通用動力 (GD) 2008 Q2 法說會逐字稿

Good day and welcome to the second quarter General Dynamics earnings conference call.

My name is Candice and I'll be your coordinator for today.

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

We will conduct a question-and-answer session after the prepared remarks.

(OPERATOR INSTRUCTIONS).

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

Amy Gilliland.

Please proceed, ma'am.

Thank you Candice, and good morning, everyone.

Welcome to the General Dynamics second quarter conference call.

I want to remind listeners that as always, any forward-looking statements made today represent our best estimate regarding the Company's outlook.

These estimates are subject to some risks and uncertainties.

Additional information regarding these factors is contained in the Company's 10-K and 10-Q filing.

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

Thank you, Amy, and good morning.

Well, this was obviously a very good quarter for us, and I think the results are really pretty straightforward and clean.

Therefore, I'll attempt to keep my remarks on the quarter relatively brief, and maybe spend a little more time with respect to the guidance, overall guidance and the outlook for each business segment for the balance of the year.

Sales for the quarter were $7.3 billion, up almost 11% from the prior year.

Earnings were $641 million, up 24%.

Earnings per share, $1.60, soundly exceeded consensus and frankly my own expectations.

I should point out, however, that approximately $0.09 per share of that result is attributable for the favorable settlement of a tax refund suit.

The settlement occurred in the quarter and is reflected in the tax rate.

However, the cash event that is the payment of the refund should occur in the third quarter and be reflected in the cash generation of that quarter.

The second quarter of 2008 is the 13th consecutive quarter of double-digit, year-over-year growth in both sales and earnings.

It is also the 18th consecutive quarter of double-digit growth in fully diluted earnings per share from continuing operations on a year-over-year basis.

Moving quickly to year to date, sales were 14.3 billion the first half, and net earnings from continuing operations were 1.2 billion, up 11 and 27% respectively.

Cash generation was obviously very strong in the quarter.

Free cash flow was 910 million, which represents 142% of net income.

Year to date free cash flow is approximately 1.3 billion, somewhat over 100% of net income.

You may know that we typically run lower than 100% through the first half so this is obviously a strong start.

This year cash has been significantly increased by the order intake at Gulf Stream.

It is clear to me at this point that free cash flow after capital expenditures will exceed net income by a significant amount.

I also believe that free cash flow exclusive of deposits for the G-650 will meet or slightly exceed net income.

Orders across the corporation were strong this quarter resulting in a $5.5 billion increase in backlog.

Total backlog is now in excess of $55 billion.

Estimated potential contract value also grew by $2.8 billion.

This category represents management's best estimate of contract awards that will be received either under IDIQ contracts or as a result of the exercise option.

So when estimated potential contract value and total backlog are looked at together, we see firm and high potential business approaching $73 billion.

Let me go to each of the business segments now and begin with aerospace.

Sales for the aerospace segment were over $1.3 billion for the second quarter, up 10% year over year.

Operating earnings were 240 million, up 21%.

Margins improved 160 basis points due to a favorable mix, improved pricing and improved productivity.

Order intake was extremely strong for the G-650.

Orders for our other product offerings continued strong as well.

Excluding the impact of the G-650, dollar denominated book to bill was 1.1 times, the 9th consecutive quarter of book to bill exceeding one to one.

Looking forward, we expect sales in the second half to increase somewhat over the first half figures at Gulf Stream.

For the year sales should be up 13 to 14% over last year.

Margins for the full year are anticipated to be between 18.5 and 18.6%, a 170 to 180 basis point improvement over last year.

Moving on to combat systems, combat systems had strong growth in sales and earnings.

Sales exceeded $2 billion, a year-over-year increase of almost 18%.

The increase in sales was driven by volume increases in both vehicle and ammunition programs, and to a lesser degree weapon systems as well.

Earnings increased very substantially year over year due to increased volume and improved margins.

Margins were up 280 basis points.

The improved margins are the result of volume efficiencies and productivity improvements across the entire group.

As you may have observed from the press release material, total backlog for combat systems decreased slightly, about $400 million in the quarter.

Subsequent to the close of the accounting period, however, we received an award for 773 RG31 category 1MRAP vehicles valued at $550 million.

Period of performance starts in the fourth quarter and continues well into 2009.

We expect order performance for the remainder of the year in combat systems to be very strong.

Looking forward, sales in the second half will be stronger than the year-to-date figures, with particular strength in the fourth quarter.

For the year, we anticipate sales in the combat systems group will be up between 9 and 10% over 2007.

Margins for the year are expected to be between 12.9 and 13%, up 120 to 130 basis points over 2007.

Turning to the marine group, they continue to improve.

Sales were up almost 10% to approximately $1.4 billion.

The growth was generated by all three of our shipyards.

Margins were 9.1% aided by performance improvement on the West Coast.

Looking forward, sales for the remainder of the year will be nicely improved over the same periods last year, but not quite as strong as the first half.

Overall marine sales should be up 7 to 8% over last year.

Margins for the year are anticipated to come in at 8.9 to 9%, an improvement of 50 to 60 basis points over last year.

Finally, information systems and technology sales were $2.6 billion, up 7% over last year.

The growth was essentially all organic.

Furthermore, total backlog increased once again this quarter.

Operating earnings were $292 million, an increase of 8.6% year over year.

For the rest of the year, volume will be stronger than the first half and stronger than the same period a year ago.

Overall we see a 5 to 6% sales growth for the year.

Margins will likely decline in the second half as a result of mixed shift towards lower margin service business.

I expect full-year margins to be in a range between 10.5 to 10.7%.

You might recall that last year IS and T came in at 10.7 and they have a fighting chance to do so again on improved volume.

So in summary, at the corporate level we anticipate sales for the year to be in a range between 29.5 and $29.75 billion, overall margins should slightly exceed 12% and return on sales should be 8 to 8.1%.

Taking into full consideration the effect -- the anticipated effective tax rate and share repurchases to date, I expect earnings per share from continuing operations to be $6 to $6.05 per share.

My observation would be we've performed extremely well so far this year, and built a backlog which positions us very well for the foreseeable future.

I'd like Hugh Redd to pick it up and review the effective tax rate, the share repurchases, interest expense and any other activity he would like to report on.

Hugh.

Thank you, Nick, and good morning.

As Nick pointed out, we settled a tax refund suit in the second quarter, and as a result of that settlement, the effective tax rate was 29.5% for the quarter and 30.8% for the six-month period.

For the full year the settlement will have the effect of reducing the tax rate by approximately 100 basis points.

Accordingly, the full rate, the tax rate, rather for the full year will be closer to 31.5%, as opposed to the 32.5% that I've suggested in prior calls.

During the second quarter, we repurchased 2 million shares, so through the first half of 2008 we have repurchased 8.3 million shares.

Interest expense -- net interest expense was lower for the quarter than it was in the prior quarter, as a result of higher cash balances and improved earnings on the cash.

At the end of the second quarter cash and short-term investments exceeded debt by $571 million.

In May we retired $500 million of fixed rate notes and we'll retire an additional 173 million in the second half of this year.

Okay, Amy, that concludes my comments.

Thank you, Hugh.

Before we move to the question and answer period, I just want to remind participants to ask only one question and one follow-on question so that everyone has an opportunity to participate.

If you have additional questions, please get back into the queue.

Candice, could you please remind participants how to enter the queue?

Sure.

(OPERATOR INSTRUCTIONS).

And our first question will come from the line of George Shapiro of Citi.

Please proceed.

Nick, good morning.

Good morning, George.

The combat systems area, you had previously mentioned you would see weakness next year and really by the fourth quarter.

Now, with that new MRAP award, what does that postpone that until sometime towards the end of 2009?

Okay, George.

I think that's a good question.

Weakness is probably the wrong word.

What we anticipated for 2009 was 5 to 6% growth over this year, and I think -- I don't want to put words into the mouths of analysts or investors.

I think there was some concern about how we could accomplish that and I've been at pains to explain it.

Given that a -- roughly 800 million of MRAP sales in the year would not recur in 2009, well, now you correctly point out that at least some of those sales are obviously going to recur, and will help us.

And may well force us to readjust our view on 5 or 6% growth next year, but we'll hold fire on that, George, because we don't have a bill yet, right?

Right.

And we'd like to see what's in all of the Army and Marine Corp line items that directly affect this group, but obviously it's good news for us, something that we weren't anticipating that wasn't embedded in our thinking.

And a little bit of that might well come into this year, but I don't have a sense yet of the timing on that one.

Okay.

Thanks.

I'll respect your comment, Amy and get back into queue.

A legitimate follow-up is okay, George, but a legitimate follow-up.

Good talking to you.

Okay.

Thanks.

Our next question will come from the line of Ronald Epstein of Merrill Lynch.

Please proceed.

Good morning, guys.

A question for you with regard to combat systems again, maybe just following up on George's comments.

The margins in that business were just outstanding this quarter.

Was there anything kind of one time in nature or maybe you can give us more color on why that business did so well.

Well, there's no one timers.

We have margin -- I mean, we had booking rate increases across a number of programs and obviously MRAP was one of them.

As many of the commentators have speculated, it's close to the end of that program or at least what we perceive to be the end of the program, And in earlier quarters we had booked it maybe a little overly conservatively and we had to increase the booking rate.

In any event, that 14% margin rate is not sustainable as I made clear in my forecast for the full year, but for combat systems it will be a spectacular year at, you know, 12.9 to 13%.

That's great.

Thanks.

I'll jump back in the queue.

Our next question will come from the line of Joe Nadol of JPMorgan.

Please proceed.

Thanks, good morning and good quarter.

Thanks, Joe.

My question, Nick, is on the Gulfstream margin expectation.

You bumped that up quite a bit here relative to what you were looking at earlier in the year, and most of the improvement, certainly you had a good first half of the year but it sounds like the second half outlook is very, very strong.

Just wondering where the changes in your plan came from.

Joe, I think we're getting a little more price in the backlog.

We are getting continued production efficiencies, both in green manufacture and in completions, offset to some degree by increased costs to our supply chain, and the volume is just treating us well.

So we have a good mix in the last half, particularly the third quarter, which we think will be stronger than the fourth, although I don't usually like to get into parsing the quarters for you, but I think that 18.5 to 18.6 is a good sound estimate.

It's neither conservative nor optimistic.

I think it's right now pretty close to the money.

Okay.

And then --

The only thing that could vary it would be some second half pre-owned sales, which would make it variable, but I think if we would strip out the pre-owned, I'll be right on.

Okay.

And then for my follow-up on Gulfstream, obviously the 650 demand has been great.

Any updated thoughts on production rates on that program?

I know it's early yet but you have to start planning way in advance.

Joe, I don't think so.

I don't think we'll turn to that until we have that plane flying, which should be next year.

Okay.

And by then we'll have some good estimates on what the supply chain can do for us, and the demand is sufficient that we'll crank it up as best we can.

We want to satisfy the demand.

There are a lot of unhappy people about how far they were out on the early production planning, but that's all gone by the boards.

We're going to deliver more airplanes than we anticipated.

Okay.

Thanks, Nick.

Our next question will come from the line of Cai von Rumohr of Cohen and Company.

Please proceed.

Yes, terrific quarter.

Thanks, Cai.

On the G-650, it looks like you got a little over 100 orders, 500 in LOIs.

How do you expect to proceed with the remaining 400 in LOIs in terms of, are you going to be aggressive about pursuing them and how much of the cash associated with the initial plus the final (inaudible) deposit on those orders that you did book did you receive in the quarter?

Cai, I didn't hear real well the second half of your question but I can tell you that with respect to the 650, I don't want to confirm or deny your number, but your back of the envelope calculation skills are reasonably good.

We are continuing to sign up customers in the order in which they appeared in our queue.

We have started off real well, again, in this quarter, and we'll continue to go right through that book.

And as people drop out who had letters of intent, we'll refund their deposit, and as they sign up, we receive additional deposit, so that's going very, very well and very methodically.

I've always been concerned that that activity, which has been superheated, would divert the attention of the sales force from the sales of the existing product.

However, that did not appear to be the case in the quarter where we did very well with the existing product, and it appears not to be the case early in this quarter as we are continuing to sign up customers for existing product.

So all in all, we couldn't be more pleased with the way our portfolio of products are being received by the buying public.

The follow-up part, Nick, was the cash associated with the orders on the 650, approximately 3 million, when you signed the contract.

Did you receive all the cash associated with those orders booked in the second quarter in the second quarter, or is some of that coming in the third?

No.

We received it all.

We don't include it as an order until we have a signed contract and it's fully funded to the extent that's required by the contract at the time.

Thank you.

So the cash numbers reflect all of the contracts here.

Great.

Out of questions?

No.

That's it.

Thank you very much.

Okay.

Our next question will come from the line of Peter Arment of American Technology.

Please proceed.

Yes, good morning, echo everyone else's comments on a nice quarter.

Nick, could you just provide us a little more color on -- there's been a lot of commentary out there about the used business jet market and what maybe Gulfstream may be seeing or how you feel they're positioned given the environment with the higher fuel costs.

Thanks.

Yes, Peter.

I'll do my best, although I must tell you that I am not a student of the used market.

We have no used inventory for sale.

What Gulfstream is experiencing is a willingness on their part to make trades within a reasonable period before delivery on our estimate of the market at the time.

And we're finding that our customers are doing better out in the used market by themselves or using business brokers.

So we're not getting much inventory.

So if there is a perceived glut out there, none of it is finding its way to us.

Okay.

Very good.

We are going to get some airplanes we hope in the second half and we think we'll be able to sell them.

Anecdotally what we learned is that late model 550s and 450s are in very short supply, and go for prices that are kind of staggering, sometimes more than new planes.

So I don't know what else -- what other color I can give you.

No.

That's perfect.

Thanks very much, Nick.

Our next question will come from the line of Carter Copeland of Lehman Brothers.

Please proceed.

Good morning, Nick.

Really a nice quarter.

Thank you, Carter.

I wondered if we could dig in just very briefly on, you noted in marine West Coast performance improvement.

I wondered if you might clarify that a bit.

Was there a change in booking rates?

Was this volume related to inclusion of product carrier or mix, any color would be much appreciated.

Carter, you might recall at this time last year we were just sort of on the cusp of a turnaround out at NASSCO and I can't remember the exact figure but we were probably enjoying margin of something less than 2%, and I use the word "enjoy" because before that that it had been a bloodbath.

We are now, without getting into the detail, recording what I might view as normal profit on the West Coast on improved volume.

They are now somewhat larger than bath iron works in terms of overall volume, anticipated volume for the year.

And some of that's product carrier volume and a real good run here of TAKEs where their performance has improved markedly and where the Navy is very happy with the product it's receiving.

I think that's the inside on the question you asked, Carter.

Nick, can I just clarify a little bit?

Are we to assume normal means similar to the group average?

No, not quite that good yet, but not too far behind.

Great.

Thank you.

Our next question will come from the line of Howard Rubel of Jeffries & Company.

Please proceed.

Thank you very much.

Just to follow up on Carter's comment about marine, Nick, could you lay out a little bit of what's going to happen with bath?

It looks like there's a number of changes that are in the works and then also it would seem that the performance on -- at EB continues to improve sequentially.

Could you talk about how the submarine programs are going.

Let me take the last part of that first, Howard.

The submarine is doing very well.

We see improved man-hour performance at Electric Boat and at our partner, Newport News Ship Building.

We're doing well on the program and we're getting ready, obviously, for increased volume there, which will, I think, help efficiencies.

So we're doing well on that program.

Bath, I don't quite know what to say.

We've got late breaking news, not officially confirmed to me, but I believe what I'm reading in the press reports about the Navy's posture with respect to the program of record, the DDG1000, and stopping that build at two and building instead more DDG-51s.

And I don't know how that will play out.

This morning I happened to look at a piece that you wrote, and your view or speculation would be about mine at this point in time.

I don't know.

It's -- there may be a slightly less volume for Bath in building DDG-51s but probably more margin.

We just don't know all the answers yet and we'll --

And no.

I appreciate it.

I know it's a hard thing to kind of --

We'll find that out as the Navy tells us what their plan is and as we see how their plan is received by particularly the appropriators right now, and whether they will get the funding they want for what they want.

But one thing's for sure, we stand ready to build it, whatever it is, and we'll work with our customer and the Congress to ensure that Bath Iron Works is well supported.

You might know that we were predicting that the marine group would be our fastest grower over the next three, four years.

We still have of that view.

Embedded within that view was no increase and a slight decrease in volume at Bath.

So this could be a plus, but I just don't know enough yet to really comment, but I can't see it being too much downside.

Thanks, Nick, I appreciate it.

Our next question will come from the line of Myles Walton of Oppenheimer and Company.

Please proceed.

Thanks, good morning, and great quarter, Nick.

Thanks, Myles.

A question for you.

We touched on the high-end large cabin market within Gulfstream, I'm just curious if you can make some commentary on the mid-size and in particular two kind of questions.

One is the accelerated depreciation, if you're seeing it tougher to fill some of the 2010 slots across your portfolio, and also just general commentary on the demand within the mid-section, mid-size, obviously I know you have less risk there, but would be curious for your comments.

On the large cabin, we've blown through the 2010 point a long time ago, so I think the answer to that question is no.

And I think with respect to mid-cabin, we haven't got there yet.

Maybe in the 200 -- the G-200, I think we probably are into 2010, selling 2010 airplanes for -- I don't think it's a factor.

Yes, we're into selling entry into service aircraft, the G-200 now.

We're not there yet on the G-150 but will be soon.

I don't think I have enough data to comment on the mid-sized market.

I had heard that Textron indicated that they might see some softening.

We are doing very well with the G-200 product, and I might have detected some softness in the G-150 product in the first quarter.

On the other hand, we had quite a number of sign-ups as soon as the quarter ended.

So I would say that it was timing.

I don't have any data which would cause me to change my production planning.

Let me put it that way, Myles.

Okay.

So that's fair.

Without commenting on the market, I don't have anything that would suggest that I'm going to ratchet down production, but you know we'll be quick to do it if we ever get any data, because particularly at the G-150, we don't have the backlog that we do on the very large aircraft where current demand is completely disassociated with my production rate.

No, that's great.

And a quick follow-up, if I could, on the 650 order intake, the 100 or so that's implied, could you give us some geographic breakdown?

Is it consistent with the trend that we're seeing towards 50 to 60% international?

It is not at the moment.

Let me give you one hint.

There's an odd number and there are one more North American aircraft order so far than international.

So let's call it 50, and if I had to guess about that, I would say that the North American guys work the wire transfer jungle drum better than the international guys did.

And you can check with me, as after each quarter, and my suspicion would be that the international number will grow faster than the North American number.

Fair enough.

Thank you.

By the way, Myles, you didn't ask that question about the existing business in the first quarter, and there the international content was ahead of North America in very much the same proportions that we had seen in prior quarters.

Okay.

That's helpful.

Next question.

Our next question will come from the line of Doug Harned of Sanford Bernstein.

Please proceed.

Good morning.

Good morning, Doug.

I wanted to ask about combat systems and just get an understanding of how the mix is shaping up there.

You described that you'll see some more growth, you expect some more growth in the back half of the year.

Can you sort of give an idea of where you're seeing that growth aside from MRAP?

Yes.

You watch the passage of the supplemental not too long ago here.

We expect orders emanating from that legislation, of which I think you're pretty much aware.

Yes.

So I think in the ordinary course of business we'll have additional orders to report to you here.

But it's not -- it's not particularly growth coming out of European?

You're going to see some growth out of the European land systems too, and we'll make those announcements as we receive the orders.

So then there's some of each, then?

There is what you would expect --

And there will be some of each.

Okay.

Thank you.

Our next question will come from the line of Harry Nourse of Bank of America.

Good morning.

Good morning, Harry.

I was just wondering, obviously you had a very good second half last year in combat systems.

It's going to look pretty flat for the second half, looking at the guidance, and then it's going to pick up again presumably at the beginning of next year.

Can you just walk us through that a bit.

I think you have it about right.

I wouldn't call it flat.

I think we will be up.

We will have more sales in the second half in combat systems than we did in the first half.

But in the second half we were competing against a very strong third and fourth quarter last year, and I believe our sales will be up over last year but not significantly.

Okay.

And then we will pick up again and you'll be -- we had been forecasting 5 to 6% growth, and I don't have a better number for you now, but there's some early indication for optimism.

But I'll do more with you on that subject, Harry, when I'm prepared to give you some more guidance on 2009.

Okay.

And for a follow-up, the buyback slowed down a bit in 2Q.

Perhaps you might just tell us about uses of cash and perhaps the outlook for M&A.

Let me address sort of forthrightly the issue of buyback.

We bought the stock significantly in the first quarter because the price was low.

In the second quarter, after we announced earnings, the price popped back up over 90 for most of the quarter.

It fell out of bed with the rest of the market sometime in June, late May or June, and we got right back in, and then we came into our blackout period.

Sure.

So I wouldn't make much of, if the market gives me a reasonable price for the stock as it is right -- as it has been, we'll buy it.

If it trades up where I think it ought to be, I'll leave it be.

We will continue to pursue acquisitions across a variety of fronts.

Some indication that things are breaking loose in that area, and we'll continue to repurchase shares on an opportunistic basis and we'll continue to reexamine our dividend policy, which we've tended to ratchet up from time to time.

So we'll visit that again spring of next year, I suspect.

But, Harry, I don't think anything has changed much on our view of capital allocation and deployment.

Thanks very much.

Our next question will come from the line of Rob Spingarn of Credit Suisse.

Please proceed.

Hi, Nick.

Hi, Rob, how are you this morning?

Pretty good, thanks.

Very good quarter.

I thought I'd change the topic a little bit to IS&T and ask if you can walk us through the sub segments there a little bit, perhaps talk about the ICE2 contract, it looks like you got re-upped there a bit at the early part of this month, latter part of last month.

If you could just give us some more color.

You already talked about margins but --

I think it's a very happy story.

I think over on the IT services side, the renewal of the ICE2 contract was very good for volume.

I think that Advanced Information Systems shows signs of doing well and, of course, our tactical communications business has been really powerful.

And I think to me the most important thing maybe that occurred was the selection of C4 systems as part of the team which will provide the airborne maritime and fixed -- the AMF version of the joint tactical radio system.

They are a significant player on the Lockheed team there.

This for us leverages our market leading position in software defined radios and places IS&T in principal roles for two of the three JTRS variance.

So I think that's where I would, if you're looking for a little color across those three segments, that's what I'd have to say.

Anything else you could tell us about the ViPs acquisition, the strategy and how you're thinking there?

Yes.

Look, I think it's doing the very same kinds of things that we do.

We're very interested in that growth market, and we see that we can move the ViPs product and what they do into some of our existing marketplaces, so it's an effort to move into a growth area.

Do you have any numbers for us there, rough color?

No, not -- I don't want to do that right now.

Okay.

Thanks.

Our next question will come from the line of David Strauss of UBS.

Please proceed.

Good morning, Nick.

David, how are you?

Good.

I don't know if you talked about this already.

I was a little late in joining.

But Gulfstream margins obviously moving up the guidance range for this year, 18.5 to 18.6.

I know in the past you've talked about not expecting to get to the kind of margins in Gulfstream that you saw during the last over 20%.

Given the improvement that you've seen in margins at Gulfstream, what are you thinking about kind of the long-term target over the course of this cycle?

I don't think about it that way, David.

I think we're going to keep pushing them to get better and I think that's in their solds so I expect continuous improvement.

If you look for a snapshot of Gulfstream next year, I would tell you that production probably won't go up anywhere near as much as it did this year, not because we wouldn't like to.

It's because we are getting increasingly close to our efficient capacity there.

But when we do improve production, and we will slightly on the large cabin aircraft, it implies improvement in productivity because we can't do it any other way.

That implies, in turn, improved margins.

So I would tell you I expect our guys to get better next year.

So we're getting awful close to the margins we once enjoyed in 2001 before we had mid-range, mid-sized aircraft, and before we had the ambitious research and development program today.

So frankly I'm surprised that -- I knew we'd make progress.

I didn't believe we'd make this kind of progress.

But it also took some aid from the market where we've enjoyed some price growth over a period as well.

So a lot of good things have happened to this Company.

Right.

And then as far as R&D, you've been level loading that so there wouldn't be any anticipated spike up in 2009 or 2010 for the 650, right?

Yes, no we've been ramping up and I think we're about there and I think it would be reasonably level.

Okay.

And any update on the Saudi order in combat?

Our guys are with them negotiating those positions right now, all the back and forth is going on that needs to make that happen.

Okay, thanks a lot.

Our next question will come from the line of Gary Liebotwitz of Wachovia Securities.

Please proceed.

Good morning.

Nick, is there any update on the UK FRES program, I guess you started negotiations with the customer there with respect to scope.

Any color on the magnitude or the timing of deliveries under that program?

No.

They're just talking away.

I mean, I don't know where we are.

It would be sometime beyond 2010?

Oh, I think the program contemplated deliveries in 2012, which was ambitious, I think, but I think they're sticking to it.

If they're going to get there, we better get the contract pretty soon.

So I can't tell you when.

That's not within my grasp.

These are discussions occurring in the United Kingdom.

Okay, thanks.

Our next question will come from the line of Ronald Epstein of Merrill Lynch.

Please proceed.

Just a quick follow-on.

Back to marine for a minute.

Just if you could give us a quick update on how everything is going with the Daewoo JV?

Absolutely terrific, Ron.

We're producing that first boat.

It is together now.

It will go to sea before the end of the year.

It's completely enclosed, all the modules are in place.

The second one is well along in the same dock and we've commenced construction of the third boat.

We've found that we're able to execute against the Daewoo design very well.

They have been very good partners, very helpful.

We have a great relationship.

We're looking at expanding that relationship into other products, very optimistic about it.

And then just about one more quick naval follow-on if I can.

This is following on Howard's question.

If we do see more interest in DDG 51s and only two DDG 1000s get built, what do you think it means for CGX?

I don't have any idea.

Okay, thanks.

Our next question will come from the line of George Shapiro of Citi.

Please proceed.

Nick, a couple of quick follow-ups.

You mentioned that in combat that ammunition grew.

Now, is that the second source with ATK or is it pretty much across the broad scope of ammunition that you provide?

No, it wasn't the second source other than small amounts.

We had -- it was across the breadth, but we had some big growth in medium Cal and we had a big one in Canada that's caused growth in the company that we acquired there.

So pretty much across the board.

It's getting to be a good sized business today.

Okay, and if --

Give you a little color, George, it's slightly larger than either Bath Iron Works or NASSCO.

It has gotten quite big, then?

Yes.

And if I just switch to Gulfstream quickly, would it be fair to say that given the low investment that you have on the mid-size, that you are still running margins at large jets probably twice what you are on the mid-size?

Let me think about that for a minute.

It's close, George.

You're close.

Without having data right in front of me, I wouldn't say yay or nay but it's close, they are half the margins of the large caliber is a close guess.

So, then, realistically at this point from the large planes, you're actually doing better than what you did in 2001?

Oh, yes, of course.

Way better.

Right.

And I would have expected that.

But the mix shift was what was pulling me down.

Right.

And the recognition, George, that we weren't sufficiently supporting research and development, and we had to get going, and also we've spent a lot of money in facility now that adds to depreciation expense.

But you're right, your essential point is correct, the margins are higher on the G-550 today than they were on the G-5 in 2001 and they're higher on the 450 than they were on the G-4SP, which was being produced at that point in time.

Okay, thanks very much.

Our final question will come from the line of Cai von Rumohr of Cohen and Company.

Please proceed.

Yes, another follow-up on Gulfstream.

Nick, your revised margin guidance is about 150 basis points higher than your prior guidance, and it looks like most of it's coming in the second half, so roughly 200, 300 basis points.

And you talk of price and yet my recollection is that you were sold out at the end of the first quarter, so I'm a little confused how price can be a factor.

And kind of related to that, could you comment on the impact of pull forward of profitable planes possibly from 2009, the negative impact possibly of G-650 orders?

Because I understand you have to pay commissions or part of them at the time firm contracts are signed, and thirdly, the potential for supplier participation payments on the 650 as a plus.

Thank you.

Boy, that's a mouthful, Cai.

Let's see.

You saw in the quarter the effect of commissions paid on the 650, so I think we're managing that nicely.

Margins, I predicted were going to be up 20 to 40 basis points at the beginning of the year, 17 to 17.2%.

I'm desperately wrong.

As far as price is concerned, some of the pricing is embedded in the backlog, and we knew it and could respond to it.

That was not true with respect to some of the G-200 and G-150 sales, where we got improved margin.

It was not true with respect to government aircraft, a special purpose and special mission aircraft, where we were new to the business.

We began with the notion that we would sell the platform, and then we started doing the engineering work to modify the aircraft, and finally we took on the modifications themselves and we're cautious about how we do on that.

It turns out to be quite a handsome line of business for us.

So I think for all of those reasons price contributed.

I think we didn't experience some of the cost increases we were anticipating.

We did gain some efficiencies in productivity that we didn't think we would, or did better than we thought we would.

We had some break-throughs.

And I think for a whole lot of those reasons, we're doing better than we anticipated.

But given that you did pay -- you do pay commissions upon the signing of firm contract, and given that you are likely to get additional G-650 firm contracts in the third and possibly the fourth quarter, isn't it true that commission payments this year are going to be higher than you anticipated at the end of the first quarter?

Yes, modestly.

Okay.

I'll follow-up.

Thank you.

I mean, I don't think it's not such a big issue.

We've managed that reasonably well.

Great.

Ladies and gentlemen, this concludes the question and answer portion of today's conference.

I will turn the call back to Ms.

Amy Gilliland for closing remarks.

I want to thank you for joining the call today.

If you have additional questions I can be reached at (703)876-3748.

Have a good day.

Thank you for your participation.

You may now disconnect.