通用動力 (GD) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 General Dynamics earnings conference call.

My name is Derek, and I will be your operator for today.

(Operator Instructions).

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

Amy Gilliland, Staff Vice President of Investor Relations.

Please proceed.

Thank you, Derek, and good morning, everyone.

Welcome to the General Dynamics third 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.

With that, I would like to turn the call over to our Chairman and Chief Executive Officer, Jay Johnson.

Thank you, Amy, and good morning, everyone.

General Dynamics delivered another solid operating performance in the third quarter with sales of $8 billion, nearly 4% better than the same quarter a year ago.

Operating earnings of $966 million were up 10.5% over the year ago quarter.

Company margins improved 80 basis points to 12.1%.

Earnings per share were $1.70 on a fully diluted basis, $0.22 better than last year's third quarter.

Third quarter free cash flow, after capital expenditures, was $784 million, 121% of earnings from continuing operations.

This includes a voluntary payment of $270 million to our pension plan.

In terms of capital deployment, we used $700 million in the quarter to retire our 4.5% fixed rate notes.

We also purchased 2.7 million shares of General Dynamics stock in the open market for $163 million.

Year-to-date, we have spent $726 million to repurchase 11.2 million shares.

Through share repurchases and dividends, we have returned almost 90% of year-to-date free cash flow to shareholders.

Third quarter orders were the strongest we've seen this year.

Aerospace and IS&T's book-to-bill exceeded 1 to 1, while Combat's book-to-bill was nearly 1 to 1.

At the end of the quarter, total backlog stood at a robust $61.8 billion.

Now let me turn to the results and outlook for each of our groups, starting with the largest of our four businesses, IS&T.

IS&T enjoyed strong orders, sales, earnings, and margins in the third quarter.

Sales were nearly $3 billion for the second consecutive quarter, an 8% increase over last year's third quarter.

This is healthy growth, in light of the fact that last year's third quarter was the group's highest sales quarter in 2009.

Year-to-date, sales are up 7%.

The group's third quarter earnings were $306 million, up 3.4% year-over-year.

Operating margins were 10.4% in the quarter, essentially in line with my 10.5% full-year guidance.

The group's book-to-bill exceeded one times for the third consecutive quarter, causing backlog to increase by $230 million.

If the group maintains this win rate, as I expect, 2010 will stand as the 12th year that book-to-bill has been at or above one times, an excellent track record for a business of this size and diversity.

Award activity in the quarter was particularly strong at our Tactical Communications and IT Services businesses.

Several of these contracts are detailed in today's earnings press release.

Total estimated contract value, which adds the potential value of IDIQ contracts to total backlog, stood at $24.9 billion at quarter-end.

This represents well over two times expected 2011 sales, and a 5% increase above the year-ago value.

Fourth quarter sales and margins will be essentially in line with the third quarter.

For the full-year, I expect group sales to increase approximately 8% to 8.5% over last year, driven by double-digit sales growth in our Tactical Communications and Information Technology Services businesses.

Margins for the year will remain around 10.5%.

As we look to the future, IS&T is particularly well-positioned.

I want to spend a few minutes this morning, giving you a sense for why.

First, a few facts that highlight the group's diverse business base.

Group sales are derived from thousands of contracts at any given time, with no single contract totaling more than 2% of Company sales.

Approximately 40% of sales come from civil agencies, restricted, commercial, and international customers.

Product and systems integration dominate the group's efforts, representing over 50% of sales.

The remaining sales consist of approximately 25% high-end engineering services, and 20% pure IT service work.

Nearly half of sales result from fixed price contracts, while approximately 38% are cost plus, and the remainder time and materials.

Over the past decade, we have evolved the group's products and services offerings into a balanced portfolio that remains at the forefront of defense and federal spending priorities.

Let me briefly review the three key pieces of this business.

First, Tactical Communications and Battlespace Management.

This segment represents approximately 45% of the group's sales, and comprises a US and a smaller UK-based business.

The group's products and services provide critical command and control capability, and enable secure continuous communications, all the way to the dismounted soldier.

Programs include the Army's battlefield network, known as WIN-T, and the new hand-held software-defined Joint Tactical Radio System known as JTRS HMS.

We have dramatically diversified our overseas C4 business, from a purely UK-based avionics house to a provider of vehicles, force protection, security, avionics, and C4I products to a global clientele.

Earlier this year, GD UK was awarded a development contract for the British Army Scout reconnaissance vehicle.

This program remains a top funding priority, and was included as a component of the Army's future land forces in the UK's recent Strategic Defense and Security Review.

Next, Information Technology in Mission Services.

Our IT Services unit comprises a little over one-third of the group's sales.

This business enjoys excellent market positions in the defense department and the intelligence community, as a provider of IT infrastructure, simulation and training services, and key mission support.

This business also provides an array of IT healthcare services to military, federal, and commercial customers.

And finally, intelligence, surveillance, and reconnaissance, ISR systems.

Comprising about 20% of IS&T's sales, this business specializes in signals intelligence, tactical imagery, and information collection, processing, exploitation and distribution.

In 2009, as many of you know, we added Axsys to this unit.

As a best-in-class supplier of high-performance electro-optical and infrared sensors and systems, Axsys provides sensor components that enhance the ability of war fighters and government agencies alike, to provide timely, actionable intelligence.

Although not a designated business unit within IS&T, cyber security encompasses core capabilities resident in each of our businesses, including encryption and information assurance, network security, and forensics.

General Dynamics is a market leader in the cyber arena with approximately $2 billion in 2009 sales, across a diverse customer base, including the Pentagon, Homeland Security, and the commercial markets.

As prime contractor on many sophisticated national cyber security programs, we employ more than 50% of US-cleared digital forensics investigators.

Government agencies and private corporations alike, will spend billions to protect and defend their networks in the years ahead.

General Dynamics will be a major part of that fast-growing market.

The IS&T group, by leveraging its current capabilities to capture new business in faster growing market segments, has the opportunity to deliver steady growth over the next several years.

Each of the group's businesses remain focused on maintaining their competitive edge, by aggressively cutting costs, encouraging continuous improvement initiatives, and selectively pursuing those opportunities that offer the most attractive returns.

Combat Systems.

Combat Systems' sales were $2.1 billion in the third quarter.

This result represented less volume than the year-ago quarter, primarily in vehicle modifications, combat logistics support and development programs.

Year-to-date, over 50% of the group's sales decline is related to less MRAP volume and less engineering work, which is largely the result of the cancellation of future combat systems.

Despite a reduction in sales, earnings were essentially flat with last year's third quarter, as margins expanded in several of our businesses.

The 150 basis point year-over-year margin improvement is the result of strong operating performance, and less engineering and development content.

Total backlog for Combat Systems was essentially unchanged from second quarter at $12.8 billion.

Notable orders in the quarter included approximately $475 million for Stryker vehicles and Abrams tanks, $80 million for Iraqi tank logistic support, $260 million for reactive armor, guns, and biological detection systems, and a $120 million award to supply ammunition to the Canadian armed forces.

Because of the success of Stryker double-V-hull testing, we received another series of orders for the new hulls subsequent to the quarter.

Double-V modifications of the current Stryker fleet remain another promising opportunity.

We were also notified earlier this month, that our US vehicle business was selected to negotiate a contract to produce Merkava APC main hulls and kits for the Israeli government.

We expect to add this program to backlog in the first half of next year, and we'll deliver these hulls over the next several years.

We made progress on several international programs in the quarter, delivering the first of 140 Iraqi tanks, finalizing preparations for FMS LAV production, and progressing through Canadian LAV upgrade engineering work.

Despite this progress, international sales are coming more slowly than anticipated, but should grow more significantly in 2011.

Consistent with my earlier report, a number of international programs have been slowed by their country's financial status, but none have been canceled or withdrawn.

Combat expects to book several additional international orders in the fourth quarter, including an FMS LAV order totaling $250 million, the first production contract for an FMS tank upgrade program totaling $300 million, and a $100 million order for German EAGLE vehicles.

In the first half of 2011, we expect to add first tranche of production funding for the $850 million Canadian LAV upgrade program to the backlog.

The pacing of US awards has also lagged our expectations this year.

Some of the awards expected in the first half, including armor and biological detection systems came late in the third quarter, and will result in lower sales than previously expected in 2010.

Other program awards, most notably the ground combat vehicle competition, were pushed out until 2011.

Looking forward for the group, sales in the fourth quarter will be this year's strongest by far.

For the full-year, I expect the group's sales to be around $9 billion.

My expectation for the group's full-year earnings remain unchanged.

Margins, therefore, will be around 14%, 40 to 50 basis points higher than my prior guidance.

This margin performance is the result of strong, operational execution in the first nine months of the year, and a favorable program mix that includes less development and initial stage international work than originally anticipated.

As we look ahead, Combat's international opportunities, combined with current backlog, provide relative top line stability as international work load mitigates some slowing in our US programs.

The group's mature program mix will result in attractive margins and cash flow for the next several years.

Marine Systems.

The Marine Systems group had another good quarter, with sales of $1.7 billion, up 12% over the year ago period, and 4% sequentially.

Earnings totaled $169 million, up 9% over last year and consistent with last quarter's result.

Sales and earnings growth were driven by growing Virginia-class volume, and SSBN replacement design efforts.

The group's third quarter operating margin was 9.9%, down modestly from both the year-ago period and the prior quarter, due to mix shift in our surface combatant programs.

With that said, this operating margin exceeded my expectations due to particularly good performance at Electric Boat and NASSCO .

Electric Boat's third quarter delivery of USS Missouri is representative of the focus on execution resident at each of our three yards.

EB delivered this submarine in a record 65 months, five months faster than any of the six prior Virginia-class boats.

Missouri required 600,000 fewer labor hours than EB's last Virginia-class sub, and was 8% under target cost.

Marine's backlog totaled $20.6 billion at the end of the third quarter, down 3% from the end of last quarter.

Despite this decline, the group booked several key orders in the quarter, including funding for Bath Iron Works to continue providing management, engineering, and detailed design development for the DDG-51 program.

NASSCO also received funding for advance engineering and long-lead materials for the new Mobile Landing Platform, MLP.

Pending final contract negotiations with our customer, we expect to add several construction contracts to Bath's backlog in the first half of next year, including DDG's 1001 and 1002, the second and third of the Zumwalt class, and DDG 115, the restart of the DDG-51 program.

Looking forward to the fourth quarter, group sales will look similar to the third quarter, with operating margins in the mid 9% range, as the surface combatant mix shift at Bath Iron Works becomes more apparent.

For the full-year, sales should be up approximately 5% compared with last year, and margins will be in the high 9% range, slightly better than my prior guidance.

Looking ahead, our shipyards enjoy a healthy backlog and an attractive opportunity set.

In addition to our Navy work, we continued to see renewed interest across the range of commercial shippers, and anticipate that we can leverage our excellent commercial tanker performance to win new commercial work in 2011.

Over the next two to three years, you will see the potential for margin improvement, as surface combatant fixed price work builds, commercial ship building opportunities materialize, and construction on two per year Virginia is realized.

Aerospace.

The Aerospace group's third quarter results were marked by improved order activity, service volume, and operational performance.

Group sales were nearly $1.3 billion, up 15% from last year's third quarter, due to more green aircraft deliveries and higher services volume.

Earnings were $199 million, a nearly 60% increase over the same period last year, while margins were 15.4%, a 420 basis point improvement.

When compared with this year's second quarter, sales, earnings, and margins were down due to the two-week furlough at Gulfstream, which caused fewer green deliveries, and the timing of R&D costs.

I expect sales, earnings, and margins to show improvement in the fourth quarter.

The business jet market, particularly in the large cabin long-range segment, continued to make strides towards recovery in the third quarter, including further reduction in pre-owned aircraft levels.

Gulfstream took one pre-owned aircraft in trade this quarter, and sold two aircraft for a modest profit.

At the end of the quarter, Gulfstream had no pre-owned aircraft in inventory.

Customer interest remains healthy, as Gulfstream booked more orders in the third quarter, than in any quarter since the economic downturn began in mid-2008.

On an absolute basis, dollar-denominated book-to-bill was 1.2 times.

Orders handily outpaced defaults, resulting in a modest 1% decline in backlog from end of second quarter.

The group's backlog remains a robust $17.6 billion.

In addition to current backlog, our pipeline of new opportunities remains strong.

We continue to experience strong international order activity and interest, particularly in emerging markets.

In the quarter, Latin America and Asia Pacific represented nearly a third of order activity, and now comprise over 40% of backlog.

Recent orders span the entirety of our in-production and new aircraft portfolio.

Flying hours improved again this quarter, a reality that helped Gulfstream's service facilities enjoy their highest quarterly volume ever.

Year-to-date, Gulfstream's service business is up 18.5%.

Beyond improved utilization figures and a growing installed fleet, Gulfstream's service volume reflects their unwavering commitment to providing best-in-class support.

In the quarter, Gulfstream's large cabin business jets were voted number one for the 8th consecutive year in the annual AIN Product Support Survey.

Jet Aviation service business has also enjoyed healthy growth this year, up nearly 10% year-to-date.

As the international installed fleet grows, we are adapting by growing our product support organization, which is the largest in the industry today.

Jet continues to enhance its service offerings across the globe, with particular emphasis in Asia, a region whose installed base promises to grow rapidly over the next several years.

Although Jet's service-related sales were up in the quarter, overall volume was down modestly from last quarter on lower completion revenue.

Business jet completions work has been lighter this year, as OEMs deliver fewer aircraft.

Conversely, the narrow body/wide body pipeline remains robust, and Jet signed agreements to complete three more of these aircraft in August.

Jet continues to take steps to improve profitability, including consolidating its US completions and MRO operations at its Cahokia, Illinois facility near St.

Louis.

Planned deliveries for large-cabin aircraft are on track, at 75 this year.

Mid-cabin orders were more plentiful than anticipated in the quarter, and I now expect a total approaching 30 this year, several more than I guided you to in July.

We continue to make exciting progress on the product development front.

With three G250 aircraft, and four, soon to be five, G650 aircraft in flight tests, we are on glide slope toward 2011 FAA/EASA certification for both aircraft.

In fact, recently the fourth G650 test article, and first ever Gulfstream test article with a fully-outfitted interior flew the fastest ultra-range flight -- long-range flight, ever flown by a business jet.

This is a compelling demonstration of the G650's exceptional high-speed cruise capabilities.

That was 5,000 nautical miles at 0.9 Mach in 9 hours 45 minutes.

Both aircraft flew to NBAA in Atlanta, Georgia last week, with the G250 making its maiden transatlantic voyage enroute.

For the full-year I expect the Aerospace group's sales to be up mid single-digit above last year, slightly higher than my prior guidance, due to better than anticipated service volume.

Operating margins will also be better than previously anticipated, close to 16%.

As we look to the future, the group will enjoy steady top line growth, driven by new product introduction, and improving service volume.

We will continue to manage this business with great discipline on the up cycle, as we did through the down.

In summary, General Dynamics continues to perform well, and remains positioned for a good fourth quarter.

For the year, I expect earnings per share from continuing operations to be $6.70 to $6.75, an increase from my prior guidance.

As we look toward 2011, the defense and aerospace markets remain dynamic.

Amidst the uncertainty of a fast changing marketplace and budget adjustments, we remain focused on execution, as we believe this will enable us to leverage our incumbency to win new opportunities.

Our defense backlog already includes a solid order book for next year.

And we are encouraged by the Congressional support our programs have received in the 2011 Defense Budget Appropriations process.

Consequently, as we look to the future, I believe General Dynamics will offer a sustaining defense business, with excellent operating margins and strong free cash flow.

In addition, our Aerospace business will be the growth engine throughout the near and the intermediate time frame.

We are aggressively managing our businesses for profitability, with continued emphasis on earnings growth and efficient conversion of earnings to cash.

Our strong balance sheet and excellent cash outlook afford us tremendous flexibility to continue deploying capital in a balanced manner, in order to create the greatest long-term value for our shareholders.

With that, I will now ask Hugh Redd to touch on some additional financial details.

Thank you, Jay, and good morning, everyone.

I will start with some observations about our cash performance and financing activities.

As you know, we experienced growth in working capital through the first half of the year due to timing of contract payments, particularly in our IS&T business.

The continued focus on this area has begun to yield positive results.

In the third quarter, we reversed the trend, and trimmed 2010 OWC growth by a third.

You can see the impact of that effort, and the impact it had on strong free cash flow performance in the quarter.

In addition, as Jay noted, we repaid $700 million of fixed rate notes in the third quarter.

As a result of strong free cash flow and debt repayment, we reduced our net debt by almost $400 million in the quarter.

This leaves us at the end of the third quarter with a strong balance sheet, and a debt-to-equity ratio of just under 24%.

With the third quarter debt repayment, we're expecting net interest expense for the year of between $155 million and $160 million, consistent with our previous guidance -- but probably toward the lower end that range.

I should point out in that 2011, we're planning a $750 million debt repayment, and a $300 million pension contribution, very similar to the debt repayment and the pension contribution made in 2010.

Finally, a quick note on our tax rate.

I previously guided you to a range which was as low as 31.2%.

That range was predicated largely on a then in-process 2009 tax return.

As we finalized the return in the third quarter, we identified some additional R&D tax credits that drove the rate to the low end of our range.

At this point, we're forecasting an effective rate of 31.2% for the year, with some opportunity to improve.

That compares with a full-year rate of 31.5% last year.

The tax rate in the third quarter reflects the true-up to the reduced full-year rate.

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

Thank you.

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.

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

(Operator Instructions).

And we have the first question coming from the line of Robert Stallard from Royal Bank of Canada.

Please proceed.

Good morning.

Morning, Rob.

I thought I would ask you a quick question on the Aerospace side, and how demand for the G650 and G250 had been tracking over the last quarter, if you've seen any interesting moves in the backlog there?

Rob, I would say that activity has been very steady and encouraging in both aircraft types.

The 650 backlog, as you know has been very strong all along, and we're now up at about 200 orders, and looking good.

The 250 is taking orders as well.

We've talked about that before.

It was a little early to get into the order book.

It showed well at NBAA, and people are actually seeing the airplane now.

It's doing well in flight tests, so that order book is starting to develop as well, and so we're very bullish on both of them.

Are you able at this stage to give a little bit more clarity on how you expect the G250 to ramp up?

I mean, it will enter into service late next year as you know.

And we'll ramp it up as the market dictates, but we think our timing relative to recovery in the mid-cabin market, looks pretty good at this point.

So we'll see how it goes.

But we're -- as I say, the order activity and the general interest in that 250 aircraft is increasing essentially week by week.

So, like I say, we're pretty bullish on that one, and you know we are on the 650.

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

Morning.

Good morning.

Jay, that was a great amount of detail, and much appreciated, on IS&T.

And you talked about the sub businesses there.

Could you, perhaps given what's going on inside the beltway, talk about the longer term growth trends for each of those businesses, and maybe highlight some of the pressure points on sales or margins?

Well, I mean, we -- the areas that I highlighted, for us are all growth opportunities.

I mean the battlespace management, tactical communications piece is as I described, which is what 45% of the business, really in one instance, is the core network communications system for the United States Army in the 21st century, going forward.

So that will be an ever-growing, and you know we're passing through LRIP and WIN-T.

And we're expecting an LRIP decision on JTRS here within the next two quarters, I think.

So that business will continue to mature and develop going forward.

The IT Services piece for us is very good business, both in the infrastructure, the support, the healthcare IT.

So we've got many opportunities, across what I would call a diverse growth portfolio in IT.

And then we've got our ISR that I talked about, which is 20% of the portfolio.

But again, a recognized and necessary fast current in both DoD space, and frankly, in agency space, and commercial applications.

Wrap all around that cyber, which we'll take a big tent with lots of players in it, for as long as the eye can see, we believe.

And we're well grounded in cyber as I mentioned in my remarks.

So I see all of that and more, giving us tremendous opportunity in IS&T going forward.

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

Please proceed.

Thank you very much.

Jay, could you talk a little bit more about -- you talked a lot about combat, but just sort of the evolving change that's occurred?

One would have expected a lot of this hard metal to pretty much be in place for a third quarter, and some of it seems to have slipped.

Maybe you can sort of talk about what sort of marching orders you're expecting from that group going forward?

Okay, Howard, thanks.

Look, the first thing I would say about Combat in terms of the year is the execution at the business level has been outstanding in all respects.

So we've got a great team doing superb work across a global scale here.

I'm very proud of that.

Now, as to the sales attendant to that performance, we had, as you know a very -- what I would call with the clarity of hindsight, a very aggressive sales plan at the start of the year, which has been softened by the realities -- mostly timing realities of the world scene.

So I would tell you that the first half of the year in terms of sales growth, if you will, pretty much happened the way we thought it would.

And I think I've been saying all along, that we were heavily loaded to the second half of the year, which is not terribly unusual for combat.

But it was more so this year, I think than perhaps historically.

So we were heavily loaded to the second half of the year.

I would tell you, in addition to what I said on my remarks about year-over-year comparisons with MRAP volume going away, and SES being cancelled, a lot of what we're seeing, Howard, is just the timing of these programs.

The indigenous vehicle programs, we're seeing European sovereign debt realities impact us in Spain, with the 8X8 competition that was going to happen this year, has been moved into the mid-year of 2011, but reaffirmed by the Spanish Ministry of Defense as being essential to the Spanish Army.

So we believe that one will still come.

There are others in Portugal and other European countries that have pushed out a little bit.

Prolonging contract negotiations on sure things, if you will, the Canadian LAV is probably the best example of that, $850 million.

I mentioned it in my remarks.

It's happening, okay, as we speak, we're in development contract execution right now.

We'll get the production contract in 2011, and off we go.

And oh, by the way there, Howard.

I should just mention on the Canadian side is, when we talk about that LAV upgrade we also talk about the tactical armor patrol vehicle, and the CCV, as down range programs that are coming.

But just in the last few days, it's been reaffirmed by the -- my source was the Army Chief up there, who basically ties this as a family of land combat vehicles, that will all be -- the RFPs for TAPV and CCV are going to happen this year according to him.

And so we'll be in production, whoever gets that, will be in production from 2012 to 2015.

So it's coming.

It's just not here this year.

Ditto with the UK Scout vehicle, which we're in contract right now on development, but it will be more to follow in the coming years.

The international vehicle export business we've talked about before, the FMS LAVs and some of the tanks, we've got some of them.

We've got more to come.

Some of them we expect here in the fourth quarter.

Would I bet everything on the fourth quarter?

No.

But if it's not in the fourth quarter, it will be in 2011.

So it's all coming.

The US vehicle business we've had descope on some of the programs that we talked about earlier in the year.

Cougar MoD is one of them, the remote weapon system for Stryker is another one that comes to mind.

We've had delay in new programs like the GCV, as I talked about.

And honestly, a little bit of lumpiness, I guess you could say, in kind of the reset and modification work on Stryker and Abrams, as we -- as the force reconstitutes or repositions itself in some measures.

And then in the weapons system business, we've seen some delay as well.

Armor is a classic example.

And then we had some softness in the commercial axle market, in some of the aftermarket that goes with that that actually is coming in now.

But anyway, I think that's probably more than you asked me for.

But to frame it all, or to sum it all, I would say it was also a very strong order quarter for Combat, which also bodes well I think for the rest of the year and for 2011.

Historically European Land Systems has been the strongest in the fourth quarter.

I expect that to happen again this year.

Okay?

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

Please proceed.

Yes.

Thanks, Jay.

I have a question that relates to Howard's question.

Which is we've got this UK Strategy, Defense and Security Review.

I want to get some clarity, as obviously there was a bit of surprise in terms of delays in 2010, which is probably going to affect your guidance in 2011.

Can you give us some color on what effect you see tightening of European budgets, in terms of its potential effect on 2011 sales and timing of expected awards?

With absolute precision, I can't do that, Heidi, but my sense is -- I mean, I mentioned, for example the Spanish 8x8 -- we believe, every indication we have says that -- that decision will be rendered by mid 2011.

And the UK piece is proceeding apace, and we're in a development contract of like $750 million I think to develop the first seven or so vehicles.

All that is going.

So for us, the Strategic Defense Review in the UK was -- we came out of that quite nicely actually, between the scout vehicle decision and the implications that it has for our Bowman program over there, et cetera.

So we'll see program movement to the right in 2011 again.

I am not naive enough to believe that won't happen.

But as I've told before you, nobody has pulled any cards off the table yet.

It's just a question of positioning them, so that they can deal with them respectively, in their countries given their financial status.

Your next question comes from the line of Myles Walton from Deutsche Bank.

Please proceed.

It looks like the default activities in the quarter might have been about $400 million.

Can you just give us some color on the level of liquidated damages, and also should we expect to see a slowdown in that through the rest of the year?

The default activity honestly was modest, shall we say.

The order activity was really strong.

The liquidated damages, Myles, were de minimus.

I expect the order book to continue to grow.

I expect the default activity to continue at a small or a low but steady as we've talked before level.

People move in, people move out, but remember, our discussions about backlog and sweet spots.

And in large cabin, we're still looking at an 18-month backlog for both G450 and G550.

And if I seem distracted it's because we're having a horrendous storm right now that I can barely hear myself for the rain hitting the windows.

I apologize.

But the backlog is strong, and you know what the order book is like on the G650, and now the 250 is building so we're bullish on all of that.

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

Please proceed.

Thank you very much.

Jay, you gave us the gains in services year-to-date.

Could you give us some color on what the two services businesses were up both sequentially and year-over-year, and secondly, update us on the expected green deliveries of G650s for next year?

I don't -- I can't pull a number out of my head, Cai.

Give Amy a call about that.

I want to say -- did I say it was 18.5% year-to-date.

But we're very -- the services business is improving as the flight activity increases, which is happening out there certainly in the Gulfstream fleet.

But the green deliveries on 650s will start late next year.

How many, I'm not exactly sure yet.

Probably 10 to 12 is kind of the hip pocket number I've got in my head right now.

And then you know I think I've talked before about the production rates that I'm advertising right now in 2012, 2013, and 2014, of 17, 33, and 33, which before someone asks me, yes, we would look forward to accelerating past that.

But we're just not ready to do that yet, although we're encouraged by everything we see and experience with the G650.

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

Please proceed.

Good morning.

Hey, David.

Jay, could you talk about your thoughts on potentially raising additional debt in the current low interest rate environment?

And then second, on pension, I know it doesn't impact you guys like it does it the other defense companies, but talk about maybe what impact it could it have on 2011, given what we've seen on the -- potentially you're seeing on the discount rate side?

I'll take the last part first, and frankly, I mean, Hugh said it.

We're -- our pension exposure right now is very much under control.

We paid $270 million this year.

We think we'll probably pay $300 million next year, and it won't get in the way of anything else we need to do as far as capital deployment goes.

And so we don't anticipate any cosmic changes there in terms of what our requirement will be.

As to the debt market, I know it's a favorite question that we get a lot, but I would just tell you that kind of in keeping with the way General Dynamics does business, which I like to think is very disciplined, we kind of don't go to the debt market unless we have a specific reason for going to the debt market.

If I've got a purpose in mind, and we need to go we've got plenty of access to go there, but we don't do it just to get some cash.

We've got $2 billion in credit facilities.

We're great cash generators.

We've got lots of cash on hand right now.

We'll continue to generate more.

It gives us the flexibility we need to be acquisitive, which we historically, as you know, have been, and we'll continue to be as opportunities present themselves.

So we're not inclined to go to the debt market for good deals, because actually the commercial paper market right now, which we've got great access to would give us more attractive rates than the debt market.

We also retired our $700 million notes this year at par with -- essentially -- with no economic cost to us.

So we think we're managing that size in a pretty balanced manner.

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

Please proceed.

Good morning.

Hey, Sam.

Just back on the Combat Systems, can you just talk a little bit about -- it sounds like the mix in terms of the development and engineering, which helps you this year, should I be thinking about as we go into next year that, that's going to put some pressure on margins?

And then your number for this year implies something on the order of $2.8 billion in the fourth quarter.

I know European land systems helps, but does that imply something closer to a double-digit type of growth rate next year, from the lower base this year, as things start to move in?

I'm not ready to really speak to next year yet, Sam, but clearly the fourth quarter will be the strongest quarter, and I think -- if I didn't say this earlier, I think I meant to, but at any rate, it will be -- it's always strong in combat.

ELS is a large part of that reality, but this year it will be stronger still.

And that kind of was the plan all the way along, and the way things are coming to fruition, it will indeed be the plan for the rest of this year.

So the margin attachments to that, the margins we received -- that we gained this time are outsized, shall we say, a little bit.

I would think of this wonderful business that we have in Combat Systems as kind of a 13% steady go business going forward.

Your next question comes from the line of Ron Epstein from Bank of America.

Please proceed.

Yes, just following up on, I guess, two things.

You said about 13% margins on a go forward basis, so what we saw this quarter was a little bit of an anomaly, in terms of the strength of the margins in Combat Systems?

A little bit, yes, Ron.

And what drove that?

I mean, one, I'll say it again, but one is not an anomaly, and that's the performance of the team in Combat Systems.

But some of it has to do with mix shift.

Some of it has to do with just timing of the products in our portfolio, and the way they come to us.

And all of that kind of coalesced to give us more uplift than -- kind of the perfect storm on the up right now.

But I would -- for calibration purposes, I think I would bring my head in around the 13%, up or down a little from that.

Okay, great.

And less engineering, too, by the way.

Did I say that?

Okay.

Okay.

And then just on the Gulfstream front, can you just give us an update on how flight test is going on both the 650 and the 250?

You bet.

In a word, very -- or two words, very well.

The 250 is -- there are three birds in flight test right now.

I mentioned that one of them, which I finally got to see, touch, and sit in, in Atlanta, flew obviously TransAtlantic from Israel.

But then was going to do a number of its test points here in the United States, before going back to Israel.

Everything is looking good.

I've talked to the test pilots on both aircraft.

We're very happy.

The 650 continues to, shall we say, outperform in all corners of the flight envelope.

It's magnificent.

I would also take this opportunity to mention that, I said it before, but it's worth foot stomping, I think.

The test bird that was down in Atlanta at NBAA with a full interior, is the same bird that we used to get the 5,000-mile 0.9 Mach nine hour and 45 minute, so we're essentially taking a service bird into the test regimen, and getting all or more than we expected out of it.

It's -- if you can't tell, we're very pleased.

Your next question comes from the line of Joe Nadol from JPMorgan.

Please proceed.

Thanks, good afternoon.

Hi, Joe.

Jay, just from a high level, it's a tough environment, I think is -- in Washington is the consensus and in defense broadly.

And some of your peers have noted that the last week or so on their calls.

And your combat business has seen the impact of that in terms of the guidance coming down the last couple quarters for this year.

I'm just trying to reconcile some of the commentary, on sort of go forward numbers, not only in combat, but IS&T, steady growth the next several years, some of the comments on Marine, which are bullish.

And do you think GD is just -- these businesses are just much better positioned than the industry or -- and I'm trying to reconcile, I guess, the environment in your commentary.

It's good to be optimistic, but how do I get comfortable with that guidance, given the environment?

Well, first of all, I'm not giving guidance for next year or beyond.

But I think if you look at the portfolios, and you look at the relevance of the businesses, I mean, the Marine group is going to be building Virginia-class submarines for a long time.

As we've talked before, the Navy will need surface combatant of scale that we build for a long time.

So that workload and the repair attendant to that will be -- certainly I would categorize it as steady, if not some growth going forward.

And I'm not -- I'm being realistic, in terms of how I think of defense.

It's not going to grow, okay, like it has been -- very obviously.

But we do believe that there may be some modest growth opportunity in there.

And what I cited in the fast currents and IS&T are a classic example of that.

On the Combat side, that's a steady business, as we see it right now.

Okay, we see a lot of 2011 already in program of record.

And if you look at the United States Army, for example, and look at the 20-some heavy brigade combat teams, and the seven going to eight, and probably going to nine, Stryker brigade combat teams with the former at 60 Abrams per brigade, and the latter at 330-plus Strykers per brigade, that kit is not going to change out, until you see a fundamental change in the force structure of the United States Army.

So we try to think of it in pragmatic terms, thread based and core based, if you will, and that really, I think, preforms -- informs the basis of my comments as much as anything, Joe.

And on the aerospace side, that is clearly a growth engine for everyone, I would say, in the industry, but particularly when you're driving the premier brand of Gulfstream, with new product about to hit the street with 200 plus airplanes in the G650 queue, et cetera.

So put all that together, and you've got, I believe a very steady, sustaining defense business.

Now, could things change?

That depends on budgets and all the realities.

But I still believe, with everything I've got, that the threat and the appetite for risk-taking at a national strategic level will drive the defense budget as much as anything.

Will there be pressure?

Is there pressure?

Good lord, yes.

Will it tighten?

It already is, in every segment we deal with.

There's no question about that.

So we're not denying any of that.

But we deal with it day by day, contract by contract, platform by platform, system by system.

And we think we deal with it very well.

And Derek, I think we have time for one more question this afternoon.

Sure thing.

The final question will come from the line of Jason Gursky from Citi.

Thank you.

That is a heck of a storm you've got going on there in the background.

I just wanted to focus in on a very specific question on IS&T.

Do you have much exposure to the JFCOM closure?

Is that one of those 2% programs that you talked about, you didn't have any programs larger than 2% in IS&T?

And then someone asked earlier what the revenue outlook was, and you did a great job of explaining that for IS&T, but I think he also asked about the margin outlook.

And I don't think you had an opportunity yet to address that, so I wondered if you wouldn't do that now.

Well, the margin piece, it's a double-digit margin business.

You're talking the about IS&T, right?

Yes, and the outlook for it going forward.

Yes, we'll be double digit in IS&T.

We lead with that right now, and we're proud of it, and we have every reason to believe we'll sustain it.

The JFCOM piece, I won't go into the whole -- you know the story, I think, Jason, but for us, the impact to us, we have -- I think probably 300 or so folks attached to or working with the Joint Forces Command down there in Tidewater.

And I mean, we'll see what happens, how this shapes out.

But I believe what we're hearing and feeling now is that as JFCOM reconstitutes, or -- I mean, is stood down or re-ported somewhere else in some way, shape or fashion, not all of those missions are going to be eliminated.

And we would expect to move with wherever those missions are translated to.

So all that said, it's not a major impact on us, certainly, and we'll go with the mission, if the mission moves, and we'll reconstitute somewhere else if it -- our part of it is eliminated.

At this time I show no further questions.

I would like to turn the call back over to Amy Gilliland for any closing remarks.

Thank you for joining our call today.

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

Have a great day.

Stay dry.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.