioned that there were cancellations.

And how big was that?

There were eight cancellations, largely attributable to financing activity, and there were, you know, obviously more orders than there were cancellations.

To the point that we didn't really have much diminishment in the funded backlog in the quarter, and overall backlog grew principally as a result of the two options in the Israeli transaction.

So, you know -- okay.

We did okay from an order perspective.

Okay.

And there were no advances, no cancellation payments or cancellations that flowed through the income statement in the quarter?

No.

And lastly, on Gulfstream, you had seven G 550 deliveries in the first quarter.

I mean, do you have any sense, I guess it's tough to tell, but do you know, to sustain that kind of rate of volume, do you know how many additional orders you need to get to kind of sustain -- given the holes you still have left for the next three quarters, to sustain that level in the next three quarters?

Steve, you didn't hear me.

I'm not going there.

All right.

Fair enough.

Thanks very much.

Our next question will come from Eric Hugel with Stephens, Incorporated.

Good morning, guys.

Good morning, Eric.

My first question is -- given the high level of deployment of the Navy -- of Navy forces to the Gulf in support of Iraq, can you give us sort of any comments on any conversations that you might be having with the Navy regarding the need for additional repair and overhaul work when those -- when those ships return?

I really can't, Eric.

I think that that should come from the Navy, not from general dynamics.

With respect to contracts and activity that's been awarded.

In terms of what the requirements of our customer is, or are, their requirements are, I would prefer that it come from them.

Okay.

With regard -- moving over to aerospace, with regards to net jets, I guess Cessna noted a couple -- a month or two back that net jets had been canceling and deferring orders.

Haven't heard that from you.

Is it safe to say that that is not the case, that it's specific to their aircraft?

I don't know what it's specific to.

You'd have to ask net jets.

The cancellations we discussed in the quarter did not include net jets.

We are always rearranging delivery dates with net jets, pulling some forward, pushing others back, but to my knowledge, there were no cancellations of aircraft orders.

And just my final question, sort of a housekeeping.

You mentioned pre-owned sale -- pre-owned income on aircraft.

Do you have -- did you mention pre-owned sales, what the impact was?

I didn't tell you what we had in terms of sales, and I think we sold four aircraft.

Roughly $40 million.

And most of the loss in the quarter was with respect to adjustment to inventory.

Great.

Thank you.

Ty Van Rumar (ph) with S.G. Cowen.

Yes.

Thank you.

The other group had a profit of 10 million.

I recall in the fourth quarter you said that commercial pension income would be down in the quarter.

How come that was so strong and how much was pension income in the quarter?

Ty, it was modest and consistent with what was in the fourth quarter.

The improvement in the other segment, our resource segment as we refer to it, is predominantly performance at the -- in the mining operations, and particularly at Freeman.

Its performance.

Okay.

Nick, in the fourth-quarter call, you gave us, you know, the granularity on what the size of the tote ship loss was.

Could you help us, how large was it?

You said it was significant.

I think I mentioned it.

Did you?

Okay.

I think it was 16 million in the quarter.

16?

16.

16, okay.

Excellent.

And your revenues, you know, across the board in the defense area were better than expected, I think than we expected, and you've mentioned, you know, yourself how strong they were.

Should we be thinking about raising our revenue estimates for the year as a result of this?

In the defense sector?

Ty, look, you know, if you want to ask me -- if you want to take me back to year-end and ask me in a sort of a holistic way, hey, Nick, you gave us some guidance on revenue and earnings way back when.

The world has changed a little since then.

What's your outlook?

I'd say we're likely to outperform our estimates in IS and it.

And combat systems somewhat.

Probably be close on the marine side and probably underperform on the aerospace side, and the other may be too small to mention but I -- they look to me to be off to a very good start and probably be -- outperform as well.

So, yeah, look, I think that the defense businesses are off to a great start all across the board, and apart from the problem we had at NASCO, they're in great position.

You've got to love it.

I mean, we're greatly encouraged that this defense engine is firing on almost every cylinder.

We've got a little operational problem to fix, and we're going to fix it.

Okay.

Mike, I think you'd mentioned that a hundred million of the organic growth at combat, a hundred million was the organic growth at combat.

That would suggest that the GM Defense was 142 million, which is, you know, I think somewhat stronger than some of us had guessed.

You know, which would really also say that that margin of eleven three was particularly strong.

Were there any, you know, abnormal factors, pluses, to kind of get you to that super margin?

Your assumption on GM is too high, Ty.

It wasn't 150 million.

Our only remembering one transaction.

We had several.

Okay.

Great.

And last one.

If you look at, you know, the backlog, you -- you know, kind of it looks like it's, you know, kind of under some pressure at Gulfstream with the cancellations.

You mentioned that for the moment, you're holding at 77.

Is it deliveries or production?

Because certainly based on what happened to the backlog and the number of planes delivered in the first quarter at Gulfstream, if it in fact you're going to be slogging through the year, that would look like an ambitious number.

That was anticipated deliveries, Ty.

It included some sales from inventory.

Recall we came into the year with some.

Right.

And in terms of cancellations, we expected whatever cancellation activity we were going to have to occur in the first quarter.

Uh-huh.

And we expected it to be associated with what we now call the G 550, which was then the G 5 SP: You might recall that brand-new program.

And cash payments were required on provisional certification and then subsequent cash payments on full certification.

We expected that to be the point that -- that produced those buyers who were having an economic issue or were in a financing bind, that that would produce them.

It did.

And we suspect that in general, that is behind us now.

Okay.

But to your point of talking of slogging through the year, the run rate of the first quarter is less than the 77 that you've planned, so I mean are you seeing enough of an improvement in March to make you feel that we will see a Step-up, or is it, you know, scheduled in the second quarter?

Can you comment to that issue?

I think I've already said that I'm not prepared to change any of the guidance we've previously given.

We'll -- we'll alert you if we, you know, agree internally to lower our production rates or to increase them, for that matter.

And we've worked awful hard on being able to do that on shorter notice.

You know, when we first began to talk about that, internally the discussions started in the second half of last year.

You might remember we were quite robust in the first half, and as we began to deal with the question of how to ramp down, it took us a while to work our way through not what it ought to be, but how can we make it quicker, how can we turn supply up and down, giving -- given our work force, the need to either RIF employees or bring them back, and to perfect bait our supply chain.

We've gotten a lot better at that, and we believe that we have methods that are fully appropriate and wholesome for our workforce, where we can turn this rate up and down, not with ease.

I don't -- I don't want to put it that way.

But with shorter turn time.

But we will -- we will alert you, as I've promised to do, as these things become real, and certainly we're watching now.

We think that the war really had a chilling effect on the market, and while all hostilities haven't ceased, it's obvious now, with the return of at least two carriers, that major organized hostilities are behind us.

We'll see what that does for the economy in general, and I can tell you, Ty, there's nothing like a 9500-point Dow for airplane buyers.

Okay.

Last one.

You said trade-in commitments were down 136 million in the quarter.

Could you share with us, you know, what the loss was on those commitments in the quarter?

Yeah.

We -- let's put it this way: On the tree, I've said already that we took 24 million in charges on the quarter. 4 million of them were with respect to trades.

Got it.

Okay.

Thank you very much.

Our next question will come from Joe Nadal (ph) with J. P. Morgan.

Thanks, good morning.

Nick, my first question is just on your EPS guidance.

You gave us five fifteen three months ago.

You've given us on this call some puts and takes to that number.

Do you want to update that or --

No, I won't.

Okay.

So should we consider this that you still have five fifteen on the table or that you don't have any guidance on the table?

Treat it as no guidance.

I think it's -- it's too varied at Gulfstream for me to predict, and --

Yeah.

-- it's still a significant component.

Okay.

I don't think that I want to get into that.

We're going to work hard to try and get to the number that we gave earlier in the year, but I don't think I want to --

Okay.

We're off to a pretty good start.

On the combat growth, on the 100 million of organic growth, was that all Stryker, or was there any Santa Barbara or something else in there?

Yes.

It was across the board.

It was in every business unit.

I think I mentioned in my remarks.

Okay.

So all three -- it was the ordinance and tactical systems, it was in the armament and technical systems, and across land systems.

And Santa Barbara as well, excuse me.

So all across the board.

It was a -- pretty much a clean sweep.

Okay.

And then finally, on Bath, you excluded Bath from your press release in terms of listing a group that had strong performance.

Can you just talk about what's going on there.

There's a lot of work going out the door on the LPD, you have work coming in the doors on the 51's.

How are things going there?

Steady as she goes.

I didn't include them for specific mention because they did not experience either organic sales or earnings growth that was remarkable.

We did at every other business unit.

Nor did they have any upset that would cause me to mention them as I did with NASCO.

So their performance in the first quarter was consistent with the way they have been performing.

No change in booking rate.

No increased volume.

No decreased volume.

Steady as she goes.

The job there is to take advantage of this really extraordinary backlog that they have.

They made a very, very good trade, the LPD for DDG swap is a handsome opportunity for them to mine the backlog, to improve their productivity against reasonably wholesome contract backlog.

So -- but they're not there yet so they didn't deserve mention.

Okay.

Could you just give us the carrying value of Gulfstream pre-owned inventory at the end of the quarter?

215.

215.

Okay.

And then finally, I'll turn it over to someone else, but you had two significant leadership changes in the quarter.

One at marine and then the other at Gulfstream.

Could you talk about your selections of new leaders.

You know, where they came from.

From within the organization.

And why you chose those two?

Sure.

Mike Toner is a lifer.

When he got out of university -- and I think he went to Marine Academy at New York state -- he went right to work for Electric Boat.

He's been with us all of his life in almost every imaginable management post.

He's headed the engineering group.

He's headed programs.

He's headed operations.

And in my view, he's the finest shipbuilder in America.

I promoted him to fire-start productivity improvements in a big way, across the organization, to make it look like Electric Boat.

And I think he's off to a fast start.

So we're -- you've heard me on this subject before.

I haven't been pleased with performance, and I'm looking forward to Mike Toner.

I have the utmost confidence in this man.

This is my guy.

At Gulfstream, we have another seasoned veteran.

Not many people in the aerospace industry don't know Bryan Moss (ph), a favorite of our customers.

He has direct intimacy with what they call the Level 1 buyer.

That's chief executive or other highly-ranked executive at many fortunate fortune 500 countries.

He's been all across the industry.

He began his career with what is today Lockheed Martin but selling Lockheed's business jets, which were called JetStars, if I remember correctly, as a young guy.

He was with Bombardier in a number of important roles.

In the (inaudible) organization at Gulfstream, he carried the title vice chairman, and he served us in a number of important capacities and in my judgment he was the guy to work closely with me as we moved Gulfstream through this difficult market.

And he's the right guy to work with me to identify and promote the next generation of talent at Gulfstream.

A very, very talented team, so I'm real thrilled with this management team and real strong.

Thank you.

We'll go now to George Shapiro (ph) with Smith Barney.

Good morning.

Only one question on Gulfstream, Nick.

Great, George.

How are you this morning?

The question is if you can update where the -- at the end of the year, in the annual, you said you had four unsold large green aircraft and 15 unsold mid-size.

Can you tell us where they were at the end of the quarter?

Let's see.

Mike, do you have that data in your little book?

I think we carried over, Nick, one large -- I'm sorry, four large airplanes at the end of the year, and about --

Yeah.

George is right.

There were four.

And 14 of the G 200s.

Yeah.

And what do we have now?

We sold two of the carryover airplanes in the quarter.

Okay.

Two of the carryover large aircraft.

Okay.

Then I want to switch, Mike.

There was a small benefit in other income of $4 million.

Is there -- is that -- could you just tell us what that was?

George, I would have been disappointed if you didn't ask about that.

We would have planted that question if you didn't ask about it.

It's essentially performance improvement at Freeman.

Over the past, we've had a number of issues at Freeman that we've talked about in the Kohl segment.

We've renegotiated contracts, we've got long-term agreements, we're doing better in our reclamation liabilities on some of the closed mines, so it's improved performance.

Also if you go down below the line, Mike, you had $4 million in what you call "other expense" -- "other income" versus, what was it, 3 million expense last year.

So you had -- if you could just explain that 7 million variance.

I can't give you the total, George.

I know that a couple of the positive items this year were currency exchange, currency revaluations, where we picked up a few bucks, but that's going to ebb and flow on currency quarter to quarter.

There's nothing significant or remarkable in there.

Okay.

And then I just want to go back to the -- some of the defense business, which clearly we're were particularly strong.

In IS and P, it looks like, you know, you had 17% or so organic growth.

I mean, is it sustainable at that level?

And, you know, what -- were there any key programs in there as to drive that?

George, it was across the board.

It was every business unit, and there are five of them.

They all grew, and, you know, we -- I don't -- I don't know that it's going to grow 17% every quarter, but the -- but the business, I think, will continue to operate sort of on the -- on the level that it is right now.

And the margin there was also stronger.

Was that unique to any -- any programs, or just continued overall good performance?

I think it's good performance, George.

I -- I don't -- you know, margins are a funny thing, and they move around quarter to quarter, but this business is doing better both from a sales and earnings perspective, this line of business, than we had planned and anticipated.

Okay.

And then in the marine -- in the marine, you had 13% revenue growth.

I mean, that might have got helped because you're finishing these tote ships, but is there anything else that would have attribute --

Look, a minor amount of help from AMSEA because the pre-positioning ships were terribly active in the quarter.

Didn't generate much additional fee, however, because of the way the contracts are constructed.

The but there is a little growth at AMSEA.

But the rest of it is, I think, just general growth.

And, Nick, in marine, the backlog was up a billion dollars sequentially as far as what contributed to that big backlog growth?

Let's see if Mike can help us.

We signed a couple of contracts at NASCO.

Yeah.

There's nothing really big in there, George, in the quarter.

A couple hundred million dollar incremental funding on Virginia class flight 2, some advanced procurement money on that program, some Seawolf R and D funding in there, general submarine engineering.

I mean, there was about $600 million of orders in electric boat alone.

Most of it kind of across the board, incremental adders.

Nothing of any significance in terms of notoriety.

The spike in backlog will occur here, George, as we complete our Virginia class contracting activity.

Whether it winds up being a one-ship buy or several, in either event you'll be able to see the blip.

The number will be expensive.

And it may -- you know, and it could very well occur, as I indicated in an earlier answer, in two separate occurrences.

So we would expect some backlog -- further backlog growth on the marine side through normal contract -- anticipated contracting activity in the year.

George, I should mention and add to that, there was about $200 million of an order booked at Bath.

They're a principal subcontractor to Northrup Grumman on DDX, and they recorded a significant tranche in the quarter on that effort.

They're supporting, obviously, the design of the DDX, so that's, again, important but not huge in the -- in a macro sense.

Okay.

And then last, in the combat area, it looks like from what you said, Mike, there's also about 17% organic growth and I think you mentioned, Nick, it came from across the board.

So my question is: Did you see any particular benefit there from -- say from ordinance because of -- because of the with war, and if so, maybe how much did that help the growth in the quarter?

I don't think that I've -- could yet identify war-related volume increases, but there was some in ordinance, some growth, and they obviously were doing some shipping.

But they're not out of line with -- with everybody else, here.

Okay.

Okay.

Very good.

Thanks a lot.

Millicent, I think we only have time for one more question.

And our final question will come from David South (ph) with UBS Warburg.

Thank you.

Nick, in a recent presentation that you gave in New York, you broke out the funded backlog at Gulfstream by year.

Could you provide us any update as to what the funded backlog looks like for '03 and '04 as of today?

I think it's very similar, David.

I haven't done that through today, but the changes would be modest.

We've worked off a little '03 backlog.

We've added some for '04, and I've identified some of the transactions.

We'll update that presentation from time to time, but it's -- it's not one, I think, that you get much help out of quarter by quarter, unless there's needle movers in the order and I don't think we have that.

Okay.

The Israeli aircraft, those are for delivery in '04?

One in '03 -- well, I think I can't get into that yet.

Okay.

All right.

Thank you.

That would conclude our question-and-answer session.

I'd like to turn the conference back to our speaker for additional or closing comments.

Well, thank you very much.

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