通用動力 (GD) 2010 Q4 法說會逐字稿

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

My name is Katie, and I'll be your coordinator for today.

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

We will be conducting a question-and-answer session towards the end of this conference.

(Operator Instructions) I would like to now hand the call over to your host for today, Amy Gilliland, Staff Vice President of Investor Relations.

Please proceed.

Thank you, Katie, and good morning, everyone.

Welcome to the General Dynamics fourth-quarter conference call.

As always, any forward-looking statements made today represent our best estimates regarding the Company's outlook.

These estimates are subject to some risks and uncertainties.

Additional information regarding these factors is contained in the Company's 10-K and 10-Q filings.

And with that, I'd like to turn the call over to our Chairman and Chief Executive Officer, Jay Johnson.

Thank you, Amy, and good morning, everyone.

General Dynamics' fourth quarter was marked by strong operating earnings and the efficient conversion of those earnings into cash.

Sales on operating earnings in the quarter increased in each of our four segments from the fourth quarter of 2009.

Sales were $8.6 billion, up nearly 9%, driven by 9.2% growth in our Defense businesses and 7.4% growth at Aerospace.

Operating earnings totaled nearly $1.1 billion, the first billion dollar quarter in the Company's history.

Net earnings from continuing operations were $729 million, or $1.91 per fully diluted share, a year-over-year improvement of 18% and 21% respectively.

Disciplined execution across the Company led to a 12.5% operating margin, the best quarterly performance in 2010.

For the year, sales were $32.5 billion, a modest increase over 2009, with three of our four business groups enjoying growth.

Operating earnings totaled $3.95 billion in 2010, with Combat Systems and IS&T both topping $1 billion of EBIT.

Aerospace led earnings growth, delivering a nearly 22% improvement.

2010 net earnings from continuing operations were $2.6 billion, or $6.82 per fully diluted share.

Free cash flow after capital expenditures totaled $1.3 billion in the quarter, a healthy 174% of earnings from continuing operations.

For the year, free cash totaled $2.6 billion, or 100% of earnings from continuing operations.

We deployed $1.2 billion of that cash to repurchase 18.9 million of our shares, including 7.8 million shares in the fourth quarter.

Through both share re-purchases and dividends, we returned 69% of free cash to shareholders in 2010.

Total Company orders in the fourth quarter were $6.6 billion.

Our order book included somewhat lighter Defense bookings, in line with our expectations, and the Aerospace segment's best quarterly intake since the third quarter of 2008.

For the full year, Defense orders were 9% better than 2009, and our aggregate Defense book-to-bill improved.

General Dynamics finished 2010 with a total backlog of $59.6 billion.

Total potential contract value, which includes backlog, unexercised options and indefinite delivery/indefinite quantity contracts, totaled $81.3 billion.

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

First, let's talk about Combat.

Combat Systems enjoyed a robust fourth quarter, as each of the group's four businesses delivered their largest sales and earnings results of the year.

Sales were nearly $2.7 billion, 8.4% higher than the fourth quarter of 2009, and 30% higher than the prior quarter.

Earnings were $400 million in the fourth quarter.

This represents 9% growth from last year's fourth quarter and nearly 29% growth from the third quarter.

Margins were 14.8%, reflecting excellent manufacturing performance and program management.

For the year, the group sales were $8.9 billion.

This represents a decline in sales from last year, the result of lower volume at our US and European vehicle businesses.

More than two-thirds of this contraction resulted from less MRAP vehicle volume and lower US engineering and development work due primarily to the cancellation of the Army's Future Combat Systems program and less activity on the Marine Corps expeditionary fighting vehicle.

Cost reduction and productivity improvements enabled Combat Systems to maintain operating earnings at nearly $1.3 billion, despite the year's decline in sales.

Margins were 14.4%, 130 basis points higher than 2009 due to excellent execution and a higher percentage of mature program volume relative to engineering and development work.

Year end, total potential contract value for Combat Systems was $16.5 billion, including $11.8 billion in backlog and $4.6 billion of unexercised options and IDIQ contracts.

Those IDIQ contracts include two notable additions in 2010 -- a hydro rocket award and the United Kingdom's Scout Specialist Vehicle Program, which has already entered development.

Notable US orders in the fourth quarter included approximately $600 million for Stryker and Abrams production modernization and logistics support and $350 million for RG31 MRAP upgrades.

Fourth-quarter International awards were also healthy, and included Eagle Wheeled vehicles, FMS labs, and tank upgrades.

Subsequent to the quarter, we received funding to produce Namer tank hulls for the Israeli Ministry of Defense.

We anticipate receiving several additional international vehicle awards in the first half of 2011, including production funding for FMS tanks and the Canadian LAV upgrade program.

For 2011, I expect Combat Systems to deliver around $9 billion in sales, reflecting stability in our European vehicle, weapons and munitions businesses, and modest growth in our Land Systems business.

This growth will be driven by several international programs, including two FMS LAV programs now in production, initial production on an FMS tank program, and the Canadian LAV upgrade program.

Expect operating margins around 14%, consistent with 2010.

Next, Marine Systems.

The Marine Systems group finished another productive year with a superb quarter.

Quarterly sales totaled $1.7 billion, a near 10% increase over 2009, while operating earnings increased 13.5%, to $177 million.

This quarter's double-digit sales and earnings growth is particularly impressive since the same quarter a year ago saw sales and earnings grow 12.4% and 18.2% respectively when compared with 2008.

Incremental Virginia class submarine volume and SSBN replacement design work drove the top line growth, while increased submarine volume and higher booking rates on our auxiliary and commercial ship programs drove the earnings improvement.

The group's 10.4% margins were up 30 basis points over the fourth quarter of 2009.

For the full year, sales and earnings each grew 5%, and the group had a 10.1% operating margin.

This industry-leading double-digit margin demonstrates the group's continued commitment to manufacturing excellence and to managing for profitability, particularly important as we begin to encounter mix shift in our program work load.

Marine's year-end backlog totaled $20.1 billion.

We anticipate adding several additional Navy ships to backlog in 2011, including two additional Zumwalt-class destroyers, DDGs 1001 and 1002, another DDG 51 Destroyer, part of the Arleigh Burke restart program, and the first MLP, Mobile Landing Platform.

In addition to our Navy work, we continue to see interest across the range of commercial shippers, and believe that we will leverage our product carrier success to win new commercial work this year.

For the year ahead, Marine Systems will be challenged to maintain sales, due to delays in receiving several contracts.

Over the long term, however, the group's outlook remains very robust, and includes commercial opportunities, the next block, block 4 of Virginia-class submarines, the SSBN replacement program, additional DDG51s, and a new program to replace the Navy's aging class of oilers.

Our Navy customers' commitment to these programs was evident in the fourth quarter, as Electric Boat received an award for additional SSBN missile compartment design work.

And the Department of Defense approved milestone B for the DDG1000 program, enabling Bath Ironworks to continue production of DDG1000 and 1001, and to begin work on 1002.

Additionally, the Secretary of Defense announced the Navy's decision to reinvest efficiency savings into increasing the planned procurement of DDG51s over the next five years and accelerating the fleet oiler replacement program.

In 2011, margins should be in the low 9% range, as the group experiences more significant mix shift in its surface combatant work load.

Moving to IS&T.

IS&T finished the year with fourth-quarter sales at $2.9 billion.

This 9.6% increase over the same quarter last year was driven primarily by increased volume on IT modernization programs for a variety of government customers.

IS&T's fourth-quarter earnings were $311 million.

Each of the group's four businesses contributed to this 10.3% earnings improvement over last year's fourth quarter.

The group's margins increased 10 basis points, to 10.6%.

IS&T sales grew 7.5% in 2010, while operating earnings grew 5.9%.

Organic sales growth was nearly 6%.

The group's full-year margin rate was 10.5%, in line with my expectations.

I am extremely pleased with the ability of our IS&T segment to deliver this healthy double-digit margin given their growing IT service workload and highly competitive fast-moving markets.

Demand for products across the group's portfolio continued.

Given IS&T's particularly strong order activity in the first three quarters, orders were comparatively lighter in the fourth quarter.

I should note that IS&T's fourth quarter order activity is historically somewhat lighter than other quarters in the year.

For the full year, book-to-bill was approximately one times again.

Year-end backlog totaled $9.8 billion.

The group's estimated potential contract value, which consists of IDIQ contracts and unexercised options, grew approximately 19% from the fourth quarter of 2009 and 9% from last quarter.

Growth in IS&T's estimated potential contract value is a particularly important metric , as it provides around 35% to 40% of the group's orders each year.

Notable contracts in this category in the fourth quarter included a contract to provide the combat and C-frame Control systems for Littoral combat ships and a contract covering low-rate initial production activities for the Army's WIN-T tactical communications network.

The group's year-end total potential contract value, which includes backlog and estimated potential contract value, totaled $25 billion, an increase from both the fourth quarter of 2009 and the third quarter of 2010.

This robust opportunity set positions IS&T for another successful year in 2011.

Sales growth in 2011 should be between 3% and 5%, while margins will be in the low- to mid-10% range.

Before discussing our Aerospace group, let me comment briefly on our Defense outlook.

Fourth-quarter and full-year results for our three Defense groups demonstrate the stability and earnings power of our Defense portfolio.

Execution is paramount, and we remain committed to maximizing profitability.

In a challenging defense environment, that means cutting unnecessary costs to ensure the affordability of our products, continuously improving our operations to drive earnings growth, and, if warranted, reshaping our businesses to better align with today's market environment.

We are certainly aware of the current Washington focus on debt and budget reduction.

Defense is a major element of discretionary funding, and will be on the table during the fiscal year 2012 congressional budget process.

Secretary Gates has done a good job of framing the spending needs of the Department of Defense and initiating an efficiency agenda to get more procurement out of the Pentagon's top line.

In a tight budgetary environment, Secretary Gates has reiterated the importance of increased investments in proven capabilities relevant to current and future threats.

In so doing, he recently announced the cancellation of several developmental programs, including our Expeditionary Fighting vehicle.

This cancellation, which was well telegraphed over the last six months, is not a reflection of the quality or performance of our prototype vehicles, which are doing well in ongoing testing.

This cancellation, while disappointing, will not have a material impact this year.

And given our experience in developing EFV, we remain well-positioned to participate in whatever comes next to fulfill this mission requirement for the United States Marine Corps.

The real world defense missions the US is carrying out right now -- foreign wars on terror, pacing peer competitors, confronting regional nuclear proliferation and ensuring global economic access -- are all limits on how much the Defense budget can be reduced.

The defense industrial base is also a key part of the US economy, supporting hundreds of thousands of jobs nationally.

Even so, we assume defense spending will be essentially flat over the next five years.

That will still be more than $100 billion in annual procurement in constant dollars.

We feel confident about our Defense portfolio in this environment.

Our facilities are key parts of the defense industrial base which must be maintained.

We have solid incumbency in the Army and Navy force structures with Stryker Combat vehicles, Abrams tanks, the Army Tactical Communications Network, Virginia-class submarines and DDG51 and DDG1000 destroyers.

With fewer new programs, incumbent platforms and programs will require continued production and modernization.

General Dynamics is also a major provider of cyber warfare-related products and services, an area where we believe spending will increase.

So even as we operate under a continuing resolution at 2010 defense funding levels and await the final congressional disposition of fiscal year 2011, we look to the fiscal year 2012 budget process with realism and a prudent operating plan.

Now let's move to our primary growth segment, Aerospace.

The Aerospace group finished the year in the excellent manner we have come to expect.

Quarter highlights included further earnings in margin growth, strong order activity, minimal customer defaults and backlog growth.

Fourth-quarter sales totaled $1.3 billion, up 7.4% when compared to fourth-quarter 2009, due to several additional Gulfstream completions and improved service work load.

Sequentially, sales were down modestly due to fewer mid-cap and green deliveries and less pre-owned activity.

The Aerospace segment's operating earnings were $210 million in the fourth quarter, reflecting a 16.6% operating margin.

The group's operating earnings and margin improved from both fourth-quarter 2009 and third-quarter 2010.

Improved large-cabin pricing drove margin improvement in both periods while the sequential comparison was also helped by the delivery of fewer mid-cabin aircraft.

For the year, sales were $5.3 billion, up 2.5%.

The group's top line growth was primarily driven by improved service activity at both Gulfstream and Jet Aviation.

Double-digit operating earnings growth in 2010 resulted in $860 million of earnings, as Aerospace margins expanded 250 basis points to end the year at 16.2%.

Excellent execution, improved new aircraft and service pricing, and the absence of pre-owned aircraft losses were the primary drivers behind the group's increased profitability last year.

The key metrics that provide insight into the health of the business jet market reflect a continued improvement in the fourth quarter.

Aircraft utilization remained robust, and our service centers in North America and around the world enjoyed another very good quarter.

For the year, our service business was up nearly 14%.

We are committed to ensuring that our service business remains best in class and that it grows in lock step with our international customer base.

Pre-owned inventory levels for both large- and mid-cabin aircraft continued to show some improvement over the last several months of 2010.

We have no pre-owned aircraft in inventory at the end of the year.

For the year, we made a modest profit on just over $100 million in sales on 7 pre-owned aircraft.

That compares favorably to the losses we realized on the sale of 6 pre-owned aircraft in 2009.

Fourth-quarter orders out-paced deliveries, as net orders reached their highest level since the downturn began, and defaults remained at low levels.

Gulfstream new aircraft book-to-bill was 1.5 times on a dollar-denominated basis, causing backlog to increase $244 million, to $17.8 billion.

2010 orders were over 60% international, reflecting a diversified regional customer base.

These orders continued to come primarily from privately-held companies and individuals, although we were pleased to see Fortune 500 companies return to the market this year and gain share in our order book.

Fourth-quarter orders included each of our business jet models, as both large- and mid-cabin orders were their strongest of the year.

Given the strength of order activity in the fourth quarter and new customer interest, we plan to deliver approximately 90 large-cabin green aircraft in 2011, including 78 G550s and 450s, slightly above our 2010 production levels, and about a dozen G650s.

Mid-size green deliveries will be around 15 to 20 aircraft and will include several G250s.

Given the steady improvement that we've witnessed in the mid-cabin market in recent months, we remain flexible, and have the ability to increase deliveries if and when customer demand warrants doing so.

We continue to be extremely pleased with our product development efforts.

Both the G250 and G650 remain on track to achieve FAA EASA certification this year.

In the fourth quarter, the G250 made its first trans-Atlantic voyage, surpassed 600 hours of flight testing, and completed a series of important milestone tests in the US before returning to Israel.

The G-650 has also surpassed several key milestones in recent months, including flying 5000 miles at .9 mach, surpassing 1100 hours of flight testing, and adding a fifth test article to the flight program.

2011 promises to be another busy and successful year for both programs, as we prepare to add these aircraft to our Gulfstream fleet.

Our commitment to innovation and product development remains steadfast.

In anticipation of continued growth in the global business aviation market, we recently announced the expansion of our Savannah campus through a $500 million, 7-year plan.

This investment is critical, as it will ensure that Gulfstream is well positioned to remain the market leader.

In 2011, the Aerospace group will enjoy double-digit growth, likely 15% to 16%, with margins in the mid-to-high 15% range.

In conclusion, General Dynamics delivered another solid performance in 2010.

The Company is well positioned for continued success in 2011 driven by the stability and diversity of Defense portfolio and double-digit growth in our Aerospace segment, fueled by new-product introduction and further recovery of the business aviation market.

The segment guidance I provided this morning implies total earnings per share from continuing operations in a range between $7 and $7.10.

As is our normal pattern, we expect EPS to grow progressively throughout the year.

Growth, when compared with 2010 quarterly EPS results, will come primarily in the second half.

I should also highlight that my guidance is operational, and does not include or anticipate the results of capital deployment.

Our strong balance sheet and excellent cash outlook, however, afford us significant flexibility in this area.

As we hit the deck running in 2011, we remain focused on executing on our backlog and continuing to identify opportunities that will create the greatest long-term value for our share-holders.

With that, I'll now ask Hugh Redd to touch on some additional

Thank you, Jay, and good morning, everyone.

You can see in exhibit E to our press release that we finished 2010 with just over $2.6 billion in cash.

Which, when added to our marketable securities, resulted in a net debt balance at the end of the year of just under $400 million.

This is down almost $800 million from last quarter and $850 million from 2009.

As a result, interest expense in the fourth quarter was down 23% from a year ago.

We expect interest expense for the full year 2011 to decline to around $135 million.

That's due largely to the $700 million debt repayment we made in the third quarter, and is also based on the assumption we will not roll the $750 million of fixed rate notes, which become due next July.

Obviously, we will make the decision to refinance the notes or retire them with cash-on-hand when we get closer to the due date.

Moving on to the income taxes, the fourth-quarter effective tax rate was 30.1%, obviously below our previous expectation of 31.2%.

The reduction was due largely to the late -- in fact, entirely to the late-year extension of the Army tax credit.

This lowered our full-year tax rate by 26 basis points, but reduced the fourth-quarter rate by just over one full percentage point.

We expect the 2011 full-year tax rate to be 31% at the high end, and probably some opportunity to outperform that mark.

With respect to corporate operating expense, which is primarily stock option expense, we are projecting a 2011 number between $90 million and $95 million.

Finally, a quick note on pension contributions.

We're planning to make a voluntary contribution of approximately $350 million to our pension plans in 2011.

That's slightly larger than our 2010 contribution.

That completes my remarks.

And Amy, I'll turn the time back to you for the Q&A.

Thank you.

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

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

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

(Operator Instructions) Your first question comes from the line of David Strauss from UBS.

Please proceed.

Good morning.

Good morning, David.

Jay, could you address -- specifically, does your guidance incorporate the potential for a full-year continuing resolution or even maybe something worse than that in fiscal 2011?

How do you see that, if that's the scenario we get, how will that potentially impact the business?

The direct answer to your question, David, is no, it does not anticipate the full-year CR or really even a modified CR of any kind.

But I would tell you -- and I would opine that if you did have a full-year CR, indeed, there would be impact which I'm not going to try to quantify right now.

The important note I would put forward, though, is that in the CR environment we are dealing with right now, there are programs that would be affected should the CR continue, significant programs, Virginia-class two a year, for example, is one.

But in every instance, I would tell you that the customer and our folks are front and center working these with all invested stakeholders so it's not passing by anyone's scan that we've got to deal with these as they are presented one at a time.

It's getting the attention it deserves.

It's a different way of doing it, but we're working hand in glove with the customer to make sure that we come to a satisfactory outcome.

Okay.

I'll hold to the rule.

Thanks.

Okay, thanks.

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

Please proceed.

Good morning.

Sort of on the heels of that last question, Jay, you did talk about pressure on defense budgets before.

How would you classify the risk at GD by segment?

And directionally, how should backlog move over the course in the next year or so in each segment?

And I'm focusing on the defense side here.

Rob, let me put it this way.

You know that the Marine group -- and I talked about this -- the Marine group is very lumpy in terms of its backlog.

It comes in big slugs.

We work off the slug for a number of years.

It comes in other big slugs.

That's the most lumpiest of any of our defense groups.

And you heard me mention also that we've had contract delays in significant programs, which are reflecting in the backlog that we see right now, the DDG1000 the DDG115, the 51 -- 115 by hull number, and the MLP, et cetera.

That lumpiness is just a reality.

We're working off the last big inject right now.

So, you'll see that come back to us, I would expect starting this year.

The Combat Systems group is kind of less lumpy, but it depends.

The vehicle, the platform business tends to be a little bit lumpy, and that runs year-plus backlog injects that the weapons systems and ammunition and guns business tends to be kind of year by year.

And then, of course, in IS&T space it's all very active inside the year loop, as I think I mentioned in my remarks.

And they did a very good job this year of getting themselves essentially one times in their backlog for 2010.

I don't know if that's totally responsive to your question, but the backlog -- I would tell you that the way I describe my feeling about our defense backlog, is I'm very watchful and very attentive to it.

Am I concerned about it?

Not right now.

Jay, this is why I asked about it, a couple of year framework.

Knowing that it's volatile, looking at Marine going from $9 billion and change the beginning of 2010 after the first quarter, down to $7 billion now.

We know you've been eroding on having not gotten the new orders in.

But even if you have a CR for the rest of this year, assuming everything comes back in the fiscal 2012 budget, at two years from today, would you say Marine's got higher or lower backlog?

And the same question to the other two segments.

Two years from today, I'm not prepared to answer the question.

But I would tell you -- I mean if you look at Marine by itself here, I've already mentioned the major platforms that are being dealt with as we speak.

Those will come into backlog, I believe, this year.

They're being worked as one offs, as I mentioned before, even with the CR.

So, they were delayed largely because of -- in our view, I believe -- the incredible workload at the program office inside the Pentagon as they redid the LCS strategy.

And now that that has been delivered, we're working very diligently with our customer on both the DDG1001 and 1002 and the 115 and the MLP contract.

We're getting inject back into that backlog this year.

In two more years, what will it look like?

Well, I'm not going to get speculative, but I mentioned in my remarks that we've got another block of Virginia-class submarines coming, which will certainly be nontrivial in terms of backlog.

That was a huge inject the last time we had a backlog.

We've got that.

We've got SSBN development work, et cetera.

You're going to see increase in the Marine backlog as we go forward.

Combat is probably, honestly going to be down a bit, flat to down.

Not unexpected on the US domestic side.

On the international side, I think we're going to see growth there -- I don't think -- we are seeing growth there.

And I believe that that will continue.

IS&T should be good on their backlog, flat to a little nose up perhaps.

But as I said, that's usually inside the year and it refreshes itself annually.

That's probably more than you wanted but that's --

That was great.

Thank you very much.

Okay.

Your next question comes from the line of Carter Copeland from Barclays Capital.

Please proceed.

Good morning, Jay and Amy and Hugh.

Just amazingly third question, the first Gulfstream question.

I wonder if you might talk a bit to the backlog growth and how it may break out between the 650 and the 450, 550 and mid-size and how that's driving production decisions when you look beyond 2011.

And within that, can you address in more descript terms what you're thinking about the 650 production plan beyond 33 a year as we look well out on the horizon?

The backlog is really being enhanced by all -- by the large-cabin, obviously, all three of the large-cabin aircraft and the mid-cabin.

So, a pretty good spread there, Carter.

We're still taking orders for 650s.

The 550, 450 book, you've heard me talk about the 18-to-24-month backlog sweet spot.

We're in the sweet spot, looking good.

I feel very confident about that.

And we're taking mid-cabin orders.

That activity continues to grow.

I think it's probably an accurate term.

It's not what I'd call robust, but it's clearly coming back.

And we're getting more activity as we go month by month, and we're taking orders for 250s.

We are taking orders still for 200s.

And so, I see that in very optimistic terms.

The production numbers I gave you for green deliveries are consistent on the large-cabin in production, 450, 550, with what I think I've been signaling pretty much throughout the year based on looking at that 18-to-24-month backlog.

Feel really good about that.

And the mid-cabin, 15 to 20, give me a little upside there.

We anticipate, I think, that probably that market may return.

But I'm giving you kind of a conservative number there, and we'll see how it goes.

But every indication we have in the mid-cabin -- and I think you may hear this from some of the other OEMs -- that the mid-cabin market is coming back.

As it applies to the 650 and I know you know very well my numbers on 12, 13 and 14 in terms of completions at 17, 33 and 33.

I'm going to stick with those numbers right now.

But, we're going to turn out about a dozen 650 greens, as I mentioned, in 2011.

And you can probably add 10 or so a year to that to deliver those completions that I just described.

And then as we get closer to full production here, we'll wick it up and anticipate being able to do so.

But I'm just not ready to write that check yet.

That's fair.

I'll stick to the rules.

Thanks.

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

Please proceed.

Good morning.

Hi, Doug.

Staying on Gulfstream, could you comment on the G650 in terms of margin?

What I'm getting at is, should we expect in the early stages of production that this would be somewhat dilutive to margin?

If so, when would you expect that to turn the corner and be helpful to margin?

Well, I would characterize it this way, Doug.

On the initial blush, I would characterize it as dilutive to large-cabin new aircraft margin.

Because it's brand spanking new -- you understand that.

But as I've said repeatedly, as we hit stride with that airplane and look at the purpose-built facility we've got, the design for manufacturing that's existent within that platform, those margins will grow handsomely.

And I expect them to be the margin setters for Gulfstream, pace setters for Gulfstream.

When that will occur?

I can't tell you.

But I would expect continuous improvement as we go.

We're very bullish on the 650, as you probably can tell and are very excited about getting it operational.

But you can't give a sense of when you may be able to at least hit the margins that you're getting on the 450 and 550?

What time fame?

No.

It will be several years.

But I'm not going to try to pin it down.

Okay.

That helps.

Thank you.

Joe Lombardo would be mad at me if I tried.

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

Thanks.

Couple of questions.

First of all, one question, but a clarification first.

What is exactly the Marine sales guidance.

I think I might have missed it.

Essentially it's flat.

The way I characterized it, I said they're going to be challenged to maintain their sales this year.

And Myles, it's strictly a function of timing on those contract delays.

Okay.

And then given the comments on the flat outlook for defense spending and what you're seeing in the backdrop, is this the environment where, Jay, you think it's more important to be opportunistic in buying defense properties that might otherwise be under-distressed, or are certainly a negative sentiment overhang.

Or, are you more inclined to say, I have a commercial entity, I'd like to increase the scale and/or buy my own shares?

Well, I think you know, Myles, we look at all of that.

And I haven't changed my direction to any of the business unit presidents out there, the 13 of them.

Within your sphere of business, you look for opportunities to grow that business with acquisitions.

Be it core, additive core, which I believe in this defense environment there will be opportunities that come available, and adjacency or dual use or commercial.

You bet.

We're looking at all of those things.

And then in addition to that, of course, we have the Aerospace growth engine that we intend to take advantage of.

But just to clarify, is there anything in the environment that could change to make you change that thinking?

I can't think of anything off the top of my head.

Our defense portfolio, you hear me say it repeatedly, one of the great strengths of our defense portfolio is that it's very diverse.

And so it gives us a lot of opportunities, and we've got ups in some places and downs in other places.

And we constantly assess what we -- how each of those -- each portion of our portfolio is performing.

And we'll grow some of them and dare say, we'll probably divest some pieces of it as we did, for example, with Spectrum master last year.

If it's better for somebody than it is for us, we're not afraid to divest.

So, we shape the portfolio as we go.

Fair enough.

Thanks a lot.

Your next question comes from the line of Peter Arment from Gleacher and Company.

Question on your European -- back to Combat Systems -- on you European land systems.

We came into 2010, I think, with a number of different contracts.

And I think, particularly the Spanish 8x8 that had to move to the right.

Could you give us some color on -- you mentioned that you are expecting to see some stability here.

How are these contracts looking right now?

And is there anything that still needs to be signed up going for this year?

I think the way I'd characterize it, Peter, is it's still very active.

There are still some soft spots in all of this.

And I have no false expectations that some of the things won't continue to move to the right.

But by and large, the European order book, both indigenous order book and the FMS export order book, are quite handsome, I believe.

We've got the Canadian LAV, which I mentioned in my remarks, which is very active.

We expect the production contract any time here in 2011.

You've got the TAPV, you've got the CCV programs after that that we're very competitive for.

You've got the Scout SV specialist vehicle in the UK.

We're in development right now on a $750 million contract.

So, that is proceeding apace, and it will be years in stride with every indication that it's going to proceed for -- per original intent.

The Spanish 8x8 that you mentioned, VBR, the Spanish government ministry is still working very diligently, given their circumstance, still working very diligently to bring that thing to contract this year.

That's about the best I can say.

They've been very consistent in that.

Will it happen?

We'll see.

They're certainly committed to making it happen as best they can.

So, we've got orders in Switzerland for platforms, dura-platforms.

We've got orders in Germany for Eagles, and the Eagle just keeps getting better and better as it goes.

And more order activity around that.

Then you move into the FMS work with our FMS customers, and you've got two huge LAV orders that are already in play.

You've got an FMS tank order in excess of $1 billion that's in play and will go into production this year I believe.

You've got the Iraqi tank order that we're already delivering to the Iraqis.

And so it goes.

So, it's very active.

And I mentioned in my remarks, the Namer for the Israeli Ministry of Defense that we're working with them on right now at about a $300 million contract.

So, the international book will continue to be very active.

There will be puts and takes I think, as I mentioned earlier, because of budget realities in other countries.

But the long term and the integrity of that book, I think, is very solid.

So what you're saying, the $9 billion -- I think your guidance $9 billion for this year -- it sounds actually and relates to Rob's question looking out over the next year or two.

This is quite a sustainable business just given all that activity you ticked off.

Yes.

I think you've heard me say it before, Peter.

But, I got my head around right now, this being a $9 billion business plus or minus a little.

And that's the way we're seeing it right now.

That's the way 2011 looks to us.

2012 is not quite as clear just because of where we are in the budget process.

But the going-in position looks pretty good.

So, we'll see how it plays out.

But I don't see any drastic motion, frankly down or up, in Combat Systems right now.

That's great.

Thanks very much, Jay.

Your next question comes from the line of Jason Gursky from Citi.

Good afternoon, everyone.

Just a quick question on the EFV.

Given what you know about the mission, and combine that perhaps with what the Secretary has said publicly about the program and maybe what the program office has told you about our amphibious capabilities going forward, what do you envision the next potential program looking like?

And how is that General Dynamics may be able to step in and fill that need?

That's probably a question to ask the Marine Corps.

Honestly, we believe the expeditionary fighting vehicle satisfies the requirement nicely.

Decisions have been taken that said it's unaffordable.

It's not a quality thing.

It's unaffordable.

We are working to make that program either wind down or reshape where we're being very responsive to lots of people's questions, as you might answer.

I would just say this.

How it ends up, I don't know.

Whatever happens -- and I alluded to this in my remarks -- we are well positioned to compete or provide whatever the Marine Corps needs to satisfy that amphibious requirement in whatever dimension it's presented in final form.

I think that's the fairest way to say it.

It's always been, and remains, a strategic mission decision on the basis of the United States Marine Corps in the 21st century.

And if they need an amphibious capability of whatever proportion, we believe, based on our experience in EFV and building lots of things that go on and under the water, that we can compete quite handsomely for that for that.

And intend to do so.

Great.

Thank you.

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

Please proceed.

Good morning.

Jay, I wanted to ask a question on the Marine segment.

And just as things have been pushed out on some of these orders, whether it's DDG1001 or 1002 or even the DDG51.

Just thinking about that in particular is, how far out do these get pushed until it somehow causes you to make changes to your cost structure.

And in terms of just what your long-term profitability of those contracts are, does that get shifted out as well with that timing?

Well, to a point, Sam.

As you know, we're very disciplined in our ability to maintain profitability at our shipyards.

If the contracts delay much longer, there's no doubt about the fact that we'll have to reshape our business up there to deal with that.

We did it at NASSCO because we got a valley, if you will, in the order book coming out there.

We'll do the same thing at Bath if we have to, without question.

Okay.

Thank you.

(Operator Instructions) Your next question comes from the line of Heidi Wood from Morgan Stanley.

Thank you.

Jay, just an observation.

Generally in the January call, you give us the EPS breakdown for the year.

Are you not doing that now because of the continuing resolution?

You mean the $7 to $7.10?

Yes, you usually give us a sense of what the spread is across the four quarters.

No, I don't remember doing that.

Heidi, I think we just generally usually try to give you a sense of how it's going to play out in the year.

You might have missed his remarks, but right at the end, Jay did comment that in the second half of the year, that's where most of the EPS growth over 2010 will be.

It will get bigger each quarter with the second half being the largest.

I did miss that.

Thank you.

And then, Jay, you've got this very strong balance sheet.

And in light of the value of the Company, what's preventing you from being bolder on share repurchase?

Well, I don't consider 18.9 million shares to be trivial.

We are opportunistic, not programmatic, in our share repurchase activity.

And when the market suggests that we're undervalued and ought to buy it back, if that's the best use of the cash, we'll do it.

But as you know, and I think we've talked before, Heidi, in terms of capital deployment we've held back just because of the environment in which we've been operating to make sure we had plenty of cash.

We have plenty of cash.

I think you could expect now as the environment is improving, to see us execute our balance preference in terms of how we deploy our capital to include more acquisitions and continued share repurchase as the market talks to us.

So, we'll deal with the dividend in March, as we always do.

We'll deal with share repurchases as it becomes opportunistic for us.

And we're looking and working the M&A side very actively right now.

You're right, 18.9 million is a lot.

But from 2009 to 2010, the net decline was only 7 million.

So that's why I'm wondering whether you've got a determination to keep chewing that down.

That's what I was trying to say.

Yes, we'll keep chewing it down as long as it makes sense to do so.

We're also about growing earnings around here.

So, the capital deployment is going to be helping us tie to that very nicely.

Then lastly, can you talk about slot availability in 2011?

And there's a considerable debate, as you're well aware, about whether the G550 gets cannibalized by the 650.

Can you give us any color advancing that debate one way or another as you look out what the demand over the second half of 2010 and early inquiries into 2011?

Yes.

We have 18 to 24 months' backlog in both the in-production large-cabin aircraft.

There is not cannibalization occurring.

We're still taking orders for 650s.

We're well out on 550s and 450s.

We're very pleased with all of that.

I do not see cannibalization as an issue.

We're holding price, very handsomely, on the large cabins.

So, the 650 is not a replacement, as you know, Heidi.

But for everyone, is not a replacement for any aircraft.

It defines its own part at the top of the market.

And that's exactly the way it's being presented, and that's exactly the way it's being received.

So, it's not threatening at all to our 550 in terms of backlog or activity at all.

Okay.

And then just to reiterate, the 550 slots are full in 2011?

That is correct.

Okay.

Excellent.

Thanks so much.

Okay.

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

Okay, great.

Your next question comes from the line of Robert Stallard from Royal Bank of Canada.

Please proceed.

Good afternoon.

Good afternoon.

Jay, I thought we just ran it up -maybe looking at the OCO leaks of the FY '12 number suggests the administration is going to bring the OCO down quite considerably.

I was wondering if you could clarify what your exposure still is there and whether you would see negative impact from that.

I think the general answer there would be not much.

In years past, I think as you know, the OCO, the supplementals, et cetera, included procurement, included MRAP, included things that were very elemental to us.

But in the past few years, what we are seeing is -- really the best way to say it, I think, is -- our core programs have moved into the base budget by and large.

Okay.

So, it's not something that is going to change our life much, if the OCO comes down.

That's probably the best way to say it.

If you could give an estimate of the percentage of sales maybe in 2011?

No.

Very small.

I don't have a number in my head.

Let's put it this way, Robert, it's not something I worry about.

Okay.

That's great.

Thanks, Jay.

At this time, I would like to hand the call back over to Amy Gilliland for 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.

Ladies and gentlemen, thank you very much for your participation in today's conference call.

You may now disconnect.

Have a wonderful day.