通用動力 (GD) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the first quarter 2010 General Dynamics earnings conference call.

My name is Shamika, and I will be your Operator for today.

At this time all participants are in listen only mode.

We will conduct a question and answer session towards the end of today's conference.

(Operator Instructions) I would now like to turn the presentation over to your host for today's call, Ms.

Amy Gilliland, Staff Vice President of Investor Relations.

Please proceed.

Thank you, Shamika, and good morning everyone.

Welcome to the General Dynamics first 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 delivered a good first quarter marked by strong operating performance across our businesses.

Revenues in the quarter were $7.8 billion, down from the first quarter of 2009.

You may recall that in last years first quarter, revenues were unusually high.

In fact, it was the Company's single largest revenue quarter ever, unlike last years experience, we expect sales to continue to increase as the year progresses more consistent with our historical patterns.

Operating earnings were $918 million in the quarter, up slightly from last years first quarter resulting in an 11.8% operating margin.

A favorable program mix and disciplined execution contributed to the 80 basis point year-over-year margin improvement with particularly strong performance at Aerospace and Combat Systems.

Earnings from continuing operations were $599 million, up slightly from last year's first quarter.

This drove a 7.7% return on sales, 50 basis points better than last year.

Earnings per share from continuing operations were $1.54 on a fully diluted basis, flat when compared with first quarter 2009.

Free cash flow after capital expenditures totaled $150 million, somewhat light but better than last years first quarter.

In the quarter, we experienced some growth in operating working capital at our IS&T group in general and at C4 Systems in particular.

This is largely a timing issue that will reverse itself as the year progresses.

We should be around 100% net earnings to free cash conversion again this year.

First quarter orders totaled $7.2 billion, significantly higher than last year with robust award activity across our business portfolio.

Backlog totaled $63.9 billion at the end of the quarter, down modestly from year-end.

Funded backlog, however, was up 3% at $47 billion.

Total potential contract value which includes backlog, unexercised options and indefinite delivery and definite quantity contracts reached nearly $81 billion.

Now I'd like to focus on the performance of each of our business segments starting with our three defense groups, and I'll begin with Combat Systems.

Sales were $2 billion, down $400 million or approximately 17% from last years first quarter.

The volume decline resulted from several factors, a significant decrease in MRAP volume when compared with the first quarter of 2009, the absence of deliveries of weapons systems that protects soldiers from roadside explosive threats, lower small caliber amunition volume, and last years cancellation of the future Combat Systems program.

Higher volume on Abrams, Stryker, and several European vehicle programs somewhat offset these declines.

Our Combat Systems businesses delivered $269 million of operating earnings in the first quarter, down just $10 million from last year on significantly less volume.

Consequently, the groups operating margin was 13.4%, 180 basis points higher than last year.

This performance was the result of a favorable program mix and strong execution on several vehicle and amunition programs.

Combat Systems backlog declined modestly from year-end to $12.9 billion.

Despite the decline in backlog, award activity was healthy in the quarter.

We received new orders on our core programs and also won several new opportunities.

These new opportunities include an additional 250 RG31 MRAP vehicles and MRAP axle awards beyond the retrofit work we had expected this year.

The MRAP deliveries, are scheduled largely in the second half of the year.

In March, we were selected as the preferred vehicle provider for the United Kingdom FRES program.

This opportunity includes both the scout variant and the common base platform for up to 580 specialist vehicles.

The FRES program also anticipates several other blocks of vehicles for which we will provide the common base platform.

We are working with the United Kingdom on the initial FRES contract and we expect to add it to backlog later this year.

The FRES program provides good upside to combats outlook over the next five years.

There are several other opportunities that could generate additional awards this year, including the Canadian LAV upgrade program for which we expect to receive a contract in the second quarter and the Spanish 8X8 vehicle competition which we expect to be awarded in the second half.

Other potential 2010 awards include the ground combat vehicle competition, the next phase of the Saudi tank program, additional Iraqi tank options and the opportunity to enhance Stryker combat vehicle protection.

For the year, I expect Combat Systems sales and earnings to grow each quarter.

This trend is typical for Combat Systems as the groups European vehicle business generally realizes a significant portion of annual sales and earnings in the third and fourth quarters.

Much of the top line growth I've guided to for the year comes from international programs including the LAV FMS program and several European vehicle programs.

Our plan anticipates these programs building in the second half.

That said, it is worth noting that we have experienced delays on international programs in the past.

While our current international programs are still on track, it is too early in the year to predict with certainty how they will unfold.

I remain comfortable with the earnings implied in my guidance for the group, although they could come from slightly higher margins and lower revenue than originally forecast.

Marine Systems.

The Marine Systems group had a solid first quarter.

Revenues were $1.6 billion in the quarter, down very slightly compared to year ago.

Operating earnings were $161 million and operating margins were 9.8% essentially flat when compared to first quarter 2009.

This margin reflects improved performance on our auxillary ship programs and negative mix shift in our surface combatant programs as DDG-51 work declines and DDG-1000 volume increases.

Marine's backlog totaled $22.1 billion at the end of the quarter, down slightly from year-end 2009.

We added orderea for two T-AKE's in the quarter as well as long lead funding for another DDG-51 destroyer.

I anticipate orders for two additional DDG-1000's later this year which will again increase the size of the backlog.

Marine Systems will see growth in volume as the year progresses, although mix shift in the destroyer program will continue to pressure the groups margins.

Given their excellent execution to date, however, I think there is a chance that they will outperform my mid 9% margin guidance for the year.

IS&T.

The Information Systems and Technology group began 2010 with their largest sales quarter ever at $2.8 billion.

Earnings were $290 million and operating margins were 10.5%.

Margins were particularly strong at our IT services business which enjoyed a favorable program mix in the quarter.

IS&T's backlog was $10.3 billion at the end of the quarter and once again, the group achieved a book-to-bill of one-time.

This reflects continued demand for the groups products and services, particularly in light of their robust first quarter sales.

This quarters order activity was very strong at our Tactical Communications and IT services businesses reflecting our success in capturing business in faster growing market segments such as tactical networks and communication, healthcare services, simulation and training, and IT infrastructure.

We had a number of notable IS&T awards in the quarter some of which you'll find at Exhibit G of our press release.

Work on these contracts will help drive the groups revenues this year, especially in the second half.

IS&T's estimated potential contract value under IDIQ contracts grew 3% in the first quarter to $13.2 billion.

When combined, backlog and estimated potential contract value totaled $23.5 billion providing IS&T ample opportunity for continued growth.

IS&T remains well positioned to achieve my guidance of approximately 8% to 9% sales growth in mid 10% margins this year.

Now let's move to Aerospace.

The Aerospace group is off to a very good start in 2010.

When compared to last years first quarter, the groups revenues were down 6.7%.

However, first quarter 2009s results reflected a higher annual production rate including three additional green deliveries, and 17 additional completions.

Of those 17 additional completions, 15 were mid cabin aircraft.

You may remember that we reduced Gulf Stream's annual production in March of 2009 as a result of the change in market conditions.

The most significant production cut was in the mid cabin aircraft.

On the other hand, first quarter revenues were $1.4 billion, up nearly 15% over the fourth quarter of last year due to additional Gulf Stream new aircraft volume.

Gulf Stream green deliveries in the first quarter included seven additional mid sized jets when compared to last quarter and one additional large cabin aircraft.

The groups operating earnings were $218 million and margins were 16.1%, improved when compared with both last quarter and the prior year period.

Last years cost cutting efforts helped to drive some of the margin improvement in the quarter.

We continue to see gradual improvement in the business aviation market in 2010 including healthy customer interest particularly for our largest jets.

We also see declining pre-owned inventory levels and healthy after market demand.

Gulf Stream enjoyed their largest order intake since mid 2008 in the first quarter with international orders dominating the order book.

Orders were representative of every major international region and demand was particularly strong for our large cabin aircraft.

Gross new aircraft book-to-bill was 1.2 times on a dollar denominated basis.

Despite good order intake, new aircraft deliveries, and default activity led backlog to decline modestly from year-end to $18.5 billion.

Orders outpaced defaults for the fourth consecutive quarter and with continued economic recovery, I expect orders to increasingly outpace defaults as the year progresses.

Pre-owned inventory levels continued to decline.

We sold three pre-owned aircraft this quarter, took none in trade, and have one aircraft remaining in inventory.

For the remainder of 2010, we have no more than four trade-in commitments.

Aircraft maintenance, repair, and overhaul demand was solid in the quarter although the first quarter does tend to be somewhat lighter than other periods of the year.

Jet aviations global FBO aircraft management and charter businesses were particularly strong.

As we expected, it appears the group services business will be up for the year in the low to mid single digit range.

We continue to make great strides in our Product Development programs in the first quarter.

Both the G250 and G650 have two aircraft in flight test at this time and we are extremely pleased with the results we've seen.

Certification plans for both models remain on track.

For the year, we remain on pace to achieve our delivery plan which includes approximately 77 large cabin aircraft and 14 mid size.

Large cabin deliveries will be slower in the third quarter as we are planning a two week furlough at Savannah.

Slight improvement in the mid cabin market could provide upside to planned deliveries.

I remain optimistic on the outlook for the business aviation market and am encouraged by the generally positive trends we've seen thus far in 2010.

Aerospace is well positioned to achieve low to mid single digit sales growth with some upside to the 14% margin guidance I've provided.

With regard to capital deployment, our solid balance sheet affords us ample flexibility to enhance shareholder returns.

In the quarter, we continued our balanced strategy, repurchasing 2.9 million shares at attractive prices.

We also expanded our Tactical Communications portfolio with the acquisition of a software company that facilitates battlefield information collection and dissemination for soldiers, a capability at the forefront of defense spending priorities.

The Board also increased the quarterly dividend by 10.5%, the 13th increase in as many years.

In summary, we've hit the deck running in the first quarter and we're on our way to another successful year.

The year is still young, so I'm going to reiterate my full year guidance of $6.40 to $6.50.

I think I've provided some indication of where I believe there may be upside to that guidance but it would be inprudent to make any adjustments at this point.

The improving business jet market and 2011 defense budget request provide a good foundation for the Company moving forward.

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

Hugh?

Thank you, Jay, and good morning everyone.

Although interest expense was up for the first quarter compared to a year ago, we expect full year interest expense to be down slightly from 2009, somewhere between $150 million and $160 million.

This estimate of course does not assume any extraordinary capital deployment activities throughout the remainder of the year.

Over the past 12 months we've cut our net debt and by net debt I mean debt less cash, cash equivalents and marketable securities, we've cut our net debt in half from $2.6 billion to $1.3 billion.

This improvement can be attributed to our strong cash performance and comes after deploying approximately $700 million in acquisitions of new businesses, $600 million in payment of debt dividend, excuse me, payment of dividends, $500 million in Company sponsored research and development, $400 million in capital expenditures and $300 million in share repurchases.

Over this period our debt to equity ratio has dropped to 30.2% from 37.8% and our debt-to-capital ratio is 23.2% down from 27.4%.

Our next scheduled debt repayment is $700 million of fixed rate notes due in August of this year.

Finally, I would also like to remind everyone that we plan to make a voluntary contribution to our pension plans of about $270 million in the third quarter of this year.

That completes my remarks.

Amy, I'll turn it back to you to begin the Q&A.

Thanks, Hugh.

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

If you have additional questions, please get back into the queue and Shamika, of you could just please remind participants how to enter the queue?

Sure, ladies and gentlemen, (Operator Instructions) Your first question comes from the line of Robert Spingarn of Credit Suisse.

Please proceed.

Good morning.

Good morning, Rob.

Jay, could you talk a little bit more about the flow in combat as you progress through the year?

You've certainly started to in your monologue but you really do need to see some kind of substantial ramp to get to the revenues and I do note that you said you might not quite get there, but how should we think about that relative to the margins as well, where it looks like we'll see some decline.

How should we think about the mix and the flow?

I think the way I'd characterize it, Rob, at the top is that our core programs are stable and have some potential to build as the year progresses and I would relight that specifically to Stryker.

But the big growth, if you will, as the year progresses will come, as I alluded in my remarks, from the international programs, and we have a number of those as you know.

So it will be gradual as it usually is, heavily weighted if you will to the third and fourth quarters which is not at all unusual for Combat Systems, but fairly substantive in its elements across both US franchise and international.

That's the general description I would offer.

Without asking to go too far into the future, would you say this is going to be the most revenue challenged segment over the long term?

But of course, you know, we would see upside or offset I should say from Aerospace and elsewhere?

I've got to say, Rob, that I'd punt the answer a little bit in the following way.

What I see, there's potential for that, but what I see for example, in the 2011 budget submit is very strong support for the US franchise programs,aka Stryker, Abrams.

We've got grand combat vehicle competition that will lay itself out later this year.

JLTV is still playing.

Stryker is in play right now.

Reset, modernization, all of those elements, it's not just new production, so it's multi-faceted and very robust as we go forward, so I don't see -- I don't see a big tail off if that's perhaps the implication here because our core programs are being very well supported.

We also have on the international side things that perhaps weren't realities the last time we talked like, as I mentioned in my remarks, the FRES contract which will be significant, a significant add to the portfolio for Combat Systems.

Jay, thank you very much.

Okay.

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

Please proceed

Good morning.

Jay, I was wondering if we could go to Aerospace and if you could comment on the operating margin in the quarter.

It's clearly ahead of your full year guidance.

Has there been any unusual items in there this quarter?

Okay, we'll talk about Aerospace a bit.

To your point on margins, I'd start it off by saying I'm very pleased with the performance at Aerospace both in Gulf stream and in jet aviation so let's just get that on the table at the start and it's reflected in the margin performance that you saw.

There are several things that play in realizing those margins relative to both year-over-year, you know, first quarter 2009 and the sequential from last quarter.

Example.

Year-over-year.

Our margins this quarter were positively impacted certainly by mix, as I mentioned I think in my remarks, so we had 15 fewer mid size completions this year than we did last year.

Also, we didn't have pre-owned charges this year which we had last year and as is usually the case when we're talking about Aerospace here, they lowered their SG&A this quarter through great discipline, continuous improvement and cost savings, so those are three I'd say elements that differentiate this quarter from year ago quarter on the margin side.

Let's talk about sequential from fourth quarter 2009 to first quarter 2010, and the positive influencers if you will are somewhat different this quarter.

I'll leave the lower SG&A in there because indeed that made a big difference again this quarter as it did in the year-over-year comparison but we also had improvement at jet aviation which is consistent with what we've been telling you was happening and would continue to happen.

We saw that quarter-over-quarter here and we're very pleased with that, and I would also say, as I mentioned in my remarks I think, that we did have some liquidated damages, so that's kind of the summation if you will of elements that I think impacted the differentiation quarter to quarter and year to year.

Now, that said, I would caution not to get too far ahead of me on margins this year because we have some things to think about going forward.

One is that we are planning a furlough at Gulf stream in the third quarter not as long as we had last year but nonetheless we've got a furlough in the plan.

Which will impact us and also, the mid size mix is still a little bit uncertain in all of this, depends on how the market recovers, depends on how many completions, etc.

So that will definitely have an impact, could definitely have an impact on the margins going forward and then I would also say that we expect the liquidated damages to be less of a factor going forward.

And we can talk about the backlog later but point of fact, what we see didn't surprise us and we see less in the next and subsequent quarters going forward so that's probably more than you asked for but that's kind of my rundown on the margin side and I hope it's responsive to your question.

That's great.

Thanks very much, Jay.

Okay.

Your next question comes from the line of Cai von Rumohr of Cowen & Co.

Please proceed.

Yes, thank you, Jay.

Good morning, Cai.

Looked like your cancellations were up a bit from the fourth quarter at about $1 billion.

Can you give us some color on A) what was the size of the LD in the quarter and kind of where did the cancellations come from and kind of what's your prospect for cancellations over the next couple quarters?

You bet.

I'd be happy to.

First of all, I'll just go in terms of orders and defaults and just lump them together here the way I've got it stacked in my head.

It was on the order side the best quarter we've had since the third quarter of 2008 across the productline and as I mentioned orders did outpace default for the fourth consecutive quarter so we feel very good about that.

$18.5 billion is a very robust backlog by any measure, so I feel very good about that even though it moves around a little bit.

Now, the default activity in this quarter, we'll talk about it a little.

A couple things.

For example, it was greater than it was the quarter before.

Were we surprised by that?

Honestly, not really.

Okay.

And here are a couple reasons why.

Let's talk about 650.

We had actually by number, five 650 defaults in the quarter, okay?

They were all tied to you recall the first flight payment milestone.

Anyway, that's a fourth quarter event that manifested itself in activity in the first quarter, so we lost five of those.

Not surprisingly, they were instantly backfilled and were still taking orders and the 650 backlog is still just south of 200 aircraft but it did in fact impact us on the liquidated damages side.

In addition to that, Cai, we had a number of defaults frankly that we've been working with the customer for a while and you could have brought some of them to default in the fourth quarter and in the year we got payment milestones moved to the first quarter and so some of that just triggered as a result of timing and things or folks we've been working with for a while so again not a big surprise.

Having said all of that, as we told you before, Joe Lombardo, Larry Flynn, the Gulf stream team and I spend a lot of time together going through the backlog, customer by customer and we still do that almost weekly.

And what we see ahead of us is an order book that is still very robust and that default activity that will decrease as the year progresses and I would expect a spread between orders and defaults to continue to increase as the year goes forward.

I hope that answers your question.

Accept for the amount of the liquidated damages in the quarter?

No, I won't provide that to you this morning, sorry.

Okay.

But it was not, it's not the highest nor the lowest we've ever seen.

It's kind of in the middle and if you took some of the actions that I described that became first quarter events that were kind of actually could have been fourth quarter events, I could almost draw you a straight line across the last four quarters.

Thank you very much.

Okay.

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

Please proceed.

Hi, good morning.

Good morning.

I think you may have touched on this at the very beginning but on combat systems book-to-bill still less than one, it was below one for 2009 and I was wondering if you looked out beyond 2010 if you can comment on what you think that might mean for sustained growth at Combat Systems and I think one of the things I think you were saying is that look, you're expecting book-to-bill maybe to improve later on in the year possibly driven by these increased European orders.

Is that essentially correct?

Yes, it is.

You've got it.

I mean, we see again in the US franchise programs, there is opportunity for growth.

Okay?

They're as stable as they can be right now, but there is growth opportunity, particularly with the other elements that we talked about like reset modernization vehicle improvements, etc.

But on the international side indeed, that is a portfolio that will build as we go.

We can see it.

I just can't time it out to the day.

That's really the reality and it's not a surprise, so you know,we can talk about backlog a little bit just as it applies across the Corporation.

It's not a one size fits all package.

What do I mean by that?

Let's just talk about the defense business, as the Aerospace backlog we talked about but in the defense businesses, you've heard us say before I think in the Marine Systems group, the backlog is very lumpy and we're usually talking big lumps when they come, okay?

We're at $22 or so million right now and when we don't have the next two DDG-1000's in the backlog yet, etc.

You understand that.

Yes.

On the IS&T side, relatively speaking, it's pretty steady Eddie, okay?

Now that oversimplifies how difficult it is to sustain a 1 X book-to-bill as they're very good at doing but they are very disciplined and very accomplished at that so that's pretty steady.

On the combat side, it's almost in between those two that I just described but it tends to come particularly when you see some of this international business in pretty lumpy orders, so all that said, we can see a lot out ahead of us but how it comes and in what size lumps I think is something we're just going to have to work our way through.

But clearly for Combat Systems, the build will be throughout the year and the programs that we see on the international side, FRES as I mentioned, the LAVS in Canada, there's another vehicle competition that we anticipate in Canada called the Tactical Armored Patrol Vehicle that we partner with Osh Kosh on that will realize itself, we believe based on what they're saying now, next year and stream out for several years.

We've got the FMS LAVS at great scale, $2.2 billion that are just coming into design work right now that will play out for the next several years.

We've got more LAVS from that customer's country that we believe will come in the second half of this year.

We've got Iraqi tanks.

We've got Saudi Arabian tanks, so there's lots of business that we can see building over the next five years, probably longer than you wanted.

That was great.

Thanks a lot, Jay.

Okay.

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

Please proceed.

Yeah, good morning, Jay.

Good morning, Peter.

Thanks for all your great color on the Gulf Stream, but maybe you could just give us an update on the flight testing of the G650 and the 250 how are things going there and also just the order activity on the 250, you've got about 15 months I guess before you'll start maybe delivery, so any color there would be great, thanks.

Okay.

I alluded to it or I mentioned it in my remarks but I would just tell you that we're doing lots of flying on both sides of the ocean with the 250 and the 650.

They are in all corners of the flight envelope and we love what we see.

That's the best way to say it.

These are sweet machines.

We're not being surprised by anything and the pilots can't get enough of them, so as a pilot, I'm envious.

Anyway, so those programs are proceeding as they need to right now.

I think we'll have the third 650 flying here within a matter of days if not weeks, so all is proceeding on pace for certification next year and I see no speed bumps in our way at this point.

The 250 order book, honestly, is a manifestation of the mid cabin market so it is not robust at this point I would tell you.

But I'm okay with that because as you mentioned we've got 15 months until it becomes an entry into service reality and when people see, touch, and fly in this airplane, they won't be able to get enough of it.

So that is my profound belief and it also will give us the pacing right now, puts us in I think in good shape to match the market as it recovers the mid cabin market that it recovers because we are seeing activity in that market and I think you're hearing that from the other OEM's as well.

Yeah, absolutely, thank you, Jay.

Okay, and I might add one other thing to that, Peter, is we don't build white tails on the 250s because we match demand with supply, but we're very excited about the 250 as we are about our 650 and I believe the sales will become very robust.

It's just not time yet.

Okay, I appreciate that.

Okay.

You have a question from the line of Sam Pearlstein of Wells Fargo Securities.

Please proceed.

Good morning.

Hi, Sam.

Jay, if I just think about everything you've said so far other than combat coming in, you're saying sales could be a little bit lighter over the course of the year but margins higher, it sounds like marine is ahead of expectations, Aerospace is ahead, perhaps interest is a little higher than you might have said in the past but what else causes you concern?

I know it's only the first quarter but what causes you concern as you look towards the remainder of the year?

Well, I guess, Sam, the timing in combat, if there's a concern as I've talked about, that may be an issue but it's not a long term issue, it's just not something I can control to the day, but other concerns, if we have an economic relapse that would certainly impact us, but right now, what I see of the year and what I see of the Defense sides, budget based on the submit for next year and still looking at the fit up as a fit up of record, we feel like or I feel lake the plan is pretty solid right now and we can execute with that plan with a chance to beat it.

Okay and if I can follow-up just a quick question.

Can you talk about the DDG-1001 and 2 in terms of is that still going to be fixed price, anything and you can help us in terms of how that discussion is going?

Sure.

We have, we expect that contract to be let here in the next couple quarters, probably it will be second half, so in terms of impact if you will this year, it won't one way or another, it will really be an 2011 event but what we should have the contract done here within the next couple quarters.

The fixed price is still there, okay, and we're excited about that so the Cost Plus boat is in the build right now and going very well by the way.

We're very proud of the work that's being done on that, so we're ready for the fixed price boats and the contract will come.

We have every indication that it's on track, it's just moving through the system.

Does that answer your question?

Yes, it does, thank you.

Okay.

You have a question from the line of Joseph Nadol of JPMorgan.

Please proceed.

Thanks, good afternoon.

Afternoon, Joe.

On IS&T, Jay, the sales were, the organic sales looked like they were negative in sort of the 3% range in the quarter and you had a strong first quarter last year so some of this might be comp but I'm just wondering your guidance implies something along the lines of a think 6% organic growth for the year so you have to be close to 10% for the rest of the year to get there, and any concern there or is this just a comp issue?

No, I mean, I think a lot of it, Joe, really is the comp issue.

This was our best revenue quarter ever and it comes off of what I'd say was an unusually strong Q1 2009 and I think if memory serves it was like 16% better than the 2008 Q1.

So we didn't help ourselves with the comp in that sense but it's really more to me, I feel very good about IS&T right now.

They had a great performance quarter as we described.

I anticipate more of that for the rest of the year and the timing of the contracts, okay, maybe not as dramatic as I described in Combat Systems but the sensing will be that that will build again throughout the year as we go forward, so we've got as you know a very diverse portfolio, all elements of that portfolio are very active.

We've got Tactical Communications, battle space managements, C-squared, whatever you want to call it with Win T, Increment 2, Increment 1, Increment 3 is in play.

We've got JTRS', we've got common hardware/software working there, IT services was very strong as I detailed in my remarks, ISR is still very active, access is busy within that space for us as we expected and throughout it all, throughout it all, we've got cyber at scale, so we're very busy in IS&T.

I don't expect that to change.

Their year is a challenge but they are up to the challenge.

That C4 issue that you mentioned, that cost you some cash flow, did that cost you some sales also in the quarter and maybe could you give us just some color on how that's going to be resolved?

As I said in my remarks, we had a little low WC issue in the first quarter that's going to work itself out through the year.

It's not even worth discussing beyond that except to say it was a timing thing and off we go.

Okay, thank you.

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

Yeah, hi, good afternoon, Jay.

Hi, Ron.

You mentioned earlier that you were pleased with the performance of jet in the quarter.

I was wondering if you could just give us a little more color around that, how much it's contributing to the aviation segment.

Well, you know I'm going to keep it at the group level but I would just tell you that and I just spent a lot of time with Jet here about a week and a half ago in Europe and took full reports and saw firsthand what's happening and Jet Aviation is giving us what we thought Jet Aviation would give us when we purchased Jet Aviation, and we've had some operational challenges at the front end, mostly to do with matching volume and productivity, but we have that well in hand and they are operating very well right now and so we're excited about what we see and they will continue to be ever more important contributors if you will to the Aerospace groups contributions.

MRO global footprint, it's becoming, when you look at the for example, when you look at the Gulf stream order book, and look at how global it is, predominantly international certainly this quarter and more than 60% last year international and you look at the Jet footprint, global footprint, the two come together pretty nicely, so we're very, that's a long way around me saying I'm very pleased with what jet is putting forthright now and they will continue to improve as we go and become ever more important to the Aerospace group.

Are you seeing a pick up of volume in the business?

Yes.

Okay, thank you.

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

Please proceed.

Yes, good morning.

Hi, Heidi.

Hi.

A question for you on Aerospace.

You were talking relatively bullish but you're acknowledging it's the first quarter so can you talk to us about what do you need to see to take the prediction rates up higher and also talk to us about the percentage of slots that are sold out for 2011.

Well, I'm very happy, very bullish on what I see on the large cabin and I think, you know, in terms of production to your first point, I think it really is going to be paced by what the mid cabin market brings to us.

We can adjust, I can adjust, Joe can adjust the large cabin production somewhat, but we've got a pretty robust plan in execution right now for that, but there is some room I think on the mid cabin, so--

Actually I was more referring to 2011.

As you look across the metrics in 2010, is 2011 flattish or are you sort of, do you see cause for 2011 going higher or what would you need to see?

Yeah, it's pretty early in the year for me to get clairvoyant on that in terms of giving you numbers and I won't do that but I will say, Heidi, back to my comment earlier about familiarity with the backlog and what we see with our customers, right now, based on what 2011's backlog looks like, frankly from a production standpoint, especially large cabin, I don't see much change at all.

Certainly not on the down.

Great, and then on the, you talked about seeing a decline in SG&A.

Talk to us about what is the sustainability of SG&A when volumes return?

I mean, we pride ourselves on my word, agility, on the down and on the up, so we'll ramp appropriately as the market takes us to different production levels.

I mean, and Joe Lombardo and his Aerospace team kind of wrote the book on that, so we know how to do it very well.

We right sized the business at the time it needs to be right sized.

We're very proud of that and we're very disciplined about making sure we never fall off that.

What I was trying to understand better was as volumes return, is the SG&a going to come back on a one on Juan basis or have you changed the business enough you'll get added leverage on the up from what you did on the down?

My answer to that would be to take you to your latter rather than your former statement.

All right, great.

Thanks very much.

Okay, Heidi.

You have a question from the line of Troy Lahr of Stifel Nicolaus.

Please proceed.

Thanks.

I wonder if you guys could help me understand the changes to your LCS partnership and what the future opportunities are for you there on LCS?

Okay, Troy.

You know that we are, we've delivered LCS to the Navy.

We are in the build at Ostile on LCS-4, Bath Iron Works is the prime, Ostile is the sub.

We have submitted, well, the fiscal year 2010 proposals have been submitted and Ostile is priming that for good and sufficient reasons, okay?

What do I mean by that?

These ships are being built in their shipyard.

They are clearly ready to prime, and quite frankly, to be as competitive as we could be with the Ostile boats, we felt that having them solo, if you will, rather than having them and Bath Iron Works in there would make them more cost competitive because you don't have two yards, you're only working with one.

Embedded in all of that for us is the fact that the core mission system of that great ship is ours, okay?

Comes from our IS&T team, AIS in particular, and it's working beautifully and it's open architecture and we're very excited about that, so that's a long way around saying that we felt that for this round, it was most appropriate for Ostile to prime this, they felt that way and we are incomplete alignment with them on that.

Oh, by the way, it also for Round 2 the way the RFP is set up by the Navy for Round 2, it also then would give us the opportunity to bid for the second source in 2012 should we choose to do so, but that's a long way down range, but I hope that answers your question.

Okay, yeah, that's great and just one other side note.

Could you just give us the numbers for the sales and the income associated with some of those pre-owned sales on the aircraft side?

Make it real easy.

It was $31 million, no up, no down, breakeven.

Great.

Thanks.

Okay.

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

Please proceed.

Thank you very much.

Jay, as we wind down in Iraq and sort of pick up the pace in Afghanistan, it looks like some of your combat business is seeing some different changes in demand.

Could you address your comments on small Cal and also on the Chameleon in particular?

Or was there something else that I'm just missing?

No, no, no, Chameleon was a program that basically got replaced.

I think that's my non-technical way to describe that, but at any rate, the program is no longer a factor for us as it was initially and that's what I was alluding to in my remarks.

The small Cal frankly was just a contract wind down and that was the impact but the ammunition business is still very robust for us, small, medium and large.

Large and medium propellant, the precision stuff so we're very active.

I didn't mean to imply and maybe I painted it that way in my remarks, I certainly didn't mean to imply that the ammunition business was suffering because it's not.

We've got a great team and they're doing great work and they've got lots of it to do.

And then could you explain the furlough at Gulf Stream?

I mean, if business is that good, why do you need to give them a couple of weeks off?

Well, I've got your point.

The truth of it is, it kind of helps us level load the year there and I guess you could say that you didn't have to do it but we choose to and I think it works for us.

At a two week plan right now, I think everybody feels pretty comfortable with that so we're going to, unless something drastically changes, we're going to keep that in place.

And just sort of on the 650, how is, I mean you're talking about the third airplane and there's more to follow.

I mean, can you, I know it's early days, is there any way you can give us an indication of the planes starting to show a learning curve and is the factory starting to fill the way you expected?

Yes, and yes.

I mean, we get into the discussion, Howard, about what are the margins going to be and what's the production rate.

I'll leave that for later.

Yeah, I'll stick to where I have been and that is 17, 33, 33 is the production rate I've got stacked in my head, but we designed that aircraft and that facility for manufacturing as you well know with the 3D Catilla V-5, the repeat ability, the produceability, the 50% fewer parts, all of that and the bonding versus riveting, all that takes us to a place.

And oh, by the way, as we go here with the flight test vehicles we're already making subtle changes to the subsequent vehicles as you'd expect, aircraft as you'd expect so all of that bodes well for great produceability at scale and we intend to do that.

It's just not time yet.

We've got to get ourselves up on the ramp and go more steady State, but we're very encouraged by what we see, we're dealing with it and we've got an order book that handles it.

Thank you very much.

Operator, we have time for one more question.

Your final questions from the line of Noah Poponak of Goldman Sachs.

Please proceed.

Good morning, Jay.

Hi, Noah.

As I listen to you talk about mid cabin business jet, you sound more positive on that market than I think the last couple times we've heard, and we just had Cessna report the other day and they talked about seeing some more cancellation activity than expected there and the potential for some downside to their production forecast there, and just sort of having limited visibility.

I wonder if you could maybe speculate on the difference in tone there.

Are you taking share or is it just at the bottom of the cycle and it's tough to tell and what's your outlook for this?

I'd kind of go with what you just said.

I mean, it's a little tough to tell but I mean I can tell you from us, I won't speak to the others in the context of numbers and what if's but for us, I mean, we are seeing order activity in the mid cabin, not just tire kickers.

People are actually buying airplanes, so that's good.

We see it in the servicing side of our business where the services have returned.

They aren't skyrocketing but it's certainly stabilized in the mid cabin for us, so the indicators are tending albeit slowly to a mid cabin recovery and some declutter in the market space out there that will bring the inventory back to what I would call right size to go forward.

Okay, and I'm going to try to sneak in one more since I'm last and you haven't been asked about this in a while.

Can you update us on your commercial shipbuilding business, what's the backlog at and what kind of revenue run rate is that experiencing today?

The commercial shipbuilding business which resides as you know, Noah, out at Nasco in San Diego, is doing very well in execution.

In fact, it's doing superbly in execution.

Every product carrier we've put out has been ahead of schedule and below budget, okay?

So we know how to build those ships better than anybody.

That said, the challenge there is the market space and so you know we're building one through five in the product carriers, six through nine are not in the build, and right now, today's answer is we don't expect them to come to us any time soon.

They are not, they are not in our plan anymore, okay?

But, that market too shall return and we are getting some interest in commercial activity that could be resident at Nasco.

And I don't want to get much more specific than that except to say and I think we've talked about this before, you've got Jones Act ships that are out there in some number that are getting very old and very tired and very inefficient and frankly, you've got environmental disciplines that are going to be kicking in here in terms of, you know.

single hull versus double hull oilers, etc., etc.

So there's a lot going on that will come.

It's just a question of when it comes.

Nasco's Navy side is coming out with 14 T-AKE's which are being done very well as you might expect and that will bring us out through 2012 there, the mobile landing platform is being put into the 2011 budget.

We're already doing some of the front end work on that and so we expect at least three of those mobile landing platform, mobile landing ships and then you've also got a significant book of business out there with repair.

There's no Navy shipyard, okay, in San Diego and they are over 50 Navy combatants that need to be maintained out there, so that I think last year was like, I don't know, 20% some, 24% I think of Nasco's revenues, so there's plenty of work in that book of business.

The commercial side just needs to have the market come back and we'll be very competitive when it does.

Okay, thanks a lot.

Okay.

I just want to thank everyone for joining our call today and if you 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.

You may now disconnect.

Good day.