通用動力 (GD) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2009 General Dynamics earnings conference call.

My name is Anita and I'll be your operator for today.

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

We will conduct a question-and-answer session towards the ends of this conference.

(Operator Instructions).

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

I would now like to turn the call over to Ms.

Amy Gilliland, Staff Vice President of Investor Relations.

Please proceed.

Thank you, Anita, and good morning, everyone.

Welcome to the General Dynamics third-quarter conference call.

I want to remind listeners that, as always, any forward-looking statements made today represent our best estimates 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 filings.

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

Thank you, Amy, and good morning, everyone.

General Dynamics exceeded expectations in the third quarter on very good operational performance.

Sales totaled $7.7 billion, up more than 8% from the third quarter of last year.

We had particularly strong growth across our defense businesses.

Our defense portfolio delivered 14% top-line growth when compared with the third quarter of last year, 12% of which was organic.

In addition, their operating earnings were up 14%, driven by excellent operational performance across each of our three defense business groups.

On the other hand, in the Aerospace group, the scheduled five-week furlough at Gulfstream caused a double-digit reduction in sales, somewhat offset by nearly $300 million in jet aviation sales.

Margins were better than I expected across the Company, particularly on the defense side.

But frankly, the Aerospace group outperformed my expectations, as well.

This business has done an excellent job of cutting indirect costs and managing the business to preserve profitability, even in light of the five-week furlough.

On a fully-diluted basis, third-quarter earnings per share from continuing operations were $1.48.

Although down from last year's $1.59, it was a good performance given the five-week shut down at Gulfstream.

Third-quarter free cash flow after capital expenditures was $513 million, which represents 89% of earnings from continuing operations.

Cash was strong across the Company, including Aerospace.

I should note that this cash result also includes a cash payment of $250 million to our pension plan.

I expect much stronger cash generation in the fourth quarter, and while we've set a tough hurdle for the fourth-quarter cash I still think it's possible to get close to a one-to-one conversion for the year.

Return on invested capital was 18.3%, 10-basis points above third quarter last year.

Orders this quarter topped $7 billion, the strongest quarter so far this year, with particularly strong activity in our Combat Systems and information systems and technology groups.

At quarter end total backlog was $66 billion, down 2% from the second quarter but up nearly 10% from third-quarter 2008.

I'd now like to spend some time discussing the performance and outlook for the rest of the year in each of our business segments, starting with our three defense groups.

So let's talk about Combat Systems first.

Combat Systems experienced double-digit growth in both sales and earnings this quarter.

Sales were nearly $2.4 billion, a 27% increase over the same period last year.

Of that growth, 22% was organic.

Organic growth was driven primarily by strength across Combat's portfolio, including increased volume on Stryker and Abrams, guns and weapons systems, and several European vehicle programs.

The remainder of the growth came from the addition of AxleTech to the group's portfolio.

The group's earnings totaled $316 million, a nearly 21% year-over-year increase.

Each of the four Combat Systems businesses contributed to the earnings growth, with particular strength at armament and technical products and European land systems.

Margins were 13.5%, 100-basis points higher than the second quarter.

Margin performance resulted from the group's strong sales volume and continuous improvement initiatives.

With the addition of more than $2 billion in orders, total backlog for Combat Systems increased slightly to $12.9 billion.

Notable contract awards during the quarter included; $647 million for production of another 352 Stryker vehicles; $301 million in Stryker contractor logistics support; and $160 million for international ammunition.

The Stryker orders in the quarter are intended to fill existing customer requirements.

In addition to these orders, the Army recently announced the conversion of one heavy brigade combat team to a Stryker brigade in the near term.

The Army has also discussed initial conversions in the future.

We believe the Army will continue to emphasize fielding what is available, affordable and technically feasible while maximizing the use of existing platforms.

International vehicle volume, including armored vehicle and tank sales to Saudi Arabia, Iraq and Canada, will also begin to grow in 2010, with particular strength in 2011 and beyond.

In each of these programs we are continuing to make progress.

In Saudi Arabia we received a $7 million contract to continue engineering work on the tank upgrades and we believe it is likely we will secure the light armored vehicle contract by year end.

In Iraq we continue to make progress on the sale of 140 Abrams tanks and associated logistics support.

And in Canada it appears likely that we will see an initial engineering contract on the labs by year end.

2010 will offer several new international vehicle opportunities, including competitions to build several hundred UK FRES reconnaissance vehicles, Spanish 8x8 armored vehicles, and Canadian armored petrol and combat vehicles.

Looking forward the group will have its strongest sales of earnings in the fourth quarter, due in large part to European land systems.

For the year, sales will be up about 21% over 2008, while margins for the year will be 12.5% to 12.7%.

Marine Systems group had another good quarter marked by several milestones, including; delivery of DDT 108 and TKAE8, the launch of TAKE9, the start of construction on TAKE12; and last week's completion of builder's trials for our first LCS.

The group's third quarter sales were up 8% at $1.5 billion.

Earnings, which totaled $155 million, were up almost 11% over last-year's quarter.

The earnings growth is particularly noteworthy, as third quarter 2008 earnings were up 27% when compared with 2007.

Sales and earnings growth was driven by the continued ramp toward two per year Virginia-class submarines and electric boats, higher repair volume, and increased booking rates on several programs.

The Marine Systems group achieved another 10% margin quarter, driven by excellent performance at each of our yards, but most particularly at NASSCO.

The yard's performance is the result of hard work from the deck plates all the way to the senior leadership team.

This stellar execution has also been enhanced by our investment in key facility improvements.

Marine's backlog totaled nearly $23.5 billion at the end of the third quarter, down slightly from the second quarter but up more than 100% when compared to last year.

The Navy ship building plan appears to be well supported in the 2010 budget process.

Virginia-class submarines, the Trident SSBN replacement program and the third DDG-1000 have been fully funded thus far in the process.

TAKE's 13 and 14, for which we already have advanced procurement funding, were fully supported in the authorization conference bill and in one of the two appropriations bills.

Our customer has reiterated the importance of funding both ships this year.

Looking forward to the fourth quarter, sales will improve slightly but second-half sales will not be quite as strong as the first half of 2009.

For the year, sales should be up approximately 15% compared with last year.

Given their results to date, I believe that Marine Systems will achieve 10% margins this year.

IS&T enjoyed a very solid third quarter.

Sales and earnings were up in each of the businesses compared to last year.

IS&T sales were $2.7 billion, up nearly 9% over third-quarter 2008 and year to date.

Organic growth was nearly 6% in the quarter and 6.5% year to date.

The group's second quarter operating earnings were $296 million, up nearly 10% year over year.

Operating margins at 10.8% were 10-basis points better year over year and sequentially.

This performance exceeded my expectations and was in large part driven by significant margin improvement at our ISR business, Advanced Information Systems.

Backlog for the group increased to $10.6 billion because of $3.1 billion in order activity across the IS&T businesses, including approximately $340 million in new cyber work and $1.2 billion in orders for IT services for a variety of customers.

The group's book-to-bill totaled 1.13 times for the third quarter and is a healthy 1.05 times for the first three quarters of 2009.

IS&T also increased potential contract value by $650 million this quarter, the majority of which will translate to backlog over time.

Several key IS&T developmental products performed well in testing in the third quarter, including WIN-T, JTRS and the LCS Combat System suite.

WIN-T Increment 2, which will provide tactical communications on the move, and our JTRS Handheld, Manpack, Small Form Factor(HMS) program will provide, which will provide significantly-enhanced networking capability to the dismounted ground soldier, both performed extremely well in field testing, moving both of these products closer to production.

JTRS HMS also successfully added the Soldier Radio Waveform to our Rifleman Radio and Manpack.

A tactical network is at the center of the Army's future development plans and our products are squarely on schedule in meeting all objectives.

We also added Access to our IS&T portfolio in September.

We are very pleased with this acquisition, which brings exceptional technologies, strong operating margins and a great opportunity to enhance product offerings in the fast-growing tactical ISR space.

Access will be nicely accretive in 2010.

Fourth quarter sales should be up over third quarter but margins will decline.

For the full year IS&T is on track to achieve 8% to 9% sales growth over last year, with margins between 10.4% and 10.5%.

The Aerospace group held its own again this quarter despite the five-week Savannah furlough, which significantly curtailed new aircraft volume.

As a result, the group sales totaled $1.1 billion, down $295 million from the second quarter and $252 million from last-year's third quarter.

Earnings totaled $125 million, obviously driven by fewer deliveries.

The decrease in sales drove margin compression at Gulfstream through unabsorbed overhead.

Modest losses on preowned sales and lower aircraft service margins also contributed to the reduction in overall margins.

We have four remaining preowned aircraft in inventory after selling three aircraft this quarter and taking in one.

This reduced inventory by half to $62 million.

We anticipate taking two additional aircrafts before year end.

Without the impact of preowned, Gulfstream's options were 15.5% in the third quarter, not bad in this environment.

Although aircraft service volumes steadied in the quarter, competitive pricing and the deferral of larger, more profitable maintenance jobs continued.

I am cautiously optimistic on the outlook for our service business, where current demand has returned our service centers to full work weeks.

Jets' sales and earnings were essentially flat from last quarter, although the business continues to make tangible progress in their completions operations, with noted improvements in both schedule and cost performance.

Newly implemented management controls and production discipline are gaining traction.

The business jet market has steadied and is seemingly on course to make slow steps towards recovery.

Order activity and interest continue to improve with particularly strong demand in international markets for our large aircraft.

Orders were stronger this quarter than last, again outpacing customer defaults.

On an absolute basis, dollar denominated book-to-bill this quarter was a healthy 1.5 times.

This does not include defaults that reflected continued weakness, mostly in the mid-sized market.

Backlog remains a robust $19 billion.

We are on pace to meet our 2009 production goals.

Continued strength in order activity and my weekly review of the group's backlog also make me comfortable with our initial projection for low 70s large cabin production again in 2010.

Large cabin spots are sold out next year.

Large aircraft are also sold well through 2011 and into 2012 for some models, which provides upside to 2010 production estimates.

Mid-sized production remains unsettled and may decline next year, although order activity in this segment was more promising in the third quarter.

That said, mid-cabin activity represents a small portion of Gulfstream's sales and earnings.

Our production development efforts met several exciting milestones last quarter.

In late September we rolled out the new G650 aircraft under its own power.

One week later we did the same for the G250.

These two aircraft are completely preparations for first flight and I expect them both to fly before year end.

We are encouraged by the success we've enjoyed thus far with each aircraft.

The group sales will grow approximately 16% from the third quarter to the fourth quarter and earnings should grow faster.

For the full year, sales will be down approximately 4%, while operating margins will be between 13.2% and 13.4%.

In summary, General Dynamics continues to perform very well and is positioned to have a good fourth quarter.

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 $6.15 to $6.20, an increase from my prior guidance.

At this time I think it's more likely to come out at the lower end of that range and, frankly, anything north of $6.20 at this time I think is venturesome.

We're now in the midst of operations reviews for next year so I'm not prepared to provide 2010 guidance today as is our practice every year to do it this way.

The defense environment remains extremely dynamic.

As the administration continues to contemplate our nation's strategy in Afghanistan, the 2010 appropriations and authorizations bills proceed through Congress, and the Pentagon wraps up the quadrennial defense review in anticipation of the 2011 and future years' defense program budget submission.

Thus far, GD's programs have received solid support in the 2010 budget process.

While we await outcome of these reviews it is clear to me that the fundamental need to fully equip our forces has not changed.

The world is an increasingly-dangerous place and our armed forces must have modern and capable systems in sufficient quantity.

Secretary Gates continues to emphasize the importance of slow and steady growth in the defense budget, with a focus on investing in 75% solution weapons systems that meet requirements across a broad spectrum of threats.

In this tough fiscal environment the equipment that is most relevant to the war fighter will prevail.

GD's products are at the center of today's fight and we continue to evolve our offerings to provide incremental capabilities that enhance war fighter effectiveness and make fiscal sense for taxpayers.

In short, I am confident our defense programs will emerge well supported from current budget considerations.

As I look to 2010 I can tell you that the defense businesses already have a solid book of work next year and the recovering business jet market provides some upside opportunity for Aerospace.

Our diverse portfolio, strong balance sheet, and commitment to earnings and cash generation position us well to provide relevant products for our customers while creating significant shareholder value.

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

Hugh?

Thank you, Jay, and good morning, everyone.

There are a few items I'd like to draw to your attention in our third-quarter results.

First, in operating earnings, as detailed on Exhibit C to the earnings release, you'll note corporate operating expense of $18 million for the quarter.

This is net of a $5 million gain on an asset sale.

I expect corporate operating earnings for the fourth quarter to be in the $22 million to $23 million range, which is more consistent with prior quarters.

The second item is the other expense of $6 million on the quarter.

This relates primarily to transaction costs associated with acquisition activity.

As you're aware, new accounting rules, which took effect this year, require acquisition costs to be expensed rather than be included in the purchase price.

Next, net interest expense was up $29 million in the quarter and up $75 million for the first nine months.

Interest expense is higher due to a $3.1 billion increase in net debt over the past year resulting from acquisitions and share repurchases.

Interest expense was $40 million for the quarter and so far this year we're averaging about $39 million per quarter.

Accordingly I expect net interest expense for the full year to be closer to $160 million rather than the $150 million I had previously given you.

Finally, I would like to point out that the effective tax rate for the first months of the year is 31.3%, which is in line with our expectation of a 31.5% rate.

I continue to expect the full-year rate to be within 10-basis points, plus or minus, of 31.5%.

That completes my remarks and, Amy, I'll return it back to you to begin the Q&A.

Thank you, Hugh.

And a quick reminder, we ask participants to only ask one question so that everyone has an opportunity to participate.

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

Anita, could you remind participants how to enter the queue?

(Operator Instructions).

Our first question comes from the line of Heidi Wood of Morgan Stanley.

Please proceed.

Yes, nice quarter, guys.

Jay, you talked about Jet.

Can you give us an update.

You talked about progress but can you tell us what kind of margins you're realizing now and where that's expected to go as you look ahead into 2010?

Maybe you can't flush out thoroughly but the puts and takes for 2010?

Okay, Heidi, good morning -- or I guess -- yes, it's still good morning.

I told -- I mentioned in my remarks and I've told you before that Jet, we're working through some operational challenges at Jet Aviation.

That's still an accurate statement.

But as I also said, the progress we're making is very tangible and we go over there once a quarter, over to Basil or St.

Louis, to observe and learn.

I would tell you that right now obviously they're single digit in their margins.

I'm very confident that we'll take Jet Aviation to double digit margins.

I'm very confident of that, but if you ask me to put a timeline on it I'm not going to do that for you today.

It's slow, it's steady.

As you know a lot of work that they do, particularly in the completions -- the wide-body, narrow- body completions are huge projects that take a long time to work through.

So patience in one sense is the order of the day but the sight line is very clear and the progress is very steady.

The MRO business, the FBO business is beginning to see the trending back upward that I described a bit earlier.

So we have good confident -- down range confidence there.

Jet is a great addition to our Aerospace portfolio and I'm very confident in going forward.

The completions business will be very strong and I'm looking for great steady progress throughout the next year.

Great, thank you, and one quick one.

Was there any one-time cumulative catch ups in the quarter on Marines to explain for those good margins?

I'm sorry, Heidi, I missed it.

I missed you.

Marine had some pretty nice margins again this quarter.

Was there any one-time cumulative catch up adjustments in the quarter?

No.

No, not at all.

It was just -- it was good work all across all three yards.

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

Please proceed.

Yes, good morning.

Morning, Doug.

On Gulfstream, when you say you're sold out on large cabins for 2010, what does that mean, sold out at what level?

I know you're looking for something at the low 70s, but presumably that would be sold out at the higher rates you used to discuss before.

Let's just say that the backlog that I track every week with leadership at Gulfstream.

The stack charts we go through, I've got a green in every stack -- in every aircraft slot and I'll just stay with the production numbers that I've given you that says we're going to be in the low 70s next year with some potential upside and I'm very confident in that.

And then on the G250, given the weakness you're seeing in the mid-size, how are you looking at that?

Have you firmed up at all your outlook for what deliveries might be for that airplane?

No, it's a little bit soon for me to really worry about that and worry's not the right word, but it is not in the center of my radar scope right now, Doug.

I mean, we're taking orders for the 250, we've got first flight this year, it's a late '11 arrival/entry into service.

So I'm confident if you look at the market that's out there and the movement we're starting to see, even in the mid cabin [POAC] prior-owned sales and the white tails that are out there.

I think by the time we get to where orders are really important to the 250 we're going to be in the sweet spot.

Our next question comes from the line of Robert Spingarn of Credit Suisse.

Please proceed

Good afternoon.

Hey, Rob.

Hey, Jay.

Could you talk a little bit about the backlog shrinkage at Marine.

You talked about funding for TAKE units 13 and 14, and how you expect backlog to flow and perhaps a couple of comments on how the commercial business is tracking?

And, finally, do you see any vulnerabilities in the ship -- in the long-term ship building plan?

That was one question.

I got it.

Rob, look, the Marine backlog I'm sure you've heard Nick say this and probably heard me say it, too, tends to come at you a little bit lumpy from time to time but it's a very robust backlog and we're quite comfortable with that.

I would tell you that we're in the -- let me just review it a little bit.

The DDG-1000, and the first one is in the build up at Bath, I think everyone knows that.

We are working the contracts on the second two, as we speak.

The DDG-51, we've got three in completion up at Bath right now; three -- yes.

And we're looking -- according to the earlier statements the SecDef we're looking for a 2011 DDG-51 there.

So Bath's got plenty on their plate.

In addition to the LCS down in Osteo where Bath is priming right now where we've got Independence, as I just mentioned in my remarks, completed builder's trials last week.

They do Navy acceptance trials next month and on we go.

The second one is in the build down there.

We're redoing the contract for the Navy right now on the next ten and so it goes.

But that's a 55-ship program still by the Navy's requirements statements.

Electric boat, we've accelerated and that's part of the margin discussion earlier.

We accelerated the Virginia-class into the first half of the year, perhaps a little more.

That's why, again, it's just timing and flow.

But we're very busy on Block 3 and the Block 2 completions up at EB with our partner.

And we're also looking forward to the two-a-year starting in 2011.

So all that's on stride.

We're doing the SSBN replacement initial engineering work right now here and with the UK, so EB has got a full plate right now.

And in NASSCO, specific to your question on the commercial side.

You know we're building the TAKEs, I mentioned that.

13 and 14, as I told you, we've got a long lead for both of them.

The customer is very supportive of us getting full funding for both of them in this budget and we'll see what we get.

But either way we're in the build through 12 right now and we'll build 13 and 14 in order.

The PC -- product carriers, we have the five, two delivered, I believe, and three to go; all coming along handsomely.

The second option or the option for the next four has not been triggered, as you know, so we're still marketing that.

There could be some impact, if we don't get those four here in the next year it would affect the loading, certainly the overhead at NASSCO.

But I have every confidence we're very good out there at matching volume with costs.

So we know how to manage that if we have to.

That said, I would tell you that there's considerable discussion and I think the QDR will probably be an elemental piece of that in terms of future work for NASSCO as it applies to; one, the TAKE line -- a TAKE or a TAKE-like ship for the Navy's downstream requirements.

And then we'll also see on the product carrier side, it's interesting, you know about the Jones Act.

The Jones Act ships that are out there in large number I think well over half of them are over 25 to 27-years-old.

So that fleet is going to have to be refreshed at some point here.

So we're talking timing, we're talking outcomes in the budget and all that I realize, but I think that the overall ship building picture is a very positive one for us across all three yards.

Our next question comes from the line of Richard Safran of Buckingham Research.

Please proceed.

Hi, good morning.

Good morning.

Just a question on cash; a two parter.

Your share count came in just a bit a bit higher than I thought and I just want to know if you could go over if there were any headwinds in the quarter?

But more importantly and bigger picture can you discuss what your intentions are for cash for this year?

Okay, I'd be happy to.

The share count -- I think the best way for me to say it is rest assured, that the share count is a fundamental part of our scan pattern.

I keep losing that, but I used to be a fighter pilot so it relates to my head.

The scan pattern for this Company in terms of the way we allocate and deploy our capital always has been, always will be.

So we're mindful of the fact that the share count moves up slightly.

But if you look at us historically on share count, absolute and fully diluted, we really keep them in pretty tight bands, so the CFO and I look at that all of the time.

That said, as it translates to this year, I will tell you that the priority for cash right now -- and I alluded to that, I didn't allude it, I said it directly in my remarks.

We expect a strong cash quarter in Q4.

But you also heard me say that we're going to be challenged to get ourselves to where we like to be in terms of 100% conversion of earnings into cash.

So quite frankly, until I get myself to the point where I can see that from looking down on it instead of looking up at that 100% line, I'm going to be very much concerned with maintaining operational liquidity.

Liquidity is our strength.

It gives us the agility we need to be opportunistic next year.

It gives us the ability to access the commercial paper market, which as you know, is really important to us to get deals don fast, et cetera.

So in the hierarchy of things we look at here liquidity is clearly at the top of that list.

I've mentioned the pension.

We made our $250 million contribution cash to the pension fund this past quarter.

We look at the dividend for the board.

We look at acquisitions of the non-transformational-type right now, I would say.

And we look at share repurchases.

And you'll see us dealing with all of that at the right time.

But again, to restate the obvious here for me, for us right now, it's a matter of maintaining liquidity and getting our nose above the 100% waterline on earnings-to-cash conversion.

Our next question comes from the line of Sam Pearlstein of Wells Fargo.

Please proceed.

Good morning.

I actually wanted to follow up that question on the cash flow because it just seems to me as you get closer to 100% net income that would certainly be a little bit better than I was expecting.

And can you talk about some of the moving pieces there?

Customer advances and deposits grew pretty nicely in Q3 versus the prior quarter and yet the backlog shrunk.

So I don't know if you can talk a little bit about that?

And your CapEx expectations and are there any major projects on the horizon as to why we might see that grow next year.

Well, Sam, last things first.

The CapEx will hold probably pretty flat for the rest of the year for sure, but overall I think the biggest movement there, to your question, really goes back to Aerospace.

That's been the cash issue in large measure for this year with the market downturn.

So as the market comes back we would expect to see more cash coming out of Aerospace.

And, quite frankly, we're looking forward to it.

Recall also that we've got in this quarter now, fourth quarter, I mentioned we're going to fly the 650 for the first time and when we do, the first 50 or so customers will be asked to provide another payment.

So that will feed into the cash plan nicely, as well.

Okay, thank you, and if I can just follow up in a separate sector within Combat Systems.

Can you size when you talked about some opportunities for additional Stryker brigade combat teams, can you just size what the potential is there?

I don't think so, Sam.

I mean, it's really -- it's premature to do that.

We've got the seventh -- let's see, one, two, three, four, five, six, seven, we've got seven brigades now.

They just announced the eighth.

We've read in the press like you probably have that there may be more but that's really the Army's decision to make and when they do we'll react accordingly.

But clearly the Stryker piece is a core element of combat going forward, in addition to the number of vehicles.

Remember the other part to that, which is the support.

The combat logistics support that goes with that and also the reset for the vehicles that have been heavily used in combat.

The recapitalization of that existing force and the modernization there too.

So there's a lot going on in the Stryker world as there is in Abrams, but specific to Stryker, I'll stay with that.

(Operator Instructions).

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

Please proceed.

Hi, Jay, how are you?

Fine, Noah, how you doing?

Okay.

Wanted to ask you about Gulfstream margins.

In your prepared remarks it sounds like you're saying you were actually pretty pleasantly surprised with where the quarter came in but it looks like you're lowering your expectation for the final year.

Can you tell me why that is?

Is it Jet coming along slower, or what's going on there?

Jeepers, I could have left it where it is and been close, but I mean, it's -- we're still in the same ballpark.

We may have a little bit of Jet in there, but I expect Gulfstream to be ever stronger quarter by quarter going forward.

Our next question comes from the line of Howard Rubel of Jefferies.

Please proceed.

Thank you very much.

Jay, could you add a little more color to the IT business.

I know you talked about some of the particular items but it looks as if you've been able to grow the business a little bit faster than the market.

Is there something in there that really stands out?

Howard, I think the way I'd answer that is it's really pretty diverse across the portfolio.

We have talked about the fast currents in there with the tactical calms and I mentioned some of that in my opening, so tactical calms are playing large in there.

We've got tactical ISR and that was very strong for us this last quarter, as I singled out AIS in terms of their margin improvement, and the addition of Access to that portfolio.

We've got a lot of IT services opportunity, if you will, in health IT and Fed Civ.

And, don't forget probably the one that crosses all of the IS&T portfolio that is big and ever bigger going forward is cyber.

So it really is, Howard, very well diversified across the whole IS&T portfolio.

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

Please proceed.

Yes, thank you very much.

Jay, you talked about gross book-to-bill at 1.5, the net book-to-bill was about 0.6.

Could you split that for us between the large biz jets and the mid-size, and give us some color on the strength and demand by geographies outside of the US?

Okay.

The book-to-bill, Cai -- I'll put it this way.

We have great -- the order book exceeded the termination and defaults book again, okay.

So it's moving in the right direction on both ends of that equation.

We're not out of that default business quite obviously yet but we're coming along.

As far as the backlog and how that impacts, what we saw on the termination side, if you will -- the default termination side is really a mix, honestly.

It's some in the large side but it's weighted more heavily, I would say, to what you'd expect and that's the softness in the mid-cabin market.

As to the demographic, if you will, of the backlog itself.

It really is staying pretty consistent here with perhaps -- if it's trending at all it's trending ever more to the international side.

I don't have a pie chart in front of me, but I think it's got me about maybe let's say 40% US/Canada, kind of North America and 60% rest of world with a significant piece of that in the Asia-Pacific and in Europe with South America picking up, as well.

So it's really diverse by geography and as I've said before, it remains diverse by owner type, if you will.

In that, fully a third are individuals and fully a third of the backlog; actually a little more than a third are private companies.

So that's kind of lay down.

Our next question comes from the line of Myles Walton of Oppenheimer.

Please proceed.

Thank you.

Good afternoon, guys.

Hi, Myles.

The -- Jay, one of the steadier contributors to expanding segment margins in the last few years has been Marine and we see you're fulfilling the promise of getting to that 10% bogey.

What's the new bogey, or are we hitting ourselves on the 10% line?

And I guess what are the contributors to that?

Is it more of the second sub coming into full production?

Is it going to swing on repair?

If you can just give some color on that and what targets you're passing along to the organizations?

Yes, it's volume, it's sales, and it's performance.

It's continuous improvement.

So we're -- I won't give you a number because I don't have a number but around here status quo is never good enough, okay, so today's 10% we look to improve and we're continuous improvement.

I've told you before it's in our DNA here.

So we will never stop trying to improve the margins or the performance in any of our businesses, but specific to Marine that's true for sure.

You mentioned repair and I mentioned it briefly in my remarks.

The repair work is a significant book of business, an important book of business within the Marine Systems group.

We've talked on earlier occasions about NASSCO and the repair work that's out there.

NASSCO is actually prime on a number of different ship classes that we may or may not have built for repair out in the San Diego area, and they're in work right now and getting more of that work.

They're increasing the fleet size in the San Diego area by, I think, 30% over the next four to five years.

And numbers of ships go from 40 something to 60 something, so as the fleet realigns itself or the fleets realign themselves, repair work there is very significant, as it is at Electric Boat and Bath Ironwork.

So the repair book is very important to us.

Our next question comes from the line of Joseph Nadol of JPMorgan.

Please proceed.

Thank, good afternoon, Jay.

Good afternoon, Joe.

Just wanted to follow up again on the cash deployment, and specifically the share repurchase.

You didn't buy back any stock this quarter and obviously we're well down year on year from where we were a year ago, I'm wondering on specific thoughts on that and how as a company you are approaching this in terms of Board interaction and I'm thinking, of course, mix specifically versus management decisions on share repurchase.

What's the interaction there and how are you thinking about -- you made a lot of acquisitions the last 12, 18 months, how are you thinking about next year?

Okay.

Look, Joe, as is our practice here, and if you look at us -- look over your shoulder at us for the last, I don't care, six years maybe, just pick a time, you'll see we have a very active year with acquisitions.

And then we follow it with, my words here, kind of year of adjusting and settling and that's kind of the rhythm we have gotten ourselves into.

So I'm comfortable with that rhythm right now, and as I mentioned earlier -- I think I mentioned earlier, we've got cash at a point that is not where we like to be in that I don't see a clear sight line to exceeding 100% conversions earnings-to-cash for the year.

Until I do, the number one thing on our list here is going to be operational liquidity.

But make no mistake, share repurchase is always a part of our scan pattern, as is the dividend, as is the acquisition piece; the opportunistic acquisitions, and the pension to which we applied $250 million this quarter.

So all of those things are looked at all the time here.

But I would also mention that in terms of the share count and dilution and all that it's really been in very tight bands here if you look at us historically year over year.

We're mindful of that, we're attuned to it, but right now to give us the agility we need and to allow me to be opportunistic looking forward next year I need to bring the cash level up above 100% and that's what this is all about.

Our next question comes from the line of Robert Stallard of Macquarie.

Please proceed.

Hi, good afternoon.

Hi, Rob.

Jay, a quick question on Combat Systems.

You mentioned some of the export opportunities you see out there for CS --

Yes.

-- if any of these get pushed to the right would it be fair to suggest that growth in Combat Systems could slow versus what we're seeing this year?

I don't see it right now, Rob, honestly.

Frankly, if some of the internationals move to the right my view is they're going to move into 2010, not out of 2010.

Anyway, I think for now I'm pretty comfortable with the flow, if you will, of the international programs.

Remember the Canadian program is on a fast track by their choice.

We've got a big year at -- in the United Kingdom with the FRES contract that they're trying to get mailed down here in the next few months.

And we've got Saudi, Iraq, we've got all our FMS and indigenous international work targeted really, as I think I mentioned in my remarks, more to a 2011, 2012 timeline.

But 2010 should be teeing us up nicely.

So I don't see it as a downer for growth, if you will, in Combat Systems.

I'll stand by what I said earlier.

That portfolio is a slow, steady powerful growth business for General Dynamics.

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

Please proceed.

Thanks.

I'm wondering if you can just give us an update on LCS.

I think you finished builder sea trials, how did that go and what's some of the feedback you're getting back from the customer?

Okay, Troy, we did complete sea trials -- builder's trials last week.

My somewhat subjective answer to your question would be it performed beautifully.

It's fast, it's sleek, it's seaworthy, it's got great capability and we were very impressed with our own ship, if you don't mind me saying that.

So, okay, I think the customer was satisfied at that point.

Obviously they were because we're now moving into acceptance trials, in serve by another name.

The acceptance trials, which start -- don't hold me to this, but it's like -- I don't know, it's mid-November plus or minus a little, so that's all on track.

And then once that completes we'll turn it over to the customer and be on our way with our next one that's already in the build down there.

So overall, it's a wonderful platform with great capability and we look forward to providing lots of them to our customer.

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

Please proceed.

Good afternoon, Jay.

Good afternoon, Dave.

Jay or Hugh, could you just touch on pension going forward?

Obviously the $250 million contribution this quarter but I think at the end of the last year you were close to $3 billion underfunded and just what you're looking at from a contribution standpoint, given PPA and CAS harmonization?

Right now, David, what we're looking at, we gave the $250 million this year, we're looking at, I think, just a little north of that next year, $260-ish million, and then after that it gets up around five something for probably four or five years.

That's present conditions and that's not really understanding the final laydown on CAS, PPA harmonization, but that's kind of the site picture we have today.

I think it's important to say, though, that given what I just described, we do not believe that that will impede our ability to effectively deploy -- allocate and deploy our capital to do the things we need to do to grow this Company going forward.

Our next question comes from the line of Ron Epstein of Banc of America-Merrill Lynch.

Please proceed.

Yes, good morning, Jay.

Hi, Ron.

Just a broader 200,000-foot question for you.

In your prepared remarks you'd mentioned about Secretary Gates talking about having steady, low, single-digit budget growth going forward for the defense budget.

Given the fiscal backdrop and all the pressures at whatever, roughly 13% of GDP deficit this year, potentially deficits as you go out five, six years that are still north of 5%, is that realistic?

Well, I think the way I'd answer that, Ron, is I just -- I look at the world in which we're living right now and it gets back to the question of how much risk are we willing to tolerate inside that world.

So the risk management piece is different than I think it ever has been before.

But for us, again, as the defense budget flattens, which essentially is what is happening here, we still believe what I said in my remarks.

If you have programs and systems and things that are relevant to the war fighter, your programs and systems and things will prevail in large measure.

And so we felt very good going into all of this, we feel confident that we'll be well supported coming out.

And, Anita, I think that wraps up the time that we have this morning, so I'd like to thank everyone for joining the call and if you do have additional questions I can be reached at 703-876-3748.

Have a great day.

Thank you for your participation in today's conference.

This concludes the presentation.

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