通用動力 (GD) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 General Dynamics earnings conference call.

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

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

Later, we will facilitate a question-and-answer session.

(Operator Instructions).

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

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

Amy Gilliland, Staff Vice President of Investor Relations.

Please proceed.

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 filing.

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

Thank you Amy.

Good morning everyone.

General Dynamics delivered another quarter marked by strong operating performance.

This performance is particularly notable in light of the dynamic environment that the lengthy fiscal year 2011 continuing resolution created.

Revenues in the first quarter were $7.8 billion, up modestly from the first quarter of 2010 due to growth in our Marine and IS&T businesses.

Operating earnings were $929 million, and earnings from continuing operations were $618 million in the quarter, up slightly from the same period last year.

Operating margins improved 10 basis points from the year-ago quarter to 11.9% as three of the four groups delivered improved earnings and margins.

Earnings per share from continuing operations were $1.64 on a fully diluted basis, up 6.5% when compared with last year.

Free cash flow after capital expenditures totaled $266 million, better than last year's first quarter.

Consistent with prior years, I would expect our cash trajectory to be back-half loaded.

In terms of capital deployment, we repurchased 3.1 million of our shares in the first quarter.

In March, our Board increased the dividend 12%, the 14th increase in as many years.

First-quarter orders remained healthy in our Aerospace business as backlog expanded for a second consecutive quarter.

Defense orders, however, were somewhat light.

This lower defense order intake is in part a timing issue caused by the prolonged resolution of this year's Defense Appropriations bill.

With its recent passage, we expect healthier order activity in the coming weeks and months.

At the end of the quarter, backlog totaled $57.6 billion, down from year-end.

Timing of Marine orders drove three-quarters of this reduction in backlog.

Total potential contract value, which includes backlog, unexercised options, and indefinite delivery and definite quantity contracts, totaled $78.2 billion.

Now, I'd like to focus on the performance of each of our business segments, starting with Aerospace.

Before I address the quarter, I want to update you on the status of the G650 program.

As you know, on April 2, the G650 test aircraft was lost in a tragic accident that took the lives of four dedicated Gulfstream pilots and flight engineers.

The National Transportation Safety Board is in charge of investigating this accident, and Gulfstream is fully cooperating with their team.

A preliminary report was published by the NTSB on April 6.

As the NTSB investigation continues, Gulfstream is moving forward with all other nonflying certification and production work on the G650.

We're working closely with the FAA in consultation with the NTSB to determine when it is appropriate to resume test flights.

We look forward to continuing the rigorous testing required to achieve Type certification.

I remain confident that the G650 will take its place atop a long line of safe, reliable, high-performance business jets on which Gulfstream has built its superb reputation.

With that said, I understand that all of our stakeholders would like and deserve a much more fulsome briefing on what lies ahead for the G650 program.

Given where we are in the investigative process, however, there is really nothing more I can add at this time.

When we have more clarity and can provide an informed update, rest assured we will do so.

Now let me address the Aerospace group's first quarter.

Aerospace delivered another very strong quarter marked by particularly good operating performance at Gulfstream and robust demand for new aircraft and aircraft services.

The group's revenues approximated last year's first quarter at $1.4 billion.

This result reflects growth in aircraft service demand, offset by lower completions work at Jet Aviation and the absence of pre-owned aircraft sales.

First-quarter revenues were up nearly 7% over the fourth quarter of last year due to additional Gulfstream new aircraft volume and growing global demand for aircraft services.

Gulfstream Green deliveries in the first quarter included four additional aircraft when compared to last quarter.

The group's operating earnings were $230 million and margins were 17%, improved when compared with both last quarter and the prior-year period.

The group's better-than-anticipated margins derived from Gulfstream's improved productivity and from liquidated damages recognized following the cancellation of aircraft options by a fractional customer.

We continue to see improved conditions in the business aviation market, including healthy new order interest, declining pre-owned inventory levels, and robust aftermarket demand spurred by further improvements in aircraft utilization.

To that last point, Gulfstream flight hours are now approaching 2008 levels.

Gulfstream participated in another quarter of notable order intake with international orders continuing to dominate the order book.

Orders from the Asia-Pacific region were particularly strong this quarter, including an order for five large-cabin aircraft that will further expand our footprint in China.

First-quarter orders favored all three of our large-cabin aircraft models.

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

Orders continued to significantly outpace defaults, which were at their lowest levels in the quarter since the downturn began.

This helped the group's backlog to grow for a second consecutive quarter.

At $17.9 billion, backlog continues to keep us in the 18- to 24-month window from newer aircraft order to delivery for our 450 and 550 large-cabin aircraft.

Pre-owned inventory levels across the Aerospace market reflect modest improvement.

We took two pre-owned aircraft in trade this quarter, with one of these aircraft available for sale at the end of the quarter and the other under contract for April delivery.

Aircraft maintenance, repair and overhaul demand was solid in the quarter with both Gulfstream and Jet Aviation posting their strongest revenue quarters ever.

We are working diligently to expand our global service footprint as our international installed customer base grows.

For example, Jet Aviation has just upgraded its MRO and FBO location in Singapore.

Eventually, this Singapore facility will include a second hanger capable of accommodating numerous Gulfstream G650s and an engine overhaul shop that will dramatically reduce the cost of shipping engines to the United States and the United Kingdom.

While Jet Aviation experienced continuing demand at its service business, the completions business remained challenged due to lower OEM completions volume following the economic downturn and throughput delays at its wide-body, narrow-bodied facility.

As a result, Jet is taking steps to restructure this business, reduce overhead and enhance completions productivity.

For the year, I am still guiding to 15% to 16% top-line growth and 15.5% to 16% margins at Aerospace.

Now let's move to the Defense businesses, starting with Combat Systems.

Combat Systems is off to a good start, with each of the four combat businesses contributing to the group's solid operating margin performance in the quarter.

Revenues were nearly $2 billion, essentially flat when compared with last year's first quarter and in line with our plan for the year.

Revenues in the quarter reflected increased international vehicle volume, including growth on a major lab export program and work on a number of wheeled vehicle programs for European customers.

This additional international work helped to mitigate a decline in US vehicle revenues caused by fewer domestic Abrams tank upgrades and less expeditionary fighting vehicle development work.

Volume was essentially flat at our weapons and Ordnance businesses.

Combat Systems delivered $277 million of operating earnings in the quarter, up slightly from last year's first quarter.

The group's operating margins were 14.2%, 80 basis points higher than last year.

Cost savings and continuous improvement initiatives across the segment drove margin improvement with additional benefit from a favorable program mix that included less vehicle development work.

Combat Systems' backlog declined modestly from year-end to $11.4 billion.

Despite this decline in backlog, there were several notable awards in the first quarter, including contracts to produce armored personnel carrier hulls for a foreign government, provide 120 millimeter mortar ammunition for the Marine Corps' Expeditionary Fire Support System, and demilitarize several types of munitions, including cluster bombs.

We anticipate improved order activity at Combat Systems as the year progresses.

Several awards expected before year-end include funding for the first tranche of an FMS tank upgrade program, additional Stryker Double-V vehicles, and an opportunity to participate in the initial phase of the Ground Combat Vehicle Development Program.

Several additional award opportunities that may happen this year but are not integral to our 2011 results include additional MRAP upgrade opportunities, a production award for the Canadian lab upgrade program, another tranche of FMS labs, the next increments in the Egyptian tank program, and the Spanish 8x8 Vehicle Program.

While we have not yet seen any international opportunities come off the table, we remain very mindful of the impact that dynamic, political, and economic developments can have on the timing of international awards.

For the year, I continue to expect Combat Systems to deliver approximately $9 billion in sales and around 14% operating margins.

My revenue guidance reflects a stable outlook for our weapons and munitions businesses, some decline in US vehicle programs, and growth in our international vehicle markets.

As I previously highlighted, we expect sales and earnings to grow in each of our four Combat businesses every quarter, resulting in a particularly strong second half.

Next I'll discuss Marine Systems.

Marine Systems continued to perform admirably in the first quarter.

Group revenues were $1.7 billion, while operating earnings were $167 million, both up slightly compared to a year ago.

The earnings increase is particularly notable in light of mix shift within several of the group's programs.

Marine's top line reflects higher submarine, auxiliary, and repair volume, offset by lower destroyer and commercial work when compared to last year's first quarter.

The higher submarine volume relates to our work on both the Virginia Class as we move to two boats a year, and the Ohio Class replacement.

This program passed a major Pentagon development milestone in the quarter, enabling it to enter the technology development phase.

Lead ship procurement is planned for 2019, and the Navy shipbuilding plan reflects the significant funding increase over the next several years to support that schedule.

Electric boat is the design agent for the program and is working closely with our Navy customer as this program moves into the next phase.

Marine Systems' 10% operating margins were a 20 basis point improvement from last year's first quarter.

This margin is driven by NASSCO, and particularly noteworthy performance on the T-AKE auxiliary program.

We launched the 12th T-AKE USNS William McLean into San Diego Bay two weekends ago and remain on track to deliver the ship later this year and the remaining two T-AKEs, numbers 13 and 14, next year.

The group's backlog totaled $18.7 billion at the end of the quarter, down from year-end 2010.

This decline in backlog is primarily a timing issue as we continue to anticipate adding several Navy ships to backlog this year.

With the CR behind us, we expect to receive the contract modification for the second FY '11 Virginia Class submarine very shortly, enabling us to move this submarine from unfunded to funded backlog.

We remain in negotiations with the Navy on the Mobile Landing Platform, MLP, and the two remaining Zumwalt Class destroyers, DDGs-1001 and 1002.

While negotiations have been slower than we had anticipated, we continue to expect to move these ships into our backlog this quarter.

We also expect to finalize the contract for the first of the DDG-51 follow-on ships at Bath later this year.

In addition to our Navy work, we continue to see interest across the range of Jones Act commercial shippers and believe that we will leverage our product carrier success to win new commercial work as these potential customers start awarding new contracts.

Marine Systems remains on track to achieve my guidance of relatively flat sales this year.

As work begins on several new ships and we experience further mix shift in our surface combatant workload throughout the year, I continue to anticipate margin compression that should lead -- should result in full-year operating margins in the low 9% range.

Next, IS&T.

The Information Systems and Technology group delivered a good first quarter, particularly in the face of the prolonged CR.

Group revenues grew 2% to $2.8 billion from the first quarter of 2010 due to higher volume on several programs in our IT Service business.

IS&T's earnings were $276 million and operating margins were 9.8%.

While both earnings and margins were down from last year's first quarter, this decline was due in part to program mix as this year's first quarter represented a higher percentage of IT Service program volume when compared with the prior year.

While IT Service work provides an excellent return on investment, profitability on these types of programs is generally lower than more product-intensive programs.

IT Service margins also reflect the competitive dynamics of this marketplace, particularly as IDIQ multiple-source contracting vehicles have become much more prevalent over the last 18 to 24 months.

IS&T's backlog was $9.7 billion at the end of the quarter as the group achieved a book-to-bill of 0.9 times.

This indicates continued demand for the group's products and services despite resource constraints and delays in contract awards imposed by the CR.

This quarter's order activity was especially strong at our tactical communications and IT Services businesses, demonstrating continued success in capturing business in faster growing market segments such as battlefield communications, cyber and IT emission services.

We had a number of notable IS&T awards in our tactical communications businesses this quarter, including a contract for our core Warfighter information network tactical, WIN-T, program.

The nearly $300 million WIN-T Increment II award in the quarter funds network development to another five brigade combat teams and represents the customer's dedication to rapidly deploying the significantly enhanced on-the-move broadband capability to the Warfighter.

WIN-T provides the network that our JTRS radios will leverage to enhance soldier communications on the battlefield.

Our HMS Rifleman and Manpack radios underwent further successful field testing in the quarter with a proved durability to provide significantly enhanced situational awareness and connectivity to soldiers at the company and squad level.

We anticipate a low rate initial production decision on Rifleman radio soon, and on the Manpack before year-end.

When combined, backlog and estimated potential contract value under IDIQ contracts totaled $24.8 billion, providing IS&T ample opportunity for continued growth.

IS&T remains well-positioned to achieve my guidance of approximately 3% to 5% sales growth and low to mid 10% margins this year.

Although in recent periods IS&T margins have been somewhat consistent throughout the year, we expect them to increase throughout 2011 as contract mix reflects increased tactical communications volume in the second half.

In summary, our first quarter provides a solid foundation for a successful year.

As is our custom at this early point in the year, I am reiterating my full-year guidance of $7 to $7.10.

This guidance presumes second-half G650 deliveries.

However, it does not include or anticipate the results of capital deployment.

As we look ahead, we remain focused on executing on our backlog and continuing to identify new opportunities.

General Dynamics' key programs did very well in the FY '11 budget recently passed by Congress.

Program funding included $1.2 billion for Stryker, $521 million for Abrams, $223 million for EFV, $591 million for WIN-T, $787 million for JTRS, and support for all of our ship programs, including DDG-51, Virginia Class submarines and the mobile landing platform, which received $500 million for an additional ship beyond what was in the President's budget.

Our programs are also well supported in the FY '12 budget request.

There is clearly significant angst and uncertainty surrounding the level of future defense spending, particularly given President Obama's recent remarks.

We recognize that, as the country deals with the urgent requirement to reduce national debt, previous predictions regarding defense spending are changing.

While it is impossible to know what will come from the administration's Rolls emissions study and the President's announced intention to find more savings in the defense budget, there are a few things that remain evident.

First, in this pressured budget environment, it is very likely the case that defense top line spending will begin a slow, steady decline.

I believe the programs most at risk are likely to be the new development programs.

As such, incumbency is particularly salient.

While we continue to pursue new development programs, we remain focused on leveraging our incumbency to help our customer identify solutions that affordably improve the war-fighting capability of existing platforms.

Second, the world remains a dangerous place, and current force structure is sized to do this threat environment.

Going forward, our nation's tolerance for risk must continue to acknowledge the global threat.

That should mean only modest adjustments to force structure.

The Secretary of Defense Gates has already warned that deep defense budget cuts would be calamitous.

His eventual successor will confront the same national security reality.

As General Dynamics plans for the future, we will continue to evaluate the long-term defense spending environment realistically.

GD is well positioned to sustain our business in a declining defense top-line environment, given our current footprint in Army and Navy force structure, and the opportunities inherent in our Aerospace business.

Our lean, agile business model, solid balance sheet, and ability to generate earnings and efficiently convert them to cash afford us great flexibility to deploy capital to further enhance our business.

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

Hugh?

Thank you Jay.

Good morning everyone.

I'd like to make a few observations about debt, interest expense, taxes and pension contributions.

At the end of the quarter, we had just over $430 million of net debt, up slightly from year-end.

This is after returning over $470 million to shareholders in the form of share repurchases and dividends.

Our next scheduled debt maturity is $750 million of notes due in July.

As we get closer to July, we will make a decision to either repay that debt from cash on hand or to issue new obligations.

Our net interest expense in the quarter was $34 million, down from $44 million a year ago.

This resulted from repayment last year of $700 million of fixed rate Notes.

For the full year, we expect interest expense to be around $130 million, that assuming of course that we don't refinance the Notes that are due in July.

With respect to income taxes, the first-quarter effective rate of 31% was consistent with our expectations and with our current outlook for the full year.

Finally, we remain on track to make a voluntary contribution of $350 million to our pension plans in the third quarter of this year.

That completes my remarks.

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

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.

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

Thank you.

(Operator Instructions).

Ron Epstein, Bank of America Merrill Lynch.

Good morning.

Just to maybe start off with a Gulfstream question, the order activity in the quarter, could you characterize what part of the world it came from, what was going on with the mid-size aircraft, if you're starting to see a pickup there, and if there was any impact to Gulfstream due to the instability in the Middle East?

Okay.

Be happy to take that question.

The order activity, Ron, was I would say very well spread across the product line.

Large-cabin is dominating, yes, but we are also taking a mid-cabin orders.

The demographics of that are very heavily weighted to international, pretty consistent with what we've been saying in previous quarters but actually, in this quarter, it was even more so, I mean like 70%-some international.

A large portion of that came from Asia-Pacific; probably half of that at least came from Asia-Pacific, and as I mentioned China being a major part of that.

So it was a good dispersion, if you will, on the international space across the product line.

The mid-size activity continues.

I would not characterize it as robust, but certainly improving the pre-owned inventory that's out there is working its way through the system.

There is still more to come, as I think you know.

But for us, we are seeing continued mid-cabin activity and we are taking orders to include our G250.

The Middle East, I would just characterize it as being about 10% of our backlog at Gulfstream, and that's proceeding.

I would say that the order activity has probably slowed somewhat in the Middle East as you'd probably expect, but nothing drastic in terms of fall-off or cancellations or what have you there.

Great, thank you.

Joseph Campbell, Barclays.

It's actually Carter Copeland and Joseph Campbell.

Good morning Jay, (inaudible) Hugh and Amy.

Just a quick question on your comment about the 650.

You said you were moving forward with the nonflying test activities and production.

Is there a point in the NTSB investigation in how long this stretches out, where you have to change that sort of strategy in terms of production and what's going on?

Do you reach a point where you need to slow that activity down, and when might that be?

How are you thinking about that?

Well, I guess the answer will be there would be a point, but that's not something that is an immediate concern here at all.

It's a very deliberate process, as both of you know, and the NTSB controls that process.

But rest assured, Gulfstream is working with the NTSB and the FAA, as I said in my remarks, to analyze, to determine, to move forward as smartly as we can.

To put a specific time line on that right now is just not something that I can do.

But I would tell you that, just reaffirm, we are proceeding with all nonflying activity as it applies to the 650 program and our other programs as you'd expect.

But specific to the 650, and at this time reflected in me not changing my guidance, I don't see any impact to the year.

We'll see how that goes, obviously, but I don't want to presuppose anything from the NTSB.

They have a very tough job to do and we are helping them as best we can.

We'll get to a resolution here and return to flight at some point.

I'm just not going to try to put a time line on that except to say that I believe it's being treated as you would expect it to be treated, very seriously, with great discipline, with great analysis on both Gulfstream's part and the other entities.

We'll come to a safe decision here as soon as it's practical to do so.

I realize that probably doesn't satisfy your desire for specifics, but that's about as specific as I can be right now.

I think it's less on the conclusions that the NTSB may draw and when they will draw them than more internally how GD is -- how Gulfstream is proceeding with production, and what your views on that which you do control outside of the NTSB investigation.

I've said very consistently that we anticipated about a dozen green deliveries this year, and we're proceeding along that pathway.

We are unencumbered on that pathway at this point with the exception of, quite obviously, Type certification for the aircraft.

So at this time, we continue to proceed, and at such time as we have to modify that, we will make those adjustments and tell you.

But that's certainly not the case now.

Peter Skibitski, SunTrust.

Good morning guys.

Jay, can you just talk to us about pricing realized at Gulfstream during the quarter on new aircraft versus the pricing in backlog, and maybe you could give a differential large versus mid-size?

I think the way I'd characterize it is the pricing is very firm on the large-cabin and a little bit softer in the mid-cabin, which I think is consistent across the industry right now just as a function of mid-cabin inventory that's out there.

But the large-cabin pricing is very strong and holding.

Can I ask -- there's a lot of reports about potential for an Abrams line break I think in 2013.

Can you talk to us about that, and then also the outlook for Stryker as well?

Is that part of the first question?

I'm just kidding Peter.

I'll take it because somebody else will ask it.

But listen.

There is work to be done as it applies to Abrams, to your point, and we know that and the customer knows that and everybody knows that.

If you look at the Army's laydown of heavy brigade combat teams with some 24 of them with 60 Abrams apiece, that and the industrial base issue that's attendant to that beautiful facility out in Lima, Ohio, we all realize that we've got some work to do to get from the multi-year that completes next year to the next phase which some are saying doesn't need to start until 2016.

So there's -- filling that space with valid work is I would characterize a work in progress right now.

Everybody is realizing that we've got something to do.

Cai von Rumohr, Cowen & Co.

Thank you very much.

So Jay, your R&D was down fairly substantially in the first quarter, and you delivered two more large biz jets than we'd assumed on a pace to do 80, and yet you really said you'd do 78, excluding the G650.

So is R&D going to be building as we go through the remainder of the year at Gulfstream?

Can you do more than 78 non-650s?

Lastly, if you don't know what the problem is, how can you still feel you're going to do 12 650s this year?

The R&D is net, and we had more launch assistance in the first quarter I think is the first answer.

As to the incremental production on the in-production large-cabin, Cai, we do have some opportunity there to add an airplane or two as we kind of talk about every year.

So there is some maneuver space there.

Look, I'm not going to go into much more than I've already said about the 650 except to reiterate that, at this point, I said we would deliver approximately 12 green 650s this year, and I am still in the place in the year where I believe we can do that.

Obviously, the Type certification and the FAA restart with the NTSB authorization is elemental to that but, at this point, I am quite comfortable suggesting that we carry out the plan.

Terrific.

Thank you.

Jason Gursky, Citigroup.

Good morning everyone.

You mentioned that you were having some throughput problems on the completions business.

Can you provide a little bit more detail as to what the issues are there and the time frame for completing the restructuring that's going on there and the impact that might have on margins for that business over time?

Well, I think the way I would characterize it is it's a number of things.

I mentioned some of that in my prepared remarks.

But you've got an OEM -- how do I characterize it?

-- shortfall, I guess, as a result of completions activity resultant from the economic downturn, the valley of that that we are dealing with, which then when you butt it against the narrow-body wide-body work that's out there, the flow and the rhythm and the volume and the overhead and all of those things kind of come together.

And you say you know what?

We may need to retool this business a little bit, given the new scope of activity that we are seeing.

That's probably the easiest way to say it.

The margins I would anticipate would improve throughout the year.

We're working very diligently to do that.

As I mentioned also, the other parts of Jet Aviation which really is what we bought Jet Aviation for, the global footprint, the service, the MRO, is coming along quite handsomely.

Then the one thing you haven't mentioned about the G650, I'm sorry to ask a second question, but what's the customer feedback been at this point?

The customer feedback has been very supportive, very concerned in terms of the losses that we've suffered, and basically reaffirming their desire to get their airplanes.

Richard Safran, Buckingham Research Group.

Good morning.

Jay, I heard your comment about international vehicle awards that are not coming off the table.

But some defense companies are noting that some international customers are taking deals off the table, but they are sliding plant purchases to the right.

I was wondering if you just might comment on whether you are seeing similar trends for combat.

We have seen some of that indeed, Richard, and we talked about some of that last year.

There was movement to the right.

Yes indeed we still see that.

The Spanish 8x8s are probably the most talked about example of that.

We still believe that the Spanish 8x8, based on what everything the Spanish government is saying, the MOD is saying, will come to a decision this year.

But we haven't seen it yet.

That's why I mentioned I think that that's not integral to our sales plan for the year.

So yes, we are seeing some movement to the right.

Having said that, though, we've still got a lot of work ongoing.

We are in production on -- development on the specialist vehicle in the United Kingdom.

We are doing the first tranche of FMS tank upgrades at Lima right now and expect the production contract later this year.

So we are doing, between the FMS labs and the FMS tanks, there's lots of activity still apace with more to come that perhaps could be delayed, but right now we've got a lot that's already in-train, which is good.

Thanks Jay.

Noah Poponak, Goldman Sachs.

Good morning.

You started to talk about Gulfstream in China, and I wanted to ask you to elaborate on that just because there's obviously a great long-term opportunity there and the debate is timing.

I think most think it's pretty long-dated and there are some hurdles there.

We were just out there.

We met with some of your folks actually and were surprised with the comments that the western companies out there were making about how quickly that is actually turning now.

So I wanted to get your kind of personal stance on that topic, and then strategically if you feel like you need to do anything there to have a bigger presence than you already do, whether it's JV-ing or moving facilities there or whatever.

To your latter first, that is a very active market, and the pacing I think is picking up to a degree that perhaps -- I won't use the word "surprise", but it's accelerating shall we say.

But as I've said before, we are very mindful of the need to match the product support with the sales, so we are working very diligently with -- and to your last point about JVs and partnerships, that's the way you do business over there right now.

So, we are working diligently with partners over there to enhance the product support business as we sell airplanes into it.

It also -- if you heard my remarks, you heard me mention Singapore as a major, basically a major maintenance overhaul hub in Asia.

All of that ties together to be able to capitalize on this growing market in China.

We believe it will be a very robust market, and we just want to make sure that we are measuring ourselves properly into that market so we don't, as I like to say, overdrive our headlights and risk diminishing the premier brand that we have in Gulfstream.

Thanks a lot.

George Shapiro, Access 342?

My question is you had mentioned in combat that you've got like $1.2 billion in Stryker orders, $500 million in Abrams, but the reality is your Stryker sales are a lot above the $1.2 billion and Abrams and two to three times what you get.

So how do you not have this sector go down fairly substantially over the next several years?

Say the last part again?

I'm sorry.

Abrams, you've got $500 million in orders like you said, which is probably maybe around a third of what the sales are currently running.

So given that Stryker and Abrams are the two biggest programs in this sector, how do revenues not go down substantially over the next several years?

I think the numbers I gave are production numbers.

You've got, in addition to that, as you know, you've got modernization, which is particularly significant in Stryker-land and also will be in Abrams.

You've got reset.

You've got combat logistics support, which is ongoing.

So, there are more elements to it than just the production I guess is probably the succinct way to say it.

Okay, I'll go back in the queue.

Joe Nadol, JPMorgan.

Good morning.

I just want to follow-up actually on that same track.

Jay, you gave some good color on what's in your combat guidance, the $9 billion for this year, and what's not.

I think you only mentioned one international order that is significant that is in there.

Most of the rest of these things, Canadian lab, Egyptian, Spanish etc., seem to be now upside to your guidance.

I just want to confirm that.

Then secondly, on the back of that, you've said in the past that this is a business that you anticipate growing modestly from this level in future years.

Is it fair to say you do need these things to hit -- these are really more important for next year and the year after than they are for this year anyway?

Yes, (inaudible) that's exactly right.

We've got a pretty good -- not pretty good -- we've got very good visibility on the year, which is why I reaffirm about $9 billion in sales.

We are less dependent than we were last year on sales coming into the book, so it's a better circumstance.

But you're exactly right.

The order book for next year is dependent on a lot of these things -- not dependent, but these would have more impact next year than they do this year I guess is the way I would say it.

The one order you need to get this year, you mentioned it was FMS Tank.

Is that into the Middle East?

Yes it is.

We are already working the front end of that, if you will, in Lima.

We anticipate a production contract later in the year.

We've got Stryker in the budget.

We think, as I mentioned, we are going to get probably more Stryker; the Army wants more Stryker.

We've got the Double-V hull.

We've got the reset -- not the reset, sorry -- the redo on the other seven brigades that aren't Double-Vs.

The only -- the comment I would make in addition to that, I mentioned in my remarks above-ground combat vehicle.

That's one of the new development programs, so I would attach some risk to that to be pragmatic about it, but that's in the plan.

Heidi Wood, Morgan Stanley.

Actually, I have combat questions.

Sorry, Jay.

A two-part question there.

I wanted to understand what percentage of combat sales is going to be international this year versus last year.

About the same, 23%, 24% all-in.

That's all-in, okay, FMS too.

Then you said the (inaudible) correctly, but actually some of us have been talking to folks down in DC.

I want to get an update as to how many Stryker brigades you see likely ahead.

Is there a world given the FCS cancellation, and again you admit that GCB could be vulnerable.

Could that be filled in with more Strykers?

My answer to that would be certainly yes, as you'd me to say.

So I guess -- I mean honestly, you know we are deploying Number 8 and realistically they're looking at Number 9.

So I guess my answer would be 9 to 12.

Howard Rubel, Jefferies.

I got butchered on that.

Good morning.

Thank you.

I want to focus on strategy for a minute.

Two things that sort of struck me, one is that you announced the sale of a small business the other day out of Combat.

Then second, if we look at the environment, it's changing to a more austere world.

Can you affect that change through either coming up with more competitive solutions that exist outside the normal procurement channels?

The Pentagon seems to want some of that.

Could you give us maybe a couple of examples of maybe how you solved the GCV is one instance or maybe what you're doing in submarines is a second instance that sort of allow you to kind of take advantage of your incumbency and your technology?

The GCV is up for technology demonstration phase, as you know, within I would say any day, within a month or two, and I think that will be very telling.

We believe that will be delivered, seen through, and then decisions on GCV would probably be made after the technology demonstration phase.

So that's why it's in our plan.

We believe we will be competitive as one of the three to be selected.

So it's in our plan there.

The risk attached to GCV, in my view, comes later on as TD phase evolves or completes.

The submarine -- the submarine piece is very, very dynamic and very strong, in my opinion, in addition to the Virginia Class, and we have talked about this.

At 18 boats of at least a 30 boats requirement, okay.

Block 3, we are on 3 of 8 Block 3 boats in the build right now.

It'll take us out to 2018.

We are looking for and working with our customer on Block 3.

We are also, as you know, working the SSBN-X Ohio replacement.

In that in particular, I think the word, as you were alluding to, the need for innovative build strategies and solutions is going to be extremely important, because you know that about 2018 to 2019 as SSBN-X requirements build in the next decade, the Virginia Class requirement does not mitigate.

So there's going to be a lot to be done and the need to be innovative and creative and how you source these and how you meet the requirements will be ever more important.

Doug Harned, Sanford Bernstein.

Good morning.

I had a question on Marine.

You've got great margins in Q1, but you're heading into the program transitions in this year, both at Bath and at NASSCO.

Can you talk about what needs to happen there in terms of the size of the workforce, any changes in operations you're looking at?

What are the things you're looking at going forward there?

Bath and NASSCO.

This won't take away from your question, but Amy is my truth serum here.

I need to go back to Heidi Wood's question just for one second for all of you.

As it applies to combat international sales, I stand modestly corrected here in that the sales actually are going to be higher this year than they were last.

I think I gave you 23% or 24%.

It's actually the combat international sales will be about 28% this year.

So just to set the record straight.

Okay, let's talk about Bath and NASSCO.

We are complete -- let's take Bath first.

At Bath, we anticipate the contracts for the two DDG-1000 Number 2 and Number 3 boats, ships, any time.

We are working very diligently with the customer now to bring those to closure.

The DDG-1000 itself is well into the build, about 40% complete on the manufacturing.

It's in the ultra-hull facility right now and being put together.

It's a beautiful huge ship.

So that's coming together.

We are in the last two builds of DDG-51s.

They're right now 111 and 112 by [hull] number.

In the '11 budget will be a contract for another DDG-51.

So you're going to see DDG -- you're going to see volume up as 1000s come in, as the next 51 comes in.

Then you're going to see margins compressed, as I said, because of creating the maturity of the DDG-51 program for the impact of the first of the three DDG-1000s at cost plus and then Number 2 and Number 3 will eventually come in at fixed price, and we'll readjust the margins.

By that time, I should also point out we anticipate more DDG-51s as the Navy puts into reality the ballistic missile defense block of DDG-51.

So that will be a steady stream of work, albeit there's some work to do to smooth the flow of those ships, as I just described.

That's probably more than you needed, but that's where we are at that.

In NASSCO, I mentioned the T-AKEs.

We do magnificent work at NASSCO building those T-AKEs.

We've got the last two to finish next year.

The MLPs are coming in now.

We've got the Navy -- we are working with the Navy right now and they've put them in sequence, which is much more efficient for both the taxpayer and for us on the build, and everybody likes that.

That's in stride now, so you'll see T-AKEs starting out at the end of next year.

We hope to start to build on the first MLP in May; we anticipate a contract any day.

Then the Navy has also pulled forward the requirement for the [T-AOX], which is the next generation of oiler into I think it's about 2014 now, so there's still some work to be done there.

But at any rate, on the Navy side, we see longer-term good opportunity at NASSCO.

The commercial side is still lagging, as I mentioned, but there is great interest in that market, the Jones Act market.

It just hasn't translated quite into contract reality yet.

As a result -- and this applies to all our yards, but most specifically at NASSCO right now -- that's why we put out more notices, that's why we have resized that great workforce out there to continue to manage for profitability, because if we don't have the work, we won't keep the workforce at idle.

So -- but NASSCO longer-term is very bullish, in my view, but we've got some work to do right now to get MLP into reality, which will happen, we are confident of that, and to return to commercial work.

Remember, too, whenever we talk about NASSCO and the other yards, but particularly here since we are talking NASSCO, the repair business is a significant part of their book, at least a quarter of the top line on last year, and they are the only full-service yard on the West Coast.

So the Navy needs their capabilities and uses it a lot.

So that will continue to be a fairly significant part of the business.

Peter Arment, Gleacher & Co.

Good morning Jay.

I guess maybe since no one has asked, I guess how are you talking about capital deployment just in general?

When you look at your defense portfolio, you've got stability, some challenges, but a lot of opportunities too.

How are you thinking about M&A?

You've been consistently buying back stock, but just maybe some broader -- and where the investment priorities are.

Thank you.

I think it's fair to say the operative word for us as relates to capital deployment is "balance".

We take a very balanced approach to it.

The M&A opportunities are out there.

It's been fairly dormant, shall we say, for the last 18 months as the economics went south.

But there are opportunities out there.

We continue to work some of those opportunities.

I don't have something to announce to you today, but rest assured we are looking at opportunities in the defense space as well as in aerospace.

I mentioned in my remarks on the Aerospace side the global opportunity -- or the global footprint expansion.

We see great opportunity there and expect to take advantage of it going forward.

So there are M&A opportunities.

We don't restrict ourselves in terms of -- we are very decentralized, as you've heard me say before.

I've got 13 businesses out there, each of which is tasked to continue to grow their business and look for opportunities inside their core or in adjacencies or in dual-use from commercial defense.

That's exactly what they do, and roll them up to us and then we make our assessments and either go or no go.

The same is true on divestitures, by the way.

So we look to shape our portfolio all the time, which is why you just read about us making a divestiture.

It was a great book of business, but quite frankly we didn't have the scale, and it will work better for somebody else than us, and so we don't hesitate to do something like that.

We've also increased the dividend, as I mentioned.

That's a significant part of our deployment 14 years in a row.

We are very much committed to dividend growth.

Our share repurchase is done tactically, as we say it, and will continue to be done in that manner.

So we've got pension requirements, as you heard Hugh mention earlier, so it's a very balanced approach to capital deployment.

But we do not believe, even as a declining -- flat to declining defense market, we do not believe there are no opportunities in defense space, quite the contrary.

We are coming up on the hour, so I think we have time for just one more question.

Myles Walton, Deutsche Bank.

Good morning.

Thanks for taking the last question.

Jay, a first clarification -- the size of the liquidated damages in Gulfstream, were they similar to what you had the first quarter of last year?

Greater, smaller?

Then as a follow-up to the --

About the same.

Okay, great.

Then the actual question was more on how you are looking at the DDG-1001, 1002 contracts.

It sounds like you're coming to the final Ts and Cs there.

My guess is HII's spin had something to do with delay.

But I'm curious if there's any sticking points in respect to the Ts and Cs, how you're limiting your risk given you're only 40% through the DDG-1000, and we're seeing some creative costs -- or some creative contract structures on these new transitions to fixed-price contracts.

I'm just curious how you're setting this one up to protect on the downside.

Let's just say we believe we know how to contract, and we also know how to price in risk.

So I would -- at the risk of putting words in the mouth of my negotiating team, I'm sure they are attendant to all of that and working it very diligently.

So I think we are actually getting fairly close.

Ladies and gentlemen, this will conclude the Q&A portion of the call.

I would now like to turn the presentation back over to Ms.

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, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.