通用動力 (GD) 2004 Q4 法說會逐字稿

Good day, and welcome to the General Dynamics fourth-quarter 2004 financial results conference call.

Today's call 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, Lars.

I'd like to welcome the members the investment community that are on the call today, as well as those members of the business press that are listening in.

As always, any forward-looking statements that will be made today represent our best estimates of future performance but are, of course, subject to the normal risks that face all businesses, and you can get a -- a rundown as to what those risks are associated with General Dynamics in any of our 10-Ks, 10-Qs or annual reports.

And I would recommend that you do look at that.

With that said, I'd like to turn it over to our Chief Executive Officer, Nick Chabraja.

Thanks, Ray, good morning.

Well, we had another strong quarter at $1.66 a share, somewhat better than analysts' consensus.

We enjoyed impressive growth and improvement in the quarter in every important financial metric.

Compared to the same quarter a year ago, sales from continuing operations were up 10 percent.

Earnings per share grew 18 percent.

Overall margin rates improved by 160 basis points.

Funded backlog was larger by 3.4 billion, and total backlog up 1.4 billion.

And maybe most importantly, we generated 709 million in free cash flow from operations, which is, of course, net of capital expenditures.

The strong quarter, in my view capped what was, for us, an outstanding year.

Just to briefly highlight.

Compared to 2003, we enjoyed a 17 percent revenue growth to over 19 billion. 21 percent earnings per share growth, coupled with, and really aided by, significant margin rate improvement in 3 of our 4 major segments.

Free cash flow from operations, net of capital expenditures, was 1.5 billion, or 125 percent of net earnings.

While -- to digress a moment here, while we always do and historically have done very well producing cash that -- that is reasonably approximate to net earnings, this is the second year in a row of what I would view to be prodigious cash production.

So we're very pleased with that.

Our net debt at the end of the year 2.3 billion, roughly 900 million below last year at this time.

And I suspect as you would imagine, individual segment results for the quarter and the year near our overall results, with significant operating earnings increases for the quarter in 3 of our 4 major lines of business, and all 4 registering sizable earnings growth for the year.

Let me briefly highlight each of -- each of these segments and give you a little color.

Our IS&T segment experienced really strong backlog growth of 1.9 billion for the year.

It now totals 9.4 billion.

In addition, they have another $6.3 billion in IDIQ contract awards that represents highly probable additional work.

This group also experienced double-digit margin rates for the year.

And in my view, it would be fair to -- to assume that -- that next year they'll proceed at a basis that looks a lot like this year's average margin rate.

Combat Systems continues to grow its backlog with very strategic U.S. and International program wins.

Revenues, earnings, and margin rates all improved.

Internal operating performance improvements at Gulfstream led the way to very good results.

Earnings increased 40 percent over the same quarter a year ago, and 80 percent compared to 2003, on relatively modest sales growth.

Year-over-year sales increased by 10 percent.

But let me give you some -- some additional detail here.

I think it might be helpful to you.

When looking at volume at Gulfstream, new aircraft volume was up $200 million, and margin related to that volume was up 280 basis points.

So good sales with respect to new aircraft and -- and you can see the result of -- of the productivity improvements we put in there.

Pre-owned volume was down $180 million, but we turned a profit $6 million, as opposed to a $64 million operating loss a year ago.

Service revenue is another good news story, up $40 million, and margin rose 140 basis points.

Let me turn for a moment to the order book.

We had 95 net orders for the year after cancellations. 97 before cancellations.

We experienced 2 cancellations early in the year.

That's 36 more orders than last year, and 43 of those orders came in the fourth quarter.

What does that mean?

If I were to exclude for the moment fractional orders from our order volume from the time we acquired Gulfstream in 1999, this would be the largest number of orders in our history, both for a quarter and annually.

And I -- and I think it's fair to exclude fractional orders, because we have had bigger numbers if you include them.

We tend to get fractional orders in large groups, and they're not entirely representative of current demand.

In other words, that order is worked off over a considerable period of time.

So for 2005, it leaves us about 92 percent sold on our planned production of large aircraft, and 68 percent sold on our planned production of mid-sized aircraft.

So overall, 85 percent sold of the aircraft we plan to produce, and we, what's more, have a nice backlog of orders for 2006 as well.

As you might have been able to see from the schedules attached to the press release, the overall book-to-bill ratio was 1.24 for the year, with funded backlog growing by almost 600 million.

Leaving Gulfstream, we continued to have some nagging problems with the tanker program at NASSCO that led to a charge in the quarter, but the Marine group was able to hold earnings constant in the quarter as compared to the same quarter a year ago.

For the year, sales are up 11 percent with earnings growth of 35 percent.

Maybe most importantly, we increased funded backlog for the year by 1.1 billion, for a total back log of almost 17 billion.

And earlier this month, we were awarded another 1.1 billion in surface ship construction contracts at our 2 surface yards, Bath and NASSCO.

Well, I think the bottom line for the quarter and the year is no matter how we measure it, we had a strong quarter and an exceptional year.

We begin 2005 with a healthy backlog and a continuing focus on improving our operating fundamentals.

With our strong balance sheet, I am confident we are in an excellent position to take advantage of the opportunities our markets present.

And continue to generate value for our shareholders in 2005.

With that said, I'd like to turn this over to our Chief Financial Officer, Mike Mancuso, to give you some additional insight into some of these numbers.

Thanks, Nick.

And good morning, ladies and gentlemen.

I will be brief.

I just want to point out a few things.

First of all, I want to remind those of you that have a copy of our press release that in addition to the income statements and segment results for the fourth-quarter and full-year, there is a wealth of additional financial information on exhibits E, F, and G, including the backlog, aircraft orders and deliveries and other selected financial information which may answer some of your questions.

As Nick indicated, segment results are very strong for the quarter and the year.

Operating earnings in the fourth quarter were 30 percent higher than a year ago, and 34 percent higher for the full year.

Interest expense for the quarter is comparable to the year-ago quarter, but full -- but for the full year 2004, interest expense is 50 million higher.

Our average fixed debt balance in '04 is about double the '03 average, resulting from the 3 billion in acquisitions we made throughout 2003.

This was partially offset somewhat by a significant low -- significantly lower commercial paper balance in '04.

You'll note that our tax rate provision for this quarter and the full year, which approximates about 33 percent, is significantly higher than last year.

Last year, you may recall, we had a number of one-time adjustments that lowered the rate to 25 percent for the fourth quarter, 2003, and 27 percent for the full-year 2003.

For planning purposes, you should assume the 2005 rate will approximate 2004, with the caveat that as prior year audit cycles conclude and we sort out the effects of the American Jobs Creation Act of 2004, there could be some favorable adjustments.

I think that covers the points I wanted to make.

I'm going to turn it back now to Ray to begin the Q & A.

Thank you, Mike.

Lars, if you would explain to folks how they can queue up for the Q & A, we'll start that.

Lars?

Are you ready?

Thank you. [Operator Instructions].

Cai von Rumohr, SG Cowen.

Yes, great quarter, Nick.

How big was the nagging problem at NASSCO in the fourth quarter?

Cai, thank you for your kind remarks.

It nagged to the tune of about $19 million.

Okay.

Great, and then just one quick follow-on.

Could you give us any more granularity?

It was terrific to get the orders for the year and by the quarter, but, like, how much were fractionals out of a large and what was the split between, you know, the G550 and other products?

Cai, with respect to orders, we didn't have any fractional orders in the year.

I am sorry if my remarks didn't make that clear.

We're still working off a relatively large backlog that we had with NetJets, and I think the last large order we got from them was in 2002.

They have been taking airplanes, however, and my memory is that it was somewhere between 6 and 8 aircraft this year.

And what else did you want to know?

We don't generally publish by product set, but we give you information by large and mid-size for competitive reasons.

I don't know anybody else that publishes that detail.

Can you give us -- the last question, those with the net orders, were there many -- any cancellations in --

I think I mentioned there were 2.

We had 97 orders, 2 cancellations early in the year.

And, by the way, in some respects, cancellations began in 2002.

We experienced -- I mean, excuse me, yes, in 2002, and we experienced them rather heavily in 2003, and they ended very early this year.

So there you have it.

David Gremmels, Thomas Weisel.

Thanks, on Gulfstream, the Q3 -- I'm sorry.

The Q4 margin was down from Q3, even as the delivery mix shifted towards -- toward large cabin.

Just wondering if you could comment on that?

Is that related to pre-owned activity, or what's behind it?

Well, David, I don't know.

There was, among other things, we had a significant pre-owned profit earlier in the year, and only had 1 million in the fourth quarter.

That is one adjusting factor.

And I believe that that pre-owned occurred in the third quarter.

So I -- I don't know that I have any other comment on -- on the subject of -- of margins.

Pretty close.

Steve Binder, Bear Stearns.

Nick, with respect to pricing at Gulfstream in Q4 on that order -- that order of surge that you saw.

How would you characterize the pricing in Q4 versus maybe Q3, which was also a strong quarter, on an apples-to-apples basis when you look at things like G550s sequentially, are you seeing some improvement there?

Significant pricing improvement in the fourth quarter order book.

Really notable and marked.

You know that in my view, demand picked up noticeably so in -- in the fourth quarter a year ago, 2003, we had a strong order quarter.

Not as strong as this one, and it continued to be a good demand throughout this year, but in the fourth quarter, there was clearly a surge, and it carried with it strong pricing improvements, across the breadth of our product line.

We should feel the impact of that late 2005, early 2006.

Nick Fothergill, Banc of America.

Good morning, Nick.

Two questions, if I may.

The first is on PDB-753.

Can you comment on the trajectory of Army spending, and if any of that is likely to come in your direction?

And also on the supplemental and the increase we might be seeing in maintenance spending.

Is there a feeling that some of these rather tired armored vehicles could either return from Iraq or be maintained in Iraq, and that's something that could fall your way?

That's the first question.

Thanks.

You know, I really don't want to speculate about what's going to fall where.

What's the good news here?

The good news is, you know, compared to the facts we know -- what you're talking about is the gossip.

The facts were that in fiscal year 2005, we had 148 billion committed and appropriated to the investment accounts, somewhat more than the President sought, which was a 6 percent improvement over FY 2004.

But to that, we had a $25 billion supplemental early in the year that had procurement funds in it.

And I don't remember the exact number, but about a billion and a half is my recollection.

But -- but we know at least -- at least it's reported and we think we know, that there's another $80 billion supplemental about to be -- submitted to the Congress, 75 of which is reported to be for defense.

We hear as you hear that a significant chunk of that dollar amount is going to go to procurement.

Size it, maybe in nature of 10 percent of the fiscal year 2005 entire investment accounts.

Now -- now that's aram [ph], but I won't be surprised if it is pretty close.

And a big chunk of that procurement money ought to go to the Army.

And -- and we are pulling for him, obviously.

As a significant Army supplier.

The guidance you had alluded to that's been in all the newspapers, but not necessarily provided to the contractors officially, what we hear is that the investment counts in the 2006 budget when the President proposes it, are likely to be up over the 2005 budget by modest but still significant measure.

And that, again, is before supplementals, which are certain to come as long as we're in Iraq.

So you'll hear nothing but optimism from General Dynamics about -- about its current market and -- and the opportunities that -- that we'll have an opportunity to take a shot at.

So we're pleased.

David Strauss, UBS Financial.

Good morning.

Nick, could you -- could you give a little more color in terms of what you're baking into your -- into your forecast for 2005 in terms of details by -- by business.

You know roughly what you're looking at for margins by business segment?

Okay.

Let's -- let me say first that our guidance is, as always, driven off of our operating plan.

It does not in any way speculate about the allocation of capital, and how we might improve that operating plan.

We just don't bake that into our guidance, because you can't count on it.

I think that you should look for, as I indicated earlier, in the IS&T group margins fairly similar to what they enjoyed this year, and we may even push them for a little improvement.

I would say that their fourth quarter is unusually low for them, and that the second quarter where they were well over 11 percent is a little bit aberrationally high.

Through the year, you should watch them bounce around between 10 percent and 11 percent, and I'd like them to average out better than the 10.5 they got this year.

Combat Systems will do very well.

Look -- look for them to enjoy margins at 11 percent or north.

Gulfstream will do as well or better than they did this year.

The Marine group will do a little bit better.

I always bite my tongue when I talk about that, but we'd like to see them -- hey, we are always pushing them to get to 7 percent, but we'll see whether they make it.

I hope that kind of gives you a general order of magnitude.

Troy Lahr, Legg Mason.

Thanks, I wonder if you can give me some, I guess, color on large aircraft orders from a dollar standpoint versus the units ordered.

It would appear that the pricing for the large aircraft, if you just divide out dollars by units, decreased about 13 percent.

Can you just comment on that?

You can't do it that way.

You've got too many different kinds of aircraft in there.

You've got 4 different kinds of aircraft.

And it depends on the product mix.

Okay.

As I think we'd indicated some, we've taken quite a number of 350 orders in the year, a little more than, frankly, we wanted.

But we had some very, very good customers that placed fleet orders.

So the 350 is our least expensive product.

So that could be in the mix as well.

But what -- but what I can tell you is what I've already said.

We experienced a material pricing improvement fourth quarter.

Myles Walton, CIBC World Markets.

Thanks.

You had mentioned that your guidance doesn't include the allocation of capital, but to that point, looking at your cash, what you've got on the books, you've been relatively quiet on the acquisition front.

You, I don't think, have been in the share buyback mode.

Your balance sheet looks good.

And -- if you could just comment on what your plans are for the billion you have on hand, as well as the billion-plus you're going to have in free cash flow next year.

We are going to do our very best to use that money to improve the results of our operations.

As we do every year.

We'll move the money opportunistically as -- as opportunities make themselves available to us.

You point out that we haven't been in a share buyback mood.

I could tell you that -- that we didn't buy shares in the quarter -- in the fourth quarter.

On the other hand, we were quite active in the early part of this year as the market made our shares available to us at what we believe to be attractive prices.

Heidi Wood, Morgan Stanley.

Yes, Nick.

When we took a look at that really solid order book that you had in Gulfstream, can you talk to us about whether you saw any material change in the customer profile?

Are you seeing expansion in international markets or government markets?

Or do you relate this simply to U.S. corporate profitability?

You know, the one marked change, Heidi, when you rack and stack between 2004 and 2003 was the growth of the public corporate business.

So this is our standby customers coming -- coming out of the woodwork and -- and that isn't really surprising, is it, when you -- when you see the earnings growth and the cash generation that has been going on in the Fortune 500.

So -- that -- that could move entirely differently than -- than the stock market is betting those stocks, and they -- they have been flush with earnings and cash and it manifests itself here, at least with us.

Joe Nadol, JP Morgan.

Thanks, good morning.

Good morning, Joe.

Good morning.

Nick, I was hoping you could provide a little color on the European combat business.

I know you have, I think, a significant volume ramp-up scheduled for '05.

I'm wondering what kind of margin impact do you think that will have on the sector?

And also we've seen some announcement of orders.

Just wondering what you think of the -- the order outlook over there, and how your backlog is shaping up specifically for those European businesses?

Joe, they did a good job.

They came through in the fourth quarter as we expected they would.

And it looks to me like they're going to do somewhat over a billion dollars next year, and I don't see it as a significant ramp, but it's -- it's a good -- good operation.

I think they'll do well.

And they have a wealth of opportunity.

You know, they're out -- their prospect list is probably second only to Gulfstream's in terms of quality and length.

So -- so we're in good shape out at our European Land Combat Systems operation.

We're still operationally challenged, I would say, with doing -- trying to create a company out of what was 3 different businesses doing business in at least 4 different countries.

We have a piece of Santa Barbara that does business in Germany.

That its site is located in Germany.

In addition to Switzerland, Austria, and Spain.

So that has been and continues to be a management challenge for us as we blend these -- also very different cultures.

Responding to yet another culture, American management.

But -- but we're very optimistic about our situation there in Europe.

George Shapiro, Smith Barney.

Yes, good morning.

Good morning, George.

Nick, if you looked at Marine and took out the charge this quarter and the charge last quarter, the margin would've still been down from, like, an underlying 7.5 to 6.3.

So is there a mix that's going -- a shift that's going on here that's making it that much more difficult for Marine, as well as the charges that you've had?

A little bit, George.

I mean -- we delivered the last of the Sea Wolves in the quarter.

And we're losing a highly profitable -- program volumes have come down.

And replaced by cost plus Virginia-class work.

So your observation is correct.

Okay.

And then if you can just refresh us in terms of when the tankers get delivered at NASSCO, so when we'd see for sure an end to the charges?

Well, we have one coming up in March.

That will be the second one.

And the -- the last one to deliver is in 2006, towards the end of that year.

So -- I mean that's -- that's really all I can tell you.

The estimated completion has been carefully reviewed with our external auditors.

Everybody agrees with the position we're taking right now.

But it is not without risks.

The -- the principle risks in front of us, I think, are steel surcharges and some issues with -- with a subcontractor, but we are at a place where we think the bookkeeping is -- is as accurate as we can make it.

But this -- this program certainly has -- has had all the bad luck it could use to -- it's been a parade of horribles, but that, I guess happens when you have one on the fin [ph].

But our guys are doing a good job.

I mean, they're out there fighting it.

The ships a great ship.

They're coming down the learning curve.

I can't quarrel with the management attention and what's going on there in the shipyard.

Eric Hugel, Stephens.

Good morning, guys.

Good quarter.

Nick, can you sort of give us some insight into your discussions with naval customers regarding maybe, future production rates as it regards to industrial base issues, and maybe the need for additional consolidation of shipyards?

I can't.

I really haven't had those discussions.

They have them in the press. [ LAUGHTER ]

Well, I mean, can you sort of talk to us about sort of what your thoughts are on -- on the shipbuilding going forward and where -- obviously there's a need for ships, but if you had to sort of put money on it, where would you think that they were going?

Eric, my thoughts on shipbuilding is I have a backlog to choke a horse.

At Bath, we go out to 2010 building DDGs.

NASSCO has -- their biggest problem is finding a dock to build the things that they have under contract.

And -- and, you know, right now the least of my worries is shipbuilding consolidation.

We are working margins right now.

We -- of course, would love to build 2 submarines a year, but that doesn't appear to be in the Navy plan and in the cards for the moment.

So we'll do our very best with the 1 a year, together with our partner, and -- and produce those.

I think what's incumbent upon us is good for the Navy as well.

That is, to -- to become the low-cost producer across our product line, to do very well, and to be able to handle lower rates of production, which we do very well historically here at General Dynamics.

So mostly, I don't pay much attention to the gossip.

Rob Spingarn, Wachovia.

Good morning.

Very nice quarter.

You mentioned that your sellout rate on the mid-sized aircraft is lower than on the large aircraft, and I'm wondering if there's a shorter order lead time there, or might you be adjusting your targeted deliveries?

It's a shorter order lead time for those aircraft.

We tend to turn them without the -- I think at that price point, people don't want to wait 2 years for an airplane, where they're willing to do that on -- it's more of a -- of a fleet plan purchase for the large aircraft.

Doug Harm [ph], Sanford.

Good morning, I am interested in IS&T, and there has been great growth there and the backlog is well up.

Can you talk a little bit about what the mix has been in terms of C4 Systems, AIS, or Network Systems and are we seeing any kind of a shift there going forward?

Not really.

It's been running relatively constant.

Let me take a look here.

The largest business is C4 Systems, but it is roughly a third.

The next largest is AIS, and the smallest Network Systems.

Of the 3 principle ones.

And then we have the United Kingdom that's about three-quarters of a billion.

To help you size that, Network Systems, that's the service company, is slightly north of a billion six.

All the rest of the Companies are in one way or another related to each other.

They are in the same general work with different customers, is a good way to think about it.

And it should be a business that does well over $7 billion next year.

Howard Rubel, Jefferies.

Nick, one obligatory question we haven't addressed in a while is, I hate to wake this sleeping animal called the A-12, but anything to comment on with respect to that?

No, Howard.

My suspicion is that you will find out at the same time I do.

My -- I think when the Court releases his findings and order, he'll probably release it to the press probably a half an hour after he gives it to the lawyers.

So you'll know when I know, and I'm -- I'm not going to irritate the judge by attempting to guess when he's going to issue that opinion, but he -- but he heard a relatively long trial, and he's -- had very substantial submissions by each of the parties, and I think he's got a lot of work to do to write his opinion.

So we look forward to seeing where we are in that matter as well.

Jared Muroff.

Thanks.

Going back to the Gulfstream and the used aircraft.

I was wondering 2 items.

If you could give us a sense of what the revenues on used aircraft may have been in the fourth quarter.

And as well, what kind of inventory on used aircraft do you have and what you might be looking for in terms of sales for '05.

I think we had 65 million in revenue in the fourth quarter.

We have 8 aircraft in inventory. 3, I believe, or 4, are under contract to be delivered and sold in the first quarter, and the others are not for sale because they're subject to temporary lease agreements with customers awaiting aircraft.

I don't know, we suspect used volume or pre-owned volume will be up a little bit in 2005 over 2004.

Principally because our commitments to accept some aircraft has grown a little bit, which wouldn't surprise you given the orders that -- that we've had in the year.

So I think the volume will be up a little bit from last year, but not as high as it was in 2003.

Heidi Wood.

Nick, I want to go back to Gulfstream and talk -- ask you a question on the manufacturing side, and then your production rates quickly.

You did 14.2 percent margins before pre-owned.

And just knowing your style, I presume you have ongoing cost-cutting actions planned at Savannah, and you're talking about average pricing improving in some ways considerably given your bookings for '05 and '06.

So -- yet you're not talking about much increases in margins.

What's the other gating factor there?

Heidi, a couple of things.

First, I'm -- I'm glad you asked the question, because I want to drive this home.

We experienced considerable pricing improvement in our order book in the fourth quarter of this year.

Those are planes that are going to deliver at the very earliest late 2005.

Most of that is 2006 delivery.

So we're going to get a little help on the price side later in 2005.

Look for more of it in 2006.

The -- the other things I think that we have talked about with the investment community is that we're going to do a little bit more of the 350s next year than -- than we did this year.

And I mentioned that in my earlier remarks.

And we're probably going to increase a little bit our spending on research and development.

Now if you -- if you want to ask me is this conservative guidance and can we beat it, I'd say yes, but I want to do it before we crow about it.

I think the worst thing I can do is -- is stretch your expectations and not be able to deliver.

We've -- we've got a lot of work to do down there before we declare victory.

And we've got some interesting things going on.

But they're all good things.

So am I optimistic about Gulfstream?

You bet I am.

And they're going to have a good year.

And -- and it -- look, I would say this, if we could pull a few aircraft into the year, our operating plan is to build 4 more of the large aircraft and the same number of the mid-sized aircraft.

If we can -- the demand would suggest that we build a few more.

The dicey part of that is the demand became clear to us in the fourth quarter, not earlier in the year; and we're going to have a little bit of a bulky supply chain.

We can handle the assembly and tests at Savannah.

The question is, can we get all of our suppliers, including some critical ones, lined up to -- to give us what we need to satisfy some customer demand.

If you were to ask our salespeople what's the toughest competitive threat that they face, their answer would be availability of Gulfstream aircraft.

Joseph Campbell, Lehman Brothers.

Good morning, Nick.

Great free cash flow.

I wondered if you could just give us a little more color about how you did it, and where it came from, and whether we can look forward to seeing the same sort of strong cash flow relative to the earnings next year?

Well, I think what we're forecasting, Joe, for next year is that we'll be proximate to net income, which -- can we do better?

We'll have to see.

I mean it's what we said last year and the year before.

Look for us to be around net income, and each year we squeeze a little more blood out of the turnip.

We'll see how we do next year, but we're pretty confident about our cash generation ability next year.

Lloyd Zeitman [ph], Bernstein Investments.

Good morning, in is Lloyd of Bernstein.

Happy new year to everybody.

Could you discuss the situation as far as acquisitions? '04 was a year of consolidation within General Dynamics.

What do you see on the acquisition front in terms of pricing and potential prospects and let's say any pipeline that there may be?

And also, could you discuss the service revenues and service aspect of Gulfstream?

I'll take your last one first, because I've answered this question in past.

It's a business around 400 million.

And it's -- it's a good business.

It principally services Gulfstream aircraft around the world; however, in a business that we call General Dynamics Aviation Services, we -- which has 4 locations, we also service other aircraft, principally at those locations.

Good business, margins are very solid.

The first part of your question went to -- oh, the acquisition pipeline.

You know it's -- it's interesting right now.

There are -- we are concentrating on filling some niches, some technology gaps that we feel across our product line.

So we're -- our -- our targeting is -- is highly specific, and it's not sort of deal-flow oriented.

So -- and we have a few things that we're working on now that we'll be announcing.

They're not unlike some of the things we worked on last year.

And I don't know how to answer your question about pricing and deal flow, because we're -- we're sort of rifle shot right now instead of going around to buy things.

Now we'll -- we'll have more time for that a little later in the year, but right now, we have 2 or 3, 4 things that we're working kind of -- and that's the general area that we're working in.

Steve Binder, Bear Stearns.

Nick, with respect to the guidance of 2005 and particular comments in IS&T, you touched on the supplemental -- in the '05 supplemental, the procurement slice being over $15 billion.

What is your assumptions and your plan of how much you're going to capture that?

Steve, how can you make an assumption about something you didn't even know about at the time the plan?

I haven't seen -- I mean it's foolish to plan about something that's sky blue right now.

Okay.

Is -- so can we just safely say that you are not assuming anything on that supplemental in '05?

I think very little.

What we did know about -- about was the earlier supplemental and the guys would bake that into their plans.

I mean I -- I would think that they're off smoking stuff if they baked in product out of a supplemental that hadn't even been proposed by the President.

So this is the kind of stuff that I'm perfectly happy to let analysts run with, if they'd like, but it's not good business practice here.

And we won't provide guidance on will of the wisp.

When we see it, when we know it, when -- when the customer tells us they have the money and the authority and they tell us how they want to spend the money and that it's firm, then we'll adjust ourselves and adjust you.

But let's -- let's be certain about this.

That money may not get spent in 2005.

David Gremmels.

Thanks.

I was hoping to get a sense of your thinking behind the 2 divestitures in the quarter, and there is more portfolio shaping to come?

Yes, David, you can take a look at what we have in our financial statement.

I guess what you can't see is that we either have sold, are in the process of selling, or have agreements for the sale of assets that generated about $375 million of revenue in the year.

That revenue is excluded from our reporting by accounting convention.

The earnings on those businesses for the year and the quarter are reflected in discontinued operations.

The results of the sale transactions will be reflected in the first quarter of this year.

So the gain and loss is not in this statement.

I think that's the best guidance I can give you.

Cai von Rumohr.

Yes, Nick, something of a follow-on.

One of your strengths has been capital deployment.

You exit the year with close to a billion in cash by your cash flow guidance, that number will be building at a -- at a handsome rate as you go through the year.

Could you lay out for us your relative priorities, acquisitions, stock repurchase for the year?

Kind of how do you think about it?

You know, Cai, I really don't want to.

I think I would be pre-empting in large part the discussion my board will have at its March meeting, where it considers both its dividend policy and discusses my authority for stock repurchases.

The acquisitions is always a priority of ours if we can -- if we can drive the bottom line through acquisitions.

We don't buy things just for the fun of it.

We do it to make money.

And we'll continue to have that be a priority, but if it doesn't happen in the year, I mean if the gain does not give us acquisitions at prices that we -- we find affordable and reasonable, we'll use our money in other ways that are productive.

Lars, we can take one more question, then we'll have to wrap this up

David Strauss.

Does your guidance include anything from -- from implementing stock option expense?

And if not, what kind of -- what kind of impact would that make on a full-year basis?

I don't have a clue.

When we get the rule, we'll tell you.

Does Mike?

I think he's going to give you the same answer.

We haven't seen the rule.

You want to give me your assumptions on the rule, then we'll tell you what we think. ut, look, I -- I don't think it's a big thing for us, given the speculation out there on the rule, it is about a 15-cent issue for a year.

But -- but I don't know.

I don't know that we're going to have a rule.

I don't know what the interstices of the rule are, and we'll tell you when we have something to talk about.

But it's not within the ambit of our guidance.

Apples-to-apples is what we're giving you.

So thank you all very much for being on the call.

I'm Ray Lewis, Staff Vice President in Investor Relations.

I'm going to go grab a quick bite to eat, and then I'll start returning telephone calls.

My number is 703-876-3195.

And that does conclude today's conference.

We thank you for your participation.

You may now disconnect.