通用動力 (GD) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 General Dynamics earnings conference call.

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

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

(Operator Instructions).

As a reminder, this conference is being recorder for replay purposes.

I will now turn the presentation over to your host for today's call, Amy Gilliland, Staff Vice President of Investor Relations, please proceed.

Thank you, and good morning, everyone.

Welcome to General Dynamics second quarter conference call.

I want to remind listeners that 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 10K and 10Q filings.

With that, I'd like to turn the call over to our President and Chief Executive Officer Jay Johnson.

Good morning.

General Dynamics delivered a strong second quarter performance, our sales totaled $8.1 billion up nearly 11% from the prior year period.

Operating earnings were $945 million, the highest result in Company history.

This led to earnings per share of $1.61 on a fully diluted basis, a $0.01 ahead of last year's second quarter results.

The year-over-year EPS comparison isn't perfect.

As a result of tax, interest and share count variances and we'll talk more about those a little later.

This quarter, however, was the stronger on an operating basis -- operating earnings basis.

Year-to-date, sales are up 14%, and operating earnings are up around 4% when compared to the first six months of 2008.

This year-to-date performance is particularly attractive on top of the very strong growth we experienced in the first six months of of 2008 compared to 2007.

You may recall 2008 six month sales were up 11% and operating earnings were 24%.

The key driver behind this quarter's results was the continuing ability of our businesses to deliver operationally.

Their disciplined execution is evidenced in the better than anticipated operating margin in each of the businesses in the quarter, particularly at Marine Systems.

Company-wide margins improved 70 basis points from the first to the second quarter.

And our ROIC increased to nearly 19%, a 100 basis point improvement over second quarter 2008.

Let me turn to cash.

Second quarter free cash flow after capital expenditures was $520 million, which represents 84% of earnings from continuing operations.

Year-to-date, free cash flow is $593 million, as in years past, I expect strong cash generation in the second half, particularly in the defense businesses.

Orders this quarter were close to $6 billion with particularly strong activity in the information systems and technology group.

At the end of the quarter, total backlog was nearly $68 billion, down approximately 5% from the first quarter, but up 22% over the second quarter of last year.

Now, I'd like to spend sometime on the outlook for each of our businesses, beginning with defense.

Our defense businesses have all experienced strong support in the ongoing 2010 budget deliberations.

While there is still more work remaining until the 2010 Defense Bill becomes law, I am confident the GD's programs will come through the process with solid support by the Congress.

As you all know, the Department of Defense is in the middle of its Quadrennial Defense Review.

When complete, this document should shape the outlook for the future years defense plan.

Until the QDR decisions are completed, and communicated to the public, there's really not much that can be definitively said about the long-term defense spending trends; however, Secretary Gates has been very clear about his intention to have a budget with, and I quote, a steady, sustainable, and predictable rate of growth.

The secretary has also stressed the importance of providing our Military with weapons systems that have the flexibility to confront both conventional and asymmetric threats.

Current threat levels, my previous experience with these types of internal deliberations and the relevancy of GD's programs to the war fighter lead me to believe that our company will emerge from this review well supported.

Understandably, they'll be both puts and takes in the QDR results, but I believe that our combat vehicles will continue to comprise a significant portion of the Army's order of battle, our surface combatants and submarines will be pivotal in addressing conventional and strategic threats as wells tactical intelligence requirements, and our IS&T portfolio will continue to be integral to meeting the Pentagon's tactical communications, ISR and cyber warfare needs.

Let's talk about Combat Systems.

Combat Systems experienced healthy year-over-year growth in both sales and earnings this quarter.

Sales were over $2.4 billion, a 19% increase over the same period last year.

Of that growth, 14% was organic.

While our organic growth was primarily driven by increased Stryker and Abrams volume, each of our three domestic businesses increased their sales year-over-year.

The remaining growth came from the addition of AxleTech to the group's weapons systems business.

The groups earnings totaled $300 million, 6% year-over-year increase.

This is a particularly good result on top of the 18% sales growth and 48% earnings growth the group had in the second quarter of 2008 versus same period in 2007.

Margins were down 150 basis points year-over-year.

Primarily because of the higher margins, second quarter, 2008 MRAP work that drove the group's margins to an uncharacteristic 14%.

Sequentially, the group increased earnings on similar sales volume, resulting in a 90 basis point margin increase.

These improved margins are the result of productivity improvements across all of our North American combat systems operations.

European land systems revenues were down slightly this quarter compared with last year, year-to-date, revenues and earnings have been steady, ELS continues to improve their operations and I expect their results to be better in the third quarter and even stronger in the fourth quarter, a pattern consistent with their past performance.

Total backlog for Combat Systems decreased by approximately $1.6 billion in the quarter.

Nearly 60% of this decline is the result of debooking the mostly unfunded backlog for future Combat Systems, in line with the Pentagon's cancellation of the manned ground vehicle portion of FCS.

As you know, the Secretary of Defense and the Army remain committed to developing a replacement ground combat vehicle program.

Our Army customer is currently re-evaluating the structure of brigade combat teams, because the revolutionary next-generation vehicle program is delayed, the Army is now modernizing and evolving current vehicles, frankly, we see the cancellation of FCS as an opportunity.

We are well positioned to evolve our combat vehicles, including Stryker and Abrams to address the changing threats faced by our soldiers.

Combat Systems receives several notable orders in the quarter.

Including approximately $320 million for the production of Stryker and approximately $450 million for the production of wheeled armored vehicles for a Middle Eastern customer.

Additionally, subsequent to the quarter end, the group was selected by the Canadian Department of National Defense for a sole-source contract with potential value of over $850 million to upgrade Canada's light armored vehicle fleet.

Looking-forward for the group, sales in the remainder of the year will be higher than both year-to-date and last year's second half, particularly in the fourth quarter.

Overall, sales in 2009 will be up about 22% over 2008.

Earnings will also be stronger in the second half.

Margins for the year will be 12.3% to 12.5%, comparable with our original expectations.

Marine Systems Group had another very strong quarter, sales were up nearly 17% for the quarter, at approximately $1.6 billion.

Earnings were up over 32% at $168 million.

This growth in sales and earnings was across all three shipyards, but was particularly driven by increased Virginia Class volume and engineering work at electric boat and increased commercial ship and repair volume at NASSCO.

Earnings growth outpaced sales growth across all three Marine businesses, causing operating margins to expand 120 basis points year-over-year, and 50 basis points sequentially.

Marine's margin improvement comes from strong operational performance and in turn, increased booking rates on all of the group's major programs.

The Marine Group's backlog totaled approximately $24 billion at the end of the quarter, down slightly from the first quarter, but up over 100% from the same quarter last year.

There are a number of notable opportunities on the horizon, which may add further to the group's backlog once the 2010 budget is approved, including two additional DDG-1000 and one additional DDG-51, mentioned by Secretary Gates as part of his budget preview remarks in April.

Development work on the next-generation ballistic missile submarine program, which was well supported in the President's 2010 budget request.

Additional literal combat shifts, quarter end backlog includes the group's second ship, the group is also currently bidding on the next two ships in the class.

Looking forward, sales for the remainder of the year will improve over the same period last year, but will not be quite as strong as the first half of 2009.

Overall, sales should be up a little over 16% compared with last year, well ahead of our earlier guidance.

Margins for the year are anticipated to be 9.8% to 9.9%, an improvement of 40 to 50 basis points over last year.

In our IS&T Group, sales were approximately $2.7 billion, up 3.5% over second quarter 2008 and 9.6% year-to-date.

Organic growth for the first six months of of 2009 totaled nearly 7%.

The group's second quarter operating earnings were $284 million, down slightly year-over-year.

Year-to-date, earnings were up 4% compared to first half 2008, primarily volume related.

Operating margins were 70 basis points less year-over-year, but exceeded my expectations.

To that point, second quarter margins were 10 basis points better than those in the first quarter on slightly lower volume; this still appears to us to be industry leading performance.

Backlog for the group increased to $10.5 billion because of strong order activity across the IS&T businesses, including $180 million in orders under the common hardware, software program and $375 million to upgrade the BOWMAN Tactical Communications System in the United Kingdom.

Book-to-bill totaled one time for the quarter, the seventh of the past eight quarters in which the group has met or exceeded one to one.

Looking ahead in 2009, IS&T is in an excellent position to leverage its current and expanding capabilities to capture new business in fast growing market segments, in particular, the group's ISR business had heavier volume in its signals collection and cyber products in the second quarter, and I expect that trend to continue.

In fact, subsequent to the quarter, this business was selected as a participate an in the two significant IDIQ awards in this area, a $600 million five-year contract to perform signals intelligence for the Air Force National Air and Space Intelligence Center.

And a $400 million contract to secure critical, federal and private sector networks.

The ISR business will also benefit from the addition of Axsys, an acquisition we announce in the quarter.

Axsys, is a leading provider of surveillance and imaging technologies, including state of the art lens and gimbal technologies.

From a strategic standpoint, we plan to leverage Axsys products into our sensing and algorithm exploration capabilities do enhance our product offerings and expand our footprint in this fast growing market space.

I expect that the deal will close later in the third quarter, be neutral to earnings for the last quarter and accretive in 2010.

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

Over, I anticipate a little above 8% sales growth.

Margins will likely decline in the second half as a result of mixed shift toward lower margin services business, I expect full year margins to be consistent with our previous guidance in a range of 10.3% to 10.4%.

Aerospace.

The Aerospace Group executed extremely well again in this quarter, amid a difficult, albeit gradually improving business jet market.

The group's sales were $1.4 billion, up 6.5% from the prior year quarter, due to the addition of jet aviation.

Organically, Gulfstream sales were down 16% year-over-year as unit delivers were reduced in line with our revised production plan.

Sales were also impacted by continued pressure on the services business which is off 21% year-over-year and 15% year-to-date.

This decline is the result of customers deferring optional maintenance and intensified price competition, triggered by current market conditions.

Though I wouldn't characterize this as a trend, we are seeing some increase service activity this month.

The group's operating earnings were down 10% year-over-year to $215 million; however, compared with last quarter, earnings were up 7.5% on somewhat lower volume, a very good result that is clearly indicative of how well the group is managing through this down cycle.

The group continues to target cost reductions, including eliminating almost $45 million of indirect cost notice first half of 2009.

You may recall from an earlier report that we anticipated $60 million in savings for the year.

We expect to achieve that and more.

This strong earnings result led to 150 basis points of margin improvement over the first quarter.

A favorable mix of large aircraft deliveries and continuous improvement initiatives combined to push Gulfstream margins to 17.9%.

These margins include a $2 million loss on two preowned aircrafts sold in the quarter, $13 million in severance costs, and $10 million in warranty reserve offset in part by $15 million in liquidated damages.

We have six remaining preowned aircraft in inventory, including one under contract and we anticipate receiving no more than three additional aircraft before year end.

We have no white tales.

Jet Aviation also showed some operational improvement in the quarter, although they still have a significant way to go.

The Aerospace Group is leveraging its completions experience and season leadership team to make meaningful changes to jet's completions business.

These management and process changes are already making a difference in jet's performance.

I expect that this business will continue to make incremental improvements in the second half.

There continues to several encouraging signs that the business jet market is stabilizing.

In recent months, Gulfstream flying hours have increased and new order interest has improved.

On an absolute basis, dollar denominated book-to-bill this quarter was a healthy one time.

This does not include the impact of defaults.

Another positive sign was that customer defaults were down almost 50% from last quarter, and orders handled outpaced defaults in the quarter.

In fact, excluding G-650 orders, this is the most orders we have taken since the second quarter of last year.

Despite this, we did see a marginal drop in the group's backlog, but at nearly $20 billion they continue to have a very robust base of work.

In March, the company provided 2009 and notional 2010 aircraft production guidance.

I feel very comfortable with our 2009 large cabin production estimates, our large cabin spots are sold-out through the end of this year, through 2010, I anticipate the large cabin production number to be in the low 70s.

Mid-sized production may further decline, however, as that end of the market continues to struggle with large inventories and considerable pricing pressure.

We are closely monitoring this situation and we'll make further mid-sized cuts as necessary.

Although, I don't anticipate they'll impact my expectations for the group's performance.

On the product development front, Gulfstream continues to progress on schedule.

We look forward to both the G-250 and G-650 making their first flights this year.

As you heard in our last call, we expect the group to have fewer aircraft deliveries in the third quarter because of the previously announced summer furlough at Gulfstreams Savannah Manufacturing facility.

Consequently, the group's third quarter sales will likely be off a little over 20%, and operating margins will be down accordingly.

For the full year I expect the group sales to be down about 5%, operating margins I anticipate to be between 13.3% and 13.5%.

In summary, General Dynamics has performed very well in the first half of 2009, positioning the Company to do well in the second half.

The third quarter will be somewhat softer as a result of the Gulfstream furlough; however, the second half should be very strong for our defense businesses.

For the year, we anticipate sales growth of 11% and operating earnings margins slightly in excess of 11%.

I expect earnings per share from continuing operations to be $6.05 to $6.15 an increase from our prior guidance.

From today's perspective, I would guide you toward the mid point of that range, with some potential upside and some risk in each of our groups.

With that, I'll ask Hugh Redd to touch on several key financial highlights.

Hugh?

Thank you, Jay, there are a few items I'd like to point out that impact the comparison of our 2009 to 2008 earnings per share, the first is interest expense, which was up $26 million in the quarter, and $46 million for the first half of the year.

This is driven by an increase in our net debt as we completed five acquisitions and repurchased almost 14 million shares since the end of the second quarter of 2008.

To be clear, no transactions were completed nor shares repurchased in this quarter, but rather in the three proceeding quarters.

As you may recall in December 2008, we issued $1 billion of five-year notes at a coupon of 5.25%.

And more recently in June we issued $750 million of two-year paper at a 1.8% coupon.

At the end of the quarter our net debt is down almost $400 million compared to the end of the first quarter and at a level consistent with the end of 2008.

Taking into considering our net debt position and the interest rates on our new debt, we continue to expect full year interest expense of approximately $150 million.

Next I'd like to draw your attention to our effective tax rate.

In the second quarter of 2008, we resolved tax litigation dating back to the early 1990s, this resulted in a one time benefit of $35 million, which reduced the 2008 second quarter tax rate by 385 basis points, it also increased earnings per share by $0.09, we received the cash associated with that settlement in the fourth quarter of last year.

Our tax rate for 2009, in both the second quarter and for the first six months of 2009 was approximately 31.5%, consistent with our full year expectation.

Finally, return on invested capital improved 18.8%, a 100 basis point improvement over second quarter 2008, and return on equity improved to 22.3%, a 190 basis point improvement.

That concludes my remarks, and Amy, I'll turn it back to you for question and answers.

Before we move to the question and answer period, I'd like to remind participants to ask only one question so that everyone has an opportunity to participate.

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

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

(Operator Instructions).

Our first question comes from the line of Myles Walton with Oppenheimer & Company, you may proceed.

Thanks good, morning, and welcome, Jay.

Question for you on the QDR as it pertains to potential changes that could come out of that, one of the decisions that is getting floated is the move away from an adversary, or two conflicts simultaneously, and the applications that will have on structure and resources, I know you quoted Gates' comment about stable potential growing defense budget.

How do you think that decision in particular could impact GD relative to what it's selling into the defense markets, and I guess how do you think it will impact and over what time?

Well, Myles, I wouldn't try to pre-guess the QDR outcome as you might expect.

But I would tell that you from our perspective, my sense is, if you look at our defense portfolio, we've got a lot of diversification in there, and to the point I made in my remarks about needing to deal with conventional threats and asymmetric or unconventional threats, we cover that space.

So the two major war scenario is something they'll have to work their way through, but in any outcome that I can imagine with the QDR, the diversity of our portfolio, I think puts us in a very strong position.

Okay, I will honor the one question rule and get back in line.

Thank you.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

You may proceed.

You gave us a lot of good color on what you're seeing on the business jet market and things stabilizing, I guess you guys had previously alluded to the potential for large cabin rates to actually go higher in 2010 versus 2009.

Is that something that's still on the table and that you're thinking about?

And can you just kind of update us on that?

Well, I like your thinking.

But I mean, at this point I think the prudent statement is the one I made, we feel quite comfortable looking at 2010 in the 70s, the low 70s for large cabin.

As you know also, we have the capacity and the wherewithal to ramp that up if we need to, or ramp it down, but we don't see that as an outcome here, so we'll see how the market develops, we're encouraged by what we're seeing, I mentioned it in my remarks.

But the large cabin market is drawing great interest and the order book is very healthy, and getting more so.

So we're confident that we can ramp it up if we need to.

Okay, thank you.

Our next question comes from the line of Cai von Rumohr with Cowen & Company.

Could you give us more color in terms of the mix between.

Of order and demand between the US and foreign buyers?

Actually, Cai, I would characterize it as quite balanced by both geography and the types of buyers within the -- the demographic within that geography, it's a mix almost across all segments, I would say.

Probably a little more international than North America right now, but pretty close to a balance, and I would categorize it as more a higher percentage of private company individuals as opposes to public companies, but it's a pretty good mix across the spectrum, we're not singled up on any one sector that causes us an issue.

Thank you.

Okay.

Our next question comes from the line of of Howard Rubel with Jefferies, you may proceed.

Yes, thank you.

Could you, Jay, talk to us a little bit about military sales?

There are substantial offers outstanding, and where are you in terms of closing on some of them, please?

Okay, Howard, I'd be happy to.

The foreign military sales will have a combat discussion here.

Yes, that's what I figured.

We feel that we have great opportunity in the FMS Arena, as you alluded some of its ongoing right now, we see opportunity in Saudi Arabia.

Those contracts, the same contracts for brigades 4 and 5 are in work right now.

So that's still coming, we anticipate it will be here this year.

We've got business in FMS business working in Iraq already, we expect more.

That's a work in progress, as you might have known.

So we think there's great opportunity there.

I mentioned the Canadian piece, but there's great opportunity for combat in Canada, with the last three upgrade as mentioned, but also follow to that, they are also the Canadian -- the National Defense Department is putting forth requirements for three different tactical vehicles, armored vehicles that we think will be -- we think we will participate in as well.

The Iraqi are sort of short on cash, and some of this looks like it's being pushed back a little bit.

Could you talk about how --

Well, I mean, as you know, Mr.[ Maliki] was here last week, those discussions are ongoing right now, and we work all of of that through FMS, so we're not dealing directly with Iraqi, as you would expect, but we still remain confident that that is going to get worked out.

Don't ask me exactly what that means, but we will come to a decision point here in the not too distant future, and we believe we're going to get a considerable amount of business through FMS and Iraq.

Thank you.

Our next question comes from the line of Ron Epstein with Bank of America, you may proceed.

Good morning.

You mentioned that orders for Gulfstream in the quarter were greater than -- [ Audio difficulties ]

Still there, Ron?

Hello?

Operator?

Yes.

I think Robert your line is still open?

Okay, I think we dropped Ron Epstein, so perhaps he can try to get back in the queue, and you can get someone else on the line?

Our next question comes from the line of Carter Copeland with Barkleys Capital.

Please proceed.

Good morning, Jay.

Good morning, Carter.

There's at least modest speculation that one or more of your competitors may need to sell or spin some business as a result of changing language around OCI, I wondered if you would speak to your own views about what this might mean for your portfolio business, can they be appropriately is a included, is it a material amount of business?

And if some of these things were to happen among your peers, would you have an opportunity to buy or would you be precluded from ownership of some of these assets?

Very general terms, how is GD thinking about these issues?

Well, I guess, Carter in the -- for us, I know there's a lot of discussion and a lot of print about the OCI issue.

But for us, it really compromises, the work is really a small part of our IS&T portfolio, and frankly, we deal with it customer by customer and probably the best example of that is when Antion came aboard and the Cedar work with Antion was divested.

I know it's out there a lot, but for us it's not a big deal.

Do you think it's something -- I mean, if you were to look broadly at the rest of the industry, is it something that can appropriately be fenced off?

Or is this the direction that we're headed?

Are these assets going to come out?

Well, for us, it's not -- as I alluded already, it's not a part of the business that we particularly yearn for, we're more of a product and a services house in that regard, so I would say it's not something that's high on our go to list.

So if something were to come out of one of your peers, it's not a business you would be particularly interested in?

Not necessarily, no.

I mean, no, is probably my best answer.

Great.

Thanks, Jay.

Our next question comes from the line of Ron Epstein with Banc of America, you may proceed.

Can you guys hear me now.

Yes, I got you, Ron.

Great, super, Jay, you mentioned that your -- the faults in the quarter were less than -- the orders were greater than default for Gulfstream, did you see any trend in the defaults?

Can you give us any more color around that?

Some of the other OEM's have had huge number of default notice quarter, you guys have done a lot better trying to get a feel for maybe why?

I need.

The defaults I would characterize it, Ron as fairly balanced across the whole Gulfstream portfolio, but the order book was as I alluded to earlier, heavily weighted to the large cabin.

So that's good for us.

And if you -- can you put a number on defaults or no?

I could, but I won't.

Okay.

Thank you.

Sorry.

Our next question comes from the line of David Strauss with UBS, you may proceed.

Good morning, welcome Jay.

Thank you, David.

Could you touch on the outlook for combat systems beyond 2009, specifically from the domestic side of things, based on what you see in the fiscal 2010 budget?

It looks as if Abrams and striker funding in 10 is down significantly.

Well, I alluded to it earlier, but let me just say, David that going into the 2010 budget deliberations, we felt cautiously optimistic, shall we say on those two programs in particular, and I think coming out will be -- that will be validated and more.

That's just -- you're asking me my sense of it, that's exactly what it is.

Those -- both of those -- the Stryker and the Abrams are relevant to the war fighter, and I keep coming back to that.

The relevance to the war fighter at a time when we're at war, I believe that our customer is going to demand more and we're prepared to give it to them.

Jay, are you thinking specifically Congress is either going to plus up these programs in particular or are you expecting a second fiscal supplemental?

I mean, if you look at some of the marks, [HAKD] there is plus up in there, -- we're encouraged by the dialogue that's gone with that, so I would hope that we'll come out of the budget itself with it, and you've also read -- some people are talking about a supplemental for next year, I'm not prepared to comment on that, except to say that it's out there, and we're going to do whatever it takes to service the war fighters out there, that's my belief.

Okay, thanks.

You bet.

Our next question comes from the line of Robert Stallard with Macquarie, you may proceed.

Good morning, Rob.

Just a follow-up on David's question, I was wondering if you've seen any impact flowing through your business from the finalized FY '09 supplement --

I missed the last part of that?

I'm seeing if you've seen any impact on the FY '09 supplemental end of your business, positive or negative, but it's down year on year.

I mean, I think -- yes, we got some lift out of it, but I don't think I have much more to comment on than that.

I mean, it was positive for us to -- the supplemental, we got some Stryker ad in there, so -- it was fine.

Is that.

I'm not sure what more you're looking for.

I was wondering you could give us any additional granularity, it's pretty big captions in the supplemental and we've seen some of the line items trend down year on year, looking to see whether any of that is impacted on your equipment or services business.

No, I think -- I mean, it's -- the supplemental is embedded in the numbers I gave you, so it's -- I think we're well healed for the year in that regard.

Thanks very much.

You bet.

As a reminder, please limit yourself to one question.

Our next question comes from the line of Sam Pearlstein with Wells Fargo, you may proceed.

Good morning, in your opening remarks, you didn't really talk at all about the cash flow and I wanted to make sure, what are your views on free cash this year, is it still going to approximate net income?

And can you talk a little bit about -- the moving pieces that we'll see in the second half, certainly customer advances and deposits with what went on with Gulfstream was a pretty big negative with the first half, and does that start to reverse as we move forward in the year?

Well, I mean, I think you've hit upon the essential ingredient here, to the second half cash flow, that has a lot to do with Aerospace Gulfstream.

But I would say to your first comment that our objective is always to get to 100% with our cash.

But I would also be less than canned id if I didn't say that it's going to be a tough go this year, as you might expect.

But the Defense businesses are strong in the second half, we like the trending that we're seeing, in the Aerospace side, so we remain very aggressive, and very optimistic there.

Okay, thank you.

You.

You bet.

Our next question comes from the line of of Joe Nadol with JPMorgan, you may proceed.

Thanks, good morning.

Welcome Jay.

Thank you, Joe.

My question is on the two Gulfstream development programs, you gave a bit of color in your comments, but just wondering if you could give a little more maybe on timing of first flights for each of them.

How are the development programs going more specifically, is there anything that's more challenging than expected and how are you working through it, and what's the demand picture been like in recent quarters since all this turmoil has started.

We are taking orders for the 250, the 650 book is solid, there have been a couple puts and takes on the far end of that, but both aircraft, we expect to be very eagerly received, so that part of it looks good to us.

As far as the jets themselves, they are coming, they look like jets, they look like real airplanes now, they're coming together nicely, they're working hard at it, it's as you might expect there are some challenges inside the lifeline there, but we still are very much confident that we'll fly these airplanes later this year, if you ask me to pin that down, I'd say probably early in the fourth quarter, but that could move around a little, and that's okay.

The process, you basically take a static article, you have build a static jet, okay?

And then you run that static article through very grueling tests on the ground and before you can take the flight article, if you will, and put it in the air, the static article has to pass.

So that's -- process-wide, that's happening in Savannah, right now with the 650, it's happening in Israel with the 250, and those things are coming along pace and we're very confident that we'll fly both of those airplanes this year, and I'm really looking forward to it.

Can we extrapolate from that that the certification programs are also on schedule for both aircraft?

My answer to that -- if I had Joel here he would give you a more precise answer, my answer to that is yes, but we're in the process now of -- we're just starting to test the test articles, the static articles if you will, so it will be a while, I don't see any showstopper in front of us, if that's what you're asking me.

These are going to be wonderful machines, and we're going to get them airborne here in the not too distant future.

Okay, thanks, Jay.

Okay.

Our next question comes from the line of Peter Arment with Broadpoint AmTech, you may proceed.

Just quickly on cyber, I mean, it continues to be talked quite a bit about, and since last quarter, I think there's been some further movement until terms of funding, how does GD look at this, as a significant booking opportunity in the second half, or is it more of a 2010 event?

No, I mean -- we're already into cyber, to the tune of probably a $1 billion a year.

Right.

And for us, as you probably know, it's spread across all of the lines of business in IS&T, so, we've got the forensics, we've got the encryption, we got the information management and security, we have the infrastructure piece across our lines of of business, so we're well into cyber, and we'll continue to be that.

We see that as a very handsome, long term growth opportunity within IS&T.

Our next question comes from the line of [Choralar] with Stifel Nicolaus.

Bringing down margins at IS&T, and should we view this as a low 10% margin business?

Or do you plan on quickly returning back up to the mid to high 10% margins beyond some of the near-term mix shift issues?

Well, we've said for the year, we're going to be low 10s, and we were confident in that, so going-forward, I think you could expect that.

Maybe a little more, okay?

Is that what you're asking me?

Yes, I mean, you guys did about 10.6, 10.7 in the first half, and you dropped down to 10% margins, long term is this a 10% margin business or in between there?

And I guess, what are the near-term issues also.

The service mix is really what you're seeing here, I think, and as the mix changes more to IT services, which is the lower margin business, but a wonderfully steady and long term business, we think, you know, where we are is in the low to mid 10 range, and that's probably as precise as I want to get it right now.

Okay, that's helpful, thanks, guys.

Okay.

Our next question comes from the line of of George Shapiro with (inaudible).

In combat systems you're expecting to sustain -- actually even accelerate a little bit to growth in the second half versus the first half, yet you have a big decrease in MRAP revenues in the second half versus the second half of last year.

What programs are ramping up substantially in the second half to offset that?

Probably the biggest is -- and this is as it goes through most of the years, the European business as you know is the first to fourth quarter building business, I would expect a lot of the second half to be reflective of the growth that we would normally and always see in Europe, European line systems.

But you're probably losing maybe $500 or $600 million of revenues for the MRAP in the second half, versus last year, I wondered if you could be a little more specific as to what programs European land systems may be increasing that much to offset the MRAP.

It's just -- I mean, it -- program specific, it's really all the programs over there, that's the way the European model is working such that it comes to you late in the year.

Sometimes real late in the year, but it comes, we've also got ATP has got a significant amount of work, and so I mean, Europe is the big mover in the second half is the cleanest way to say it, I guess, George.

Okay, thanks.

Okay.

Our next question comes from the line of Jim McElroy with Colin Stewart, you may proceed.

Thank you.

In the second half it looks like you have marine revenues up substantially over the first half revenues, but margins not expanding at all, what's the reason for that?

We're pulling pretty handsome margins out marine across the year, I mean 10.3 this quarter was superb, and we're targeting ourselves to the high 9s across the year.

And I'm pretty confident and comfortable and pleased with that.

Is there any change in mix in the second half, that we should be aware of?

None that I could think of except -- I mean, one of the realities in the second half of the year has to do with repair work.

I mentioned in my remarks about repair work at NASSCO specifically, sometimes that comes to you in fits and starts as the customer goes through the end of their year.

So there may be opportunity there that we haven't expected.

It could work it the other way as well, but I'm very confident in the high 9s for marine, which -- and we're very proud of that.

Thank you.

Our next question is a follow-up question from the line of Noah Poponak, you may proceed.

Noah?

Hi, sorry, I was on mute there.

Okay.

A couple follow-ups, a lot of discussion on combat here, and there's obviously a lot of moving pieces, but you guys are on record as throwing out a couple of different mid single digit growth numbers in 2010.

Just wonder if you're sticking by that, given everything you see here, or any comment you see here, or any comment there.

I would characterize it this way.

Combat is a solid steady growth business that I actually characterize it in the terms of -- it's the Abrams tank.

It's very sturdy, it's very steady, and it proceeds as it needs to.

And combat will grow its portfolio in smart moves, but I -- you're going to see slow steady growth out of of combat.

So it sounds like thinking, something in the low to mid single-digits for 2010 is still ?

Yes, yes, yes.

One more question for you, Jay?

Given that you're kind of the new kid on the block here, I wonder if you would take a minute from a high level of talk strategy, maybe the 2 or 3 things that you're focused on the most in the near-term for the company, you think you may do a little different, any comments there, thanks?

Okay.

Strategy.

It's interesting.

Nick and I worked together for a long time on this -- the objective was that when he walked out the door as he did on the first of the month, it would be as seamless as it could possibly be.

I believe that has happened.

I feel that way, I have great confidence and pride in this magnificent corporation, and I'm proud to be its president and CEO.

The portfolio is diverse and very strong.

We own on the commercial side, we manufacture the premiere brand on this earth in Gulfstream, okay?

On the Defense side, our portfolio as I've said before is diverse, it's very strong, and it is relevant in today's world and the world we see out ahead.

So that portfolio is pretty wholesome the way it is.

Static and status quo are never good things in this business.

So we will continue to enrich and nourish that portfolio as opportunities present themselves is, how do we do that?

We do that the way Nick taught us, okay?

And that's about earnings and cash and ROIC and margins, okay?

Those disciplines are in our DNA as I've said before.

That's the enabler, those are the enablers to allow you to nourish and enrich this portfolio, so that's where my focus of effort is, that's where my commitment is to both our customers and the wonderful men and women in uniform out there that we're serving and to our shareholders.

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

Our final question will come from the line of Doug Harned with Sanford Bernstein, you may proceed.

When you look forward at marine, and I know you'll have talk about the it overtime, there are two things ahead of you here, one is more work on the DDG-1000.

And the next is the DDG-51 which you referred to earlier, when you look at those two ships, is this going to create a challenge in terms of expanding margins on DDG-1000 or on the DDG-51 given that you'll have a gap here between current production and the start of that new ship?

New ship meaning --

The next DDG-51 that you start --

I don't see that as an issue honestly, Doug, because we're well versed in the construction of DDG-51, as you know, and the DDG-1000, I mean, you probably had this conversation with Nick and/or me before, but that DDG-1000 going into that new build, the design work is more complete than with any other ship class start we've ever seen.

We have strong confidence in our ability to bring the DDG-1000's home the way we sign the contract to bring them home.

So we have good confidence in the ability of our works up at Bath Iron Works as well as the leadership up there to do exactly what we said we were going to do, and deliver a quality product on time and on budget.

You don't see the DDG-51 going to the next one as being -- I'd say first significantly different in terms of the capability or cost of that ship?

I mean, I -- my answer today Doug is no, I do not see that.

I mean, if the customer changes something and wants to take it to a different place, that's a discussion that I'm certainly not privy to yet, and we would adapt accordingly, but right now.

I mean, we do DDG-51s beautifully, and we can continue to do that.

Okay, great.

Thank you.

Okay.

Thank you, Doug.

This concludes today's question-and-answer session, I will now turn the call to Amy Gilliland and for additional closing remarks.

Thank you for joining the call today, if you have additional questions I can be reached at 703-876-3748.

Have a great day, thanks.

This concludes today's presentation, you may now disconnect.

Good day.