通用動力 (GD) 2008 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2008 General Dynamics earnings conference call.

My name is Carissa, and I will be your coordinator for today.

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

We will be facilitating a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Mr.

Ray Lewis, staff Vice President of Investor Relations.

Please proceed.

Thank you very much, Carissa.

And welcome everyone in the investment community as well as the financial media who are on the call today.

As always, I want to remind that you any forward-looking statements we make today represent our best estimates as to what the future may hold but obviously are subject to the uncertainties that face any business and those risk factors are dealt with at some length in our 10-Q's and 10-K's.

I would recommend you look at those if you haven't already.

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

Thanks, Ray.

And good morning.

I think our results are pretty straightforward, so I can be pretty brief.

If you've seen the press release for the quarter, you can understand why I'm extremely pleased with the performance of General Dynamics.

Sales were up 11.2% and earnings from continuing operations were up 30.2%.

Earnings per share were $1.42 on a fully diluted basis well ahead of everyone's expectations including my own.

We obviously enjoy tremendous operating leverage in the quarter.

Margins improved 150 basis points year-over-year.

Each business segment improved margins significantly over both first quarter 2007 and maybe more importantly to me fourth quarter 2007.

Arguably, the best thing about the quarter from a forward-looking perspective was the strong order intake.

As a result of nearly $10 billion of orders, our backlog grew by $3 billion to almost $50 billion.

The growth in backlog was most dramatic in the combat systems and IS&T segments but each of our four segments.

But each of our four segments ended the quarter with more backlog than at the beginning of the quarter.

The company generated $346 million in cash after capital expenditures which is about 60% of net income from continuing operations.

I think that's kind of typical for the first quarter.

In my 15 years here, we've had two great first quarters.

Happened to be the last two years but as I looked back, first quarter has traditionally been a little weaker.

But I can say that it's stronger in any event than our plan provided for.

And I'm fully confident that we will meet or exceed our bogey of 100% conversion of net earnings in the cash for the year.

Overall, performance was spectacular, each segment having a good quarter.

Some in painfully obvious ways and others in more settle ways.

I'd like to give you a little color on each of the four segments.

Maybe I'll begin with Gulfstream.

Sales increased 17% year-over-year and margins improved 270 basis points.

Gulfstream's book to bill expressed in dollars was 1.18 times for the quarter.

This is the eighth consecutive quarter with a book to bill greater than one.

As a result, backlog at Gulfstream increased $200 million during the quarter.

Let me make very clear that this increase in backlog and order intake is with respect to airplanes currently in production.

As you know, we launched the G-650 product on March 13, but did not begin taking letters of intent and initial refundable deposits until this quarter, until April 15.

I'm pleased to say that the G-650 has been well received in the marketplace and are now engaged in the process of converting letters of intent into contracts which will result in orders for the second quarter.

Gulfstream operating margins were spectacular to say the least at 18.5% aided in part by some launch assistance payments but nevertheless a very strong performance.

Combat systems, this was another great quarter for them with revenue increasing by 27% year-over-year.

Margins improved 190 basis points resulting in a nearly 50% increase in operating earnings.

Backlog improved $1.4 billion during the quarter.

The largest single stimulus to revenue growth, and frankly to earning growth, was the MRAP program which ramped up quickly and will also ramp down rather quickly.

Fortunately, demand for our other products will replace this volume as the year progresses.

Margins were great at 13% but let me say not sustainable at that rate throughout the year.

Nevertheless, combat systems will have a great year and I think clearly outperform our earlier guidance.

Marine systems, sales improved 9.6% over the same quarter a year ago.

Nice up.

Earnings improved 25% and margins 110 basis points.

Backlog increased over $500 million during the quarter.

This quarter's performance marks the fourth straight quarter of margins above 8%.

Evidence of stability, completion of our turn around and of our continuous improvement.

IS&T, the story in the information systems and technology segment is a little more subtle than the other three segments but encouraging nonetheless.

Consistent with a constrained market and strong competition, revenue in the northern American market was flat year-over-year.

Meanwhile, the Bowman program continued its slow ramp down.

We have, however, reached what we think is steady state for our business in the United Kingdom.

And while revenue for the whole segment declined 1%, margins improved 60 basis points resulting in 4% improvement year over year operating earnings.

Total backlog a real good story, increased $800 million while IDIQ contract balances increased over $400 million.

Importantly for us, this is the third straight quarter of increased backlog for IS&T.

The growing backlog will result in good revenue growth in the second half of the year but at margins lower than the first quarter and more consistent than last year.

In summary, by almost any measure this was a great quarter.

Given this quick start, it is apparent to me that our original guidance to you was conservative.

However, we will make a comprehensive analysis during the second quarter, and provide detailed guidance on the second quarter earnings call consistent with our practice the last few years.

I'd like Hugh Redd, our Chief Financial Officer to provide some additional color and to fill in some of the details and then we'll deal with your questions.

Alright, thank you, Nick.

Let me start with interest expense which is down $7 million or 27% compared to the first quarter of 2007.

And that's primarily due to increased earnings on our cash balances.

I should say the impact of interest income, however, was less than we expected.

And that's for three reasons.

First, we saw disruptions -- or as saw disruptions in the capital markets early in the quarter, we moved toward more secure investments.

We weren't alone in the flight to quality and accordingly yields on the highest quality investments dropped.

Second during the quarter we accrued $6 million of interest expense related to the settlement, of a dispute in the aerospace segment the principal amount which we substantially (resevenned) in prior periods.

The third reason was lower than expected cash balances due to share repurchases.

Taking these factors into consideration, we see the interest expense for the full year to be in the $55 to $65 million range.

Speaking of share repurchases, during the quarter we spent $519 million to repurchase $6.3 million shares at an average price of $82.96.

Taxes for the quarter were 32.2% and that's consistent with our expectations of 32.5% for the full year.

Nick mentioned backlog and discussed the strong order intake and result in backlog, I should point out that we adjusted orders in backlog downward to reflect our expectations in the Pandur vehicle program in the Czech Republic.

Discussions with the customer are progressing well and are expected to result in a definitive agreement for a lesser quantity of vehicles but on terms and conditions that will be favorable to both parties.

Ray that concludes my remarks.

Thank you very much, Hugh.

Carissa, if you will once I've set down the ground rules explain once again how to get into the queue for Q&A, as we have for some time now, we ask that you ask one question so that everyone has a chance to ask questions.

If you have more than one question, please get back into the end of the queue after you've asked your one question.

Okay Carissa, if you could explain now how they can get into the queue once again.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of George Shapiro of Citigroup.

Please proceed.

Good morning, Nick.

Good morning, George.

If you could go through a little more color on how -- on the Gulfstream margin.

I mean, you mentioned a supplier payment so maybe if you could talk about how much -- how R&D as a percentage of sales was and maybe if there was any issues with SG&A so you can kind of get a feel for what, maybe, the real incremental margin might have been because on the surface, there were great numbers and it looked like the mix was somewhat unfavorable with more of the lower -- the mid-sized aircraft, too.

Yes, George, we got about $15 million in launch assistance in the quarter.

It was a little more than is typical so our R&D was down a touch.

I don't think we'll have a major impact in the second quarter.

But as the year goes by, we don't see the margins for the first and second quarter repeating.

That having been said, I'm going to tell you that there's some moving parts here that's slightly unpredictable.

But my earlier guidance to you all in this segment is going be conservative because I was looking for margins in the low 17% range for the year.

We're not going do that.

We're going be better than that.

But I don't see for the year that we're going be as good as we were in the quarter either.

Although, the second quarter, will also be strong.

I want to alert to you that right now.

So, I hope in general I've answered your question.

Yes.

If I could just follow just a little bit.

So, if you looked at the percentage of the revenues for R&D this quarter, what was it, 50 or 100 basis points less than what it was last year?

No.

No, because otherwise we'd be ramping up, George, about the same.

Same as the percentage of sales which means the R&D was higher?

The amount's the same.

The amount is the same.

We're ramping up.

I don't have percentages here at the tip of my tongue.

The amount was the same on higher revenues.

Right, so percentages, it was down.

Okay.

Thanks very much, Nick.

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

Please proceed.

Yes, thanks an awful lot.

Nick could you comment on two things.

First, you know, I gather you are going to start accepting orders for the 650 as of the middle of April.

You know where are we on that process and give us a little update on the color of what you're seeing in the (biz-jet) market?

On April 15, Cai, we began a process that included the acceptance of letters of intent from our customers supported by a $500,000 refundable deposit.

We received a significant number of those, what some might call at an overwhelming response.

We obviously can't make everybody happy when you get sort of oversubscribed.

But we're going begin the process now in an orderly way and we've already begun converting those letters of intent into full contracts for the purchase of the 650 and orders.

We'll do that in an orderly and methodical way.

And I think, you know, it behooves us not to spend all of our time on the 650 because those represent orders or aircraft to be delivered beginning four years from now.

And to continue to focus on, you know, more current demand.

The market continues to look good to us.

We had a good quarter from an order intake point of view.

We're off to a good start this quarter for orders unrelated to the 650.

We had one cancellation in the quarter.

We canceled the customer who proved too difficult.

I don't see it as any harbinger of things to come.

The dollar volume of orders we provide to you is net of that cancellation.

Market looks good.

Particularly strong internationally in the fist quarter I would say that -- I'm trying to remember, I think 56% or 57% of the orders were international as opposed to North America.

So, that trend from last year is continuing.

Sort of really terrific response overseas, and our backlog for the large aircraft the 550 and the 450 is problematic right now.

We have with the 550 we have entry of the service availability starting, kind of in 2013, last quarter of 2012 and 2013 so sales guys have a tough job out there selling product that's not available for four or five years.

Thank you.

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

Please proceed.

Good morning, Nick.

I want to work off of Cai's question for just a minute.

Can you bandwidth for us a little more specifically, how you define an overwhelming response on the 650?

Was it something north of 30 orders or 50?

If you were listening carefully, I made no mention of orders.

I noticed that.

The process, and it is a process, is to request letters of intent supported by deposits refundable deposits.

Those deposits were time stamped in an identifiable process.

And now we're going through those in order one by one attempting to convert.

If you looked at the fact that we anticipated 17 aircraft for entry in the service in 2012 and 66 over the next two years that was our initial plan.

You have 83 aircraft in the first 2.5 years of the program.

The initial response is a -- 6 to 7 times at availability.

So, we'll see how all that shakes out.

As we begin the process of converting.

But it's a very successful response.

So then help us understand the -- when you -- the thought processes you're going through when you look at the struggles of your salesmen that sale airplanes out five years hence, obviously an amazing response on the G-650.

How are you going go about the decision about whether to raise your capabilities here?

We'll do our very best to ramp up production here.

Our initial production planning is inconsistent with the demand.

We'll have to replan and pulse our supply chain.

And take them dragging and kicking with us.

It's going to be a successful program for all of us.

So, I think it's fair to say we'll produce more airplanes than that but we're at the very early stages of dealing with demand that we didn't anticipate.

A lot of very good friends, very good friends of mine are very unhappy about their number in the queue.

All that will sort itself out as we work hard at improving production and also seeing who's for real in this sign up process.

So, it presents us with a problem but a happy problem.

Thanks, one last question.

If we break out the MRAP on combat systems, what do the normalized margins look like ex-MRAP?

I can't tell you, Heidi, because I haven't done that calculation.

We're going get a mix shift later in the year as MRAP which is a highly profitable program declines and it's replaced by good business and good margins but not the way MRAP was.

You'll see some degradation of that margin.

But here again, combat systems we're going beat our guidance.

We will in all four segments.

I just need to take some time to calibrate where that is and give you some good advice.

Okay, thanks very much, Nick.

Your next question comes from Howard Rubel of Jeffries.

Thank you very much.

To talk about something on the ground instead or maybe in the water.

Nick, tell us a little about what's going on in Marine.

The numbers are better, you've got a new (tanker) carrier that you are working on in NASSCO you are starting on (inaudible) an LCS -- kind of package at all where the puts and takes.

And then clearly DDG is reaching the final stages of being a very successful program

Yes, look, I think Howard, volume was up nicely in the quarter.

That helped.

For efficiency sake, they had, I think, surprisingly good margins better than anticipated.

NASSCO has turned around.

They're not reporting great earnings but they're reporting earnings and they're poised to get better and the yard is full of work.

They're doing very well on the PAKE program.

And the learning is outstanding.

They're doing very well on the first product carrier tanker and starting the second.

So far, we're well within our budgets.

Things are progressing nicely.

And I think that over time they're going be a significant contributor to the profit potential of the group.

Things at electric boat are very good.

Efficiency on the Virginia class program continues to improve.

Everyone who's participating is doing well.

We're pleased with our relationship with Northrop Grumman, Newport News.

Cooperation is good, performance is good across the board.

And we now see the second submarine in the Navy's plan for FY '11 and we'll begin to see revenue from that in calendar year '10 if not somewhat before.

So, you have two shipyards in very good shape and getting better.

And one in transition that we need to watch it's one without transitory risk.

That's BIW -- high-performance facility doing extremely well on the DDG program, but we have five left to deliver.

They're highly profitable.

We'll replace that work with the DDG 1,000 and have maybe some LCS work and some other work that we're undertaking now but we have a period of change where the mix is shifting and we'll have to be careful there.

That's the watch item.

But I think we'll get through it and hold our own on volume.

I'm not so sure we'll hold the margin rate that they currently enjoy, but the bigger pieces of the puzzle are the other two shipyards and their both full speed ahead.

So, I like the way the Marine group is shaping up.

Mike Toner and his operating guys have done a great job.

Thanks, Nick.

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

Please proceed.

Good morning.

It's actually Carter Copeland.

Good morning, Nick.

Good morning, Carter.

How are you?

I'm good, good quarter.

I wondered if you might talk to us just briefly in sort of general terms about the issue of finding your successor and see if you can give us some general color on the process and how that's going and things you're looking for just to help us think through this issue a bit?

I don't know that you have to do a whole lot of thinking, Carter.

I think we'll have an announcement for you sometime next month.

Okay.

I think the decision has largely been made.

The board will have its final deliberations either at their May board meeting.

Or, if they don't conclude it will be in June, but you will have an answer very soon.

Great.

And then one quick one on the -- on IS&T in the North American revenue's being flat.

It seems that the GDUK piece would have been about where you expected but North America -- any chance you could provide some color on how far short that may have fallen of your expectations?

It's pretty much the same old same old Carter.

We were down in IT services from our expectations.

A little bit -- on weakness of commercial market where we provide infrastructure for a number of telecom companies and that's been persistent the last several quarters.

And we've had not quite as much infrastructure work as we've enjoyed in the past from our own net -- what used to be called network systems business.

We also have been pointing out weakness and our advance informations systems business from a revenue perspective in the classified world, that remain the same, and we have a little bit of out performance at C4 systems.

So, all in all, we were okay.

I'd say a touch behind our revenue plan.

Our revenue plan and the guidance I've given you always provided for a ramp and we indicated if I remember correctly that we'd have about 5% or 6% organic revenue growth for the year.

I think that's still a very good piece of guidance.

I think the upside in this particular segment can come from margin expansion.

Great.

Thank you very much.

That's very useful.

Your next question comes from the line of miles Myles Walton of Oppenheimer.

Please proceed.

Thanks.

Good quarter.

Nick, a question on M&A.

You've been reasonably quiet here for a little while now.

Has the deteriorating credit environments coupled with probably lower cash interest -- interest rates, made you more interested in deals and could you comment on availability and pricing as well?

You know, we're always looking for deals, Myles.

We have a strong balance sheet and we're always looking to strengthening our business and growing it.

When we don't see opportunities, we sit tight.

The opportunity in the last quarter was to repurchase our own shares when the market made them extremely attractive and accretive for us.

We keep looking and talking to folks.

Harder to borrow money for large transactions I think.

But transactions of reasonable size, I think, given our balance sheet that's not an issue.

I think the question of pricing has yet to resolve itself.

It's moving around here.

People don't quite understand what pricing is like.

I mean, there's some competing elements out here.

One thing is if you get financing, it's at lower rates.

Which has the effect of increasing pricing.

The tightness of money and the general (squirmishness) of the market suggests PE multiple compression, which can have an impact on pricing, but it's too hard to generalize about that right now.

We just keep working it and see what happens.

That fair enough, if I could just squeeze in one, on the 650 order interest, could you qualify how much of that interest is from legacy Bell stream customers and how much you might be pulling over some share from your other competitor in the market?

Yes, I can't right now, Myles, but we intentionally made this an open process.

In other words, we didn't favor long-term Gulfstream customers, which I'm sure some of them in their hearts will say is unfair.

On the other hand, when you do that, you don't take share.

So, this is our intention to get customers from all kinds of aircraft.

But Myles, look, there's another way to look at this.

In this segment, at least at the moment, I think we have all of the share.

Because there isn't a competing aircraft in my view.

Now, there may well be some day but right now it's not a share issue, it's trying to get folks who are in the family in the loyal family of our competitors into our aircraft so that they are exposed to the entire line.

And that they begin with our flagship for the 650, we're pleased with that.

Fair enough.

Thanks for taking questions.

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

Please proceed.

Nick, I think maybe I didn't hear you correctly, but George had asked earlier about the overall SG&A and R&D bucket on a year-over-year basis.

Because in your K you nicely parse out incremental gross margin versus how much SG&A and R&D hurt you -- or helped you.

So, can you maybe touch on a year-over-year basis, how much that total bucket in absolute dollars moved?

Yes, maybe Hugh can help you.

Yes, same quarter last year.

We were at $23 million in R&D and we're $23 million this quarter.

So that's I think like, 2.1% the first quarter of '07 versus 1.8% the first quarter of '08.

And you know it bounces around in a band that you know is fairly tight, but, you know in some quarters when we have a lot of launch assistance which would net against that then we could go down as low as $5 or $10 million.

And then in some quarters we've been as high as $30 million.

So, last year we ended up the year at $85 million of R&D at Gulfstream.

And we're kind of on that pace again this year.

Right thats just R&D how about SG&A though?

SG&A, you know, I think this quarter there's about $75 million additional, because I think we're up a little over $100 million for the quarter.

That goes up with launches -- or excuse me with selling expense.

It was a little bit higher this quarter because of selling expense relates to the 650.

Other quarters if we have large order intakes or milestones on aircraft under order then we have commissions to the sales force.

So, I suspect I didn't totally answer your question.

I'm trying to get a handle on, you know, on incremental gross margins because it looks like if SG&A's up, you had probably a dozen, 35%, 40% incremental gross margins, and I am just wondering, is that pretty much all out of new aircraft?

Do you see expansion of the service business?

You know, margins are improving across the new aircraft and across service business.

And then you have a mix issue across the 2.

So, it's a little hard to answer the question with a single answer.

Steve, you can't solve this.

I'll help you by telling you you had a great mix quarter.

There were no 350's.

There were no 500's.

There was great growth in the pure fleeted the large aircraft and you also had improving margins in the smaller ones.

So, all of that contributed, and that won't be the same every quarter.

All right.

And then, Nick, you said you're going recalibrate all your sectors in Q2 but combat systems, you touched on it about the strength and the great performance in the quarter.

I don't think I remember a quarter where the first quarter margin represented the highest margin for the year of any quarter for combat systems, so is that going hold true again this year?

I have never had a program like MRAP that was a quick start quick finish.

You begin booking, it starts in the second half of the last year for us effectively.

You begin as you would keeping warranty reserves and everything conservative and prudent and now you're well on your way and you've got to begin taking your profit, you know?

And it'll end.

So, if you didn't get that, you weren't listening very well.

Thanks so much.

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

Please proceed.

Good afternoon.

Thank you.

Nick, is part of the reluctance to raise guidance at this point to kind of see how the supplemental works out and when that comes in?

It's a piece of it, but I think, you know, the supplemental for us is probably more risk than upside.

Some of it's baked into our plan, that which we'll enjoy this year.

And it's the out years where's there's some upside for us.

I really want to understand fully the implications of this performance before I go and give you guidance.

I don't want it as I've told new prior years, I don't want it to be water torture.

I would rather give you a good number and kind of stick with it.

If we beat that number it's because we performed great.

And if we miss it, it's because we ran into some risks that I didn't see.

But I'd rather give you a good number than just be (noodling) it little by little here.

There's some pieces of the puzzle that I'm missing right now.

Okay and then as far as combat systems, kind of thinking beyond '08, I don't know if you'll want to do there.

But you talked in the past I think about obviously a moderating growth rate in '09 versus '08 given MRAP's rolling off.

But I think you've talked about a 5% to 6% top line growth (inaudible) for combat.

Is that something you're still comfortable with?

Yes.

Next year you're talking about, in '09?

Yes.

That's where we think we're going go.

We think you're going have a fivish growth rate in '09 and '10.

Okay, great.

Thanks a lot, Nick.

Your next questions comes from the line of Ron Epstein of Merrill Lynch.

Please proceed.

Ron?

Good morning, guys.

Sorry about that.

Yes, just a question, Nick, on what you're seeing in terms of international activity in the defense business?

You know there's been talk about potential orders from the Saudis and some other things.

So, if you would give us some color on whats going on in the international community in your defense business?

Yes.

You know, our international business has been stable for the last three years at about 18% of our overall revenue.

Now, Gulfstream's international business is growing but it hasn't yet found its way in significant parts into our revenue numbers, right?

That is to come because we've been talking about orders together.

So, while they're -- while their international revenues have been going up marginally year-over-year, it's not been big.

And our non-US government commercial work or defense work is the better way to put it, has been stable over the last three years at about $3 billion a year.

That should go up as we, you know, begin to deliver at Elks on our backlog.

And as we begin to enjoy the Saudi program, which we believe will reduce to contracts this year.

But that's kind of a little bit in '09 and a lot in '10 and '11.

So, that's where we should see some growth in our international defense business.

Whether it will be a overall growth in percentage terms I'm not quite certain.

Okay, okay.

And then just one follow-on.

On the commercial ship JV out at NASSCO, how's that proceeding?

Yes, great.

I think I talked to that a little earlier.

I said that we're a little over 50% done with PC-1, it's shaping up in the dock real good.

We're beating our internal budgets and forecasts.

A little too early to declare victory.

We'll get to some tougher parts of the ship a little later but so far, looks very good.

We plan to deliver that ship, I guess, early in next year, and then start to deliver one every six to eight months there after.

So, we're doing well with that program.

The second ship is under construction now, and our bill strategy seems to be working out beautifully.

Every week, I get pictures of the progress of the product carrier one, and it's really remarkable how quickly that ship's coming together.

Great.

Super.

Thank you.

Your next question comes from the line of Doug Harned of Stanford and Bernstein.

Hello, good morning.

Good morning Doug.

On IS&T again, you talked about why the revenues are flat this year, the US revenues.

But when you look at the backlog growth that you mentioned earlier, that's quite substantial.

Can you talk about where that's coming from, AIS, C4 systems information technology?

Yes.

It's kind of spread all around.

Let me see if I -- I've got a list of program wins and so forth.

Notable contract awards during the quarter, we got $374 million at AIS, which has been part of the problem.

And, look, I'll give you a list, Doug, of contract wins.

It's a lot of different things.

It's a long, long list, and I think that we're addressing our short fall, but these are the things that give me encouragement that we're proceeding as we plan to have 5% or 6% growth in the year, which suggests that growth in the latter half of the year is going to be much stronger than that.

But C4 systems has been pretty strong relative to the others?

Yes.

Do you expect going forward that there will be any shift in mix given the program wins you're seeing elsewhere?

Oh, I don't think so.

I think C4 looks powerful.

If anything, some of their programs that they've won years ago are maturing now can be significant contributors.

That business looks very powerful to me.

I think we'll do okay here but again, I want to say that our guidance, our earlier guidance on revenue in this segment is not changing.

I don't expect that to go up.

In fact, I think they'll fight like hell to get to 5% to 6% revenue growth, where I -- what I want to explore before I give you guidance in considerable detail is the possibility of margin expansion.

It's suggested by the first quarter performance, and I want to run that into the ground, we can do a little better there from margins.

Then we can beat the 3% or 4% growth over last year, which is what I had given you in our earlier guidance.

I told you the operating earnings would grow in the 3% to 4% range.

And we'll see if we can't do better and I'll have an answer for you next quarter this time.

Okay.

Great.

Thank you.

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

Please proceed.

Thanks, Nick, can you talk about margins at IS&T.

A little stronger than we were looking for this quarter.

Pretty nice compared to the last couple of quarters.

Anything going on there in particular and is this a sustainable level around this 11%?

Yes, look, I think I just talked about that more than a little bit, but it was a good quarter.

Surprised me a little bit.

There was nothing unusual in the quarter.

You know, no strange one-off items.

They are telling us internally that this is not sustainable at this level, but I have indications that for the year they will outperform their plan where I had previously guided you.

That would be 3% to 4% operating earnings growth or EBIT growth over the course of the year.

I think their margins improve as I believe they will not over this 11%, but over the forecast.

We have some upside opportunity here in IS&T and I want to quantify that and give you more careful guidance.

Is it just a mix in the back half of the year on why it's not sustainable?

The 11% wasn't predicted.

So, we have to go to the root cause of the improvement before I can tell you how we'll turn out.

We don't have a mix shift here going on.

We just probably had some good performance on programs in the quarter.

Let's see if we can't repeat it instead of guessing about it.

Okay and any update on JLTV, kind of where your team stands, and kind of how you -- what you're thinking about the down select coming up?

I don't think anybody's put in RFP yet.

Yes, we have okay.

So it's coming up in July?

What do you want me to do, handicap it?

I'm just wondering how you guys are progressing on it.

(Inaudible) that puts stuff in the newspaper.

The customer's going make that decision, not me.

I think if we put in a response to the RFP., we've got a good team.

Like our partner, strong, capable people, we'll see what happens.

Are you going to down select to what three I think?

Okay that's fine.

That's all I was looking for.

Let's wait till a customer announces.

Sure.

Thanks.

Your next question comes from the line of Joe Nadol of JP Morgan.

Please proceed.

Good morning.

Nadol.

Joe.

Yes, that's right.

On Gulfstream, Nick, I'm wondering if there was some service revenue decline or some disruption the quarter?

Because, you said your mix was good, and -- yes, so what happened there?

I think that the service people did okay, too.

Let me take a quick look at it.

Yes, no.

They did a good job.

They were -- Joe, let's think because you and I had a little debate about what the revenue would ultimately be.

Yes.

I think I was suggesting 680 and you were about 700.

Mm-hmm.

You look a little better than I do right now.

Okay.

Well then, overall for Gulfstream, I guess I'm a little surprised revenues weren't a little higher given that delivery mix service grew.

Is there something else going on?

Obviously you gave us the pre-owned sales numbers, but anything else -- ?

Yes, I don't -- no.

I don't -- I can't strike up your revenue expectations with the results.

I don't think we had very much pre-owned in the quarter at all.

No.

Okay.

And then on free cash flow, could you give, maybe by segments, where and I'm splitting hairs a little bit, but where maybe some of the short fall might have been?

Well, from our plan there wasn't a shortfall but it was in combat systems.

If you want to think about a big needle mover here.

We have about $200 to $225 million of inventory in the Czech Republic program.

Okay.

And while we've made significant progress with them and entered into a memorandum of understanding about restructuring that program, we didn't get the vehicles delivered or the money collected.

That would have been a major driver.

So, I would say that of the performance of all the groups, combat systems had the weakest cash performance relative to plan because of that.

Mm-hmm.

That should bounce back in Q2?

Pardon me?

That should bounce back in Q2, presumably?

Well, one would hope.

Yes, I mean they are going to go through some tests for those vehicles and some adjustment of them to suit the Czech Army but I think we're making considerable progress there and that the parties are working together in a harmonious way to restructure that program.

Okay.

Thank you.

And your next question comes from the line of Gary Lebowitz of Wachovia securities.

Please proceed.

Thank you, good morning gentleman.

Nick, has the timing of the Saudi vehicle order expectations changed relative to three months ago?

Like (inaudible) you still expect in the frist half of the year.

If anything, it slipped a quarter.

Okay.

Also, you gave for, I believe -- what was it 70 tanks, is that a second half event?

I think we're looking at both of them the second half.

We have three different things going right now.

The Saudi National Guard labs, the tank for the Army and labs for the Army as well.

So we have three different programs all at work here all being negotiated.

And it is a process, let me say, that takes always longer than one would think.

But we think everything looks good.

It looks very good, as a matter of fact.

Okay.

Also, did you give -- you said fourth quarter 2012 for quoting service entry now for new G-550's.

What is the period for G-450's?

A year short of that.

Okay, thank you.

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

And your final question will come from the line of Rob Spingarn of Credit Suisse.

Please proceed.

Hello, guys.

Nick, going back to the backlog and maybe you just answered this question, but the unfunded portion at combat systems had a nice uptick since last quarter a billion plus, with is there anything there that wasn't in the press release?

I think it's the Abrams (inaudible) multi-year.

Okay.

And then on the same topic, any update at this point on UK frez?

No, I mean it's just where it was the last time we talked, it's there for decision in the MOD.

Okay.

And then you brought up something earlier that prompts another question going back to go Gulfstream.

You're currently delivering a largely domestic aircraft.

I guess you said the international order flow doesn't really convert to deliveries for awhile.

What point will your deliveries be over 50% international if and when that happens?

Probably three years from now, I'm guessing but that's about what -- you know, today's orders become deliveries in three, four years.

So, that's what you're looking at.

Okay.

Excellent.

Thank you, Nick.

Okay.

And I want to thank everyone for being on the call today.

Many of you know this, some of you don't.

I will be retiring in June so this is my last earnings conference call.

The very capable Amy (inaudible) will be my successor coming in June.

And I just want to take an opportunity to say what a great privilege and pleasure it has been for the last 16 years to be working here.

All of that time in one way or another with Nick and how much I've appreciated the staff here at corporate headquarters and support they've given me over the years throughout.

And I have to say something about the operating people and the way they deliver for the customer and for shareholders and the cash generation that has been such a driver for shareholder value the time I've been here.

So, my 40 years laboring in the corporate communications vineyard, this has certainly been the highlight of my career.

And with that, Amy and I are going to get a quick bite to eat.

My number is 703-876-3195.

Amy's is 703-876-3748 and we'll be happy to take your questions this afternoon.

Good day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.