通用動力 (GD) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q4 2009 General Dynamics earnings conference call.

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

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

Toward the end of today's call we will conduct a question-and-answer session.

(Operator Instructions)

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

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

Amy Gilliland, Staff Vice President of Investor Relations.

Please proceed, ma'am.

Thank you Steve, and good morning everyone.

Welcome to the General Dynamics' fourth quarter conference call.

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.

And 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 finished 2009 with a very good fourth quarter, marked by strong operational performance, excellent cash flow, and the achievement of several key milestones.

Sales in the quarter were $7.9 billion, up slightly from the fourth quarter of 2008, but somewhat lighter than I had anticipated, primarily because of timing on several international vehicle contracts and the delayed passage of the 2010 Defense bill.

Net earnings from continuing operations were $618 million, or $1.58 per fully diluted share.

In the quarter, we achieved a 12% Company-wide operating margin, our best performance in 2009.

For the full year, sales were nearly $32 billion, a 9% increase over 2008, driven entirely by our Defense businesses.

Demand for our Defense products and services generated 12.7% top line growth, more than offsetting the 6% decline at Aerospace.

Nearly 10% of the the growth in our Defense businesses was organic.

2009 earnings from continuing operations were $2.4 billion, or $6.20 per fully diluted share.

Operating earnings totaled $3.7 billion in 2009, with Combat Systems and IS&T both topping $1 billion of EBIT.

I should also highlight that Marine Systems delivered their best ever earnings performance, and Aerospace exceeded $700 million in earnings, an impressive performance in a very challenging market environment.

Free cash flow after capital expenditures totaled $1.4 billion in the fourth quarter.

Each of the business groups contributed to this excellent fourth quarter result, which brought total cash for the year to $2.5 billion, or 103% of earnings from continuing operations.

This included a pension contribution of nearly $250 million.

Fourth quarter orders reached $7.4 billion, the strongest quarter this year.

General Dynamics finished 2009 with a total backlog of $65.5 billion, more than two times annual sales.

Total potential contract value, which includes backlog, unexercised options, and indefinite delivery, indefinite quantity, IDIQ contracts, totaled $83 billion.

Now I'd like to focus on the performance and outlook for each of our business segments, starting with our three Defense groups.

First, Combat.

Combat Systems had a very successful fourth quarter.

Sales were $2.5 billion, 6.6% higher than the fourth quarter of 2008, due primarily to increased Stryker, Abrams, Armor, and Weapons Systems volume.

Double-digit earnings growth in the fourth quarter was the result of 14.8% margins, 160 basis points of improvement over last year's fourth quarter.

Margin performance resulted from increased booking rates on several of our US and European vehicle programs, and a more favorable mix in our Guns and Weapons Systems business.

For the full year, sales were up 17.7% compared with 2008, including 12.5% organic sales growth.

The group's organic growth was driven by Stryker, Abrams, and European vehicle volume.

The remainder of the the growth came from AxleTech.

While I am pleased with this double-digit growth, I had anticipated over 20% sales growth.

The difference is the result of timing on several contract awards and year-end vehicle deliveries.

For the year, the group generated operating earnings in excess of $1.2 billion.

Margins were 13.1%, 50 basis points lower than 2008, due to mix shift.

Year end backlog for Combat Systems totaled $13.4 billion, of which $11.4 billion is fully funded.

Fourth quarter orders, which totaled over $3 billion, were greater than sales, causing backlog to grow $500 million from the third to the fourth quarter.

Foreign military sales contracts were particularly strong in the fourth quarter, including $160 million for Iraqi tank upgrades, $18 million for Saudi Arabian tank work, and $2.2 billion for light armored vehicles.

These international programs will begin to take hold in 2010, with growing volumes over the next several years.

The group also made significant progress towards several future opportunities in the fourth quarter.

In early November, our JLTV became the first vehicle to successfully complete critical design review, with our first prototypes due to be delivered to our customer this spring.

Additionally, our European Land Systems group, led by General Dynamics UK, submitted its FRES bid to provide the British Army's next generation reconnaissance armored fighting vehicles.

European Land Systems is also bidding on a Spanish program for several hundred eight by eight armored vehicles.

For this year, based on the strength of our backlog and continued support for our core programs, I expect Combat Systems to deliver 4% to 5% sales growth with operating margins in the high 12% range.

Marine Systems.

The Marine Systems group finished their best year, with another very good quarter.

Quarterly sales totaled $1.6 billion, a 12.4% increase over 2008, and operating earnings increased 18.2% to $156 million.

This quarter's double-digit sales and earnings growth is particularly impressive, since the same quarter a year ago saw sales and earnings grow 13.3% and 30.7% respectively, when compared with 2007.

Virginia-Class Submarine and repair volume drove revenue growth, and increased booking rates on several programs drove the earnings improvement.

The group's 10.1% margins in the fourth quarter were up 50 basis points over fourth quarter 2008.

For the full year, sales and operating earnings increased 14.5% and 23.2% respectively.

Margins for the full year were 10.1%, a noteworthy accomplishment, resulting from hard work and sustained, disciplined execution in all three shipyards.

Marine's year-end backlog totaled $22.5 billion, down from year-end 2008, but robust by any measure.

We anticipate adding orders for several ships in the first half of 2010, including T-AKE's 13 and 14, DDG's 1001, and 1002, and advanced procurement for another DDG51 destroyer.

For this year, I expect Marine Systems sales growth to be between 7% and 8%.

Margins will degrade somewhat, maybe in the mid-9% range, as the group experiences some mix shift in its surface combatant workload.

IS&T.

Fourth quarter sales in the IS&T group were $2.7 billion, a 2.8% increase over same quarter last year.

Margin rates increased 80 basis points, causing earnings to grow 11.5%, compared to fourth quarter 2008.

Margin improvement was particularly strong at our Tactical Communications and ISR businesses.

Sales for the full year grew 7.6%, while operating earnings grew 7.1%.

Organic sales growth was 4.4%.

The group's 2009 margin rate was constant at 10.7%, a very good result.

Demand for products across the group's portfolio continued in the fourth quarter, resulting in over $2.3 billion in new orders.

IS&T's year-end backlog totaled $10.3 billion, up slightly from fourth quarter 2008.

Total potential contract value, backlog, and estimated potential contract value under IDIQ contracts grew 12.9% through 2009, to $23.1 billion a year-end, positioning IS&T for another successful year in 2010.

Sales growth in 2010 should be between 8% and 9%, while margins will be in the mid-10% range.

Now, before moving to the Aerospace group, let me comment briefly on our overall Defense outlook.

2009 was clearly a successful year for our Defense businesses.

Operating performance was very good, and we will continue to build on those successes moving forward.

Execution remains paramount.

The 2010 Defense bill, passed in late December, fully supported our core programs, positioning our Defense business for success in the year ahead.

Most of our procurement programs were funded in the 2010 base budget, as supplemental funding targeted operations and maintenance requirements.

In the coming weeks, we will get more detailed insight into defense funding priorities, and requirements for the next several years.

I am confident that GD will fare well.

Our products are at the center of today's fight, and we will continue to evolve our offerings to address changing war fighting requirements in a way that is affordable to our customer.

Now, let's move to Aerospace.

The Aerospace group finished an exceedingly difficult year with a solid fourth quarter.

Several of the quarter highlights include continued strength in order activity, substantially fewer customer defaults, improved service volume, and the first flights of our new G250 and G650 aircraft.

The group's fourth quarter sales were $1.2 billion, and operating earnings were $167 million.

While sales and earnings were down significantly when compared to fourth quarter 2008, sales were up 5.4% and operating earnings were up 33.6% compared with third quarter 2009.

The group's 14.1% operating margin was up 290 basis points from third quarter 2009, due to a better delivery mix and improved pricing in the services business.

For the full year, sales were $5.2 billion, down 6.2% from 2008.

The sales decline resulted from fewer green aircraft deliveries, and a 15% reduction in our Services business, somewhat offset by the addition of a full year of jet aviation.

Operating earnings for the year were $707 million, and margins were 13.7%.

While earnings and margins were also down from 2008, they were outstanding given the environment.

These are the earnings of the market leader.

Gulfstream's proactive approach to managing production and internally driven cost cutting initiatives protected profitability in an unpredictable and decidedly difficult market.

All indications point to continued market improvement in 2010.

The improved trend in flying hours in the third quarter of 2009 held through year-end, and our service centers continue to work full weeks.

Pre-owned inventory levels are continuing to decline, particularly for large cabin models.

We have four remaining pre-owned aircraft in inventory, after selling one in the fourth quarter and taking one in trade.

In 2010, our aircraft deliveries include potential trade-in options for nine pre-owned aircraft.

Orders outpaced deliveries again in the quarter, and customer defaults slowed significantly.

New aircraft book-to-bill was 1.47 times on a dollar denominated basis, leading to a slight increase in backlog.

Backlog now stands at $19.3 billion.

Our 2009 orders were 60% international, with great diversity in the customer mix.

Given the continued pace of order activity in the fourth quarter, and new customer interest, the backlog remains durable.

Our large cabin backlog is essentially sold in 2010.

Three quarters sold in 2011, and we're already making significant progress in 2012.

We plan to produce 77 large green aircraft in 2010, several more than we produced last year.

Mid-sized production on the other hand will decrease to 14 aircraft.

Mid-cabin activity represented around 5% of Aerospace's 2009 sales, and less than 5% of their earnings.

Our product development efforts remain on track in the fourth quarter, with successful first flights of the G250 and G650 aircraft.

Both aircraft continue to undergo rigorous flight testing in preparation for 2011 FAA certification.

Given the success of the testing to date, we believe that the Aerospace group is well positioned to begin delivering the G250 in 2011, and the G650 in 2012.

Revenues and earnings on these programs will begin driving growth in 2011.

For 2010, I think it's reasonable to expect low to mid single digit sales growth in Aerospace, with margins around 14%.

This admittedly conservative guidance reflects the market as we see it today.

If market conditions continue to improve, particularly in the mid-sized market, we have the flexibility to adjust, and I will factor any upside into subsequent guidance updates.

In summary, 2009 was a good year for General Dynamics, and we anticipate continued success in 2010.

The guidance I've provided this morning implies mid single digit growth in sales, margins will be in the low to mid 11% range, causing earnings from continuing operations to grow at a mid single digit rate.

I expect earnings per share from continuing operations in a range of $6.40 to $6.50.

I should note that this guidance does not include or anticipate the results of capital deployment.

It is purely an operating forecast.

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

Hugh?

Thank you, Jay and good morning everyone.

I'd like to cover a few items that impact the comparison of the 2009 results to 2008, and communicate to you our expectations for 2010 with respect to those same items.

First, I'll mention our corporate operating expense, which you can see on exhibit C and D for the quarter and for the full year respectively.

The increase year-over-year is attributable to increased stock option expense, which we report for the entire Company in the corporate expense line.

We expect corporate operating expense for 2010 in the range of $95 million.

Next, our interest expense is up for the quarter, and the year, focusing now on the full year.

Net interest expense is up due to a reduction in interest income of about $55 million.

That was driven by lower market interest rates and lower average invested cash balances during the year.

In addition, we issued fixed rate notes in December of 2008 and June of 2009.

That increased our interest expense during the year.

Strong cash performance in the fourth quarter reduced our net debt by $1.2 billion, preserving our strong balance sheet and the financial flexibility that comes with it.

With the reduction in net debt and the scheduled repayment of $700 million of fixed rate notes in August, we're expecting our 2010 interest expense to be down from 2009, to around $150 million.

Regarding taxes, you may recall that our 2008 tax provision included the favorable settlement of long-standing tax litigation.

That reduced our provision by $35 million, or $0.09 per share, and resulted in an effective tax rate of 31.2%.

The effective tax rate for 2009 was 31.5%, which was in line with our expectations.

We expect the 2010 rate to be in the same range, perhaps up by 20 to 30 basis points.

With respect to our shares outstanding, you can see the diluted count effectively unchanged from the fourth quarter of 2008 to 2009.

We did repurchase 1.5 million shares in the fourth quarter of 2009, but that activity was late enough in the year that it had minimal effect on our weighted average share count.

This was in addition to 2.1 million shares repurchased in the first quarter of the year.

As Jay pointed out the 2010 guidance does not assume the impact of future capital deployment activities, including potential share repurchases.

Finally, a couple of thoughts with respect to pensions.

You'll notice [that the] impact of changes in our funded status in several places in our financial results.

First, as Jay pointed out, our strong cash generation in 2009 includes contributions of about $250 million to our pension plans.

This, combined with asset returns of approximately 20% in 2009, improved our plan's funded status by $500 million.

This of course had a positive impact on shareholders' equity, which reflects changes on the funded status of our retirement plans.

For 2010, we're planning approximately $270 million in contributions to our pension plans.

That completes my remarks, and Amy I'll turn this back over to you for q-and-a.

Thank you, Hugh.

As a quick reminder, we ask for participants to ask only one question, so that everyone has a chance to participate.

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

And Steve, if you could just remind participants how to enter the queue, please?

Yes, ma'am.

(Operator Instructions) Your first question comes from the line of Ronald Epstein of Banc of America Merrill Lynch.

Please proceed sir.

Good morning, guys.

You didn't say too much about the 650 in your prepared remarks.

I was wondering if you could give us some color on how flight test is going, and how the conversion from the initial deposit to the more permanent deposits has gone?

Okay.

Be happy to, Ron.

Flight test regiment is proceeding on schedule.

No speed bumps that I'm aware of.

We're very pleased with the airplane, the flying qualities are sweet as we thought they would be, and so it goes.

I mean, it's proceeding on track.

I would also add, even though you didn't ask, I could say the same for the 250.

Both those programs as far as the flight test programs, or regiments are going are performing very well, which was the basis for my remarks that we're on track.

In terms of 650 deposit activity, Aerospace reported, we reported strong cash in the fourth quarter, and a sizable amount of that is attributable to the 650 deposits, so we're very pleased with that, and the backlog remains very robust at almost 200 in the [Q's], so we're on track with the 650 and looking forward to getting it delivered.

Great.

Thank you.

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

Please proceed.

Good morning.

Just as this has come up on a couple other calls today, as you think about the 4% or 5% earnings growth in 2010, do you expect that to be similar in each of the quarters or is it more back end loaded as the timing of various programs?

I think, Sam, I'd stay with the latter statement you just made, and you can look at us year-over-year.

We usually ramp up toward the fourth quarter.

So I'd stay with that.

Thank you.

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

Please proceed.

Good morning.

Good morning, David.

Jay, on Combat Systems, you talked about timing on some international contracts [flying] now and in the 2010 bill.

Have you baked that in, then, to the 4% to 5% growth guidance for combat?

Because I thought you had been talking about before, when you had a higher forecast for Combat for 2009, I thought you had also been talking about kind of low to mid single digit growth at Combat in 2010.

Yes, it actually, David, it was more on the low side, and so the answer to your question is yes, we baked it into that 4% to 5%.

Whatever moved from 2009 into 2010 is part of that 4% to 5%.

Your next question comes from the line of Peter Arment with Broadpoint.

Please proceed, sir.

Actually, you hit upon my question, Jay, with the 650.

Thank you.

Okay.

Your next question is from George Shapiro with Access 342.

Please proceed.

Yes, Jay, just want to follow up on David's question.

[If] you were supposed to get a nearly $10 billion of revenues in Combat based on your guidance in Q3, so based on the 4% to 5% growth you're talking about, we would really have pretty minimal growth over the $10 billion you were expecting.

So if you could just explain a little bit more how it doesn't seem like you factored in this slippage out there, maybe I'm missing something.

I'm not sure where you're going with that, George, but I would tell you that the core programs in Combat are well supported in the 2010 budget.

I mean, as I mentioned in my remarks, Stryker, Abrams, the international sales, which are now 22% I think of Combat's backlog, with more to come.

So some of the contracts that we had in 2009 actually delivered, like between Christmas and New Year's, that late in the quarter.

So I think the growth as I outlined it is probably very realistic for what we see right now.

Am I missing something?

Well, I was just trying to figure between the Q3 guidance you figured that Combat would grow over 21%, which would get you to between $9.9 billion and $10 billion, and now if I just take 4% to 5% growth on the nine, six, four, five that you reported, I get maybe somewhere 10 to 10.1.

So on an adjusted basis, it doesn't look like you're really getting much growth at all off of what you expected to report.

So it strikes me that maybe you didn't adjust the numbers for the anticipation, or there's something that's turning out to be slower in terms of growth than what you expected before.

Yes, part of that too, I mean, I maybe didn't complete the last statement correctly, but part of that may have to do with these international orders that have a tendency, as you probably know, to build more slowly, and that plays in this for sure.

They're coming.

I mean, if you look at the international book itself, we're very pleased with the contracts we've received.

We believe there are more coming.

We can see more out there, and then these will build through 2010 and really get into production in 2011 through, say, 2014 to 2015, so in that context, the international side, we're very bullish on right now.

And then just on the other side, you had said the margin would be like 12.5 to 12.7 on the third quarter call, and it turns out to be 13.1, so where did the positive surprise turn out to be there?

Performance.

Okay.

Very good.

Thanks, George.

Thank you.

Your next question comes from the line of (Unidentified Participant) with Buckingham Research Group.

Please proceed.

Good morning.

Just a quick question on M&A and cash deployment.

I think you said that in Q3 you wanted to kind of be opportunistic in 2010, so kind of like a two-parter here.

For M&A do you still see attractive deals?

Would you consider making a deal, for example, for a second or third tier Defense company if you can comment on that?

Or should we maybe expect maybe more an acquisition to expand your commercial footprint?

Well, let me put it this way, Richard.

I mean, in terms of capital deployment, the first priority for us has been and will remain sufficient operational liquidity to do what we need to do.

I know you understand that.

I'm stating the obvious, but that's number one.

We've got pension, that Hugh mentioned, that we'll deal with this year in the $260 million to $270 million range.

We've got dividends, which we're very committed to, that the Board will deal with again in a couple of months.

And we've got tactical share repurchases.

So the M&A side, we remain very opportunistic and very acquisitive in our search patterns, but very selective in what we do.

So I would anticipate remaining within the bounds of deals in the max of $1 billion to a $1.5 billion, and where they will add value in our portfolio or fill a gap that exists in that portfolio, and to be honest with you, that covers a lot of territory, both on the commercial side and within Defense space.

And that's about as specific as I'll get right now, as you might expect.

Fair enough.

Thank you.

Okay.

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

Please proceed.

Yes.

Thanks, Jay.

So your performance looks pretty good at business jets in the fourth quarter.

You had $5 million of used business jet losses.

Were there any forfeiture profits?

Were R&D, SG&A lower?

How did you get that very robust profitability?

And when you talk about conservatism for next year, is that conservatism just in terms of deliveries of mid-sized, or is there performance upside also?

To the latter, I would say yes to both.

We're always looking for performance upside and we're very good at getting it within Aerospace, Gulfstream, as you know, and I'm also anticipating performance upside at Jet Aviation next year.

But to the first part of your question, I think what I'd say is it's probably a function of the mix.

Could you explain?

More heavy.

More large cabin and fewer mid-cabins.

Well, therefore - -

And the pre-owned that we have.

Right.

Fewer pre-owned.

But I mean as you look forward for next year, we have more large planes than we did before, and fewer mid-sized.

So wouldn't that say that there's definitely more margin leverage in terms of the mix next year?

That would be my expectation, but I'm not willing to put that card on the table just yet.

It's too early in the year.

Got it.

Thank you very much.

Okay.

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

Please proceed.

Good morning.

Hey, Rob.

Wanted to ask you about Jet Aviation a little bit, if we could delve into that.

I think last quarter, you hinted to the fact that the sales were relative to the totals, about 25%.

We know that the margins lag there.

With the price improvement or the pricing improvement, how should we think about current profitability at Jet, and what kind of outlook do we have as volumes return?

As I've told you before, I believe, my report on Jet would be as follows.

We recognize that we had operational challenges at Jet.

We have addressed those challenges.

We have done a great deal to put efficiency and precision into the Completions business, which is a particular challenge, and you now we're starting to see in other facets of Jet, MRO, FBO, Services, okay, we're starting to see increased activity, shall we say, as things improve within the market space.

So that's a way around saying that Jet's margins, I've told you before, have been low single digit margins, but we are seeing and continue to expect, and demand actually, improvement working toward double-digit margins at a time yet to be announced, yet to be realized.

Nonetheless, I like what I see at Jet right now, and we believe we have a skyline, as they say, of work that will keep us very active, and so Jet is going to become a much more robust part of our Aerospace portfolio within the coming year, I would say.

I was just going to ask you if you had a time frame, but that sounds like what it is.

I'm expecting, from what I've asked Jet to do this year, I expect them to outperform, and the trending we see right now in terms of deck plate performance in the Completions business and everywhere else tells me that that's not an unrealistic expectation.

Okay.

I'm looking for upside in Aerospace, and not all of it attributable to Gulfstream.

I was going to say, this could lead the Gulfstream performance given where the base is.

The base is so low.

Indeed.

One last question on Gulfstream.

In the 650 order book are you seeing any sense of cannibalization of the 550 at all so far?

Negative.

Negative.

None whatsoever.

You know, we may have talked about this before.

Indulge me for a second, please.

We went through this with the four and the five, and the price point delta is about the same, you know, 15 to 20, depending on how you load it up, $20 million, $15 million to $20 million.

It's a totally different segment of the market, so there is a different customer out there for the 650.

Now, have we had some 550 people that are interested in 650s?

I hope so.

But we've also got the 550 backlog is very robust and very strong, so we see no cannibalization whatsoever at this stage, nor do I expect any, quite frankly.

Excellent.

Thank you, Jay.

Okay, thanks.

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

Please proceed.

Hi, good morning, Jay.

Hi, Noah.

How are you?

Fine, how are you doing?

Okay.

Question on IS&T.

The book-to-bill had sort of picked up there the past few quarters, and I think this is typically a pretty 4Q loaded segment, but it doesn't look like you grew much organically in the quarter, and I think it was one of the weaker quarters of the year.

Can you talk about what happened there, and I would also like the to get your opinion or your view on what a budget freeze would mean for a Defense company's IT business.

Okay.

The book-to-bill is still over one to one.

I mean, over one, we're looking good in IS&T.

The reality you just described, though, Noah, I think really is a function of the impact of continuing resolution in the delay in the budget being approved, which as you know, impacts the IS&T contracting business probably more, as much or more than any of the rest of our business group.

So to your last point, the budget freeze, if there is a budget freeze, which we don't have a whole lot of clarity on yet in terms of what might impact, I don't see it as a lot here, but it might be in the IT services and some of the nondefense related IT services piece.

Yes.

But you sort of need more clarity on it at this point it sounds like?

Yes.

We see no obvious impact, material impact right now.

We'll see how it develops.

Okay.

Thank you.

Okay.

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

Please proceed.

Thank you.

On Marine, could you talk about the lower margins for 2010?

You said this was due to mix shift, and could you provide some detail on that?

Sure, Doug.

I mean, it's really if you look at Bath Iron Works right now, it really comes down to the mix shift attributable to the DDG-1000, in the build now at somewhere between 7% and 10% complete, as a cost-plus boat ship, and then DDG-1001 and DDG-1002 will be fixed price.

We're still working the contract on those.

But we're moving down to our last three DDG-51s, because we don't have the FY 2011 DDG-51 yet, as I mentioned in my remarks, we believe it will come, the contract will come this year.

So it's really that mix shift between 1000 cost plus and weaning down somewhat for now at least the DDG-51s.

And then frankly, there's probably a little that might be attributable out at NASSCO as well in terms of how that work mix develops in the coming year as the PCs complete.

We're still working PCs six through nine, and so there may be some impact on the TAKE in terms of overhead absorption, et cetera, et cetera, but that's probably enough.

Does that paint it for you?

Well, two things that I wondered about on this.

One was the new DDG-51s, will those be in any way different enough that could change your margin outlook from what your more traditional production has been?

And then the other part of it was if you look at Electric Boat, I know you've made some changes and some layoffs there and some new hires, and it seems that there may be a shift, some shift there at the margin too.

I don't see much at Electric Boat.

And what was the first part you asked me about the - - ?

The DDG-51s if these would be in any way different?

The answer today is no.

I guess, and you read as I do what's going on in terms of missile defense and what that may mean for DDG-51s down range, and I think all that's being shaped right now.

But for us, we certainly know how to build the DDG-51,and if changes do come to it, we'll accommodate accordingly.

But right now we believe the 2011 DDG-51 will be very much like the ones that we're in the build with right now.

And also, you know, at EB, remember too, we're working already the SSBN.

We're getting lead engineering development funding for that, engineering services, so there's a lot going on there in Virginia-Class as wells as Ohio-Class replacement.

Okay?

Okay.

Very good.

Thank you.

Okay, Doug.

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

Please proceed, sir.

Good morning.

Good morning, Howard.

Thank you.

A couple of things.

On IS&T, could you talk a little bit - - it looks like in aggregate though, you're growing share.

Could you sort of address what kind of success you're seeing in your bid rates?

I know it's not 100%, but you had some notable items where you did some things toward the end of the year, for example, that one would not have expected in the Healthcare area, as (inaudible), and I think there's a few others like that.

Yes.

I actually think the capture rate, if you will, has been pretty high in IS&T, and I think it was in our release this morning.

You know, the contract for IT, for the new National Capital ,Walter Reed Army National Military Center, we've got IDIQ for ITES-2S as it's called.

We've got pretty good response or pretty good capture on most of the programs, not most of the programs, but I think significant growth in Cyber this year.

About $2 billion of IS&T sales are attributable to Cyber across Forensics Encryption Security Info Data Networks, data center integration, et cetera, so, Health IT, it's pretty well spread.

Okay.

To change, but still talk about the future a little bit, you highlighted the JLTV progress that you've made.

How do you sort of envision your ability to continue to both serve the longer term needs of the Army, but also my sense is the move into Afghanistan and so on is probably stressing the force, and what sort of responsive actions are you taking to help the military in that region?

We are very committed to, as I said in my remarks, adapt to the needs of the war fighter, and that reflects exactly on what you just asked me.

So we never accept a Stryker as being good enough, for example.

We're always looking, and we have received and to be honest with you, Howard, I can't remember, it's either late 4Q or early in this quarter, we've received modernization contracts from our Army customer to do exactly that to the Stryker, to modernize it.

So we continually adapt the platforms and the systems to the fight.

That's a great strength of ours, a great opportunity, and frankly, an obligation we owe to the troops.

And then last also, clearly the Naval Industrial base, every year seems to be a topic of consternation.

How do you think about, you addressed sort of the issue at Bath.

There's only going to be three DDG-1000s, and so at some point Bath's going to need some work, and then if TAKE doesn't receive any kind of a follow-on for a command ship, that too will be resized.

And given the long-term nature of the business, what are you doing in those two instances to try to bolster them or improve them, both competitively and I'll say market-wise?

Howard, my simple answer to that, my straightforward answer to that is one word, perform.

And it is our belief that if we continue to deliver platforms, systems, on schedule, on or below cost, that are of quality that makes the customer excited to receive them, then the industrial base discussion puts you at the top of the list.

And so we're very committed to that at all three of our shipyards, and, recall the DDG-51, there may be only one you see right now, but virtually everything you read and anybody you talk to says okay, we have to recapitalize the surface combatant force.

What that looks like, the customer is still trying to define to a certain extent.

That said, it is our belief that Bath Iron Works will be building surface combatants for a long time to come.

The key for us right now is to perform well on the DDG-1000 class and then deliver it to our customer and let them see what will shape itself out of that between that and the DDG-51.

Out at NASSCO, the TAKEs, let me just back it up.

Out at NASSCO, I don't think there's any mystery anywhere of the quality of that shipyard.

It's very highly regarded by everyone as it should be.

So I believe there will be, and you know, we're a little premature here, but within a week or several weeks here, you're going to see an 2011 budget and you're going to see a QDR product or parts of one, that I think will help us get some more clarity on what particular platforms may be part of NASSCO's future.

But on the Navy side, on the military side, the MLP is already being forward-funded to develop.

We're hopeful that more will come out of that and I think it will, but we're also, on the commercial side, you've got the [Jonsczak] Fleet out there that is aging and not double-hulled in every instance, et cetera, et cetera.

So there is a market that is out ahead for that.

It's a question of how it shapes itself and when it arrives, and that's our challenge to manage as operators out there.

Thank you, Jay.

Okay.

As a reminder, please limit yourself to one question.

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

Please proceed.

Good afternoon.

Jay, I was wondering if you could give us an update on what you think the impact could be on General Dynamics of the US pulling all of its troops out of Iraq by the end of 2011, and on the flip side what the surge in Afghanistan could do to you?

I think the way I would answer that, Rob, is I believe we'll be gainfully employed in either instance.

And by that I mean, if the troops come out in 2011, and that's another whole discussion people can have, but taking your question as fact, or reality, if the troops come out at 2011, there is still considerable work to be done on the platforms that we've deployed so hard for the last decade almost in Iraq and Afghanistan.

So the reset alone, the refurbishment, the recapitalization of that wheeled and armored vehicle fleet, if you will, will be very much in our wheel house in terms of work to be done, we believe.

And then also, as I said before, we've got another part of the Combat portfolio in the European Land Systems that's going to give us considerable, and I believe, we believe growing business across the domain, in Europe and elsewhere.

So I don't see the pull-out, if you will, or redeployment as being significantly impactful to us at this stage of the game, because we've got lots to do with the kit that's out there, and don't forget, we also have JLTV in play.

We have EFV in play for the 2015-ish time frame, and the Army Ground Combat Vehicle to be shaped and defined over the next few years.

So I believe that we'll be very busy.

Okay.

Thanks, Jay.

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

Please proceed.

Good morning.

Thank you.

Jay, can you talk a little bit about your confidence in margins in IS&T in 2010?

It seems when we look at the trends in IT that we ought to be bracing ourselves for a tougher Ts and Cs.

So does your guidance reflect anticipation of possibly tougher contract terms, higher standards for award fees, and possibly even lower award fees going forward?

It does, Heidi, and what you say, I think the trending is there, just as you described it.

But we're very attentive to the Ts and Cs going in, and we're very good at outperforming in execution.

So that was the basis really of the margins that we put forward.

All right.

And I'll press more on that offline, then.

But can you give us color on the discussions and demand for Gulfstream coming out of Asia?

Give us some sense of what the order book looked like out of Asia in 2009, and what's the outlook in 2010 to 2012, what's your sales team expecting?

Here is one example to your point.

I always talk about the diversity of the backlog in terms of demographic and geographic.

In 2009, the backlog, the Asia-Pacific backlog, grew from I believe it's 13% to 23%.

So there's definitely increased activity in Asia-Pacific.

And then what your sales force is expecting over the next couple of years?

I think we're expecting more activity, but as we've talked before, it's not one of, shall I say, instant gratification or I don't want to overdrive our headlights here, because we believe the Asian market will continue to grow, but the pacing of that is still somewhat to be defined just based on air space, air fields, [FEOs], et cetera, et cetera.

But clearly, we believe that's a market that will continue to grow and we look forward to being a big part of it.

Great.

Thanks.

I'll let someone else get into the questions.

Thanks, Heidi.

And Steve, I think we have time for one more question this morning.

Yes ma'am, then your last question will come from the line of Myles Walton with Oppenheimer.

Please proceed.

Great.

Thanks.

Good afternoon, guys.

Hi, Myles.

The question on Gulfstream kind of a follow-up to Cai's.

Even within the large cabin mix, the 77 versus 75, isn't the mix in 2010 more favorable within the large cabin toward the 550 in 2010?

Yes, is the short answer, it is.

The 550 is very strong.

The pricing is very strong.

The 450's doing quite well, but if you had to me to rank them right now the 550 is definitely strongest.

I mean, what is the pushback on the margin line, is it higher R&D?

Are we staying at the 2% or is there something else, or does this just come down to pure conservatism?

Yes, you just said the word.

We are being, as we usually are at this stage of the year, very conservative, and I won't apologize for that.

All right.

Thanks.

Okay.

Thanks, Myles.

And that concludes the q-and-a portion of today's call.

I'd like to turn the presentation back over to Ms.

Amy Gilliland.

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

Thanks and have a great day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.