通用動力 (GD) 2005 Q2 法說會逐字稿

Good day and welcome to the General Dynamics second quarter 2005 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, Rokee.

And I want to welcome the members of the investment community and the press that are listening today.

As always there are likely to be some forward-looking statements made today.

These represent our best estimates of how the future may work out.

But they are, as always, subject to the normal risks any business faces, and I would recommend that people take a look at our 10-Ks and 10-Qs for a fairly straightforward explanation of what those risks might be.

With that said, I'd like to turn things over to our Chairman, Nick Chabraja.

Thanks, Ray, and good morning.

I intend to be relatively brief.

I think the numbers pretty much speak for themselves this quarter.

We had another very strong quarter with overall double-digit sales and earnings growth, solid margin rates, and a substantial year-over-year increase in backlog.

In fact, three of our four major operating segments generated impressive sales and earnings growth over the same quarter a year ago.

The press release and accompanying financial charts I think provide all of the relevant comparisons to the second quarter of 2004.

Therefore, most of my remarks will be directed to a comparison of these results with the first quarter of this year, so that we might take a pass at following how the year is progressing.

With that said, let me address each of our business segments with that format in mind, quarter over prior quarter.

In IS&T, our largest segment, we had revenue growth of 261 million, almost 15% greater than the first quarter.

Operating earnings grew at about the same rate, and operating margin held at a very respectable 11.2%.

I'm pleased, particularly pleased with the steady margin performance, and I must say somewhat surprised by the size of the sales growth.

In Combat Systems, sales grew by $61 million, operating earnings by 19 million, and operating margins by 120 basis points.

We look forward in Combat Systems to an accelerating rate of revenue growth in the last two quarters of the year and strong double-digit margin performance.

I think we'll see an opportunity for these margins to even improve.

In the Marine group, revenue is down modestly but earnings are up by 16 million over the first quarter.

Operating margins improved up 150 basis points.

We were pleased that there were no additional charges on the tanker program at NASSCO.

However, operating earnings and margin rate for the group were hurt by a $16 million charge taken at Electric Boat on a fixed-price submarine repair and overhaul contract.

While we are not without continuing risk in this segment, I am encouraged that we are making significant progress.

The third quarter will be a very important one for the Marine group, and frankly an important factor in the Company's year end results.

So we'll watch the Marine group performance in the third quarter as the harbinger of year-end results.

Gulfstream obviously had a very good quarter.

Sales were up 75 million over the first quarter, and operating earnings were up 24 million.

I'll digress a moment on the sales subject.

While the sales are up 75 million, you should observe that there was less pre-owned volume compared to the first quarter, so the sales of new aircraft were actually in excess of 100 million higher quarter-over-quarter.

The real story, however, at Gulfstream is the 170 basis point improvement in operating margin to 15.1%.

I should also indicate that Gulfstream had another very good quarter in terms of order intake with a book-to-bill ratio of 1.4 when expressed in dollars.

This is the fourth consecutive quarter that Gulfstream's book-to-bill ratio has exceeded 1.

All in all, we exceeded consensus expectations, and frankly we exceeded our own.

With that said, let me turn this over to Mike Mancuso for a few more remarks.

Thanks, Nick.

I think Nick said it all.

The numbers really tell the tale, whether the comparison is to a year-ago quarter or to the last quarter.

Let me remind you that there is a significant amount of financial information to be found in the exhibits attached to our press release, including a breakdown of segment backlog, Gulfstream's aircraft deliveries, and the details of the change in net debt for first half of 2005.

And focusing on net debt for a moment, I just want to point out that is has decreased 461 million since year end, and 859 million from a year ago, further strengthening our balance sheet.

During the quarter, we repurchased another 957,000 shares of our stock for just under $100 million, bringing our year to date repurchases to approximately 2 million shares.

You'll notice net interest expense in the quarter of 29 million was 10 million below last year on the strength of the lower debt balance.

Now, that's all I really have to say.

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

Thank you, Mike, and let me say -- remind people once again, our new format is that each person gets one question.

If you want to ask a second or third question, you need to get back to the end of the queue.

That gives more people an opportunity to talk to Mike and Nick.

And with that said Rokee, if you would please explain to folks how they can get in the queue.

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At this time we'll go to Cai von Rumohr, SG Cowen.

Yes, good quarter.

Could you give us a little more color why the sales at Gulfstream were up 100 million?

Because you really only did one more large aircraft and a couple more completions.

Was the mix within large aircraft better?

And could you give us any more color on also why the profitability was as good as it was?

Thanks, Cai for the compliment on the quarter.

Yeah, we can give you a little help here.

We had one more airplane, and it was a large airplane, compared to the prior quarter, but we also had a preferential mix.

You might have remembered in the first quarter I pointed out that we had a disadvantageous mix.

There were, if memory serves me, four or five aircraft of the reduced range versions.

The G-500, or the 350, where we get lower margins.

In this quarter we had very few.

And I think that fact, a better mix, together with improved pricing, which we began to see about a year ago, contributed to the high margin rate in the quarter.

Thank you.

Moving on, we hear from Heidi Wood, Morgan Stanley.

Good morning.

Nick, you had been talking about your reluctance to raise the production rates until you'd seen more favorable trends in pricing at Gulfstream.

Now that you're seeing that, can you talk to us about what more you need to see to raise those production rates and also touch on what percentage of the slots are full for 2006?

We're in fact raising production rates as we go along here, in a measured way.

Next year's production is intended to be somewhat higher than this year's.

We -- and with respect to how we look for next year, without being able to give you precise numbers, we look to be about half sold out.

The first half of the year planes are spoken for, but many for the second half have letters of intent on the aircraft.

And we're actually in very good shape to satisfy an increased production rate in 2006.

Great.

Thank you.

Moving on we'll hear from Howard Rubel with Jefferies.

Very nice numbers on IS&T, Nick.

Could you give us a little more color?

And is some of this attributable to some of the supplemental spending being released a little early?

Howard, I don't think so, as to your -- the latter part of your question.

Frankly, I still don't know the nits and bits of -- what was surprising to me was the -- was the significant revenue increase.

And again, I'm directing myself to the first quarter, but we saw it across the business units.

C4 was significantly up over the first quarter, so was Network Systems.

And I haven't had a chance to -- I knew they would be up.

I just didn't know they'd be up as much as they were.

And I don't think it's the supplemental.

I don't think that's found its way home yet.

So we'll have to see.

Is some of this timing, or is this sort of things they'd picked up on an incremental basis just because of the nature of some of the business?

Howard, I don't know that.

I can't parse that.

It's too early for me to tell.

And I suspect if I ask them today they're going to be very cautious, as you would expect.

And we, in turn, will be cautious, 'til we can reverse engineer this and see how much of it will sustain itself across the third and fourth quarter.

But it is ahead of where we thought they would be, and it is part of the reason why we are where we are there in their operating earnings.

Very nice.

Thank you.

Moving on we'll hear from Steve Binder with Bear Stearns.

One moment.

Hello?

Nick, good quarter.

Thank you, Steve.

On a different thought, can you maybe just share with us your thoughts on -- over at Gulfstream as far as new product development?

And whether you think -- maybe whether you're considering a launch of a new product either at the very high end or at the upper end -- upper mid-end of the range?

Steve, the way we approach product development at Gulfstream is to spend continuously on product development.

We are, each and every quarter, taking as a period charge significant product development work.

We are going to go through our product line.

You should count on it.

And every one of them will have a different version every seven or eight years.

Whether it's a brand new airplane or a mid-life enhancement to the existing aircraft is obviously confidential.

But you will see a lot of activity from us, as you have.

We have the 550, which was the mid-life extension of the 5.

We've brought out the 450, which is, at least in our view, almost an entirely new airplane. 70% parts commonality with the 5 series.

And you're going to see, in 2006, enter into service the G-150, which is a brand-new airplane.

So, from what I've said, you can make your own deductions.

But we have a very aggressive, well funded and efficient product development program, and I'm very proud of Pres Henne and the guys that work for him at Gulfstream.

They're a terrific bunch.

And they bring their programs in on time, on schedule, on budget.

Thank you.

Moving on, from Banc of America, we'll hear from Nick Fothergill.

Hello, Nick.

Good morning.

Very good quarter, which leads me on to ask you why at this stage you don't decide to revise your forecasts after this year or next year?

Is it because of the third quarter issue surrounding Marine, which you reckon would be a harbinger for the year end, and if it is, could you explain why it has such an effect on the group?

You know, Nick, mostly I'm embarrassed, because at the beginning of the year you asked me if we could be talking about a $7.00 earnings per share year, and I gave you a hard way to go, you might recall.

I remember.

And it looks to me like we should be talking about that right now.

Look, let me be cautious, in part because we have some moving parts out there that we don't completely understand.

And suggest to you that our internal forecasts show that we'll do $7.05.

And that assumes that we don't run into any more charges in the Marine group.

So I'm happy to give you that guidance.

You may view it at this point as cautious guidance, but again we still don't understand the impact of the supplemental on us, whether we'll feel any of it this year.

And we certainly don't understand whether some of this quarter's success was pulled forward from the third and fourth quarters.

So we're being a little bit cautious, but $7.05 I think is -- is a number we feel pretty comfortable with.

And any reason why, Nick, the delay in this clarity for the supplemental is holding things back?

When do you think you might get greater granularity into it?

I have no idea.

When the customer issues us contracts.

Fair enough.

Thank you.

Moving on we'll hear from David Strauss, UBS.

Thanks.

Nick, at Combat Systems you've talked about 18 to 20% growth for the year.

In the queue you've talked about margins equivalent to what you did last year.

To get to those kind of numbers you've got to do about 25% growth in the back half and margins have to be over 13%.

Is that -- is that still reasonable to think about in that -- in those terms?

They are the one group that's less than cautious.

They tell me they're going to get there.

And I have every reason to believe them.

So your calculation about what it is they have to do in the second half is as good as mine.

But they're showing me and it's supported by their backlog and contract structure, increasing volumes in a step function in the third and fourth quarter and increasing margins.

As you would expect, given that kind of accelerating volume with their SG&A costs remaining constant.

So look for good news from Combat Systems throughout the year.

Thank you.

Moving on we'll hear from Joseph Campbell, Lehman Brothers.

Nick, good morning.

With regard to the surprising growth in defense that we've not yet nailed down, can you just remind us how much of the growth in the defense business especially, the IS&T crowd, is due to the acquisitions that you did last year and how much of is it organic?

Thank you.

Joe, good morning.

Let me clarify my remarks.

I'm not sure whether I misspoke or you misunderstood.

But the surprising revenue growth wasn't in defense, it was in one of our segments where I expected growth but not quite as much as we got.

That was in IS&P.

And what was the balance of that question?

[inaudible]

Joe, it's relatively insignificant on the acquisition side.

I haven't parsed that.

We made a couple of little acquisitions in the year, and I can't really tell you.

Those acquisitions were blended into C4 Systems and let's say that a good chunk of this growth is organic.

Is that true for year-over-year, or just Q1 to Q2?

I was thinking there was some pretty good size acquisitions last year.

No, I think for the half, to the extent we can parse it, all right, I'm not sure we can, I believe that about 150 million of sales comes from those acquisitions.

Thank you.

Moving on we'll hear from Troy Lahr with Legg Mason.

Thanks.

You talked in the quarter about -- this particular quarter about a profitability shift mix, focusing more on larger aircraft.

What's it look like in the second half?

I don't know.

I'm not looking at the delivery schedule.

I think what we'll probably see is something in between the first quarter and the second quarter.

And is that where we can expect margins in the second half, then?

Kind of in between the first and the second quarter, or is this pretty much, this 15%, a steady run rate for the second half?

I wouldn't view it as a steady run rate.

On the other hand, we could drop a little bit below it, and we could beat it, too.

So, there's a lot of moving parts down that business.

We'll deal with mix shift as we go along, but I would say that we had an unusually high concentration of the lower margin aircraft in the first quarter.

I don't expect that in the second half.

On the other hand, I don't really care to speculate on that.

I don't have a delivery schedule in front of me.

Thank you.

From JP Morgan, we'll hear from Joe Nadol.

Thanks.

Good morning.

Nick, on the Marine, could you provide any more color on why Q3 is so important?

And then also specifically on the $16 million charge, is there -- what's the activity level in terms of repair and overhaul at Electric Boat and any more color you can give on that charge and sort of what the outlook is there?

Thanks.

Well, it's important because if you can reverse engineer the quarter, and we didn't take that $16 million charge, the profitability in the marine group is moving then, quite nicely towards respectability.

Not as we would like it, but still getting quite a bit better.

So if we get through the third quarter, it would seem to follow that we have enough data under our belt, and it would be unlikely that there would be any further charges, period.

That being the case, it's an important -- it's an important quarter, and I don't believe we'll have any further charges at Electric Boat.

As a matter of fact, I think there's some high potential there for recovery to their plan.

I think they've worked their way through the worst of it, and it was kind of a new line of business for them.

We've always done some selected availabilities, but these were major availabilities for us.

And we worked them and ran into some issues on fixed price contracts.

And we've carefully cataloged the lessons learned, changed the business model, and have the appropriate talent on the problem.

I think they'll do quite nicely, and I don't expect this to repeat itself.

I don't know what more could I say about it, Joseph.

Well, the key in Q3 then, is more on the commercial side, more at NASSCO and less at EB?

Yes.

I'm not worried --

Okay.

I'm not worried about -- EB is an enormously high performance organization and this occurred because it was really a new emphasis for them, and it occurred at the same time that they were delivering two first of a class submarines.

So they had a little diverted attention, and some issues crop up that they'll work.

And I expect that you'll see them be a major contributor through the remainder of the year.

I'm not excusing at all what has happened, but they'll turn to and deliver for us the balance of the year.

Okay.

Thanks, Nick.

Moving on we'll hear from David Gremmels, Thomas Weisel Partners.

Thanks.

Good morning.

Nick, for the last several years cash flow has been strong in Q2.

This year it was down about 50% from a year ago.

Just wondering what caused that.

And the press release said you were still above plan for the year, so just wondering what your plan is.

I think that Q1 was stronger than we ordinarily experience and anticipate in the first quarter.

We've even been cash users in the first quarter in our history.

So we had a relatively strong first quarter, and we indicated at the time that it was some timing, we were going to take -- we were taking some second quarter money, and at the half we are where we typically are.

We're pretty comfortable that we will wind up with free cash that's closely proximate to net income.

Thanks.

Thank you.

Moving on we'll hear from Byron Callan, Merrill Lynch.

Yes.

Nice quarter, Nick.

Nick, do you want to just briefly touch on the broader defense environment?

Any change in your thinking about what might come out of the QDR?

There's been this panel that's been formed by General Kadish to look at cost growth in weapons systems.

How does the broader environment feel to you?

First, thanks, Byron.

Second, I don't think that's what General Kadish is charged to do.

What he's charged to do, and the panel that he has, is look at acquisition reform in its broadest sense, including possible recommendations to the Congress in connection with updates to Goldwater-Nickels.

Second, the broader defense environment is -- I don't know how it could be characterized any way but strong.

I think that the Department of Defense feels the pressure that's -- that's a natural corollary to their stewardship when they're conducting operations in foreign lands and spending an awful lot of the taxpayers' money.

And I think that there will be constant pressure on them by the Congress to execute that stewardship in careful ways.

That being said, I think this is a strong marketplace for the participants who have the critical mass to supply and support our customers.

So, I saw, as you probably did, the article in the weekend's Barron's, and I thought the article and the picture on the first page were a cartoon.

Thanks.

Agreed.

Thank you.

From CIBC World Markets, we'll hear from Myles Walton.

Good quarter.

You remain active on the share repurchase front.

I'm just wondering, do you continue to see that as the best allocation of the cash balance you have on hand?

And also a little bit of more color on the M&A outlook, if could you provide that?

What you're looking at in terms of properties or pricing, general market conditions would be great.

Myles, the share repurchase activity is one of the tools available to us in connection with the deployment of capital.

And it's been in our interest to deploy a couple hundred million dollars in the first half of this year.

We are always looking at acquisition opportunities, that's par for the course.

And beyond that, I don't want to speculate about the state of the market because I'm not sure that I believe there is such a thing, and these deals are all sort of one-off.

But we are actively looking at some properties, and we'll see what happens.

And do you think the remaining authorization of 2.5 million is enough to last you through the rest of the year?

Oh, I would think so.

Great.

Thanks.

Thank you.

Moving on we'll hear from Doug Harned, Sanford Bernstein.

Good morning.

Nick, on Marine, when you look longer term, and right now we've got some very different budget proposals coming out of the house, coming out of the Senate, and there's also quite a bit of uncertainty, just on what the Navy's plans are.

When you think of the business recovering, how do you see this affecting -- uncertainty affecting long-term margins and your ability to manage costs in that unit?

If you think about our Marine business you need to think about it in three separate parts.

Electric Boat is steady.

They're getting one submarine a year until the out years where the Navy, I think, still has in their plan a second submarine.

And as far as NASSCO on the west coast is concerned, they're in the middle of -- at the infancy of a very large program of PAKEs, and I don't know whether it will be 10 or 12 ships.

And there is a clear demand in the Navy's plan for auxiliary ships.

There will need to be.

The issue, in terms of budget, has been in surface combatants.

Where we have a very wholesome backlog at Bath Ironworks, that -- and we know full well we're going to head into low-rate production, and we're fully equipped to do that.

And to do that while preserving margin.

So to me, we can manage this, and it's a good business to be in, because ultimately, this country needs to begin to build capital warships and budget for them.

When that will happen, I can't fully predict.

But we can work our way through it because we've had that experience.

We've had it at Electric Boat.

But if you were to gain some more clarity on the plan, both from the Navy and from Congress, does that enable you potentially to improve the performance even beyond where you're headed?

Well, of course.

But I can be petulant and sit on the steps of Congress or in front of the Navy yard and beg for clarity.

It's not the way of the world.

They're going to do the best they can to come up with a program that's consistent, and that the Congress favors, and adopt an acquisition strategy that make sense to everyone.

But we know that throughout the services this is a difficult task and it's particularly difficult when your budgets are challenged, as the Navy's have been recently.

But I expect ultimately that they will be funded for what's in the national interest.

And it's my guess that building ships is going to be in the national interest.

And I fully believe we'll be building two a year at Electric Boat, sooner rather than later.

But we'll see.

Great.

Thanks.

Thank you.

From George Shapiro with Citigroup.

Good morning, Nick.

Good numbers.

Thanks, George.

The question I've got is, you've seen in the marketplace some more used G-4s come into the market.

Probably reflecting the firming in price, so people figure they could get a better price.

Maybe it's defractional.

Does this affect at all what you're seeing in terms of the new market?

And if you could maybe just categorize what you're seeing now versus what you saw three and six months ago in the new market for Gulfstream?

I mean, this backlog performance is certainly good this quarter.

George, the -- first, the used market is tight.

We don't have any aircraft available for sale.

We have three or four in inventory, none of them G-4s, that are on temporary lift agreements with customers.

So we have very little available in our mix.

I'm not surprised that there are some G-4s in the marketplace, because I suspect people are trading G-4s to buy new G-450s or G-550s.

Most of our customers have aircraft already, and they need to trade those to get new ones.

Sometimes they trade them with us, and sometimes they place them in the market through brokers or sell them on their own, depending on their degree of sophistication.

So, we don't see anything in the used market that causes us to be concerned about the state of the new market.

We're at the place, George, where our backlog is so extended that interested customers are complaining that we can't them an aircraft to enter into service within a reasonable time.

What's reasonable?

Industry custom is about 18 months.

We're now outside of 24 months.

So we have no reasonable alternative but to step up production here in the near term.

But we're not Pollyannish about this.

We watch, not only macro economic data, but we watch what our sales logic system is telling us about the nature of our buyers and how long it takes from introduction to contract, and all of those indicators right now are very good -- very, very good.

Okay.

Thanks very much.

Thank you.

We'll now hear from Jared Muroff, Prudential Equity.

Thank you.

Again, a good quarter.

Recently in the press there's been a couple of statements made by some folks in the Army, some folks in D.C., that following the end of the conflict in Iraq there will be a need for replenishment of the Army, to the tune of maybe 100 billion or more needed to restore and reset some of the material being used over there.

Was just wondering if you could give us a sense if you've been hearing anything from the customer in regards to that, what sort of timing they may be looking at and what kind of needs they might have as regards to the equipment being used up overseas.

The interesting part of all of that discussion is the initial premise -- when the war is over, and the equipment returns.

I don't know when that will be.

I think neither do people in responsible positions with the government know that.

But they know that they'll have to deal with equipment that has been rode hard.

And they've talked to us about how we might participate, and I'm confident that they're looking at the government facilities, the Army maintenance and depot facilities.

And we'll probably be interested in whether we can partner with them in some of that activity.

And we'll be looking at that further when the -- as it comes closer to being real.

Right now, I think we'd be in the stage that's called exploring each other's capabilities and speculating a little bit about the ultimate requirement.

Great.

Thank you.

Moving on we'll hear from Robert Springarn, Credit Suisse.

Hi, guys, this is actually Pete Skibitsky (ph).

Had a question for you on programmatics.

Couple of programs in particular that it looks like the Army has potentially re-competed.

One, the Advanced Precision Kill Weapon System, which looks like the've re-competed that.

The other is a joint network node program, I guess the WIN-T predecessor, which they're think about re-competing, I think.

Was wondering if that represents potential risk to your sales guidance, or maybe that's already baked in along with that, given the strong IS&T growth we've seen?

Are we likely to see double-digit growth in '05 or the whole year and again in '06?

Well, that's a whole gaggle full, Pete, but --

I know.

I tried to do one long run-on sentence.

I think, what -- without getting into program detail, which I don't want to do, I think the emphasis should be on the word that you used, "thinking about."

I don't think the acquisition strategy in either of those instances is fully developed right now and articulated.

So I really don't know.

The Advanced Precision Kill Weapon System is a new program, new weapon that's intended ultimately to replace the HYDRA-70 rocket, for which we have significant orders.

It's being used extensively in the current force, and in the current conflicts.

So I think that with respect to anybody's guidance, that program is beyond the purview of our guidance, well beyond it.

It's an out year kind of thing.

And I think that the other program you mentioned, the joint network node, we're doing a lot of work on that.

I don't -- I'm not concerned that -- about the speculation there.

I think that we're delivering a very important product to the war fighter that they like an awful lot.

And folks on the outside looking in, a lot of elbowing.

It's par for the course in this business.

Got you..

And in terms of the IS&T growth, should we assume double digits this year and next?

I think high single digits next year is what we've been telling people for quite sometime.

Great.

Thank you.

Thank you.

Moving on we'll hear from Lloyd Litman (ph), Bernstein Investment.

Hi.

Fine quarter.

Since my questions have been answered, the one other thing that I was wondering is, the tax rate, should we stick with 33% for this year?

33.3, Lloyd.

Okay, thanks a lot.

Thank you.

We'll now hear from Phil Marriott (ph), KASB Advisors.

Thanks.

Good morning.

Very solid quarter.

On the aircraft side, sometimes you give us a little more data on the revenues and EBIT from used aircraft.

Is that something you could provide this quarter?

Yes.

Phil, I think it was inconsequential.

We had two aircraft sales in the quarter and no earnings.

I think it was $28 million of revenue.

Okay.

And just to follow up a little bit on your Marine comments for the third quarter, is there a delivery taking place on the commercial side that makes it -- ?

No.

So it's really just -- ?

No. [inaudible]

I'm sorry.

We will have made enough progress on the third and fourth BP tankers, and we will be far enough along in the initial PAKE, that we'll have a better sense of whether there are any more charges in the woods.

And my view is, and I could be wrong about this, but we'll be far enough along that we don't have to take a hit the third quarter, it ain't going to happen.

Okay.

That's great.

Thank you very much.

We do have a follow up from Steve Binder, Bear Stearns.

Nick, or Mike, either one, your cash taxes, Nick, you addressed cash flow being down for the first half of the year, there was pull -- you had strength in the first quarter.

But your cash taxes look like the reason why cash is down year-over-year, because your cash taxes year-to-date's like 268 million up 190 million from a year ago.

Just wondering why is that?

Number two, are you looking at cash taxes being a higher percentage of book than it's been the last three or four years?

Let me have Mike Mancuso address that, but I don't think so.

The answer to the last part, Steve is no.

But just let me add a little background.

First of all, if you look back to the last six years, this first half six months of free cash flow from operations is the second highest it's been in the last six years, and substantially higher.

The difficulty is that last year happened to be the highest by some five hundred and -- it was 583 million for the first six months last year and we're 462 this year.

So we're suffering a little bit, if you will, from comparison to last year but if you look back over the years this is not aberrational.

We had a very strong first quarter.

If you go back to the fourth quarter of '03, we actually had a tax overpayment in the fourth quarter of '03 that was actually applied to our second quarter '04 tax payment.

Keeping in mind that we normally don't pay a -- make a tax payment in the first quarter unless it's a true-up.

So that affected last year's cash taxes in the second quarter.

This year is a normal year.

Shouldn't read any more into it other than the fact that last year was somewhat aberrational.

So we're still looking at around roughly, what, 60, 70% of book this year?

As Nick said earlier expected free cash flow from ops to approximate net income.

No, no, no, I'm talking about cash taxes to book taxes.

Yes, to the number you just quoted.

It could be as high as three-quarters, but --

Okay.

Thank you.

Hey, by the way, let me answer the prior question a little more fully.

Phil Marriott's question.

Phil, we do have delivery of BP-3 in the third quarter likely towards the end of the third quarter, but that's not the event that's the triggering event.

It's how many hours we use to get the ship delivered, and the progress that we've made on four that will determine the quality of our EAC.

Thank you.

We'll now move to Heidi Wood, Morgan Stanley.

Yes, a follow up.

Nick, can you talk to us a little bit about what you're seeing on the international front, both touching on your ability to penetrate Gulfstream internationally as well as what you're seeing happening on the defense side?

We're seeing with some other companies somewhat of a pickup internationally.

Lockheed F-16s, Raytheon is seeing some.

What are you seeing?

We're seeing a fair amount of activity for the IS&T group, and a fair amount for our European land combat systems business in terms of opportunities, programs that have been announced and funded by governments, which we are being invited to participate.

I don't always think about it the way you've just articulated it, because unlike many of our colleagues, we're less of an export company and more indigenous.

We have businesses in Canada, the United Kingdom, Spain, Switzerland, and Austria.

And there the people principally service the export community.

You may have observed recently that our GD-U.K. business just got a contract to service the Netherlands, the Dutch version of BOWMAN.

They order in Portugal for Steyr.

They're competing now in Croatia and in Czechoslovakia.

Real programs with real funding.

So, that's going on.

And in Gulfstream, Nick?

Gulfstream has had a fair level of activity from international buyers and governments.

I don't know that it's any more or less than is typical.

And Joe Nadol had asked the question about that $16 million charge at DB.

Can you give us a little more detail on what happened there?

Yes, we signed a fixed price contract and couldn't finish the boat for the price agreed.

So we took a charge.

But it wasn't due to any -- the commodity costs were higher or -- ?

No, no, no, no, no, no, no.

It had -- it frankly had to do with change.

The -- these are difficult at best, and we've given the government notification of change and we'll debate that with them for some time, and there could ultimately be some recovery.

But it had to do with the scope of work being more extensive than anticipated.

And just on the international side, the combat vehicles usually -- you used to do a nice business in the middle east.

Are you seeing any interest there?

Yes, there's been expressions of interest with at least two middle eastern countries that are currently being worked.

All right.

Great.

Thanks very much.

Thank you.

Moving on we'll hear from David Gremmels, Thomas Weisel Partners.

My follow-ons were answered.

Thank you.

Okay, David.

And I think we're okay.

We can take one more question, and then we'll put it back to me to wrap up.

Thank you.

Our final question is a follow-up from Joe Nadol, JP Morgan.

Thanks.

Nick, on the ACS program, there's been some indications that the Embraer-145 won't be large enough and the Gulfstream aircraft are being considered, among others, as replacements for that.

Do you have any comment on that, and any timing maybe when we know whether you might get back on that program?

I know as much about it as you do.

I read it in the newspaper.

W've had some requests for pricing and availability of certain of our aircraft but no request for quotation.

So I don't have any idea, frankly.

Okay.

Thanks.

Okay.

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