通用動力 (GD) 2003 Q4 法說會逐字稿

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

Today's call is being recorded.

For opening remarks and introductions I would like to turn the conference over to Mr. Ray Lewis, Staff Vice President of Investor Relations.

Please go ahead.

Thank you, Sarah, and I want to welcome all members of the investment community and the press that are listening today.

As always I want to caution you that there probably will be some forward-looking statements made today.

Those statements are our best estimates of future possible performance, but they are subject to the risks of normal risk of business and once again I recommend that you look carefully at our annual reports and quarterly and 10-K reports for a more detailed description of what those risks are.

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

Thanks, Ray.

Good morning, ladies and gentlemen.

Let me see if I can provide you with at least my perspective on the quarter and the year.

As my comments and our press release suggests, I am pleased with our fourth-quarter performance.

We ended another solid year with truly exceptional cash flow and impressive revenue growth.

The earnings for the quarter and the year are solid, particularly so when one considers the market issues and business aviation and the problems we encountered building commercial ships.

So in sum, very good performance against very strong headwinds.

We entered 2004 with a record backlog, a very healthy balance sheet, strong DOD and congressional support for our core defense programs, and improving economic outlook for business aviation, and some real learning curve improvements taking place at NASCO.

Just a word about some of the acquisitions during the quarter, we also expanded our international presence in one our core businesses with the closing of the acquisition of the Austrian armored vehicle manufacturer, Steyr.

We then unified our European land combat vehicle business under a single management team, bringing together MOWAG in Switzerland, and Steyr of Austria, Santa Barbara of Spain.

If I had to single out our most important achievement in the quarter, it would obviously be cash flow.

Strong net earnings coupled with significant reductions in working capital generated almost 800 million in free cash flow from operations, net of capital expenditures.

This facilitated a $664 million reduction in net debt from the third quarter.

Our net debt is now 3.2 billion.

That is 2.1 billion above last year, but it is really kind of remarkable when you consider we made 3 billion in acquisitions during 2003.

So good cash flow does a lot for you.

Free cash flow from operations for the year is 1.5 billion, over 600 million more than a year ago, and about 150 percent of net earnings.

Let's stop on that point for a moment.

Cash in any particular year as compared to net earnings can be aberrational up or down.

But when one looks at cash over a three or a five-year period, you see the true measure of the performance.

Over the last five years we generated $4.7 billion of free cash, which is 101 percent of net earnings.

If we looked at it just for the last three years, we generated 3.1 billion, which is 108 percent of net earnings.

That to me is remarkable, particularly when we were supporting the growth that this business has achieved over that timeframe.

Our order activity in the aerospace segment is another important aspect of performance in the quarter.

As I said in the press release, we signed 34 new orders in the quarter, 26 of them were large body aircraft.

I think with the numbers we supplied in the press release it is sort of obvious that quarter activity picked up in the second half, particularly in the fourth quarter.

And when you exclude fractional activity its much stronger than the second half of last year or the first half of this year.

One was trying to gauge market demand through an examination of our orders.

You can see that we had a dip in the second half of '02 and the first half of '03.

In fact, the fourth quarter is the largest number of new orders we have ever received in a quarter, and the third quarter was unusual.

It is the first time we didn't have a dip in the third quarter.

Third quarter is traditionally the summer months, summer doldrums.

This year our third quarter sales were up, but the third quarter tied for a historic high.

So some good things happened at Gulfstream in the second half.

Our defense business captured several new awards in the quarter.

Important among them is the 2 billion Future Combat Systems award to our land systems subsidiary to develop the next generation of manned ground vehicles.

Todate, when we include our IS&T group, General Dynamics has been awarded over $2.5 billion of Future Combat System related contracts.

In our Marine segment we took another charge at NASCO on the commercial tanker contract, $26 million.

This is in addition to the $45 million charge we took in the third quarter, you will recall.

The first ship of four was put in the water in early November and is now over 90 percent complete, but the labor hours are more significantly complete.

The remaining work is largely subcontract effort.

We have a high degree of confidence in our estimated completion in this program, and if there are either charges to be taken in 2004 or for that matter incremental earnings on the program, either will be insignificant.

NASCO expects to deliver the first ship in June and the second in November.

Despite NASCO's problems with these double hull commercial tankers, they have a modern shipyard that we updated, good construction processes and a robust backlog and a bright future.

Overall the Marine Systems with an $18 billion backlog and solid management is well positioned for margin improvement going into 2004.

So in summary, we had another strong quarter.

We grew backlog, revenue, earnings and cash.

We began 2004 on solid footing, and I fully expect that we will continue to enhance shareholder value here in the new year.

Thanks, Nick, and I will now turn it over to Mike Mancuso for some specific comments on some of the performance numbers in the quarter and in the year.

Thank you, Ray.

Good morning, ladies and gentlemen.

First let me call your attention to the exhibits attached to our press release.

In addition to the detail we have been providing, as Nick indicated we have also added a schedule of aircraft order activity at Gulfstream.

That's exhibit G. In reading it you will see the point that Nick made, and that is that orders excluding fractional activity have increased during the second half of the year.

Now if you have the release in front of you, please go to exhibit A, the consolidated statement of earnings for the quarter.

I just want to point out that as you read it down, interest expense of $39 million in the quarter is considerably higher than last year this time, and this is a result of the higher debt balance this year incurred to fund the $3 billion of acquisitions that Nick had commented on.

A little bit further down right below that in the other income line you can see last year we had $39 million of other income, included in that was the onetime $36 million gain we realized on the sale of our space propulsion business.

We had no such non-recurring activity this year.

And then finally further down the fourth-quarter '03 provision for income taxes is $96 million.

It is $39 million less than a year ago.

Two adjustments that contributed to the reduction.

An $18 million reserve reversal to reset our overall liability and a run rate adjustment to bring the year in line with the projected run rate, which is about 32.3 percent for the year.

On discontinued operations line, you will recall last year we took $112 million charge to exit the marine fiber-optic cable laying business.

And finally, on exhibit A, you can see the diluted weighted average shares outstanding in the quarter of 199 6 (ph) is 2.6 million lower than last year.

This is primarily the result of our share repurchase activity early in the year.

If you will recall, we repurchased 4.7 million shares for approximately 300 million, an average share price of $64.08.

There were no share repurchases in the fourth quarter.

Now a few comments on segment results, exhibit C. You will note that operating margin rates were lower in the quarter versus last year.

Largely the effect of the acquisitions in IS&T and Combat Systems introduced in the fourth quarter.

The $26 million charge on the tanker program at NASCO and Marine Systems that Nick spoke of and we have lower earnings in the resources segments.

Aerospace operating margins improved as preowned losses narrowed significantly in the quarter versus last year.

Aerospace margins also, I'd like to point out, has improved almost 400 basis points from the third quarter of '03.

Preowned aircraft sales were 130 million in the quarter and we sold seven airplanes.

In the fourth-quarter of last year we sold 21 airplanes, generating 262 million in sales.

The loss on the sales this year was 5 million versus 37 a year ago.

For the full year 2003 the loss on preowned aircraft sales was 64 million as compared to 81 million in 2002.

Of the 81 million last year, 72 of it was recorded in the second half of the year.

This year we recorded 16 million of the 64 in the second half of the year.

Guaranteed trade-in value commitments at the end of the quarter dropped to 229 million, and that represents 7 airplanes.

That number was 551 million this time last year, representing 18 airplanes.

We ended this year with 7 unsold new aircraft on the books, and those are all mid size airplanes, valued at 71 million.

Last year this time we had 23 new aircraft, valued at 262 million.

So with that said, let me turn it back to Ray to begin the Q&A.

Thank you, Mike.

Sarah, if you would explain to folks how they can get in line to ask questions.

(OPERATOR INSTRUCTIONS) Byron Callan with Merrill Lynch.

A couple of quick questions.

First on marine, and maybe just in general if you can talk about 2004 and how some of these sectors are going to shape up.

I think you refer to this last quarter as having completed your strategic plan, you guys might have some more fidelity as to how the different sectors will look in 2004.

Can you run through that for us, please?

The marine group that you asked about will start to approach 7 percent margin for the year in my view.

IS&T will be marginally below 10, principally as a result of digesting new acquisitions.

Combat will continue to perform around 11 percent, slightly in excess; they did this year and should next year.

And aerospace our plan is going to get about another 130 basis points or so over the fourth quarter.

So, in the 11 to 12 percent range.

Okay, great.

And then you got stuck with the range of expectations that you kind of, I guess on a preliminary basis, addressed in Q3.

What are some of the variables in that range, Nick?

You mentioned you think you can get to the high end of that range now, but what are some of the variables that you look at in this 2004 set of projections?

Byron, first let me take your question as an opportunity to refer to a collective press release we sent out.

We had a typo in this press release.

I didn't intend to shrink the range.

You will recall last quarter I gave you 540 to 555, and what my intention here -- and I thought it was conservative at the time and said so -- my intention here was to shrink that range a little bit.

I don't think 540 is a likely outcome, so you can shrink that range in your mind from 550 to 555.

What are the risks and what are the upsides?

A lot of puts and takes, but frankly we feel like we are in good shape.

One risk, of course, is just the economy.

Gulfstream is well positioned in the year in terms of backlog for the year.

We are crowding 70 percent sold out of our manufacturing positions.

A higher number than that for the large aircraft.

And you can't get a delivered Gulfstream that is fully completed in either the 400, 450 series or the 550 series until 2005.

So we thought, as we went into the year that our risk was the remaining 4 hundreds before we introduced the 450 in the fourth quarter for green delivery.

Well, not much of a risk anymore.

All but two have firm contracts supported by deposits, and the remaining two are under LOIs, and we expect they will close within this month.

So very good shape there.

So why do I worry about the economy if we got it sold out?

It's the old bugaboo of cancellations, right?

The world goes to hell, I can't predict the cancellation outcome.

But right now we are cautiously optimistic, as I said in the press release; the marine group is just blocking and tackling.

And I think that they could outperform; all our plan assumes is they won't bleed at NASCO.

We get improvement at NASCO, and we get improvement at Bath.

We will beat that number.

I think Combat Systems and IS&T will perform as predicted.

IS&T has some upside from synergies as they consolidate the new acquisitions and as we put C4 systems and decision systems together; there will be some cost savings that could float to the bottom line.

So I am not prepared to give anybody a different number.

But we are on the bullish side; and as the year progresses we will start to refine our forecast.

I have some more questions but let me turn it over to someone else;

I'll get back in the queue and follow-up with those later.

You are kind, Byron.

We will take our next question from Ellen Schmidt (ph) with SG Cowan.

It is actually Cai Von Rumohr.

Nick, in light of the strength at Gulfstream, what are you looking for, what is your delivery schedule now for 2004?

Is there any chance you might increase it to avoid losing some potential orders to competitors?

Is that an issue?

You know, I think we talked from time to time about adding a couple of airplanes, but I think, Cai, that I would much rather work on getting the price up, instead of producing additional volume.

If we really parse through, you and I to have all of the new order material in front of us going back five years, you would quickly discern that in this down market that raw market demand didn't vary terribly much.

That there remained a relatively steady new interest that was manifested in the orderbook.

What happened to hurt us was two things, cancellations, which sometimes isn't a manifestation of market demand at the time; it's the manifestation of a financial problem, the underlying economy that finally hit a buyer.

And pricing was the problem because the supply, outstripped the demand so people frequently sort of are lose about market conditions.

And it never was that demand dried up.

It was that the supply exceeded the demand, and to some degree we were a culprit.

We had four aircraft in inventory; a large aircraft at the end of last year, and we had 14 G200s.

But that has been absorbed relatively painfully for the industry, I think we were not the only one, and we were probably the least among sinners.

So I think that kind of explains it, Cai.

What is the delivery schedule for 2004 at this point?

What are we anticipating?

Let me take a look here, and I will tell you in a heartbeat.

We are anticipating 55 of the large cabin aircraft, and let me see if I can find my chart -- 20 of the midsize.

Okay, and then since I know there are other questions, the cash flow really looked terrific.

Maybe give us a little bit of color on that and why you still look for 100 percent conversion in '04, given you were so spectacular in the fourth quarter.

Let me see if I can't put my finger on some items.

Three or four drivers that could explain the 50 percent over net income.

One of them we already talked about.

We talked about the sale of inventory at Gulfstream, both new and used.

So that was a cash boost.

Another one that may not be obvious from the material we gave you but will be obvious as soon as we file, is that while we had a tax provision for earnings purposes somewhere in the neighborhood of $360 million -- don't count me to the penny there because I'm doing this from memory -- our cash taxes for the year were about 70 percent of that.

So the delta between cash taxes and book provision is a cash benefit.

Another one would be almost every year in December we get an advance at Santa Barbara for the ensuing year's work.

So that repeats itself.

This year we got a little more than we did the prior year so I would say that's 100 million sort of larger than typical.

Those would be the big drivers, Cai, and some people will talk about our tax provision, which is among the highest in the industry.

But for twelve years in a row now, I think cash taxes have been materially lower than book taxes.

One last one.

In light of the strength you've got here, why narrow the range downward at the upper end from 555 to 550?

I think you missed the remark I made earlier to Byron.

We sent out a corrective release on that subject; that was a typographical error.

So you're really saying you are closer to the 555?

I'm saying let's narrow the range, put it between 550 and 555.

Got it.

Okay, thank you very much.

Heidi Wood from Morgan Stanley.

A question, it looks like you did about 390 million in used aircraft sales at Gulfstream.

I just want to get clarification on that because if so, if I reflect the losses on a manufacturing basis, it looks like you are already doing about 11 percent margins.

Is that correct?

I think I said our preowned sales in the quarter were 130.

Are you talking about the year or the quarter?

The year, taking the 130 you gave us to the fourth quarter and adding what I think I have to the remaining three quarters, I come up to about 390 in sales.

You are low, Heidi.

Preowned sales were slightly above 450 million in the year.

All right, then that makes the case all the stronger than on a manufacturing basis.

If I do that math, Mike, then on a manufacturing basis your margins would have been about 11.3 percent.

Is that reasonable?

You are in the ballpark.

Okay.

Can you talk a little bit about IS&T Nick, tell us about how much of that growth that we saw was organic versus acquisition, and can you expand on that overall of the 3 billion in acquisitions you did, about how much added to EPS?

Heidi, I don't know that I can parse that out right now.

Your question is the organic growth in IS&T in the quarter?

For the year, actually.

Mike, do you have that?

Heidi, I think we haven't parsed through that detail enough to be able to quote accurate numbers.

Let me refer you to Ray after the call, and he'll be able to walk you through that information.

Okay.

Turning a little bit on Byron's earlier question on Nick, when you talk about higher confidence and Byron kind of tried to get a sense of the puts and takes, can you tell us when you look at it, is it that you have higher confidence with the IS&T and combat systems given the recent wins, or can you -- is there a way that you can again give us a little more amplification on where your higher confidence is stemming from, is it the defense side or the aerospace side?

I think it is across the board.

If we take the marine side, the backlog grew, it is in the bag.

I'm not worrying about the business going forward in the year.

It is a margin improvement issue, and I think our forecasts are cautious.

I feel comfortable, as I indicated in my earlier remarks that we've reached the ground truth at NASCO.

I feel very comfortable.

I've been out there twice.

Mike Toner has been out there every other week.

We are real comfortable about where we are and the quality of the estimated completion.

The Combat Systems business is solid, growing, nice contracts.

Some of it came to pass in the fourth quarter.

The execution risk in Combat Systems is really the same as it is in IS&T.

It is assimilating the acquisitions; some of them across the Atlantic Ocean.

And getting that management performing as we anticipate.

But those are all, I think within the range of reason, and then we turn to Gulfstream.

And I don't think in our plan we've created a mountain to climb.

It is a cautious plan; we are not relying on building more aircraft, although we could if the demand suggested it.

But my real intention is to sort of shrink supply a little bit.

And actually on the Gulfstream, the second part of question I meant to ask you was, what do you project for your losses in Gulfstream in '04 because we've established you are doing already well on the manufacturing side.

I'm wondering what the puts would be on the losses.

I've indicated all along that we don't believe we're going to incur used aircraft losses in 2004.

We have changed the business model considerably for that activity.

Our risk is way down, and the market is solidified.

It might be of interest to you to know that on the sales in the quarter we have made $1 million on preowned aircraft sales.

We took a charge on inventory that is really not available for sale.

You remember there is a delta between the expression that we have one aircraft available for sale, and an inventory that has seven used aircraft.

A bunch of those are on lease, and those were written down further on an abundance of caution.

Okay and you also had twelve cancellations versus six last year.

Can you quantify how many of those were large versus midsize cabins?

I don't think so.

I can't right off the top of my head.

I don't think you are numbers are right, Heidi.

It is in your press release.

You are comparing quarter to quarter.

I'm looking at --.

Okay.

Looking through here, the detail that you provided for us on the cancellation -- you have gross orders cancellations and then total.

In 2003 you had a total of 12 cancellations --.

I see what you are talking about.

That's what I am trying to get clarification on.

If you take a look at what really happened, you can make the cancellations fairly well with the order decline.

Remember I told you that our difficult period where we walked through the valley of death was the second half of '02 where we experienced six -- you might remember in '02 we went swimmingly through the first half, had very good earnings, everything was fine.

And then in the first half of '03, we had eight cancellations.

That's dropped four in the second half.

Okay.

And we have very little that our guys carry as risk items.

I think that they would be not core customers, but you worry about fractional activities, whether they will take the airplanes that they have committed to.

And I think they will.

Right, but what I want to establish in terms of net orders because gross orders are great, but net orders are more interesting.

Of the 66, I would love to have a breakout between how many are large aircraft and how many are midsized.

Heidi, I don't have that number right now, but the --.

I can get that later.

One last question then let somebody else, sorry about this.

Can you talk, Nick, for us about what your priorities for the future use of cash?

You did not buy back any stock in the fourth quarter.

How are you thinking in 2004?

I'm thinking about operations in 2004.

I'm not thinking about the cash right now.

We still owe $3 billion -- if an opportunity comes along that is appropriate, we will buy it.

If it doesn't, I'm not out there looking.

We are focused internally.

We have a pretty nice internal growth rates for next year if we can just execute as I believe we will.

We'll have a very nice year.

Great.

Thanks very much.

Nick (indiscernible) of America.

Good morning.

A couple quick questions if I may.

The first is, Nick, what was the spread of customers amongst the 34 Gulfstream aircraft that were ordered in the fourth quarter?

Where they mainly corporates, where they Fortune 500?

Can you give us a bit of color on that?

I don't have that for you.

Okay, second question.

General Pete Schoomaker (ph) of the Army has been getting a lot of questions on Future Combat Systems, and how to bring the network forward into his current vehicle fleet.

I think the Army has seen Stryker appear in the field in Iraq and is very impressed with its networking capability.

Do you have any idea what scale and what timing there would be for a contract, hopefully this year for the Army to start trying to get some of the FCS networking capability brought forward and put into the current vehicle fleets.

And if that was going to happen, would you see yourself playing a major part there?

I do not want to anticipate the Army.

I think that their plans are internal to them right now.

They are in gestation, and commenting on it would be inappropriate.

We are obviously a major player for them, not only on the combat vehicle side, but as a provider of C4I capabilities and it's hard for me to imagine that we wouldn't play a role no matter what it is they decide to do.

But I don't want to get ahead of my customer right here.

Thank you, and the third question is on the IS&T.

How do you see the margins progressing through this year?

Is this something that you can rectify a little bit with integration of Veridian, or is margin going to stay fairly static and really you are relying on kind of revenue activity?

And is that activity likely to be as strong as you've seen in '03?

I think what we are planning for is, as I said earlier, margins kind of IS&T a little bit below 10, and they have some upside potential if they can execute.

As I indicated and successfully take some cost out of their business and get it up to double digits again, I think that is a potential upper there.

Right now we are thinking about them as somewhat below 10.

Okay, Nick, and lastly in the last question you were talking about prioritizing operations this year.

But are you still out there looking for bond funds and particularly in IS&T.

Is that something that you would not want to pass up?

I think we won't pass up good properties at reasonable prices in any of our segments.

To suggest that I'm out there looking is probably not an accurate assessment, but sometimes transactions come looking for me.

And when that happens, we have the balance sheet and the credit rating to do them at low cost of capital.

Any color on Gulfstream activity since the quarter in the first couple of weeks if you like of '04 if things continuing to improve?

There is a lot of activity over there; the principal activity would be at the end of the year, they executed somewhere in the neighborhood of half a dozen or more LOIs, and their contract folks are in the process of negotiating those contracts and reducing those expressions of interest, contractual expressions of interest, the firm in binding orders.

So yes, we think it is going okay.

I don't think we expected the first quarter to look like the fourth quarter.

We think we saw some pent-up demand there in the fourth quarter and maybe the third as well --.

Is that partly due to the tax breaks?

I don't know that in our case.

I really just don't know.

I'm not sure that our customers share with us how important that is to them.

Thank you very much.

I'm not sure it is important to sophisticated corporate interests.

Maybe more important to their Treasury Department, less important to the guy that is buying the airplane.

That's fair enough.

Thank you very much.

Sam Pearlstein with Jefferies & Co.

A couple of things.

One is, was there anything else within marine besides the NASCO charge?

We've been watching for a while now in terms of Bath and whether there is any room for profit rate adjustments on the destroyer business, but is there anything else that changed for marine?

No booking rate adjustments whatsoever.

Bath'S performance is not terrible, it is just middling.

We haven't yet improved booking rate there, although there is some sign hope.

In Combat Systems we saw the extra $200 million in revenue I think when I look at third quarter to fourth quarter but a margin decline.

Is that all acquisition related, or is there anything that is driven in terms of a shift towards newer programs?

I think its acquisition driven, Sam.

Inco (ph) and Steyr interests.

In terms of you went through some of the items with cash flow into '04, can you touch on CAPEX.

We see now a couple of years of decline after the Bath expansion.

What should CAPEX look like as we start to go forward in time?

I think its going to look very much like what we have right now.

We are forecasting 224 next year, 225 this year. '03 was 224.

We are going to do 225 in '04.

In this fourth quarter itself you mentioned the tax payment that really, they were not as high as you necessarily would have thought.

Is there anything else when I think of the roughly $500 million or so in cash generation between net income plus depreciation is, and where you reported cash flow from operations?

Is there anything working capital you can help us with?

Sam, I think you misunderstood my remarks.

It had nothing to do with the quarter.

It had to do with the year.

Cash taxes were significantly less than the tax provision we took.

The delta is positive cash.

And I think I told you that we got quite a cash boost out of Gulfstream by the sale of premanufactured inventory.

And that we have a little bit of an upper out of Spain on an advance.

The advances we received in Spain are annual.

This one was just a little larger than we've had in the past.

The rest of it, I would say is due to just performance in collections and shrinking working capital.

You will see that as you see more detail on our balance sheet.

Okay, all right.

Thanks a lot.

Steve Binder of Bear Stearns.

Good quarter.

Just want to follow-up on Sam's question trying to tackle the cash flow question a little differently.

I heard the three things you talked about upfront about what caused that strong cash generation for 2003.

But the fourth quarter your free cash flow did exceed income by threefold nearly and that's far better than the fourth-quarter performance you've achieved in the last three years.

You touched on three things cash taxes, but that was cash taxes were about equal to the provision of the fourth quarter.

Most of those actions were reduction of preowned inventory occurred in the first three quarters of 2003 if I'm not mistaken.

I think you were at 94 million in the third quarter;

I think you touched on 71 million at the end of the year.

So the big decline happened the first nine months, and liquidation of the unsold aircraft occurred largely in the first nine months.

It seems like there are some other factors occurred in the fourth quarter outside of just the advance.

If you are parsing it to the fourth quarter you had 34 orders at Gulfstream.

Some of them larger than a typical deposit because they are for aircraft that were early in the Q. So you've got some near in deposits at Gulfstream, too.

My remarks were for the year, not for the quarter.

Right, but I'm saying much of the upside in the cash flow for the year occurred in the fourth quarter.

That's just collecting money, collecting money and reducing inventories.

I was wondering outside of the strong customer deposits in the quarter, was there also any catch-up on G550 deliveries?

Were a lot of those launch orders?

Did you have an unusually high level of payments that came upon deliveries than you normally would have?

Was there anything like that or was really just the deposits?

I think very little but there was some of that, some people in the dark phase of the market were able to negotiate a more attractive cash terms than they had previously been able to negotiate.

I think when you get the details of working capital; you will see a significant reduction in receivables in the quarter coupled with advances that Nick talked about, both for our foreign customers for the Gulfstream thing, so I think you're going to see a similar across the board improvement in working capital.

All right, as far as you gave the assumptions for deliveries for Gulfstream green deliveries in 2004, you know the 220 million of trading commitments I think come due by the end of 2004, so I am just wondering what is your assumption on used aircraft sales in '04?

The trade-in commitments, Steve, of 229 roughly break down about 120 million of those commitments come in '04 and the balance in '05.

So do you have assumption yet on what used aircraft sales will be in 2004?

No.

And maybe lastly, just on the --.

You know what people are going to turn in.

You have some idea I would think just based on the trading commitments alone.

They're pretty modest, aren't they?

But if somebody -- we've got some open slots and if somebody wants to offer a trade, we will deal with it.

The reason I ask is simply you just kind of gave margin guidance for Gulfstream in 2004, so it is largely triggered by the level of sales in used aircraft sales for that year, right?

Because right now in the fourth quarter you are above 12 percent on a preowned basis.

Yes.

And last question, Nick, maybe touch on G450.

Have you sold any of those?

You launched that aircraft; have you sold any positions (ph) yet?

The emphasis has been exclusively on G400 where our risk was.

We are not going to have any trouble selling 450s.

I think five of them in the fourth quarter.

And we don't have a launch customer at the moment, but we have -- we are deep in the negotiations on every one of them.

Would you say if there is upside to your forecast for Gulfstream in 2004 its going to be a combination of new equipment pricing as well as for those unsold slots as well as pricing on the preowned?

In all of the cost we took out of the business this year.

Right, but you were projecting a 65 to $80 million benefit from that.

Is there a potential upside on the cost side as well do you think?

Not beyond that.

We could get some modest learning curve improvements, but I am not baking that into the plan.

What we baked into the plan is the elimination of preowned losses and the realization of the cost we took out of the business this year and paid for this year.

So the upside is any additional volume or pricing benefits remaining unsold aircraft.

Would you say that the G400 pricing, the plan is that you end up selling the fourth quarter, because I remember on the conference call you had some conservative expectations on pricing on those unsold G400 slots.

Did that kind of materialize better than you thought?

We did okay.

Okay, thanks very much.

Sarah, I think we have time for one more question.

Joe Nadol with J.P. Morgan.

First question is on the Gulfstream cancellation.

Nick, you mentioned I guess the downside risk to your plan for '04 would be if the economy turned down and you got some cancellations.

Back in before this downturn in the last two years plus, the Gulfstream never really got any cancellations.

I know this has been unprecedented what has happened the past couple of years to the market, but have -- I guess the question is in your current stable of backlog, what are generally the cash terms relative to where you were a couple of years ago.

And is there any incentive for customers to cancel their orders at this point?

No, the cash terms are stronger.

We have taken steps to tighten our contract requirements across the board.

We changed our business models for preowned aircrafts.

We are frankly much less accommodating.

So did things really pick up from a terms standpoint in the 3Q and 4Q periods were orders, were gross orders picked up as well?

We were getting better terms and conditions on the orders that we signed -- in general.

You get in the specific competitive situations or a plane that you need to move for one reason or another.

But in general, terms are improving.

Okay.

On the marine side, you talked about the outlook for the commercial ships, but how about on the order side.

You been talking about the potential orders coming in there.

Any movement there?

There are several things in the works.

When we have them, we will report them.

Okay.

And on the tax rate, Mike, could you mention again what the precise reserve reversal was regarding, and I guess could you provide a tax rate expectation for 2004?

Let me answer them in reverse, Joe.

For '04 we are looking about 33.6, 33.7 as the effective rate for '04.

In the fourth quarter of this year there was 18, $19 million reserve reversal.

If you recall in the third quarter, we settled with the IRS years '96 to '98, and we flushed that immediate benefit through of the result of settling the issues.

Some issues that were settled had tax implications that went into obviously open years.

So on the strength of our agreements with the IRS for '96 to '98, we adjusted the open years and reset the liability based on our settlements and the understandings we have.

So thus, we were able to reduce it further by the 18 million.

So now we think we are set going forward, notwithstanding new events.

And those are R&D tax credits -- is that right?

No, the R&D tax credits were in prior years.

These are just general issues.

You recall when you make a lot of acquisitions and do a lot of movement; you get a lot of tax issues that require discussion.

So it is a potpourri of a lot of things.

It is not -- there may be some R&D in there, but it is not significant.

Okay, so for the years '99 and on, are there any ongoing discussions, or you don't expect anything at this point?

Well, there's always discussions, Joe.

We have open years, but we are trying to calibrate the tax reserve consistent with the principles that were established in the tax years through '98.

That's all Mike is saying.

We could win or lose issues in subsequent years.

It would either increase reserves and rate or lower it.

So stay tuned.

Plus regulatory changes -- that's always a factor.

Okay, thank you.

Thank you all for joining us today.

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Again, thank you all and good-bye.

That concludes today's conference.

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