通用動力 (GD) 2006 Q3 法說會逐字稿

Thanks very much for holding, everyone.

Welcome to General Dynamics third quarter 2006 financial results conference call.

As a reminder, today's call is being recorded.

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

Please go ahead, sir.

Thank you, Kevin.

I would like to welcome everyone in the investment community, as well as the press that is listening today.

As always, I would like to remind you that there may be forward-looking statements made today.

Those represent our best estimates as to how the future may unfurl, but they are always subject to the risks associated with any business, and I would recommend that you take a look at our 10-Qs, 10-Ks for a more extensive explanation of what those risks are.

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

Thank you Ray.

Good morning, ladies and gentlemen.

We had a good third quarter with what I would describe as pretty crisp execution across the board.

Earnings per share of $1.08 from continuing operations somewhat exceeds consensus.

Revenue, revenue was up nearly 800 million over the year ago quarter.

That is a respectable 14.5% growth.

The IS&T and Aerospace segments were the biggest contributors to the revenue growth, each increasing by something in excess of 20%.

I should note, however, that the growth in the IS&T group is largely but not exclusively the result of the Anteon acquisition.

At Gulfstream sales continue at the pace set last quarter, that is in excess of 1 billion dollars a quarter.

Combat Systems revenue was up 10% over the year ago quarter.

But I should point out that it is up over 22% for the first nine months of the year.

Those of you who follow us might remember that a year ago in the first two quarters, we got off to what was a slow start, and it ramped up quite severely in the third and fourth quarters, so our comparison is against an extraordinarily strong third quarter a year ago, but the year-to-date figures are pretty impressive.

Operating earnings, they increased 17.7%, a greater rate of growth than revenue.

That is obviously indicative of improving margins, which in fact grew 40 basis points to 11.2%.

This margin expansion was driven by the Marine Group, whose margins in the quarter were 8.4%.

While this quarter signals the return of the Marine Group to a range of profitability consistent with our ultimate expectations, I do not believe that it is sustainable at this level in the near term.

Nevertheless, we are greatly encouraged that the Marine Group has now enjoyed margins in excess of 7% for the fourth straight quarter, and we can get into this quarter and how those margins were achieved a little bit in response to your questions.

Gulfstream margins are down 90 basis points from the third quarter of 2005, and 40 basis points from the second quarter this year.

This is the result of a shift in mix across product lines and increased research and development expense, both as we had previously forecast to you.

Nevertheless, the 1.1 billion in revenue this quarter and 15.2% margins, with those figures, Gulfstream continues to perform very, very well indeed.

For the full year we expect margins at Gulfstream to be nicely ahead of last year, both with and without preowned activity.

Although IS&T and Combat Systems margins are down from the prior year, they are steady against the second quarter of this year.

By the way, Combat Systems margins are up 30 basis points for the year-to-date.

That coupled with over 22% revenue increase year-to-date creates a pretty powerful performance by any measure.

Cash, free cash flow for the quarter, was 452 million.

This brings the year-to-date free cash flow to 1.1 billion, which is about 89% of year-to-date operating earnings.

This leaves us on-track for the cash generation we expect for the year, and have been forecasting.

With respect to backlog, we had strong order activity across all four of our operating groups.

As a result, funded backlog grew to 31.7 billion, an increase of about 1.2 billion, or 4% growth over the second quarter of this year.

Total backlog stands at 44.4 billion, up 5% from the second quarter of this year.

We also experienced about an 8% growth in IDIQ contracts, so very good order activity, and all-in-all, all up across the board pretty good quarter.

Now I would like to turn it over to Hugh Redd, our Chief Financial Officer, for some additional remarks and insight into a couple of items on the P&L.

Hugh.

Thank you, Nick.

I would like to address a few items that might be of interest to those on the line.

The first two are options expense and pensions.

The expense required to be recognized under FAS 123-R has been running about 12 million a quarter, and we have included this as a reduction to operating earnings.

Obviously that was not the case last year, and so keep that in mind when you are making comparisons year-over-year.

With respect to pensions, we are evaluating the implementation of FAS 158, which deals with accounting for defined benefit plans.

We don't believe that the impact of this implementation will be significant on our financial statements.

As people should know, FAS 158 is required to be implemented for fiscal years ending after December 15th of this year, and accordingly our financial statements, in particular our balance sheet at the end of this year, will reflect the funded or unfunded position relative to pension liabilities.

I should mention that we are also evaluating our approach to these liabilities, in context of not only FAS 158, but also in context of the Pension Protection Act, and we will take whatever actions seem appropriate to secure the future and remain competitive.

I now would like the turn to four items which are below the operating earnings line.

First interest expense.

As you can tell, interest expense is up 4 million over the third quarter of '05.

That is due principally to borrowing in the commercial paper markets to fund the Anteon transaction.

I think it is interesting to note that during the 12 months since then, we have spent about 2.9 billion for acquisitions, dividends and share repurchases, and because we have had very strong cash flow in that period, the net debt has only increased 426 million.

Turning to the tax provision, the year-to-date effective tax rate is 32.6%, whereas at the end of the quarter and through the end of the second quarter, we had been reporting 33.2%.

That 60 basis points decrease drives an effective tax rate for the quarter of 31.7%.

Discontinued operations net of tax has stabilized at a $2 million loss attributable to our Freeman Energy operations.

As we indicated earlier, Freeman Energy is being held for sale.

We are in the process of marketing it.

We have a handful of bidders, and we expect to have a contract very soon.

Finally, there were no share repurchases in the third quarter.

Diluted weighted average shares outstanding averaged 407.2 million over the quarter.

That is up 200,000 from the prior quarter, but it is certainly consistent with our expectations that we would be hovering around 407 million for the third and fourth quarters.

With that, Ray, I will turn the time back over to you.

Thank you, Hugh.

Before I turn it over to Kevin to explain how the Q&A queue works, I would like to remind people we have instituted a rule now that we would like you to ask one question when your turn comes around.

And if you have more than that one question, just please get back in the queue.

This allows more people to actually have access on the call.

So with that in mind, Kevin, would you explain how folks can get into the Q&A queue?

Absolutely. [OPERATOR INSTRUCTIONS] First up we have a question from Heidi Wood at Morgan Stanley.

Good morning.

Nick, my question is going to center on Gulfstream.

If you back out the preowned sales and normalize for R&D, can you talk about what were the Gulfstream margins on a preR&D basis, and kind of thumbnail for us what R&D is going to look like at Gulfstream over the next year or two?

Let me hack away at the R&D expense, Heidi, for the first bit, and then I will have Hugh chase the margin for you without, no I have got that, too.

In the third quarter we were 15.6 margin without preowned aircraft, compared to 16.2 in the third quarter of 2005, and 16.1 in the second quarter of 2006.

We preowned, let's see if I can find the exact number here.

You have those.

I have got that.

I am curious about the pre, I want to do one step further and see what your pre-R&D profit margins are.

I can't do that for you, Heidi.

What I tell you is I think that we were I think 10 million higher than a year ago quarter in R&D, and 12 million higher than the second quarter.

Okay.

And then can you remind us what your maximum capacity rate is on the large and the mid-sized aircraft?

Would these sort of peak order numbers that you are giving us, talk about what you're thinking about in terms of delivery slots for 2007?

Well, I think as I indicated previously, we have our initial production planning, it indicated 79 units of the large aircraft, but we are reworking that to see if we can handle a number about 82, and we are also looking at 83 right now in 2008, and looking at ways to elevate that somewhat.

The capacity that I speak to is what I call intelligent economic capacity.

We know we can build 95 to 100 aircraft in the facility in a year.

That doesn't mean we can do so efficiently.

So every time we increase production we try to be very careful that we're doing it in intelligent way and not harming the economic result, and so far it has been pretty good.

Next up in the roster we have Steve Binder at Bear, Stearns.

Nick, I think you said last quarter that you thought the IS&T revenues would be up at a modest single digit growth rate in the second half of the year, and it looks to me when you are back at acquisitions I am guessing, there wasn't growth in the quarter, maybe even a slight decline.

Can you touch on if that is all back end loaded the fourth quarter?

We are showing a little bit of organic growth in this last quarter as I indicated in my opening remarks, Steve.

Let me take a quick peek and see what I have to say on the subject of the fourth quarter in IS&T revenues here.

Let me take one quick look at that.

They are going to experience some fairly nice growth in revenue in the fourth quarter.

I will get back in the queue.

We'll move on to Cai von Rumohr, Cowen & Company.

Thank you, Nick.

Gulfstream's profits were only a million down from the second quarter, and you had been kind of complaining about we are going to have an adverse mix shift, but by my numbers used aircraft was down 9 million from the second quarter, R&D was up 10.

Really that's an adverse swing of 19 million, and on slightly higher sales we end up with the same profit.

What happened to get us to such good results given the volume?

Cai, I can't even begin to absorb your question.

That sounds like a pencil pusher's delight.

Why don't you and Ray chew that one over a little later.

Okay.

Thank you.

We have a question now from George Shapiro with Citigroup.

Good morning, Nick.

Good morning, George, how are you?

Okay.

Clearly the book-to-bill was again above 1 at Gulfstream.

Can you kind of just talk a little bit about the environment because in some of the latest data, it looked like the amount of used planes had creeped up a little bit in the marketplace.

If you can try to just give us your crystal ball.

You know, people talk to me about that every quarter, George, and it appears that that's what the survey data tells us.

It doesn't surprise me that used aircraft are up, given the volume in new aircraft that are being sold.

Somebody has to be trading something somewhere.

All I can tell you is, we don't have any late models like new used aircraft that we would die to get our hands on them, because we can make money on them.

Our trade activity is relatively light.

The news I get from Gulfstream is that the order book is extremely active, they have started off strong again in the fourth quarter with orders already received, and letters of intent executed.

They expect a good fourth quarter.

Their pipeline is full and growing.

A question I am frequently asked sort of plays into that.

The demand seems to be growing internationally at a greater rate than in North America.

For example, in this quarter which was a very good quarter from the point of view of orders, only 54% of the orders were from the United States and Canada, which is lower than typical.

Strong European order block, that is about 22%, that includes Russia in our geographical map, so pretty strong, 9% Latin America, expanding demand there, Middle East and Africa and Asia each running about 7%, pretty steady.

So it is still a very good picture from our point of view, and I can say that as we look at the orders for the year by industry, nothing jumps out at me, George, other than maybe financial services being stronger than usual, may have made up 20% of the market if I include within that, people who are engaged in personal investments as well.

So put those two categories together, I get 20% or a little bit more.

But otherwise, the spread is very wholesome with nothing, no industry segment representing more than 7% of sales, so a pretty balanced, strong market.

Next up we have a question from Stifel Nicolaus' Troy Lahr.

Thanks.

Can you walk us through the Marine segment, if there was any contract close outs, and is repair work continuing to ramp up?

I know that was a big driver last quarter to the margins.

I am glad you asked that, Troy.

Let me shed some light on what was really for us a happy quarter in Marine with an 8.4% margin.

If we really wanted to get the pencil out and parse through this, we could see about 10 million of items that are nonrecurring. 1million of it was a foreign currency exchange item.

Then with respect to the end of the BP tanker contract, the best way I can explain the other 9 million is, about 5 million of it represents revenue and earnings that we received from the customer, you know, in settlement of some items, and another $4 million of cost savings, in other words, we beat our EAC, so the contract closeout is 4 million there.

Together there is about 10 million in various nonrecurring items.

There is, however, a recurring you mean item in here that bodes well for the future.

We increased in the quarter our booking rate on the DDG program at Bath Iron Works.

That will sustain itself as we go forward.

If you extract these one-time items out of there, we still had a pretty good quarter, about 7.5, 7.6% margin rate, and to be completely candid with you, I think that the Marine Group will struggle in the fourth quarter to sustain that 7.5, 7.6 area.

I think they will fight to try and get there.

We're very hopeful that they can get to 7% again for a fifth straight quarter, and their future and how soon we can get to a sustained 8% environment, depends in large part on when and the terms of settlement of our REA claim with the Navy, with respect to the T-AKE program, which we look forward to doing either by the end of this year or early in the first quarter of next year.

I think that is a pretty full answer to that question.

Next.

We'll move on to Richard Safran at Goldman Sachs.

Good morning.

I was wondering if you can give us an update on the Daewoo JV with your ships, first delivery, and also if you can give us a number per ship if possible?

We start construction third quarter next year, and I don't recall when the first delivery is.

You will see modest amounts of revenue and earnings in that program until then, but relatively modest.

It is 9 ships, if I recall at about 1.1 billion.

Correct.

On track.

The program is on track.

Our next question comes from Rob Spingarn at Credit Suisse.

Hi guys, it is actually Pete [Skavinski].

Combat was down sequentially.

I was just wondering why that was, and if you're still expecting almost 6 billion for the year?

Yes, Pete, I think we had a little Stryker timing in the quarter, which left it a little bit below the revenues in the second quarter, but if you look at this year, it has been pretty level loaded, but it will pop in the fourth quarter, and I don't think we get to 6 billion, but we get a number between 5.8 and 5.9, if memory serves me correctly.

A question from Robert Stallard at Banc of America.

Good morning, guys.

Nick, I was wondering if you can give us a quick update on your overall thoughts for 2006 revenues and EPS.

Look, I think revenues are pretty much what I have always said they were going to be.

They were going to be slightly in excess of 24 billion.

Our best guess right now is 24.1.

We can be off there a little bit, but that is where it is, and as I look at most of the sell-side models, they are modeling way more revenue than we are showing.

They are looking to me to be about 24.5, 24.6.

Those numbers are high.

I have been saying that to anybody who would listen to me, but not many do.

EPS guidance remains unchanged as far as we are concerned.

We are going to have, you know, a good fourth quarter, and we will get where we are, but it is not going to be a blow away fourth quarter.

If you look at Gulfstream, look at their performance last year in the fourth quarter, margins went down to 13%.

They will go down in the fourth quarter this year, not to that level.

We will beat that margin, but they will compress.

IS&T will struggle with its margins in the fourth quarter, and Marine won't do as well as it did this quarter, so I think our guidance to you has been pretty correct, and everybody wants to run away from that, go ahead, be my guest.

We will be pretty much right on.

Next is Myles Walton, CIBC World Markets.

Good morning, Nick.

Good morning, Myles.

Wondering if you could peel back for us within Combat Systems the year-to-date book-to-bill has been pretty outstanding at 1.5 times.

Could you pull out some of the drivers there?

Unlike prior years it really hasn't been lumpy.

It has been relatively consistent quarter to quarter and in fact accelerates, and also if you can give a flavor of the international component.

It is pretty much across the product line.

We have done very well with the main battle tank.

It's had a renaissance.

The Stryker order book has been relatively consistent across the conventional ammo orders we have announced with great regularity.

The medium-caliber gun systems and weapon systems have had strong order intake.

The small-cal is a new line for us, and of course, you have read about the [Chameleon] program for the Marine Corps, so they have had a fairly strong order component.

The European land combat systems has done well, several notable orders, Czechoslovakia was a win.

We entered in first quarter the contract, the win in Portugal, and there have been others, there are too many to count, but this is a business that's doing very, very well, and should continue to do so we'll expect good performance out of them next year, and nice growth.

From Thomas Weisel, this is David Gremmels.

Good morning.

The IS&T revenue growth excluding acquisitions looks slightly negative.

Last quarter the softness there was attributed to BOWMAN and some Army funding disruption.

I am wondering are you seeing the same, or did you see the same factors in Q3, and are you seeing any change in the Army funding environment now that the '07 supplemental is in place?

David, we get a higher rate than you do, but of course we have the numbers, right, and you are just guessing.

So I will let it go at that.

One thing is clear.

The growth rate in the second and third quarters is slower than we have experienced.

If you look at the last two or three years, we have experienced tremendous organic growth rates in that business, and it has slowed in Q2 and Q3.

It will perk up in Q4, but some of it is program delays, and some of it is kind of outlays, and some of it is some of our mature, you might call legacy programs, are coming towards the end of their economic life as major revenue producers, and there are replacement programs which we are heavily involved in, and have yet to go into production, so we are replacing production dollars with R&D dollars which are fewer, but that tide will turn, and exactly when I can't predict right now, but we are seeing slower growth rates in IS&T.

A question from Ron Epstein at Merrill Lynch.

Good morning.

Nick, are you seeing any supply chain constraints, either on the Aerospace side, or even on the military side in Combat Systems with the surge in demand you're seeing?

Let's see.

We are seeing some not commodity shortness but price increases that are excessive, caused by either increased world demand or shortness of supply, with respect mostly to metals, some steel and some specialty metals that of course puts pressure on us, and the United States Government, because in most of our contracts that is escalated pursuant to an Embassy.

At Gulfstream, I think that we are experiencing what you would expect in a supply chain that is receiving the kind of demands that we're putting on it, and that our colleagues and competitors are putting on it, so from time to time, we get some shortages, but it has been manageable at the production rates that we have set.

But that is part of the equation when we set a production rate.

It is what we can handle internally, and what our supply chain can handle externally that enables us to produce, but so far we have been able to meet the demand at Gulfstream, maybe not quite with the alacrity that our customers might prefer, but I think all-in-all we have ramped up very, very successfully, and I think you can see that in the numbers.

Next on the roster is Doug Harned from Sanford Bernstein.

Good morning.

Good morning, Doug.

On Anteon, could you talk a little bit about how the integration is proceeding, and when you are looking at where you expect to capture value, have you seen any surprises one way or another?

I think it is going very well.

I think we have captured a little more synergy on the cost side than I would have anticipated this early, and we will have to wait and see to see whether we get the sales synergy that we were looking for.

I have every reason to expect that it will happen.

From AG Edwards, Mark Jordan.

Good morning.

You have announced obviously a significant capacity expansion at Savannah, and given the fact you are currently sort of bumping up against your efficient capacity threshold and 82, 83 large aircraft, when should we expect a step function up in efficient capacity as a result of this expansion plan?

We will have a new facility in place at the end of 2008.

It will begin late 2008, early 2009, with respect to prototype activity of a next generation aircraft, and then assuming all goes well, begin producing that aircraft subsequently.

It will not provide relief for the current aircraft, and we will just have to work on our efficient capacity by improving our processes, and helping our suppliers improve theirs, so we will keep to the extent that the demand provides that we must, we will continue to increase our production, but we will do it I think carefully.

We'll go back to Heidi Wood for a follow-up from Morgan Stanley.

Nick, I want to ask you a longer-term question on the Marine side.

If you look at the Navy ship building plans, really a lot has to go right in order for them to execute, including things like no-cost growth of any kind just to fund the current plans.

If we get down to kind of one cruiser or destroyer a year, what's your plan for keeping Bath Iron Works healthy?

I think Bath Iron Works is very healthy right now through almost 2011 with the DDGs they have in backlog, so, and active in the LCS program.

If we need to, we will put some commercial work into Bath Iron Works, but I don't see any problem with the Navy being able to execute a surface combatant program.

I think one a year will not be satisfactory to the Navy, and I think , look, I am greatly encouraged by the way that Congress did the Navy in the appropriations Bill, and I am pleased that for two years in a row now, we have had a very consistent Navy plan with only the most minor modifications, so that Congress and the President for that matter, are getting to look at a Navy plan that is beginning to repeat itself.

I have no insight into their 2008 budget proposals, because they haven't been released yet, but I would be very surprised if the Navy didn't stick right to its knitting, and give us a budget that looks very much like the last two, so I think we are getting some consistency from the Department of the Navy, and some reasonable support from the Congress, if anything, I feel pressure from the Congress to increase support of the Navy.

You hear a lot of hollering up there on the Hill about not enough money for ship building, so all-in-all I am optimistic about where Bath is.

Bath is highly efficient right now.

They are doing a hell of a job as indicated by their increased booking rate, and they are highly competitive.

It is a good place to be for us.

Question from Joe Nadol at J.P. Morgan.

Good morning, Nick.

Hi, Joe.

On the budget, firstly, just how do you think FY '07 unfolded for you, and then very specifically in the reset opportunity, how have you sized that internally, and how big is it, and when do you think you will start getting contracts?

Joe, '07 went very well for us.

It should have been obvious in most instances our programs, I think on every instance our programs were fully funded, either in accordance with the President's budget, or in excess, and in most instances where the House and the Senate differed, we seem to get the higher end of the stick, so we are pleased with the results in '07.

Reset is obviously a very big opportunity, and I don't know how to size it for you, and I am really reluctant to do that, particularly when most of the sell side runs ahead of me on revenue.

Somehow things go from opportunity into forecasts long before we do it internally.

So it is a meaningful opportunity, and we will begin to advise the financial community about its metes and bounds, as we have meaningful contract discussions.

Back now to Steve Binder at Bear Stearns.

Nick, the international component of Gulfstream has obviously changed a lot in the last couple years, and I think you touched in the past that North America used to run 80% of your business, and sounds like year-to-date international is closing on 45% of your business.

I am just wondering when you look at pricing, cash flow, costs, how does that change in mix really change the fundamental picture for Gulfstream?

I think it expands our market, Steve.

It is really that simple.

I think that the dollar in relation to other currencies is helpful.

I think the petro dollar wealth that has been created in the near past will sustain itself over some period of time, and I think that we are beginning to see that market grow the way it has in the United States, so I think the implications for Gulfstream are extraordinary, and it wouldn't surprise you that we are building our future research and development plans and a product development plan are driving towards that globalized market.

Back now to George Shapiro at Citigroup.

Nick, maybe since everybody has slightly different organic numbers for IT, let me throw you the numbers that I had.

I was taking out 365 million for Anteon, and about 60 million for the two smaller acquisitions, Itronix and FC.

Since that would give me -1 organic growth, and you are saying slightly positive--?

All I can tell you, George, is you are wrong.

I am not going to give you the figures on revenues at items, and frankly in some of these things we can't any more.

They are varied.

In larger entities, they have been combined.

I don't have any way pay to parse that, some of that for you, but your revenue assumptions with respect to these entities is wrong is all I can tell you.

It is very easy to take out Anteon, but why don't you accept my statement that we have modest internal organic growth.

Let's let it go at that.

Troy Lahr from Stifel Nicolaus.

Wondering if you want to talk about 2007 at all, maybe just what you're beginning to see for that?

We will talk to you about 2007 when we completed our budget process, which culminates in November, and I usually do that on the conference call at the end of next quarter, sometimes if there is a venue in December or November at one of the conferences, I might come out, but you know, a lot of our revenue is late breaking.

We are struggling I think the way other people are with what is in supplementals, whether we can get it under contract, whether it is up or consistent with our expectations that are already embedded in the business units thinking, so we will tend to be a little late for this year.

We will go now to [Phil Marriott ]at ASB Advisors.

Thanks.

Good morning.

I just wanted to follow up on your comment on Gulfstream R&D, with respect to answering question from Heidi.

Is it fair to say that that the growth in R&D dollars for the year is in the ballpark of 40 to $50 million, and I was curious, is that the level we should think about going forward, or would you expect to grow your R&D spend at Gulfstream for the next couple of years?

Thank you.

Let me put it to you this way.

Year-to-date last year we are within $4 million of that figure already.

So at the end of the day, we will have significantly increased R&D spending.

I would say we will then be at a relatively stable place, and that it will increase marginally as we go forward each year.

Back now to David Gremmels, Thomas Weisel.

Thanks.

Wanted to take another stab at the Gulfstream margin.

What I am look at is your delivery guidance, and it looks like the mix of large cabin jets troughed in Q2, Q3, so wouldn't it be reasonable to assume that the Gulfstream margin also troughed in Q3, and could start to increase in Q4, and into '07?

No, it won't increase in Q4 for a wide variety of reasons.

It will be better than it was Q4 a year ago, but we wind up with some extra expense in the fourth quarter, that SG&A and a few other things hit us in the quarter, that we tell you about time and time again, and that is the way it will be.

If you want to probe further, I would expect around a 14% margin.

I can't be highly specific because I don't know the preowned activity, and whether it will contribute or detract, but I would expect to beat the year ago number by about 100 basis points.

Moving back to Ron Epstein at Merrill Lynch.

Just coming back from MBAA, it was pretty robust show this year, I thought one of the more interesting things was Cessna was showcasing a large cabin jet.

Can you give any comments on the dynamics of the industry, what's going on, the changing competitive landscape?

Not to my knowledge, they weren't showcasing it.

My understanding is they were teasing the market, with respect to a potential opportunity, and they were going to contact customers to see if there was some interest before they [inaudible] such a plan, but what's the balance of that question?

You built on Cessna.

Where do you go from there?

What was the rest of the question?

Sir, can you requeue by pressing star one again please?

The point is you have got Cessna maybe moving up market, and you have got other guys moving into the market competing against Cessna.

How do you see it playing out?

I don't.

I don't.

I pay very little attention to what the competition does.

I think it makes people kind of crazy, but we are doing our drill, and the competitors are going to do whatever they are going to do, and that's not going to change our behavior.

Our behavior is to build the very best airplanes that fly, the most reliable airplanes that fly, that fly further faster and higher than other people's aircraft, and we have been doing that for a good long time, and I think we'll continue to do that, and I think we'll be continue to be first to market.

I don't think you should count on me to be the one that explains the market dynamics, because there is all kinds of moving pieces, and all of the competitors are trying to find a niche or a way, that we have got ours.

We know where we are in this marketplace.

We are pleased with it.

Next up, Doug Harned, Sanford Bernstein.

Yes, Nick, could you talk a little bit about Virginia-class and how that's proceeding, and are we starting to see the impact of the second flight yet in margin?

Not really, just little bits of revenue, but what I can tell you is that we are pleased with the progress we and our partner, Northrop Grumman Newport News, are making.

So far the labor curves tell me we are doing well on the third and fourth boats, and that bodes well for our multi-year fixed price ships when we get into them, so we are greatly encouraged by the learning we are experiencing, both ship yards on three and four, and we hope that that continues.

We are not prepared to declare victory yet, but we like what we are seeing so far.

Question now from Cai van Rumohr, Cowen & Company.

Can you update us on the proposed large Saudi order for vehicles, lab and tank, and any other large FMS potentials you might have, qualitatively if you can't do specifics.

Yes.

Cai, I think nothing has changed since I last commented on this.

The Saudi government has asked the United States to open two FMS cases, one for the Saudi National Guard for in excess of 700 LAVs, family of LAVs, and the Army, Saudi Army, has asked for in excess of 50 M1A2's, Saudi configuration, and upgrades of their existing fleet of Saudi M1A2's there in excess of 300 tanks.

We expect to engage in discussions in the first quarter, with respect to the LAV buy, or proposed buy, and I will know more about it after we have had those discussions, and I will be able to tell you more about it.

With respect to the tank, I have said and I continue to say, I expect those discussions to follow, and the first discussion will be engineering contract, so I am optimistic that those are very real and very meaningful opportunities.

They have gone through the Congressional process, and been vetted to the Congress, no objection was raised.

Now it is simply a matter of trying to get the opportunities under contract, and we will work that.

I don't think that anything comes to mind.

We have an Australia opportunity with respect to the tank, but I can't think of any real major needle-moving FMS cases, besides the two Saudi opportunities that you mentioned.

We'll go to Rob Spingarn, Credit Suisse.

Hi, this is Pete again.

Just wondering back to the beginning you made some comments about the new Gulfstream facilities.

Did you allude to a new clean sheet design, a new tube in the late '08 timeframe?

I said that we were going to in late '08 open a new factory, maybe early '09, and that its first mission would be to build the prototype for next generation aircraft.

I have no further interest in saying anything about that.

Moving now to Robert Stallard, Banc of America.

Hugh, wondering if you can tell us what your expectations for the tax rate for the full year now?

That's the 32.6.

That 32.6, which is where we are now year-to-date, and that is why we had to take the tax rate down in the third quarter to 31.7 to get us year-to-date at what we expect for the year.

So what you see for the year-to-date third quarter is what we expect for the full year.

Moving to go Neuberger Berman's [Todd Ernst].

Good morning.

Nick, what are you going to do with all the cash?

Have you had any change in priorities in how you plan to deploy it?

No.

You know, we might, however, keep a more conservative balance sheet than I would typically like, because this A-12 matter is nearing a decision point, and while I am optimistic that that decision is going to favor the contractors, it would irresponsible of me to engage in probabilities.

I need to be able to respond if it doesn't turn out the way I want it to turn out.

So we will keep our powder dry in that regard, and if you throw in a little reserve in your thinking for that contingency, then I think we have reasonable opportunities to deploy the capital, and continue to do so, and we will behave opportunistically.

Steve Binder.

Nick, looks like free cash flow you ran slightly ahead of net income this quarter, and I think you are 89% of net income for the year year-to-date.

Are you still expecting to reach at least net income, and can you maybe just touch on inventory performance for the quarter?

I think that's what I said, Steve, in my remarks if you were tuned in.

I said we seemed to be on-track to meet our forecast.

I think we did okay this quarter from a cash generation standpoint, and we have some cleaning up to do in the inventory supply, I am not unhappy with where we are right now.

I don't know that inventories either grew or shrunk in a remarkable way.

Next, Heidi Wood.

Nick, follow up on this use of cash question a couple questions ago.

You haven't been that active for understandable reasons on the share repurchase front.

In fact, less active than the other defense peers as all of these names get up around their highs.

Can you talk about your plans for share repurchase over the next twelve months?

It is not a matter of plan.

We don't plan share repurchases particularly.

We try to take advantage of the market.

If circumstances create a situation where the stock gets below some thresholds we have, and if at those prices it becomes significantly accretive to us, we buy it.

If it doesn't get there, we don't.

We have other uses for the cash.

Now we will go to David Gremmels.

My questions have been answered.

Thanks.

Thank you very much.

No other questions holding, gentlemen.

I will turn things back over to you.

Thank you, Kevin, and thank everyone for their interest today.

I am going to be taking questions on nitty gritty kinds of things for the rest of the day until around 4:00, and I am going to heading head out of town.

I am going to grab a quick bite to eat.

If you need to talk to me, Ray Lewis, 703-876-3195.

I will do my best to get back to you.

Have a good day.

Thank you, everyone for attending.

That will conclude today's conference call.

Have a good day.