通用動力 (GD) 2003 Q3 法說會逐字稿

Good day and welcome to the General Dynamics third quarter 2003 teleconference.

Just a reminder, today's conference is being recorded.

For opening remarks and introductions, I would like to turn the conference over to Mr. Ray Lewis.

Please go ahead, sir.

Thank you very much.

I want to welcome all the people in the investment community, as well as the media, who are listening today.

As always, you're likely to hear some forward-looking statements during today's conversation.

I want to remind everyone that these are our best estimates of future possibilities.

They are subject to the risks that are always there for businesses.

I would recommend strongly that you read our Annual Report, 10-Ks and 10-Qs for a full explanation of what those risks are.

With that said, I would like to first turn it over to our Chief Financial Officer, Mike Mancuso, for some remarks.

And then Mike will turn it over to our CEO, Nick Chabraja.

Thank you, Ray.

Good morning, ladies and gentlemen.

First off, let me remind you that attached to our press release are several financial exhibits that contain a fair amount of additional financial information for the three and nine-month periods, including segment operating margins, selected balance sheet data and ratios, employment and productivity measurements, the breakdown of our backlog by segment, and aircraft deliveries at Gulfstream.

Now, just a few brief comments on the income statement Exhibit A, and I will turn it over to Nick.

You'll note that interest expense is higher this year, and that's as a result of the additional debt we have placed to fund approximately $3 billion in acquisitions this year.

The provision for income taxes is lower as a result of event-driven tax liability reserve adjustments, including completion of a three-year audit cycle.

Completion of a cycle normally also results in adjustments for liabilities for subsequent open periods.

Those of you that have followed us over the years have seen these event-driven fluctuations occur from time to time.

Discontinued operations shows a gain of $7 million.

That's due to a reduction in lease liabilities associated with our discontinued Cable Ship business.

And if you will, one last comment.

On page 3 of our press release -- our boilerplate information was updated for employment, but not for revenue.

We expect 2003 revenues of approximately 16.1 billion, not the 15.5 that's reflected in the release.

With that said, I will turn it over to our Chairman and CEO, Nick Chabraja.

Thanks, Mike.

Good morning.

As Mike indicated in his remarks, I think that our press release and supporting charts are relatively fulsome and support a considerable amount of data and detail, so I will attempt to be brief and emphasize just a few points.

As a company, we feel good about our results this quarter.

Our performance was solid.

We strengthened the business going forward.

I say that for six identifiable reasons -- very strong cash generation; we closed three important acquisitions in the quarter and then a fourth early in October; there's really been significant backlog growth; the overall organic revenue growth was about 20 percent in the quarter; we had good earnings; and Gulfstream, importantly, continues to show signs of improvement as we work our way through what has been a very difficult market and economy.

But let me speak to each of these briefly.

Cash -- free cash flow from operations on a GAAP basis, then net of capital expenditures, was 320 million in the quarter; 711 million for the nine months year-to-date.

Let's compare that with net earnings for the same two periods.

Net earnings were 262 million in the quarter and 725 million year-to-date.

So you can see a very strong correlation between earnings and cash.

They're almost identical year-to-date, outperforming on cash somewhat in the quarter.

This speaks to the quality of our earnings, and this recurs year after year and we are relatively proud of it here at General Dynamics.

Acquisitions -- we closed the Veridian and DSR acquisitions and folded those businesses very nicely into existing units within our IS&T Group.

Advanced Information Systems, run by John Stewart, was the principal beneficiary of these two businesses.

But some of it fit into our Network Systems business, where Mike Chandler is the President.

The IMCO transaction also closed in the quarter and is now part of our Ordnance and Tactical Systems businesses under the direction of Mike Wilson.

That's within our Combat Systems Group.

Earlier this month we also acquired the balance of Steyr of Austria, thereby expanding our armored vehicle product lines around the world.

You might recall that for some (technical difficulty) Steyr of Austria and that goes back many years.

And they've partnered with us from time to time.

Backlog -- compared to this point a year ago, total backlog grew by over $9 billion to almost 39 billion at the end of the quarter.

The six Virginia class submarine block-buy contract that we entered into in the quarter was the primary driver of growth.

That really brings us 19 billion of backlog in our Marine segment.

We have a tremendous opportunity there to improve performance as we go forward.

The six ship block-buy contract would be converted as we go forward, probably in the first quarter of next year, into the five ship multi-year that has been approved by the Congress.

That will immaterially change the amount of the backlog.

Revenue growth -- I mentioned earlier that 20 percent of revenue growth for the year paced by IS&T and Combat Systems.

That was in the quarter.

Year-to-date total sales growth is about 19 percent, over half of which is organic.

So pretty much as we had indicated all along, we expected low double-digit organic sales growth.

With reference to net earnings, all things considered we're pleased with our numbers.

IS&T and Combat Systems continued to post solid earnings and led the way.

Gulfstream improved their operating earnings for the third quarter in a row.

We find that encouraging.

We did take a sizable charge, as I indicated in the press release, in Marine Systems against the commercial tankers at NASSCO.

And of course that had the effect of depressing their margins in the quarter.

But despite that charge, we realized 128 in earnings per share from continuing operations and 132 overall.

I think both numbers better than consensus.

Finally, Gulfstream, as I said earlier, earnings have improved for the third quarter in a row.

Pre-owned losses narrowed.

Pre-owned aircraft inventory is down considerably.

Both new and pre-owned pricing appears to be firming somewhat as supply across the industry is absorbed.

And Gulfstream continues to take costs out of its business.

Product improvement initiatives also continued.

And earlier this month, as many of you know, we announce the introduction of the all-new, improved performance G450.

Kind of interesting, Gulfstream is teamed with Northrop Grumman, and together we will offer the G450 as the best solution to meet the Army's aerial common sensor aircraft requirement.

This provides significant future potential to Gulfstream's special mission aircraft endeavors.

So in summary, a good quarter, generating positive momentum and positioning us quite nicely for a solid 2004.

Now let's get to your questions.

If you would, explain to folks how to get into queue for Q&A, and we will do it.

(OPERATOR INSTRUCTIONS) Heidi Wood, Morgan Stanley.

Good morning.

Can you provide us a little more color on the size of the charge, as well as the size of the tax credit?

When I sort of run through the numbers I sort of figured it was about a 40 million -- $50 million charge and a $30 million tax credit.

Is that about right?

You're very close.

I think it was 45 the charge and 30 on the tax credit.

So the two are essentially equal.

The after-tax effect of the charge and the tax credit are essentially the same.

But how much of that charge is cash versus non-cash?

It's a non-cash charge.

Right.

And the tax credit is cash.

And can you talk to us a little bit about the -- you had very sizable organic growth in Marine, which frankly was a little bit surprising to me.

Is that coming out of Electric Boat?

Actually, the growth is across the board in Marine.

Yes, Electric Boat has a big piece of it, but so does Bath; engineering work at Bath on DDX, for example, as well as a small piece of LCS.

And NASSCO's repair business has also contributed to some of that growth.

So it's spread all three -- EB probably being the largest of the three.

Heidi, you might recall that SSGN work has been started up, and that adds to volume.

I have that factored in, Nick.

I have actually a fairly large uptick in the SSGN volume, but I still had a little bit of difficulty accounting for it.

But the DDX and LCS might help a bit.

But you still have a 200 million sequential improvement.

Should we be anticipating about these kinds of levels in the fourth quarter?

Are you going to continue to ramp up as SSGN's work builds?

We will take a look here and see what we're thinking about.

I think you may see some modest decline in the fourth quarter in terms of total revenue in the segment.

Some of it is timing, as I said, on repair work and that kind of thing, but modest.

And final question, so some others can ask.

Nick, you mentioned that operating profit in Gulfstream has improved every quarter this year.

However, your margins have been declining the last three quarters.

Can you talk to us about what you are anticipating in the fourth?

Should we basically be using sort of a similar margin that we've seen in the last three quarters for the fourth?

I think it will be a little better.

The margin that you compute as you look at the result is a result of a mix.

And we have a mix shift here.

If you looked at delivery information we've provided to you, you see quite a few more mid-size aircraft that were both in the green deliveries and in the completions.

And that changed the margin mix.

I would expect -- let me not speak to margin for a moment.

I would expect Gulfstream to be slightly more profitable in the fourth quarter and then see some acceleration next year.

You talked -- sorry, one last question.

You talked about kind of 60 million in used aircraft losses and it looks like -- and you've done 48 in the first half.

I'm estimating you did about 10 to 12 million in used losses this quarter.

So can we assume that by the fourth quarter you will be fairly done with the losses in used?

I think that the fourth quarter will be less.

I think I've been saying 60 to 65, and I think that estimate is going to look pretty close.

Cai von Rumohr, SG Cowen

Yes, Nick.

In marine -- the charge -- could you tell us kind of what that reflects?

And where are you with completion of the first tanker, and therefore what degree of confidence do you have -- and should we have -- that this is basically it on the tanker?

At the end of the quarter we were at about the 70, 75 percent completion point in the first tanker.

The charge represents our best estimates of a reserve for the entire program.

We will be about 95 percent complete on that first tanker at the end of the year.

And I think we will be in a perfect position at that point to assess the adequacy of this reserve.

For the moment it appears adequate to us.

But I don't want to say we're without risk in the fourth quarter.

But certainly by the end of the fourth quarter, when that first boat is essentially complete, we will be in a very good position to make an analysis for the entire program.

Great.

Turning to Gulfstream, could you give us some numbers on -- it looked like the used aircraft inventory came down.

What was, in dollar amount, the used aircraft inventory at the end of the quarter, the trade-in commitments, and any color you can provide us on the restructuring expense that might have been absorbed in this quarter versus others?

Let me give you a little help there.

I will scramble a little bit to find all of this data, because it's scattered a little bit.

Let's take the pre-owned aircraft inventory at the end of the quarter.

We had about six aircraft in inventory available for sale valued at about $94 million.

That's down from ten aircraft at June 30th, so a reduction.

And of those six, three of them are available immediately for sale, and the other three are on temporary lift arrangements with customers.

Your question was compound, so help me.

I know I have answered --

And the rest of it was what is the dollar value of the trade-in commitments (multiple speakers) --?

The current value at the end of the quarter is 240 million, and that's some $80 (ph) million below what it was at June 30th.

It's about half of where we were at year-end.

I'm aware that.

What about -- you mentioned also, I think, that there would be some cost cuts and absorption of some of that.

How much has that been year-to-date, and how much of that was in the third quarter?

I think we had 4 million in the third quarter.

And I don't really recall what it was year-to-date.

But it's its pre and prior periods.

So we're beginning to crowd 20 million in charges, either foreclosure of facilities, as severance -- the whole ball of wax.

As those trade-in commitments come down, obviously they flow through the new aircraft P&L.

Could you give us any help on how large those trade-in losses in the third quarter and for the year-to-date might have been included in the new aircraft P&L?

You mean by reducing margins in the new aircraft?

I don't have a clue.

Given that the backlog -- the firm backlog at Gulfstream -- was down 300 million from mid-year, have you seen any pickup in new orders?

And given what you see now, what might we look for a range of deliveries for the large aircraft next year?

And is that 14 percent margin you talked about recently still a realistic goal for '04?

Let's talk about orders for a moment.

I'd say that in some respect the third quarter of last year was sort of the low point for orders, the way I look at it.

There were 57 orders in that quarter, but 50 of them were for a new aircraft, the G150, that we don't intend to deliver until 2006.

So in some ways looking at those 50 aircraft isn't a fair way to assess the vibrance of the market at that point in history.

And we have been coming down in retrospect through that year.

But the low point was the third quarter.

The fourth quarter orders picked up, but were probably not a fair barometer of the market either because you get a lot of year end activity that's sort of hard to analyze.

But thereafter, we've had a steady increase from the first through the second through the third quarter in order activity.

We've chosen for competitive reasons not to give you units of order to reflect it in the backlog.

It's a little hard for you to measure it because we also experience some cancellations -- cancellations that grew out of orders actually taken several years ago.

And sometimes those cancellations are happy events for us because the pricing isn't what we might have wanted.

Other times we wish we had kept the order.

But all in all, the order activity is on a steady but modest increase.

To give you a little sense of it, I don't want the investment community to become excited about this because it's modest.

We expect this year that we will deliver in the neighborhood of 50 of our large Gulfstream aircraft in the 300 to 500 Series aircraft.

We expect it to be about three more next year.

So a modest increase, not even 10 percent.

But we see a firming of demand.

It's relatively steady.

And I think that's the best description of it.

Is that consistent with your comment about 14 percent new aircraft margins?

No, margins -- I guess what you're searching for is at the bottom line what is the Gulfstream average margin going to be?

And if you want to reverse-engineer it, take out pre-owned aircraft and the restructuring -- the benefit of the restructuring, the costs that we've taken out of our business, you may well get to a number like that.

But I'll let you do your own homework on that.

Thank you very much.

Steve Binder, Bear Stearns.

Good morning.

Nick, I don't think you touched on the number of unfilled units at the end of the third quarter at Gulfstream.

How many large and how many mid-size?

Steve, at the end of the third quarter with respect to the large aircraft, we had no unsold inventory.

We began the year with a mid-size.

We had about 14 in inventory and I think we are down to about 5.

So I guess if you look at Gulfstream year-to-date -- it is not fair to just look at these two items -- but you mentioned pre-owned inventories down 136 million for the year.

Right?

You're essentially gotten rid of those four large planes in inventory that were unsold that were constructed last year and ten mid-size.

If you look Gulfstream year-to-date, do you know offhand of the 711 million in free cash flow how much Gulfstream has generated?

Gulfstream is about right on plan.

They're not an excess contributor.

But was the plan assuming that you would get rid of pretty much all that unsold inventory this year?

You might remember that the cash consequences of the unsold inventory of the G200s don't significantly impact Gulfstream.

We've gone through that, how we account for that.

In the three or four planes, yes, that we've built at our expense, were in that anticipation.

With respect to -- so as far as -- okay, it's fair.

There's no group that's particularly laggard on cash either.

It's across the board.

I know you had the notion last quarter, and I chose not to correct you, that all of the cash was generated out of Gulfstream.

And you were not right.

It's hard to know from the outside, giving it my best guess.

As far as Gulfstream is concerned this quarter, embedded in that $50 million number -- 61, 62 million before pre-owned -- was there any cost savings from -- the cost take out you talked about the 65 to $80 million benefit you're going to see next year, was there any savings realized this quarter from the cost reduction activities?

I think it's insignificant because we're still taking charges, and it's kind of paying for itself as it goes.

I think next year is the first year you really get a bang for the buck because the charges will be behind us and the costs will be out of the business.

Then just to kind of go into '04 a little bit more -- I know you touched on it for a couple of prior questions -- but are you assuming -- when you look at pricing in '04 you're obviously launching the G450.

Are you assuming that G400 pricing and G550 pricing and overall the large cabin aircraft, are you assuming pricing is going to be level at this juncture from all of '03?

Or do you think it will be up?

Let me tell you what we're assuming.

We know what our pricing is on the G550 because most of the positions are sold.

So I don't have to make much in the way of assumptions (inaudible).

With respect to the G400, we're assuming some modest risk with respect to pricing, in some part related to market conditions, but more related to the fact that we have a brand-new aircraft that will be delivered green in the fourth quarter.

So we've assumed continuing price softness on the 400s that we need to sell in the quarter -- in the next several quarters to finish the sales of that production run.

And we're not assuming any price improvement in the marketplace in our assessment of Gulfstream for next year.

We're relying on the cost savings in the business, an elimination of pre-owned aircraft losses, a slight improvement in volume in the large aircraft, maybe offset somewhat by a slight decline in volume of the mid-priced aircraft, giving us a slight mix benefit will make up our plan for Gulfstream.

Pretty solid.

If we get some good fortune, either from volume or pricing, it will be to our benefit.

But right now we're planning pretty conservatively.

Just to switch gears -- I know this was touched on as well, but if you look at the $100 million plus increase in sales out of Marine for Q2 to Q3, I think you (indiscernible) the last three years and then Q3 revenues have typically been down -- not to say there's seasonality in the business.

It is really just from the programs you mentioned, that increase?

Or is it also from Virginia Class and the 51 Program as well?

I don't think so, Steve.

I think it's a little bit here and a little bit there.

There's no big driver on Virginia.

That steady as she goes.

We're on one a year.

There's going to be no surprise volume on Virginia.

The Seawolf will be coming down over time;

SSGN moving up.

The Swinger is engineering work again in new programs and repair work, as Mike indicated.

Some years we get more and some less.

Thanks very much.

(OPERATOR INSTRUCTIONS) Sam Pearlstein, Jefferies & Co.

Good morning.

Nick, when you first announced the Veridian transaction, at that time you talked about revenues in next year on the order of $18 billion.

And since that point of time we've seen a couple additional acquisitions.

And I guess just where you stand now with a little more confidence in the Gulfstream outlook, and how does that $18 billion look next year?

Are you now more comfortable with a different number if we included the acquisition?

Our internal estimates now look to be 18.4, 18.5, is kind of where were coming out.

Okay.

Within this quarter, can you talk about what the contribution from acquisitions were to revenue earnings, as well as the backlog that you reported at the end of the quarter?

I don't think it was enough for us to measure.

We picked up Veridian with a month to go in the quarter and others subsequently.

So I don't think we had enough contribution that I went around measuring it.

Mike, do you have any --?

It is a month's worth of Veridian and it's in pieces of the other ones.

Veridian has blended into two units in IS&T, for example.

It's lost forever in terms of being able to track it.

But as far is the backlog itself,that would come in total.

Is there much of a backlog in Veridian's business?

Like all of the IS&T businesses, their programs renew themselves rapidly so they don't bring in large backlog.

And some IDIQ --

I think Veridian may have brought with it 8 or $900 million of backlog existing as it came over.

Okay.

And just going back, I know everybody's asking a similar question about Gulfstream and margins, but can you talk about how the furlough or just the shutdown over the summer -- and which would have been in this quarter -- how that impacted this margin, and just isolating that event --?

I don't have an ability to isolate it for you.

Okay.

I guess the last question is just really with regards to double-hull tankers.

How can we get confidence that we're not going to see this continue over the next couple of quarters with regards to additional cost adjustments?

I'm not sure how you get confidence, but I can tell you how I will.

As I sit here now -- let me describe what I said to Cai -- this is our best estimate.

Frankly, one could have waited for the end of the year.

We didn't think that that was appropriate.

We believed that we were in a loss position and needed to create a reserve, and this is what our estimate of the completion is telling us.

We will have very good information by the end of the year.

We will apply to that information our historic learning curves, program after program; curves that we have reason to believe we will duplicate in this program as well.

And the fat will be in the fire at that point.

So going forward, if NASSCO doesn't do well it will be on some other program; it won't be on these tankers.

We think that we will be able to give the financial community very good information by year-end.

We think this information is very good.

But I can't promise you that it's perfect.

But we took a significant charge, and we believe that whatever happens in the fourth quarter, one way the another, it won't be as dramatic as what we did in this quarter.

Also on NASSCO, has the experience with TOTE -- has there been anything else with regards to TOTE?

Or is that now behind you completely?

TOTE ships are doing very well.

We're not experiencing warranty claims.

The owner of those ships is very pleased with their performance.

So we look forward to building some more of them.

Thank you.

Nick Fothergill, Bank of America.

Good morning.

A quick question on Veridian.

You are expecting, I guess, next year 1.4 billion or so of revenue to be reported for Veridian.

How will that effect your operating margin in IS&T next year?

Already this year it looks as though your original target of 10 to 11 percent of operating margin is going to be outdone.

Is there any kind of cost savings to be achieved in Veridian in the early part or even later part of next year?

Or is this really a revenue synergy integration?

Of course if one were to just look at the margins that Veridian was experiencing as a freestanding public company and integrate them with us on that basis alone, it would have the natural effect of depressing overall margin.

And I expect that that will happen, but not to the extent that you would be able to calculate it because there is a cost synergy here that we will work on and try to do better than what would be estimable.

There was some very impressive performance in Combat Systems and IS&T.

I remember last quarter you said really for both of them it was right across the piece.

How much is Iraq contributing to these?

And do you expect the kind of mid-double-digit growth to decline a little bit next year?

Or is this a kind of run rate that you can sustain?

Look, I don't know that Iraq in and of itself is making a significant contribution to Combat Systems' performance.

I think you get a little volume in our Ordnance and Tactical Systems business as a result of conflict and the reestablishment of stores.

But this is pretty solid programmatic kind of effort.

And for next year, I think I'd rather speak -- to the extent that anybody presses me today about next year, I will speak to it in corporate terms, where we expect to be, because we are kind of in the early stages of planning.

But I don't want to get into segment data.

So I will duck the part of your question that is with respect to next years growth rate in any particular segment.

But if somebody wishes to ask me about what we think about next year at this point in time, I will deal with that.

And we will provide segment color either later in the year or the first time we have an opportunity to speak publicly on the subject once our planning closed, which will be early November.

Is that fair enough?

That is absolutely fair enough.

In that case would you be able to give us a little bit of color on where you think the group might go next year?

I think I wanted to do that early because the analysts' estimate seem to defy consensus there in a very broad range.

Let me say that I want to be conservative about this.

I think we're going to have a good year next year.

But let me be on the cautious side today.

We would expect to be in a range of results between 5.40 and 5.55 for earnings per share.

We could outperform, but I'm not ready to go there yet.

And we will talk about that later and give further guidance either later this year or early January when we're at a place where we can do the segment data with strong confidence.

But this is where the early data that we're getting in planned submissions for our businesses would lead us.

One last one.

Gulfstream -- the pipeline of interest and conversion of that to orders, can you describe how that's picking quarter-on-quarter?

And also, a little bit of color on the fractional market and whether you're still confident they can take delivery of their aircraft, although that market is still pretty tough?

Let's deal with that piece first.

I think that the growth in that market from the data that I receive publicly, as you do, has apparently slowed significantly.

I guess of the providers NetJets has been a want to experience any significant growth of all, and it's not what they were previously experiencing.

So we, like everyone else, have experienced either cancellations or delays -- more often delays -- from the fractional buyer.

And that's okay.

We're not counting on that to stimulate our results next year.

Thank you very much.

Joe Nadol, J.P. Morgan.

Good morning.

My first question is, Nick, on the tankers.

I believe there are two options outstanding for the customer.

Have you heard from BTS to whether -- do you have any feeling as to whether they will exercise those options?

I don't believe that they will, and I don't know that they're still outstanding.

So you're not anticipating, obviously, anything --?

I think they've expired.

We'd like the opportunity to build a couple more.

A different price, obviously.

No, same price.

You keep going down a learning curve, time to get well .

Moving over to Gulfstream for a moment, I don't think you actually gave the used sales and the losses specifically in the quarter.

Could you give those numbers?

Mike, do you have that handy?

Yes I do.

As far as the losses are concerned, the number was overall $11 million, 7 of which was associated with the sales of nine aircraft.

And $4 million was a revaluation against the remaining unsold inventory.

And the sales total in the quarter?

Not the income, but the actual sales number?

Pre-owned aircraft sales were 135 million in the quarter.

Thanks, I appreciate that.

And then on the backlog, as of the end of Q2 NetJets was 55 percent or so of that backlog, which is now down 300 million.

Do you have an updated number there?

Was there cancellation from NetJets, or --?

I think there were two, Joe, in the quarter.

But I don't have a revised backlog by customer.

Okay.

I guess I'll wait for the Q on that one.

We'll have it in the Q.

Mike, on the taxes, I was not clear on whether you will expect to continue to see a benefit in Q4.

And then sort of a tax rate for next year.

I can't predict whether or not we're going to see -- this is, if you will, a onetime adjustment in the quarter for the events that occurred in the quarter, and to the extent that -- and the benefit in the quarter to the extent that the issue is resolved, resulted in us being over-provided for future events in that regard.

As far as the fourth quarter is concerned, since new, non-recurring events surfacing in the quarter, I would expect that we would regress to our run rate, which is in the neighborhood of 33 percent.

Look, let's try and put this in some context.

While our ordinary run rate is roughly 32 to 33 percent, it is not unusual for us to have tax events.

We're working a lot of tax-advantaged opportunities, as we have been over the years.

So I don't want you to be under the impression, or be shocked in the event we have a winner next quarter or early on next year.

We've got things in the pipeline that our tax guys are working on very well.

Just a couple more.

On the cash side, we know what you paid for Veridian.

I'm not sure if you disclosed the price of the other two companies that you closed on.

Could you give us, since you did close on them, the cash payments in the quarter?

For all of the reasons that we didn't make those disclosures at the time, we won't make them now.

Okay.

Finally, just on the organic revenue side, Nick, I know you said you had 20 percent growth in Q3, 19 percent year-to-date, which was more than half organic.

What was the organic portion in Q3 of the revenue growth?

Bear with me a minute.

It is sizable.

I'm looking for the adjustment.

I'm going to ask Ray to provide that to you.

That would be fine.

You're looking in the growth in the quarter versus --?

Yes, organic sales growth in the quarter versus last year.

Versus last year.

I know it's close to several digits.

It's about 660 to 700 million.

That's fine.

Thank you.

(OPERATOR INSTRUCTIONS) Byron Callan, Merrill Lynch.

Good morning, gentlemen.

A couple of just general questions, kind of business changes that may be out there and how they might impact kind of longer-term growth expectations in the Company.

The first is this whole Navy fleet response plan and what that may or may not do to maintenance schedules on ships.

Is that going to be a new business area for you?

Should we look for changes there?

It seems pretty significant shift in the Navy's position.

Byron, where I would look for maintenance opportunities is less in the way the Navy today is articulating its view of how it's going to do business, and look more at the opportunities to partner with the naval shipyards, as we are doing at Electric Boat, and experiencing some growth in our business, some of it reflected in the numbers and the questions you previously heard.

So I don't see a sea change of volume coming from some of the articulation of the Navy's ways of doing business; but I see some opportunities here with respect to working with the naval shipyards.

Okay.

And on the combat vehicle side, you are, I guess, almost halfway through Stryker.

That's a fair assessment.

And it seems the M1s that are in Iraq are getting a fair amount of wear and tear.

Just kind maybe if you could sketch out maybe some of the events that need to occur in the coming year to see additional Stryker business, and when we might get some clarification on what kind of upgrade work could happen to the M1 fleet, if that's factored into your plan.

It's not in our plan for next year.

Stryker business for next year is under contract.

Stryker is doing well.

The program is on schedule, on time.

The new Chief of Staff of the Army made it clear that Stryker is central to the Army's transformation.

We expect we will build all six of the planned brigades.

There is a significant interest in the Stryker internationally.

Maybe you don't want to view Canada as international, because the Stryker is also built in part in Canada.

The Canadian Army is expressing a significant interest in the mobile gun system in particular of Stryker.

And other nations have also spoken up about this.

So we see a robust opportunity for Stryker.

We were pleased to see, coming out of Iraq, the United States Army advised the Congress on an un-funded request on their part to build out to M18 two set configuration , the third ACR.

And the Congress funded the first tranche of those.

It will be built in three parts over three years.

With respect to maintenance of equipment that was run hard in the conflicts, we will have to see.

But that's not something that's embedded in our plans.

And I think where we stand on all of that is we stand ready, willing, and able to support our customer in the way that they see fit.

Two more questions.

You've been fairly active this year on the acquisition front.

Do you think you're going to see the same type of volume of deals in 2004?

Or is the balance sheet kind of -- you want to work some of the debt down and be a little bit morequiet in 2004 than you have been in 2003?

Byron, as I look back over history, if you look at our deal flow, you'll notice that it spikes one year and then quiets the next; spikes again the third, quiets the fourth.

I have just realized that that's been my pattern.

And I think I'm worried a little less about the balance sheet, because we have maybe the finest balance sheet in the industry.

I'm sure it's the finest.

And I'm more concerned that we pause from an operational standpoint and fully integrate and absorb what we've acquired so that we can honor our commitments to the customer and to you all who have relied on what I've said is in these acquisitions about future performance.

So my instinct, as I've said publicly recently, is to pause somewhat here, not work on major transactions.

And you're always doing some things, but they're not significant from a dollar point of view until we get these things absorbed.

But you know, I answer that question always with some trepidation because I don't know who's going to knock on my door tomorrow and how attractive I might view that.

But our present intention is that we're out aggressively seeking transactions.

We are internally focused.

We're working on improving our businesses.

We've done a lot of work with our Gulfstream team, pleased with what's going on there.

And of course we've been occupied with the Marine group and made significant management changes during the year to address some of those issues.

Some of the management changes are visible to the investment community because they have involved officers; others are not visible to you because they're changes that occur within the organization and not named positions.

But that's really where our focus is right now.

The last question, there's been a split of opinion it seems among some of the analysts about defense budget growth prospects -- are we going to peak here any time soon.

I was just wonder if you could share your thoughts on has the market outlook as you see it changed all that much with higher deficits and Iraq operating costs?

Or is it enough change that you really have to think differently about the way you manage or configure the Company?

We manage and configure this company very conservatively in any event.

We're not spending either CapEx or IRAD or BNP in expectation of enormous growth.

We wait for it to happen and then we move.

So I think we're poised no matter which way it goes.

I'd like to remind the investment community of how well we did in a down market.

Spectacularly, as a matter-of-fact.

But look, when I have had an opportunity to speak about this publicly, and I did recently, I think what I gave investors was the facts as they exist -- what the budgets have been, as published by the administration; how the Congress reacted to those budgets -- received them well, plus them up .

In general -- I won't get into all that detail today because there's not time.

But I pointed out that the Congressional Budget Resolution is consistent with the administration's five-year spending plan.

So we've got harmony of interest right now.

The administration has indicated that it's FY 2005 budget won't be a bottoms-up budget, that they're going to use what they had forecast in the FIDA (ph).

And Iraq, while it may be a challenge to the entire federal budget and economy and general deficit, modernization accounts have not been a bill-payer for Iraq.

The Congress has supplied the money to prosecute the war and indicates a continuing willingness to do that.

So those are the facts, I think, as I see them without giving you the numbers.

And I think, Byron, that you and most of the other analysts are maybe more familiar with those facts than I am.

Everybody, every citizen that's interested in government spending, is worried about the deficit and its ability to impact that spending going forward.

And where I sit, the current deficit is tolerable.

History tells us, however, that when deficits start to approach six percent of Gross Domestic Product, they become politically difficult.

Even if as an economist one might say, "well, with the size of this economy, that sort of deficit is tolerable."

That becomes an academic debate among economists.

I think the body politic gets very concerned at that point.

And I think spending, not just for defense but for important domestic programs, will also suffer as well if that happens.

Right now, we're not there.

So my crystal ball is not much better than anybody else's.

But the facts support a reasonable growth scenario for defense.

And that's what we're planning for.

But we're not being excessive about it.

And our next several years of results have precious little to do with the growth in those budgets.

They're kind of things that have occurred already in the past that will drive the next several years of results.

Thanks, Nick, I appreciate that perspective.

I believe we've now run out of time.

This is Ray Lewis.

Anyone who has any additional questions, just give me a chance to get a bite to eat.

I'll be glad to talk to you.

My number is 703-876-3195.

For anyone who has a colleague who wants to listen to this, or who has come in late on the call, beginning at 2 PM Eastern time we will have a replay.

That number is 719-457-0820.

The pass code is 196396.

Thank you all very much for being in attendance today.

That does conclude today's conference.

We thank you for your participation.