通用動力 (GD) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the fourth quarter 2007 General Dynamics earnings conference call.

My name is Maria and I will be your audio coordinator for today.

At this time, all participants are in listen-only mode.

And we will be facilitating a question-and-answer session towards the end of today's conference.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to Mr.

Ray Lewis, staff Vice President of Investor Relations.

Please proceed.

Thank you very much, Maria and greetings to the members of the investment community as well as those of the business press that are listening today.

We had a great quarter.

I would like to remind everyone that there may be some forward-looking statements made today.

These will represent our best estimates of future performance, but they are subject to the risks of any normal business, and as I remind you each quarter, you can get a more detailed exposition on what those risks are if you look at our 10-Qs and 10-Ks.

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

Thanks, Ray and good morning.

I'm pleased to report that fourth quarter 2007 is obviously a very strong finish to what has been a spectacular year for us.

The fourth quarter results represent the highest revenue, earnings per share and free cash flow we have ever been pleased to report to you.

Earnings per share from continuing operations were $1.42 for the quarter, compared to $1.13 for the fourth quarter 2006, a 25.7% increase.

Earnings from -- for the full year, earnings from continuing operations were $5.10, per fully diluted share, an increase of 21, almost 21.5% over 2006.

This growth in earnings in both the quarter and for the full year was driven by strong revenue growth and significantly improved margins.

We achieved terrific operating leverage.

Let's take a brief look at both revenue and operating margins.

Revenues for the quarter grew to 7.5 billion from 6.5 billion, this $1 billion increase represents 15.4% growth over the fourth quarter of 2006.

At the same time, operating margins increased 80 basis points to 11.6%.

Full year revenues were 27.2 billion, up 13.2%.

Operating margins for the full year increased 50 basis points to 11.4, from 10.9 in the prior year.

Free cash, free cash flow from continuing operations in the quarter was approximately 900 million.

For the full year, free cash flow from continuing operations totaled approximately 2.5 billion, which represents 119% of net income from continuing operations, about 19% better than I'd been guiding you through the course of the year until maybe the fourth quarter.

As a result of this strong cash generation, we ended the year with cash and short term investments nicely in excess of our total debt.

In fact, in excess by almost $270 million.

We also ended the year with funded and total backlog at all-time highs.

Obviously, we could not be more pleased with the earnings and the cash generated by our business segments this year and the strength of our balance sheet leaves us in a powerful position to add value during the course of the year.

Let me now address the segment detail and lay a little groundwork by segment for the 2008 guidance that I gave you in the press release.

I'll start with Aerospace, Gulfstream.

I was obviously very pleased with Gulfstream's performance in the first three quarters of the year and I'm further impressed by what they accomplished in the fourth quarter.

Sales increased 17.2% for the quarter, and were up a similar amount for the full year.

Operating margins continue to improve.

Both fourth quarter and full-year margins improved 120 basis points over last year.

As a direct result of the 17% revenue increase and improved margins, earnings were 212 million in the quarter, and 810 million for the full year, an all-time record.

Both increases are about 20% -- 26% greater than last year.

The book-to-bill ratio for the quarter was 2.14 times, resulting in a further significant increase in backlog.

So, as we look into 2008, we're forecasting revenue growth of 13 to 15% for Gulfstream, with margins improving yet again between 20 to 40 basis points over 2007.

In other words, look for operating margins for the full year between 17 and 17.2%.

All right.

Let's move to Combat Systems.

Revenue in Combat Systems segment grew 46.5% for the quarter and a full 30.3% for the year.

The growth in this segment has been absolutely phenomenal and is attributable in large part to growth in combat vehicle markets worldwide.

However, we experienced growth across each and every product line within the segment.

Margins for the quarter were 12.2%, up 150 basis points over the fourth quarter of 2006.

For the full year, margins increased 40 basis points to 11.7%.

Needless to say, the combination of 30% revenue growth and 40 basis point margin improvement resulted in powerful growth in operating earnings, up 35.3% for the year.

So what do we do for an encore?

For 2009, we believe revenues will continue to grow, somewhere between 9 to 10% and margins should improve again, another 30 to 50 basis points.

So continuing healthy bottom line growth out of Combat Systems.

Marine Systems.

In the Marine System group, revenues were modestly up for the quarter and for the year.

I'm very pleased, however, by the margin improvement this year, better than I thought it would be.

Margins were 8.3% for the quarter and 8.4% for the full year.

As a result, operating earnings improved a little bit over 20% for the quarter and over 12% for the entire year.

Next year we expect revenues to increase between 3 and 4% and margins to improve another 10 to 20 basis points.

Let me carry a minute here.

You notice, we're forecasting relatively modest growth next year and some continuing slugging it out in the trenches for a little more margin improvement.

Really good, hard work by these guys.

What you don't know is, that in the out years, throughout the course of our plan, Marine Systems is forecasted to be the strongest grower in terms of compound annual growth rate through 2011.

And you will see that hit in each of the years, 9, 10 and 11.

So in '09, we're looking for something in excess of 9% growth year end.

We feel pretty confident about that.

Lastly, Information Systems and Technology.

Sales were off about 2% for the quarter, but up 6.6% for the full year.

This requires some normalization.

As you know, we are experiencing the slow but steady ramp-down of the Bowman program in the United Kingdom, a very large program.

Additionally, the year-over-year comparison is somewhat skewed by the acquisition of Anteon during the course of 2006.

So adjusting for these events, we calculate a modest 3% increase in North American base revenue year-over-year.

Margins have declined slightly, 20 basis points in the quarter, and 10 basis points for the year.

You may recall that my earlier guidance to you anticipated declines in margins closer to 50 basis points.

So they did a very good job to close the gap.

I would like to have seen more growth and improved margins but the year was better than we had expected.

Importantly, the group's backlog increased nicely during the fourth quarter.

As we look at 2008, we see top line growth, organic growth between 5 and 6% and further modest pressure on margins.

Taken together, operating earnings should grow year-over-year by 3 to 5%.

In summary, we had a good quarter and a great year.

We had two businesses, Aerospace and Combat Systems that really hit it out of the ballpark.

The Marine Systems group had a solid year with margins back to levels we haven't seen in some time.

And the IS&T group has done a good job managing a pause in portions -- identifiable portions of its market.

By the way, Information Systems and Technology is the first line of business, General Dynamics, to top 1 billion of operating earnings in a year, no small feat.

It should be joined in 2008 by Combat Systems, with Gulfstream not far behind.

In my view, all four of our lines of business are well-positioned.

Accordingly, we see earnings per share in 2008 increasing to a range of 555 to 565, which is between 9 and 11% earnings per share growth.

As I've pointed out earlier, our relatively powerful balance sheet leaves us some opportunity to improve this because the guidance I give you does not take into account any potential deployment of capital.

I think Hugh Redd has some additional detail that might not be apparent in the attachments to our press release.

So Hugh.

Thank you, Nick.

Let me start with taxes.

The effective tax rate for the quarter was 32.8%, which included modest true-ups and discrete items.

The effective rate for the full year was 31.7%, in line with our expectations.

Backing out extrodinary items, the run rate for the full year was 32.5%.

We expect the run rate in 2008 to be about the same, 32.5%.

Nick mentioned that free cash flow from operations for the quarter was approximately 900 million.

That represents 154% of net income from continuing operations for the quarter.

Furthermore, that 900 million reflects a reduction for a voluntary contribution of $100 million that was made to our pension plan during the quarter.

The strong free cash flow this year put us in a net cash position, as Nick mentioned, and accordingly we see next year's net interest expense to be minimal.

With respect to share repurchases, we used $505 million last year to repurchase 6.5 million shares at an average price of $77.88.

Total backlog grew 300 million in the quarter and 3 billion for the full year.

As a result, we ended 2007 with the largest backlog in company history.

My comments are focused on total backlog.

Because this represents work which is under firm contract with a defined scope of work.

Total estimated contract value which we've reported in our attachments, on the other hand includes total backlog, plus options, and management's estimates of future work -- future awards under IDIQ contracts.

So focusing on total backlog, the four segments ended the year with backlog to sales ratios as follows.

Aerospace, 2.6 times.

Combat, 1.7 times.

Marine, 2.4 times.

And Information Systems and Technology, 1 times.

I think it's noteworthy that, to point out that Marine Systems Group tends to get orders in large drops, consistent with large, long-term construction projects, particularly submarines and surface combatants.

Consequently, backlog fills up in one year and steadily depletes over the next several years.

That steady run-off is what we are experiencing now in Marine Systems group.

IS&T, on the other hand, tends to go out and fill their book of business each year.

This year the book-to-bill was 1.2 times, indicating support for the revenue growth in 2008, that Nick has just outlined for the IS&T group.

Ray, that concludes my remarks.

Thank you very much, Hugh.

Maria, before we get into the Q&A, I would like to reiterate that we would like each of you to ask one question, if you want to ask more than one questions, please then get to the back end of the queue, so that we give everyone the opportunity to ask a question during the time.

Maria, if you would, explain to them how they can get into the queue.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Robert Spingarn with Credit Suisse.

Please proceed.

Good morning, Nick, Hugh.

Good morning, Rob.

Question, general question on Gulfstream, sort of a hybrid question, but if you could give us some more color on what's driving the very impressive backlog growth there, book-to-bill?

And then you gave us revenue targets for '08.

Does that anticipate the same -- the existing unit guidance that you've given before?

And if you could also just talk about the margin strength and what's driving that, is it pricing?

Is it execution?

Okay Rob, we'll try and give you some color.

I think 58% of the orders in the quarter were International.

That is, outside of North America.

53% for the year.

Let me speak to the year for a minute.

Domestic orders were up from 92 in 2006 to 121 in 2007.

But the percentage declined from 58% to 47%.

So we were faced with robust demand by any reasonable standard in the United States and Canada, an up market for us, but the percentage of orders declined in the face of powerful growth across the rest of the world.

In the fourth quarter, we experienced particularly strong growth in Asia, which was nice to see.

The order growth, I suspect, will continue, at least through the first quarter, where we've experienced steady contract activity early in the year and a number of funded memorandum of understanding, not yet reduced the contract but off to a good start in the quarter, in terms of sales activity.

Margin question, if we compare year to year and it differs a little bit for each product, so I'll generalize here, about 50% of the margin growth was attributable to price and basically planned for.

Most of that was in our plan.

With a few exceptions, because we could get some relatively near-term pricing on mid-sized that we couldn't plan for because we weren't a year out at the time.

And the other 50% of the margin improvement was through clear productivity gains, and the productivity gains had to offset some increase in our purchase material and systems costs.

So if you could see the metrics that I look at, Gulfstream really beat, quite handsomely, their budget for labor hours on all size aircraft, and then really did a bang-up job on completions, which enabled us to make greater margins on the mid-sized aircraft.

So all in all, spectacular performance there.

Any update on the new programs?

No, I don't have anything to say about that, Rob.

I think I've announced pretty loudly that we're going to have some major announcements in the year.

One of them in the first half.

So I don't want to steal Gulfstream's thunder on that.

Those announcements, frankly, are for the benefit of customers, and analysts and shareholders should bask in the warmth of additional orders rather than getting the information in advance.

Thanks very much for the color.

Your next question comes from the line of Joe Nadol with JPMorgan.

Please proceed.

Good morning, Nick.

Good morning, Joe.

My question's on Gulfstream as well, but it has to do with your guidance.

You've given some nice sales growth guidance for Gulfstream, but your margin guidance appears, from my standpoint, to be conservative and certainly you've been conservative during the up cycle the last few years.

What's holding you back from doing a little better, considering all the pricing you got in the last 18 months, 2 years, the productivity improvements your making, what's going on with R&D, et cetera?

You know, the pricing is embedded, Joe.

I mean, we're going up again.

And you've got learning curves that should be starting to flatten.

I mean, these guys have extracted enormous [clearing] out of their production schedules.

So I don't know that I'd regard it as conservative.

I think it's steady improvement, continuous improvement, and --

can you share-you broke down very nicely what happened this past year with margin improvement.

Can you say how those two different factors play into your guidance for 2008, roughly?

Yes, sure.

It's relatively easy.

Most of the improvement is on price, which we know and is embedded and we have what would be viewed as normal learning relatively late in a production line, a mature line.

So if they beat it, it will be a lot of Lean Six Sigma effort that they did this year, but I think doing another 100 basis points is tough slogging, so we don't have that embedded.

Was there also some operating leverage that should help you out?

Do they have an opportunity?

Yes, sure they do.

They have an opportunity to be better.

But I think it's -- Joe, the way I look at this is it's a 50/50 plan.

I see as much risk in it as I see opportunity for them.

Maybe not quite as 50/50 as we have on the -- on some of the defense units, because some elements of risk are gone.

For example, there will be no question about the volume, the number of planes to be delivered, their plan will be precise within one unit, probably.

The prices are identifiable across the entire product line now because they're more than a year out for every product.

And the issue then is the productivity question.

Some variables having to do with pre-owned aircraft sales and what we do over on the service side of things.

So all in all, I'd probably say here slightly more opportunity than risk.

But I wouldn't run away with the upside on the opportunity.

Okay.

Thanks.

I'll get back in queue.

Your next question comes from the line of Cai von Rumohr with Cowen.

Please proceed.

Yes, Nick.

Good quarter.

Thank you, Cai.

It looks like you delivered one fewer large Gulfstream and two fewer mid-sized than your, I guess, most recent guidance.

Why the miss?

And could you give us some color on what you expect for unit deliveries in 2008, by those two models?

Yes.

Cai, yes, I'm going to take it in two parts.

First, the large and then the small.

On the large, in fact, I had had guided to 80.

And we slipped one and delivered 79.

The other airplane delivered third or fourth of January.

And we could have delivered at the end of the year.

We had a willing and able customer, FAA certification.

But it would have required a fair amount of overtime in the completion center and we chose efficiency and the customer accommodated us.

With respect to the mid-sized deliveries, we had a little conundrum here in basic terms.

And I will get tricked up every now and then.

What I was giving the street were our production estimates.

The delivery estimates in guidance are very similar but they can be off by one or two.

We in fact produced the number of mid-sized aircraft that I had indicated.

We delivered 59 of them.

The other two are in service as demos.

So every now and then, I get caught in the switches between production and delivery.

But as far as next year is concerned, we plan to produce and deliver same number, 90 of the large cabin aircraft.

We plan to deliver 67 mid-sized.

But we'll probably produce 69 to 70 of them.

And again, that is the variability between test items or demos, which we need in the course of our business.

So but we'll deliver 157 aircraft next year, up from 138 this year, and that's what's embedded in our revenue guidance to us, to you.

But the thing I don't understand, if you're up this 13% or so in terms of units with equivalent mix, how come we're not up more in terms of sales, because isn't the price hike around 4%?

Cai, you can't count on that, because costs go up as well, right.

It's the net and we haven't been netting 4%.

And in percentage terms, the mix isn't identical.

And I'm -- as I pointed out to you, I'm producing more than I'm delivering and there's a cost associated with that.

In a year when those two mate perfectly.

I'm not trying to trick you here, Cai, we're giving you our honest plan here and the variability that's embedded in it.

Terrific.

Thank you very much.

Your next question comes from the line of Robert Stallard with Banc of America.

Please proceed.

Good morning.

Nick, there's obviously been some concerns about the impact of a slowing U.S.

economy and possibly a global economy.

How do you get comfortable with the back as it currently stands for Gulfstream that this is a really firm backlog?

And how far can you now look out in terms of availability for a new plane today?

Rob, obviously we can't ignore what's going on in the world around us and what's most apparent in the market that you watch every day.

On the other hand, we're scanning this backlog as a result of that.

We started scanning it monthly.

We're probably scanning it weekly now, looking for any infirmity and we can't find any.

We have not had a cancellation and we don't have any customer in discussions with us today for a slip.

And we are in discussions with many customers who are in that backlog about opportunities for a move-up, which we can't give them, other than through increased production.

So we'll continue to scan that like a good cyclical will, because that backlog's critical to us.

But we have very significant deposits associated with that backlog.

And particularly closer in for the next several years, as we make -- as we move along the production of the green aircraft, we get more and more deposits.

So lot of cash sitting in the bank to support that backlog.

And so far, backlog holding very, very well and a lot of blue chip customers.

So that makes you feel pretty good.

For the moment, the -- and look, a lot of things could go wrong here in the economy and Gulfstream would still look very, very powerful in '08 and '09.

And probably '10 as well.

So it's a long-term view and I believe we'll have ample opportunity to behave like a good cyclical if we encounter a cyclical downturn here.

But at the moment, we're pleased with where we are.

We're also pleased with our relatively cautious decisions about how we ramped up production.

We were under a lot of pressure from both customers and from analysts and shareholders, to step up the pace.

I think we protected the business in the long run, and have managed it wisely and I give enormous credit to my team down in Savannah, Georgia.

They're in good shape and will continue to deliver for our shareholders.

That's great.

Thanks, Nick.

Your next question comes from the line of David Strauss with UBS.

Please proceed.

Thanks, good morning, Nick.

Good morning, David.

You gave us a bit of color in terms of the growth in Marine looking even further out than '08.

You've also I think talked about a 6 -- potentially 6.5 to $7 billion business out in 2010 and 2010, 2011.

Is that correct?

If so, can you give us a little bit of color?

Obviously you got seconds Virginia class coming in, but just a little bit of color in terms of how you get to those kind of numbers?

Yes, you really start to see it 2010.

We break 6.5 billion in that year.

It's a lot of product carrier work, continued strength in the TAKE program, the -- and getting the two submarines a year and electric boat and that's the year when we should see the major impact of that.

And then another boost again in 2011 that gets us chasing 7.5 billion.

Not quite getting there.

Okay.

So 2010, you do the math and you're applying close to 20% growth for that business?

In that year, that happens.

Okay.

The year before, a little bit more like between 9 and 10%, 29, but you're going to see it start to ramp and it will be of all of our businesses, unless something happens that I'm -- it always can happen.

But in terms of embedded in their operational plans, Marine Systems is the largest grower.

And on that 6.5 billion 2010 you're still looking at 10% margins?

I think that's the year they could get there.

I don't know that we have it embedded in our plan.

They're not that bold.

But you asked me what could you do.

People frequently ask me that, particularly about Gulfstream.

The question I always get is, when can you get to 19%?

I tell you, not for a while.

Not going to happen for a while.

Here, I'm happy to tell you, I think they can get there.

Whether they're bold enough to embed it in their plan is another story.

But their plan keeps improving year-over-year in terms of operating margin.

And I see opportunity there.

They're a little gun shy about the volume -- they're going to get the volume.

They're a little gun shy about embedding what that efficiency can do for them in their plan.

But I have a great deal of confidence here that they're going to do the job.

Great.

Thanks, Nick.

Your next question comes from the line of Joe Campbell with Lehman Brothers.

Please proceed.

Good morning, Nick.

Good morning, Joe.

I would like to ask about Combat Systems, the other place besides Gulfstream that really knocked the cover off the ball.

And in your guidance it's going to have another strong year, certainly relative to overall defense growth.

And I wondered if you could just sort of go through the various vehicles in there or the various -- what is it that's driving it?

You mentioned that across the board all of the vehicles contributed in 2007, just give us a little update on how the combat stuff looks in '08?

And maybe, its sensitivity, if any, to what happens if the up tempo falls off, and then of course presumably there's reset behind that?

Thanks.

Joe, we have very strong tank program.

It has many facets.

But it's embedded.

It's in the backlog.

It's well-funded.

I don't have any concern about it.

If anything, in our plan we've been a touch cautious about striker, because there is some further striker potential growth in '08 but it's in the supplemental, the next supplemental, and to me that's always a gamble.

So we don't embed it.

M-Wrap provides us with very nice volume in 2008, more than we had in 2007.

And then we don't have it again and our view is that goes away.

If it doesn't or if more goodness occurs, well that's splendid.

That's upside for us.

Europe continues to grow.

So the vehicle business and also the export opportunities are significant.

They don't quite hit us much in '08.

But they begin to hit us in 9, 10 and 11 and they will permit modest continuing growth throughout our planning horizon as the U.S.

Army's combat vehicle programs, I think, normalize.

So I mean, that's sort of the way we see it.

But we're also getting powerful growth out of our ordinance business and out of advanced technology products, ATP, so all in all, I think still a strong business.

Thanks very much for the update, Nick and another good year for you guys.

Thank you, Joe.

Your next question comes from the line of George Shapiro with Citigroup.

Please proceed.

Nick, yes, just pursue a little more detail maybe, the M-Wrap?

I kind of figured that maybe you had 500 million sales in '07 and probably goes to maybe 800 in '08 and then your plan you have it going down to 0 in '09.

Just to clarify.

Yes.

And with the 0 in '09 you're still able to see sequential revenue growth between '08 and '09 for the whole sector and if so, what's making up for that 800 million loss?

A lot of growth in other program activity.

And it's a very big business today, George.

And there is an enormous amount of activity here.

[We have V], JLTV, striker growth, tank business, reset business, European sales, exports, the Saudi program hits us in 2009.

Two different programs.

ammo, strong, so a lot of growth opportunity here.

If anything, this is one that I think is a tad conservative in the out years, next year I think is fine.

Okay.

But when you say you're predicting modest growth in '09 and '10, so modest I assume is 5% or so?

4-ish.

Okay.

Thanks very much.

Your next question comes from the line of Heidi Wood with Morgan Stanley.

Please proceed.

Nick, I wanted to ask a question from the International perspective on Gulfstream and combat.

Can you lay out for us, in your deliveries in the '08 and '09, what is the percentage of deliveries that will be International for Gulfstream?

And again, on that international --

I can't, Heidi.

I don't have that data.

It trails the orders and trails them considerably.

So it will still be less than half, I believe, in '08.

When that turns, I can't tell you.

Okay.

So you don't know whether it's '09 or 2010 when you --?

Okay.

No, I don't know.

That's fair.

Then, on combat, on International, can you talk to us about what was the percentage of International content in '07?

And then what does that look like in '08 and '09 and 2010?

I can't -- Hugh, do you have a sense of that?

I really don't.

Because you've got the European business and you've got exports, both international, plus Canada.

I don't have that data for you, Heidi.

Maybe you can help me.

To me, that's -- I'm trying to understand the growth in sales you're talking about and the modest margin expectations when it seems to me like the mix of business should be getting better and it seems to me from the orders that you should be getting a lot more international content, both non-European as well as European.

To me that would be a margin plus.

I'm trying to understand what the offsets are.

Look, I think what is probably embedded in our plan is some conservatism about U.S.

Army resources in the out years, and we could be wrong with respect to that.

And that's why I said earlier there is probably more upside opportunity in our out year plan for Combat Systems than we have embedded in it.

For example, we don't take striker beyond the seventh brigade, other than reset opportunities in our plan.

I think there is both an eighth brigade opportunity and there are opportunities to use striker in other ways.

So if you want to bet that in your forecast, you can do that.

We have some very nice pieces of export business, both out of Canada and out of the United States lined up.

And as we always do with export businesses, we discount those a little bit in our plan, because they have a way of slipping to the right over time and being for fewer vehicles than initially announced as countries struggle with their own budgets.

If you could see the detail on our plan, you'd see us applying discount factors to well-established programs, even where the probability of win for us is almost sole source or extremely high, we'll discount the program just on the what nature and history tells us things slip and get a little smaller as they go through time.

But plenty of upside opportunities.

Absolutely.

Good.

Thanks very much, Nick.

Your next question comes from the line of Steve Binder with Bear Stearns.

Please proceed.

Nick, can you maybe touch on IS&T.

I know you said last quarter that you thought the fourth quarter would be modestly higher year-over-year in revenue.

It came up a little short.

Can you maybe touch on where the variance is from?

I'm not quite sure, Steve.

It came up short, I think, more on the services side than anywhere else, but I think we look good going forward.

I mean, we're seeing the pipeline starting to fill up.

We saw in the quarter some programs that we had under contract go from unfunded to funded.

And we saw some IDIQ orders in relatively significant numbers, task orders were issued and went to funded.

So all of that was an indication to me that the pipeline was getting a little better.

Hugh, do you have some detail on that you could give him?

Well, just to your point, the orders under the computing hardware systems, 113 million at the end of the year, and the win T orders of 663 million were significant.

And so those were things that went to funded and task orders issued and we're seeing more of that.

So it enabled us to support an organic revenue growth across the sector that's in the 5 to 6% range next year, and I'm pretty comfortable with that.

I don't mean to be nitpicky, but your total backlog rose, I think $300 million Q3 to Q4, but the IDIQ contract value did decline $800 million from Q3 to Q4.

If you look at your stable that you provide, total estimated contract value, it's down 500 million from Q3 to Q4.

That column that you're referring to is management's best estimate of what the future awards under IDIQ contracts can be, and so it's subject to management revising competition and other people who have IDIQ awards.

It can be wholesome too, Steve.

They can revise -- my suspicion is that that 800 million is a combination of two things, some revised estimates on programs that are very slow to take off.

And second, that number goes down when things to the left, when they go into the funded category and we had some particularly good opportunities there this quarter that happened.

So I'm pretty comfortable with that.

I'm happy to have you arguing the other side of the coin, though, Steve, because most of you have been out pacing me in your growth estimates for this IS&T group for the last couple of years.

I think this is a conservative estimate next year and they can achieve these growth opportunities.

You had a great cash year.

I mean, 120% net income and you did get $1 billion of advances in deposits, helped out by the strength out of Gulfstream.

If you do have some kind of tail off in activity in '08, are you still confident you'll be seeing free cash flow equal or better than net income?

I think we're -- our plan provides for me giving you that guidance, and I hadn't done it, and I think it's equal to, not better than.

I think equal to is very good, what we've accomplished recently is extraordinary.

And in part, that's been helped by the advanced deposits on aircraft by Gulfstream.

One other thing on the Czech, there's been, obviously, a lot of news reports about the carrier contract with the Czech government.

Do you want to give us an update on that and is there potential earnings impact from that?

Considering, I think, you still have some inventory there.

I don't think so, Steve.

If it is, it's not material.

We -- there's really not much to say.

We're in the midst of discussions with the Czech government.

They would like to restructure that contract.

We would like to restructure it.

They probably bit off more than they can chew.

We had a couple hundred million probably in revenue forecast for this year.

If we don't have it, we'll cover it.

It's not significant for us.

It's something we're just in the midst of working out with them.

So I don't really know how to comment or want to engage in much speculation.

I think my guidance to you considers all possibilities in that area.

Okay.

Thank you.

Your next question comes from the line of Howard Rubel with Jefferies.

Please proceed.

Thank you very much.

Nick, with the cash that you have today, there gives you an awful lot of opportunities.

How would you sort of -- I mean, the past you've used some of it to buy back stock.

Is that still a reasonably high agenda item?

Howard, I think where that particular item appears on the agenda is directly related to the stock price.

I think you've all known, I'm an opportunist.

I think you should make your assumptions about our behavior in direct correlation to the opportunity that exists in the stock market.

This is a market in full retreat and not necessarily in intelligent retreat.

So you can draw your own conclusion.

And then as one follow-up, as you looked at what has been funded in the supplemental and what's yet to be funded, how would you sort of -- how would you handicap your opportunities?

You clearly talked about the 8th Stryker Brigade as one opportunity.

Is there some jump ball things or -- ?

I think there's some jump balls out there, Howard.

I think the first supplemental was largely O&M and everybody who -- services who might have had their hands out for other kinds of money didn't get that satisfied.

And so we'll either see it in a second supplemental or it will slip into the next year's budget.

But we're cautious about the way we handicap these supplementals.

We'll work hard with the customer, if they want our help, to develop their requests.

But we'll start to increase our view of things when it happens.

I think that's fair.

Thank you very much.

Your next question comes from the line of Ronald Epstein with Merrill Lynch.

Please proceed.

Good afternoon, Nick.

On Gulfstream, in terms of the ramp-up, how's it going with the supply chain and your suppliers?

Are you seeing tightness in any specific areas?

Are you working through it?

How's that going?

They're actually doing pretty well now.

We have to work that constantly.

And it was a problem much earlier in the ramp-up.

The reports I'm getting is that they're doing well.

We had isolated issues that we had to work through, and sometimes it was in the supply chain of our supplier.

But I think that the industry, as best I can tell, is doing fairly well, in terms of meeting their commitments, and they are to us.

Okay.

Great.

Thanks.

Your next question comes from the line of David Gremmels with Thomas Weisel Partners.

Please proceed.

Thanks.

Good afternoon, Nick and Hugh.

You talked about new development activity at Gulfstream and you mentioned it again this morning.

Just wondering if you could give us a little bit of color on Gulfstream R&D trends as a percent of sales?

Directionally was it up in '07?

And I don't know if you can say anything about '08.

Yes, it was in fact up, and it will be up again, a tad, in '08.

I don't think will be a major driver.

It is starting to approach 2% of sales on a net basis.

And it moves around quarter-to-quarter as -- not because of our spend rate but because of the cash we receive from our partners and participants in the program as they fund some of our advanced research.

So I think it's 2% or slightly below, but moving steadily towards 2%.

And that's on a net basis and it's been satisfactory to fund the robust program.

And I believe that's higher than it's been in the past.

As you look out longer term, do you anticipate that it stays around this 2% number?

Is there some room that it could tick back down a bit?

It's going to stay that way forever if I have anything to say about it.

very good.

Thanks very much.

Your next question comes from the line of Troy Lahr with Stifel Nicolaus.

Please proceed.

Just a question on IS&T.

You talked about margin pressure next year.

Is that just because you had a strong second quarter this year?

And then when you say pressure, are you talking maybe 10, 20 basis points or could it be more than that and why?

Yes, I think we're talking about maybe 20, 30 basis points and it's business mix question.

We expect growth in the IT services business where they have lower margins.

Okay.

So you're looking at kind of repeating what you did in the fourth quarter, so fourth quarter is kind of more of a steady run rate for you going into next year, it sounds like, at 10.4%?

I don't know.

Yes, I think that's closer to it.

Okay.

Just so there's no additional margin erosion.

Okay.

Thanks, guys.

I was as explicit as I would care to be about that.

I mean, I think I've given you -- you can do the math.

I've given you a 5 to 6% revenue increase and a 3 to 4% bottom line increase organically, depending on how we do on the margins.

So --

No, that's good.

That's helpful.

Thanks, guys.

I think we will be as good or better than we were in the fourth quarter and you should only see maybe 20 basis points of loss in the year.

Your next question comes from the line of Doug Harned with Sanford Bernstein.

Please proceed.

Good morning.

I have a question also on IS&T.

When you look at the individual units, could you talk a little bit about AIS and C4 systems in terms of growth going forward in those two?

C4 systems has continued to enjoy strong growth, as it did in this yea,r and it offset what we didn't get in AIS, had some declines.

AIS has a very large space segment, both small to mid-sized satellites and payloads.

If you follow, you know where the space program is, particularly with respect to new starts and commitments, new commitments in their segment of the market.

And even at the larger end where we're a supplier, the level of activity has been dramatically slow.

So that's why they've been a slow grower.

And the IS&T or the Information Technology segment has been slow, as you can observe at many other public companies where they do that exclusively, and C4 has been the power and will continue to be a power and its programs have been well-funded.

They're in very good shape.

So we would look for them to continue to lead.

We see IT services getting some traction and starting to have some growth for us.

And at AIS, there's not a lot I can say about it because they draw from classified budgets.

But for the moment their growth is slower than the other segments.

Okay.

And then, just separately, can you comment at all on the time line for the Saudi vehicle contracts, how that's going?

Yes, I think on the labs, we should see contract activity in the first half of '08.

We should see revenues -- and they're two different contracts, one for the Saudi National Guard, the SANG and one for the Ministry of Defense and Aviation.

They total 724 vehicles for SANG and 120 some, 124 for the Ministry of Defense.

And you should see revenues beginning in '09, but the strength of the program probably in '10, '11, a little bit in '12.

We should see tank activity also, maybe an order later this year and work there probably revenue streams hitting in '10 and '11.

Some revenue in '09, but stronger in the out years.

These are among the programs that are going to provide our out-year growth that we were talking about.

But those are now very much set is what you're saying.

I know this has been a long process.

I think the program is now well-scoped.

The requirement is fairly cleanly identified.

Size adjusted.

We know what our content is.

We're in the midst of contract discussions, and I think our level of confidence here is fairly high.

Okay.

Great.

Thank you.

And, Maria, I believe we've sort of hit the end of our allotted time here.

I would like to remind folks that if any of your colleagues have not heard the entire call it will be rebroadcast beginning at 1:30 this afternoon.

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The pass code is -- I'm sorry, that's 888-286-8010.

The pass code is 97541627.

I'm Ray Lewis.

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Thank you very much for being on the call and good

Thank you for your participation in today's conference, ladies and gentlemen.

All parties may now disconnect.

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