通用動力 (GD) 2011 Q4 法說會逐字稿

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

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

(Operator Instructions).

I will now turn the presentation over to Ms.

Amy Gilliland, Staff Vice President of Investor Relations.

Please proceed.

Thank you, Maria, and good morning, everyone.

Welcome to the General Dynamics fourth-quarter conference call.

As always, any forward-looking statements made today represent our 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 would like to turn the call over to our Chairman and Chief Executive Officer, Jay Johnson.

Thank you, Amy.

Welcome back and good morning.

General Dynamics fourth quarter was marked by our best cash quarter ever, and strong operating performance at Gulfstream and across our defense businesses.

Charges taken by Jet Aviation's completion business blemished an otherwise solid quarter and year.

Fourth-quarter sales and operating earnings were the largest of the year at Gulfstream and at each of our defense businesses.

Company sales totaled nearly $9.2 billion, up 6% from last year's fourth quarter, driven by Gulfstream G650 deliveries.

Operating earnings were $950 million for the quarter, while net earnings from continuing operations were $603 million or $1.68 per fully diluted share.

For the full year, sales were $32.7 billion, a modest increase over 2010.

Operating earnings totaled $3.8 billion, with Combat Systems and IS&T both topping $1 billion of EBIT.

Net earnings from continuing operations were $2.6 billion or $6.94 per fully diluted share, an increase of 2% over last year's EPS result.

Free cash flow after capital expenditures totaled $1.8 billion in the quarter.

For the year, free cash totaled $2.8 billion, or 109% of earnings from continuing operations.

Let me address the two Jet Aviation charges first.

One related to contract losses and the other an impairment of intangible asset.

These charges reflect two issues that I have previously highlighted; namely, lingering performance challenges on several narrow-body wide-body aircraft and a significant decline in other OEM business jet completions work.

The contract losses taken this quarter, which depressed group margins by over 400 basis points, resulted primarily from cost growth caused by increased labor hours and late penalties on three wide-body narrow-body aircraft.

These legacy aircraft are the most complex custom completions projects ever undertaken at Jet Aviation.

Once we've delivered these aircraft, our Jet team will focus on completing the next series of aircraft, which are already benefiting from new management and operating processes.

As a result of trends experienced in the completions business, we conducted a fourth-quarter review of long-lived assets at Jet Aviation and recorded an intangible impairment charge of $111 million.

This impairment, which reflects an outlook with substantially fewer business jet and narrow-body wide-body completions than when we acquired at Jet Aviation, negatively impacted Aerospace margins by 600 basis points in the quarter.

These charges are very disappointing and clearly not in keeping with General Dynamics' operational track record.

The new management team is instituting necessary measures to improve Jet Aviation's completion business in 2012, including restructuring operations to lower overhead and headcount, improving the coordination between engineering and operations, and strengthening supply chain management controls.

I would point out that the other three quarters of jets business portfolio continues to perform well.

Revenues at jets aircraft service facilities around the world were up double digits in 2011 and remain well positioned with an established global footprint as emerging market business jet demand takes hold.

I said many times that we acquired Jet for their global footprint.

As the business jet installed base expands internationally, jets facilities will be ever more elemental to our aerospace growth.

Now let me talk about the Aerospace group, and more specifically, Gulfstream.

Gulfstream enjoyed a banner fourth-quarter marked by strong cash generation, healthy order activity, and the first 12 green G650 deliveries.

These aircraft deliveries drove significant growth in the group's fourth-quarter sales.

Aerospace sales, which totaled $1.9 billion, were up nearly 50% when compared to fourth quarter 2010, and up over 30% sequentially.

Operating earnings were $73 million in the fourth quarter, reflecting the impact of charges taken at Jet.

For the year, Aerospace sales were $6 billion, up 13%, while operating earnings were $729 million.

The group's top-line growth was driven by the fourth-quarter G650 deliveries and improved service activity throughout the year.

Gulfstream made meaningful progress in product development in the fourth quarter, to include receiving provisional type certifications from the FAA for the G650 and from Israel's Civil Aviation Administration for the G280.

Both aircraft remain on track to achieve full FAA EASA certification and entry into service in the midyear.

Our first 12 green G650 deliveries went smoothly, giving us further confidence in the G650's design for manufacturing processes.

Business jet and market indicators were positive again in the fourth quarter.

Aircraft utilization remained robust, and our service centers enjoyed another good quarter.

For the year our aerospace service business was up a combined 15%, including Gulfstream's best year ever in service volume.

Preowned inventory levels for both large and mid-cabin aircraft continued to show gradual improvement.

We took one aircraft in trade in the fourth quarter and subsequently sold it for a small profit.

We had no preowned aircraft in inventory at the end of the year.

For the year, we made a modest profit on just over $75 million in sales on five preowned aircraft.

The Gulfstream order book was healthy again in the fourth quarter and exhibited many of the trends we've seen throughout the year.

Although orders were placed for each of our aircraft models this quarter, demand remained strongest for our large cabin offerings.

Similarly, international customers continued to dominate new orders, although North America enjoyed its strongest quarter of the year, comprising nearly 45% of the order book.

Notably, with this strong fourth-quarter finish, Gulfstream booked the highest number of orders in 2011 since the introduction of the G650 in 2008, causing year-over-year backlog to increase to $17.9 billion.

New aircraft book-to-bill this quarter was one time on a dollar-denominated basis.

Despite strong bookings, backlog decreased from the third quarter, due primarily to the large number of green G650's delivered.

Also as expected, G650 defaults were higher than normal this quarter, as customer milestone payments were triggered by provisional type certification.

We actually saw fewer defaults than anticipated and still have over 200 G650 aircraft in backlog.

I should also highlight that we continue to maintain an 18 to 24 month backlog for our G450 and G550 aircraft.

At year-end, Gulfstream's backlog consisted of 64% international customers, including 27% in Asia-Pacific.

The Gulfstream product support organization continued to expand in 2011 to keep pace with our international customer base, including new facilities or additions in the United Kingdom, Spain, Singapore, and elsewhere.

In the fourth quarter we also announced the opening of a product support office in Hong Kong and the opening of an office in Beijing, which will enable us to better serve our growing Asia-Pacific-based customers.

Fortune 500 and other public companies comprised 34% of year-end backlog, up modestly from 2010, with individuals and private companies comprising the other two thirds.

In 2012, we plan to deliver just over 100 large cabin green aircraft, including approximately the same number of G550s and G450s as in 2011, and about two dozen G650s.

We expect midsize green deliveries to be around 10 to 15 aircraft, primarily the G280.

The additional G650 deliveries will drive 15% top-line growth in the Aerospace group this year, and margins should be around 15%, driven by improvement at Jet Aviation.

Next, the defense side of the business.

Before discussing the performance and outlook for each of our defense segments, let me comment briefly on our defense outlook.

Amidst a backdrop of continued deficit focus and political divide, we are pleased to start the new year with a 2012 defense budget, as this provide some clarity to our 2012 planning process.

General Dynamics programs were well supported again in this year's budget, including $577 million for Abrams tanks, $723 million for Strykers, $1 billion for WIN-T, and $1.1 billion for JTRS and full funding for all of our ship and submarine programs.

Congressional support for the defense industrial base was solid throughout the 2012 legislative process, particularly as it relates to our tank, Stryker, and shipbuilding programs.

However, even with an approved 2012 defense budget, we recognize the potential complications to budget execution from the combination of upcoming elections, likelihood of another continuing resolution, and the looming shadow of sequestration.

As we saw in 2011, particularly in the shorter-cycle IS&T world, budget officers and program managers are put in a position where they naturally hold back or make awards very cautiously when a continuing resolution is likely.

This year, with the added threat of sequestration, the situation becomes even more unsettled.

If sequestration were to occur as laid out today, it would be very bad for defense and, frankly, for our country.

While many believe, as do we, that it is unlikely to happen as presently described, no one knows how it will be resolved.

The DOD has already provided some FY 13 budget details, particularly as they relate to the Budget Control Act defense top line.

The Secretary of Defense is scheduled to provide more detail this week, with the service chiefs to follow in the days thereafter.

That should give us more insight as to how investment accounts overall, and our programs in particular, will fare.

Given our incumbency and relevance, we do not expect any significant surprises.

The roles and mission study implies that ship, ISR, and cyber programs will continue to be priorities in 2013 and beyond, especially as the new Pentagon strategy pivots toward Asia-Pacific.

Conversely, we would expect to see some uncertainty in the 2013 budget request concerning the final disposition for Stryker and Abrams funding by Congress.

Following a decade of growth, we are now in a new era where defense spending is clearly coming down.

Given this backdrop and our lessons learned from the changing defense environment in 2011, my 2012 defense segment guidance is realistic.

We are doing everything in our control to position our defense businesses for the declining budget headwind, including continuous improvement initiatives, restructuring, divesting non-core businesses, and headcount reductions.

These types of actions enabled us to maintain defense earnings in 2011 despite declining sales.

As appropriate we are also adding new businesses to shore up our outlook and improve our competitiveness in faster-growing market channels.

We continue to feel confident about the defense portfolio relevance in this environment -- our defense portfolio relevance 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, and with fewer new programs, incumbent platforms and programs capable of addressing today's dynamic threat environment will require continued production and modernization.

Now let's move to Combat Systems.

The Combat Systems group delivered a productive fourth quarter, marked by the acquisition of Force Protection and healthy domestic and international order activity.

The Force Protection acquisition, which closed in late December, expands combat systems sustainment business, tactical wheeled vehicle product portfolio, and product development capabilities.

As partners in delivering thousands of Cougar variant MRAP's to the Marine Corps, we gained an appreciation for the company's significant research and test capabilities.

Our broadened development experience together with Force Protection's proven product portfolio better positioned Combat Systems to compete for vehicle sustainment and upgrade opportunities in new development programs globally.

In the fourth quarter Combat Systems sales were $2.6 billion, while earnings were $388 million, both down 3% when compared to last year.

This downslope was in part a function of timing, as several new engineering and development opportunities planned for the year, including the Ground Combat Vehicle, moved to the right.

Margins were 14.9%, also on par with the year-ago period.

For the year the group sales were $8.8 billion.

This represents a modest decline in sales from last year, the result of lower US vehicle volume, particularly Abrams and Stryker.

International LAV upgrades and axles for military and commercial OEMs helped to soften the US vehicle decline.

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

Margins were 14.5%, modestly ahead of our expectations, as cost performance improved in several of our core vehicle programs.

Combat Systems enjoyed its largest order quarter in two years in the fourth quarter, with sizable awards for US, European, and FMS vehicle programs.

Notable US orders in the quarter included approximately $800 million for Stryker production and sustainment, and $100 million for MRAP upgrades.

The group's nearly $1.4 billion in international fourth-quarter awards included LAV and tank upgrades for several customers and another tranche of Duro vehicles for the Swiss government.

The quarter's healthy order activity and the addition of Force Protection caused Combat's backlog to expand by $1 billion, a 10% increase from the third quarter.

Year-end total potential contract value for Combat was $14.9 billion, including $11.4 billion in backlog and $3.5 billion of unexercised options and IDIQ contracts.

While the way ahead is not entirely clear, the flexibility and operational success of our Abrams tanks and Stryker vehicles are undisputed.

We believe we will see additional Abrams upgrades and Stryker Double-V holes, either through new production or upgrades of existing vehicles.

The Combat Systems business will also be extremely competitive in each of the major development programs, including the Ground Combat Vehicle, where we are one of just two teams selected to compete, the Joint Light Tactical Vehicle, the Amphibious Combat Vehicle, and the Armored Multipurpose Vehicle.

In the event that these programs are impacted by budget decisions, we have a portfolio of proven vehicle solutions to offer.

Combat Systems will continue to provide support and sustainment of vehicles we produce.

We have the experience and the infrastructure to expand those services to support a wider array of Army and Marine Corps vehicles.

Our successful teaming relationship with the Army's Anniston Depot over the last five years differentiates General Dynamics from our competitors.

Additionally, with Force Protection now in our portfolio, we have enhanced our exposure to US and international inventories by several thousand vehicles.

The requirement to improve vehicle suspension, protection, and power capabilities will create opportunities for us to leverage our experience and help our customer identify ways to affordably reconstitute and modernize.

Our international vehicle business continues to grow.

With several billion dollars of orders in backlog, we are at work on LAV and tank production and upgrade programs for a variety of foreign customers.

This work helped to mitigate pressure on our US vehicle business volume in 2011 and will continue to do so through 2014.

Beyond our ongoing contracts, we are tracking a variety of international competitions, including the TAPV and CCV programs in Canada, and several 8x8 vehicle and tank programs in the Middle East.

Our munitions and weapons systems businesses also face budget pressures over the next few years.

However, adjacent and international market opportunities, and continued strength in the axle business, should provide some offset.

For 2012 I expect Combat Systems to deliver around $8.5 billion in sales, reflecting declining domestic vehicle funding, somewhat offset by growth in our international vehicle programs and the addition of the Force Protection.

We expect operating margins in the low to mid-14% range, consistent with 2011.

Next, Marine Systems.

The Marine Systems group finished the year with another solid quarter.

Quarterly sales totaled $1.8 billion, up 3% over 2010, while operating earnings increased 7% to $190 million.

The group's 10.8% margins were 40 basis points higher than fourth quarter 2010.

Higher Ohio class replacement volume and the addition of Metro Machine, now known as NASSCO-Norfolk, stimulated simulated top-line growth, while strong TAKE program performance drove the earnings and margin improvement.

For the full year, sales were $6.6 billion, down modestly from 2010, while earnings grew 2.5% to $691 million.

The sales decline was primarily a timing issue, as several destroyer awards planned for earlier in the year slipped into the third quarter.

The group's 10.4% operating margin for the year reflects the commitment to manufacturing excellence across our shipyards and improved performance on the TAKE and MLP programs throughout 2011.

Marine's year-end backlog totaled $18.5 billion.

This enduring backlog includes several awards received in 2011, which position the group for success in 2012 and over the next several years, including two additional Zumwalt class destroyers, DDGs 1001 and 1002; two DDG-51 destroyers, part of the Arleigh Burke restart program.

Two Mobile Landing Platform/MLP ships, and additional repair work, enhanced in part by the NASSCO-Norfolk acquisition.

In 2012 we expect to receive the RFP for the next block of Virginia class submarines, which should include nine boats.

This contract is scheduled to be awarded in 2013.

For the year ahead, I expect Marine Systems sales to be ever so slightly down, with margins in the low to mid 10% range.

The group's outlook is very stable, with a number of opportunities, including the next block of Virginia class submarines, the SSBN replacement program, additional DDG 51s, a new program to replace the Navy's aging class of oilers, and new commercial work.

The value of our Navy's global mission was reaffirmed by the Pentagon's recent roles and missions study, which emphasized the importance of maintaining a strong military presence, particularly in the Asia-Pacific region.

This bodes well for our shipbuilders.

Moving to IS&T -- IS&T finished the year with fourth-quarter sales at $2.9 billion and earnings at $315 million, essentially flat from the year-ago period.

Continued strength at our IT service business, bolstered by the addition of Vangent, helped to offset a decline at the group's tactical communications business.

Group sales were pressured by the FY 2012 continuing resolution, which exacerbated the sluggish award activity felt throughout 2011.

Margins increased 20 basis points to 10.8%.

For the full year, IS&T sales were $11.2 billion, down 3% from 2010, primarily due to lower tactical communications volume.

This lower volume was a result of several program cancellations, FCS brigade modernization, IWIN, Integrated Wireless Network, and JTRS AMF, just to name three.

And award delays, particularly in shorter-cycle encryption, mobile, and ruggedized computing products.

Two of our largest sole-sourced tactical awards in 2011, WIN-T increment 2 and CHS4, were delayed by approximately 6 months.

Despite significant market pressures, the group's IT service business continued to deliver organic growth in 2011.

This growth, which helped to mitigate the group's sales decline, was primarily due to several large IT infrastructure support projects and success in capturing new business opportunities.

IS&T operating earnings were $1.2 billion in 2011, as margins expanded 20 basis points to 10.7%.

Consistent with the group's historical trends, IS&T order activity was lighter in the fourth quarter than the previous three.

For the year, IS&T book-to-bill was 0.92 times, a good result in a year which includes seven months of continuing resolutions.

Year-end total potential contract value, which includes backlog IDIQ contracts, and unexercised options, totaled $32 billion, an increase of 28% from 2010.

This healthy opportunity set positions IS&T well for 2012, particularly given the reasonably strong support the group's products received in the 2012 defense budget.

For instance, following successful 2011 customer testing, we anticipate receiving FY '12 funded awards for the next low-rate production increment of WIN-T and the first tranche of full rate orders for our rifleman radios.

Also, despite the market environment, IS&T's opportunity pipeline is larger than ever, as our products and services portfolio remains well aligned with customer spending priorities, focused on cyber security; enhanced ISR; battlefield communications; and streamlined, more cost effective IT infrastructure.

IS&T sales will likely be flat in 2012.

As suggested earlier in my remarks, this guidance anticipates that the shadow of sequestration and the potential for another fourth-quarter continuing resolution continue to prolong and delay awards, effectively pushing sales to the right even more than what we saw in 2011.

Margins should be in the high 9% range, driven by a higher percentage of IT services work, continued slowdown in product volume, and the competitive market environment.

The 2012 segment guidance I provided this morning implies total earnings-per-share from continuing operations in a range between $7.10 and $7.20.

This guidance is operational and does not include or anticipate the results of capital deployment.

In terms of capital deployment, we maintained our balanced approach in 2011 and I expect that to persist this year.

Last year, we deployed $1.4 billion to repurchase 20 million of our shares.

Through both share repurchases and dividends, we returned 77% of free cash to shareholders in 2011.

We also spent $1.6 billion to acquire six businesses that enhance our Combat, Marine, and IS&T portfolios.

Our strong cash performance in 2011 and excellent cash outlook for this year afford us great flexibility to further enhance and strengthen our business.

In closing, while no one today can say with certainty what defense spending will look like in 2013 and beyond, we feel our businesses are as well positioned as any.

Marines products are at the heart of the Pentagon's Asia-Pacific focus, while IS&T's cyber, ISR, and intelligence mission support capabilities remain well aligned with customer requirements.

Combat's vehicle programs will be challenged.

However, strong international sales will help to defray budget headwinds.

And we continue to believe that enhancements and upgrades to our vehicle programs offer an attractive, lower-risk alternative to our customer as they re-capitalize the force following a decade of war.

Outside of defense, our Aerospace group will serve as the Company's primary growth engine over the next several years, as G650 deliveries ramp and the international sales increase.

Clearly, General Dynamics' diverse portfolio remains a distinguishing asset.

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

Hugh?

Thank you, Jay, and good morning.

I'd like to cover a few additional financial items before the question-and-answer period.

First, net interest expense was $38 million for the quarter, and $141 million for the full year.

These amounts were in line with our expectations.

For 2012 we expect net interest expense between $155 million and $160 million, reflecting the full-year impact of the $1.5 billion of fixed-rate notes we issued in 2011.

As you may recall, in July we issued $1.5 billion just prior to the maturity of notes in the amount of $750 million.

Corporate expense was $77 million for 2011, and we expect corporate expense to approximate $80 million again in 2012.

The effective tax rate was 33.8% for the quarter and 31.4% for the full year.

The fourth quarter was higher than in prior quarters and higher than we anticipated, due to less European income than we had expected.

That, of course, was the result of the performance in our Swiss-based completions business.

For 2012 we expect an effective tax rate of approximately 32%, rising slightly over the 2011 rate, and due in large measure to the current lack of an extension of the R&D tax credit and the provisions of the tax code.

Finally, cash contributions to our pension plans for 2012 are expected to be approximately $500 million, occurring primarily in the second half of the year.

Amy, that concludes my remarks.

Thank you.

I'd like to highlight that a summary of the guidance provided this morning is now posted on our website as Supporting Materials in the webcast link.

As a quick reminder, we do ask participants to ask only one question so that everyone has a chance to participate in the call.

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

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

(Operator Instructions).

Myles Walton, Deutsche Bank.

Jay, I'm hoping you can give us a little color under the surface in some of the guidance that you provided, particularly on Combat and IS&T.

And just start with Combat.

The underlying organic decline there about 10%.

Can you give us a little bit more clarity on programs that constitute that shortfall, or that decline, and as you look out further, those programs stabilizing, or are they continuing to retreat, and then you would backfill them with the international growth elsewhere?

Well, as I mentioned, we are seeing US decline that we offset with the international, as you just said, and I said in my remarks.

But I mean, it's a combination of Stryker and Abrams, primarily.

And if you look out past 2013, you don't see a lot.

But if you looked at a year ago what we had in 2012, you didn't see a lot either, and we ended up being very well supported.

So this is a constant work in progress between us, the customer, and the Congress and I would anticipate that to continue.

So there will be some US vehicle decline.

We see that quite clearly.

But don't forget, those programs are both elemental to the United States Army even as they reshape themselves.

So, we will use the international sales to help offset that, but we'll still do a great deal of business in both those domestic programs, and now we've got Force Protection in there to help us on both the product and sustainment piece for the vehicle business.

Was it roughly split -- the billion dollar decline organically between Stryker and Abrams?

Or is it favoring one more than the other?

No, I think it was more Stryker, actually.

David Strauss, UBS.

Jay, just to follow up on that, a lot of moving pieces.

Could you maybe give us a number -- organically, how much you see the entire defense side of the business down in 2012?

Probably a percent or two would be my off-the-top-of-my-head, offset by the Aerospace growth.

Okay.

And as a quick follow-up, you mentioned North America for Gulfstream's strongest quarter in a while there.

What do you think is driving that at this point?

And do you think what you're seeing is sustainable?

Well, first of all, the Gulfstream order book is healthy across the board.

We are very pleased, particularly, as I mentioned, in the large cabin.

That's a consistent message I've been delivering, but it's backed up by the backlog and the order book.

We see very healthy order activity, particularly in the large cabin offerings.

I would say the North American market returning is a good sign.

It's still outpaced by the international space, but we are very encouraged to see the North American market activity picking up.

Joe Nadol, JPMorgan.

Jay, on the G650, could you update us on how things are going there?

You've got the provisional cert.

You delivered the aircraft.

You had said, I think, that margins on the first aircraft would be on in-line with the sector average around 15%.

So did that actually transpire in the quarter?

And then as we look forward, how do you feel about getting the complete cert?

The rate ramp up, the completions, how is all that coming along?

Joe, first of all, I'm very pleased with the 650 program.

We are very excited about it.

The aircraft is performing beautifully, and the sales book is still very active, even with over 200 in the backlog.

So that's all good.

We are on track, as I mentioned in my remarks, and I think the way I said -- the words I used were in the midyear.

We are still looking at about late second quarter, thereabouts.

It's paced, quite honestly, by the working down of the test points, in collaboration with the FAA.

All on track, all looking real strong right now.

The airplane is, as I said, performing beautifully.

The margins were consistent with what I've been saying, Joe.

They are better than the group average, but not as strong as you would expect as the in-production large cabin aircraft.

That too will change, as I have said before, and it will ramp up beautifully.

I'm just not ready to wick that up verbally yet.

But everything we see on the production side, everything we see in Savannah, is coming along very handsomely with the 650.

So the rate ramp up that you asked about -- again, I'm going to hold to what I said before.

The production -- we were going to add about two dozen or so green deliveries a year.

Did I say -- yes.

10 to 15 a year is what I -- yes.

10 to 15 a year green deliveries, but my complete deliveries, I'm sticking with 17, 33 and 33 for right now, with every expectation that we'll exceed that.

I'm just not ready to go there yet.

And just finally, the completion process, that has been a bottleneck in the past on new aircraft types.

How are things going, and how do you feel about getting those first dozen aircraft that you've taken payment on in terms of green deliveries into a customer's hands?

We feel very good about it.

I think it's proceeding just very, very, very well, actually.

We're anxious to get them to the customers.

Sam Pearlstein, Wells Fargo.

Can you talk a little bit about the Marine segment?

I would've thought that with the delay on the DDG-1000, as that starts to come in, that you'd actually have a worse mix.

And it sounds like if I just look at this fourth quarter as well as your outlook into next year, it would seem like you're not seeing some of -- any sort of an adverse margin mix in marine.

Well, we are clearly still benefiting from the superb performance on the TAKE program.

And that keeps it up.

But honestly, even as that matures out and completes at the end of this year, I don't -- I do not expect to see a drastic margin reduction at all.

And I've been very consistent in that.

This is a 9% to 10% margin business with these three superb shipyards, and I say that publicly and then charge the shipyard presidents to beat it.

But it's not at 10%, but you're driving to above 10%.

So should I say that's -- or think that's the TAKE?

Yes, yes, exactly.

Indeed.

Yes.

And as I said, that will complete at the end of this year, Sam.

Heidi Wood, Morgan Stanley.

Jay, a question on Combat.

I just want to get a clarification.

Can you tell us what the percentage of international sales was for Combat in 2011 and what that looks like in 2012?

Yes, Heidi.

It's about low 30%s in 2011, and I would see it going up probably a couple of percent or so in 2012.

And therefore, continuing that kind of a ramp out for the next -- well, with clarity, through 2014 to 2015.

And on the Jet Aviation, at your September conference you talked about the issues at Basel and highlighted Jet as a turnaround story in the second half of 2012.

Can you give us -- sort of fold in the charges we are seeing today relative to those comments?

What changed and prompted this charge?

Did things get worse?

I think the best way for me to say it, Heidi, and I've described it, as you point out, kind of throughout the year.

But when we put the new management team in place, just after the midyear, and Dan Claire and his team settled in, we brought in some other subject matter experts from across the businesses here at General Dynamics, and particularly at Gulfstream, with a sight line to get clarity and definition, if you will, more granularity on what we were feeling and seeing.

They did exactly that.

And as we brought ourselves through the second half of the year, we came to a point in the fourth quarter where the magnitude was -- became very clearly defined for us.

And therefore, we realized the operating earnings impact, which then triggers an impairment review of the long-lived assets, and so you have it.

78 of one and $111 million of the other.

And I also mentioned in my remarks that most of this tied to the legacy aircraft, and the three legacy aircraft in particular, and somewhat to the OEM business mix change from the other OEMs, which has impacted us.

Those three legacy aircraft will be delivered here within -- one of them within a matter of a couple, a few weeks, and the others -- by the midyear I should think they will all be gone, delivered to customers, with very happy customers in terms of the quality of the work.

But I would also say that the charges that were taken capture the costs that we have incurred thus far and those we project for the completion of those three legacy aircraft.

I think it's important to put that out there.

So we've got the right leadership in place.

The management team is firmly in control.

The processes that were causing us problem with throughput have been in large measure really well-defined, clarified, and we are running smoothly with a workforce that is pulling together in the ways that they need to.

So I think we're planning ourselves in 2012 in a place of much better improvement at Jet completions, and we are anxious to see that reality unfold throughout the year.

Cai von Rumohr, Cowen and Company.

Two issues at Aerospace.

First, if you could update us on the status of the G280 -- when that should be certified?

And secondly, if you could give us the number of the dollars that you had of forfeiture gains in the final quarter, and some color on what you look for for 2012.

Thank you.

Thanks for the question.

The 280 certification timeline I mentioned in my remarks.

We got CAI, the Israeli certification, provisional -- the full cert, sorry, and so now we are working with the FAA to get provisional type certification here in the US.

That's ongoing right now and proceeding.

There are no issues here.

It's just marching down the timeline.

I believe, based on that, some of the software issues we talked about before in terms of what you need to get final certification type certification, I would expect that to be a second quarter, midyear, as I said, entry into service.

But as far as the aircraft itself, the aircraft itself is performing very well, and there is great customer interest.

So I think that captures most of the 280 -- let me think -- yes.

That's probably enough on the 280.

But we're on track for delivery by the midyear.

The dollar forfeiture, the forfeiture is -- the LD is really a function of getting liquidated damages from the defaults that we experienced, which were higher than they would normally be.

We knew that would probably be the case.

It was the case; yet it was less than we expected, which sounds like I'm talking around a circle.

But at any rate, we got substantially fewer than that in the forecast for 2012, and I think that's probably enough to say right there.

Can you give us the number?

No, I won't give you the number, but let's just say it's -- it was probably at least half of the entire year's amount in the fourth quarter.

That's very helpful.

Thank you.

Ronald Epstein, Bank of America Merrill Lynch.

Just want to follow up -- I think it was on David's question from earlier.

You mentioned you're seeing some activity pick up a little bit more in North America.

Are you seeing any of that in the midsized aircraft?

If you could give some commentary on what you're seeing in midsized aircraft, because that's clearly been a softer spot, right?

Honestly, Ron, it's still a soft spot.

I think that's a fair way to say it.

We are seeing activity, as I have said, I think, for the last several quarters, in the mid-cabin.

We've got activity in the 280, but it's still a very -- there's a lot of inventory out there still to absorb is probably a fair way to say it.

So it's clearly still a very bifurcated market with, I would say, very strong activity in the large cabin, and modest to -- but active at a lower level activity in the mid-cabin.

Okay.

That begs a follow on to the large cabin, which was very active in the large cabin.

I think at one point, you guys said that maybe full production on the 650 would be like 40 a year.

Have you questioned that to maybe go higher to maybe 50 a year, or 60 a year?

Is that -- are those kind of program assumptions being investigated?

Well, let's just say with 200 in the backlog and the purpose built facility that you've seen, and the way that these airplanes are coming together, and the excitement that surrounds all of that, we are always looking at opportunities to increase production as rapidly as we can smartly do it.

And that's really the operative.

And that's why you won't have me getting very aggressive on the number -- as aggressive as perhaps you would like or that the airplane deserves, but in time we'll be there.

Carter Copeland, Barclays Capital.

Jay, I wondered if you might talk briefly to aircraft development.

The Company has always had a -- focused on a kind of regular cadence of product updates and introductions, and with the 650 and the 280 entering into service later this year, you're working on some stuff -- what should we think the thinking about when we hear about new product introductions?

What kind of impact should those have on, or are they having, in your plan on the 2012 margin outlook within Aerospace?

.

I don't think that that's -- the R&D investment, as we've said for years around here, is a constant investment.

And whether the top line is going up or down, we've been through that over the past few years.

I would say that the R&D investment this year was higher than kind of normal for us -- a full 3.4%, I think, something like that.

But we target 2% to 2.5% and then deviate that from that as circumstance and development requirements dictate.

But we are -- suffice it to say we are in product development all the time.

And you know the cycle of our airplanes, nominally a 15-year cycle.

So we're either looking to enhance, upgrade, or perhaps replace airplanes in due course.

The 650, as you well know, isn't replacing anything.

It's defining its own spot at the top of the market.

The 280 is coming in for the 200.

That transition is going well.

And the rest of it will be done in due course.

But we are very, very pleased with the product line we have right now, and by the order activity that I described earlier, I would say so is the customer.

So just to follow up to that briefly, presumably with the growth in the 650, the R&D investment would be declining as a percentage of sales, but is it declining in absolute dollar terms?

No, no, it is not.

Robert Stallard, Royal Bank of Canada.

Jay, I just wondered if we could have a comment from you on cash deployment and whether your thinking has involved on whether it might be more effective to increase your dividend as a proportion of the cash payout versus buybacks or acquisitions?

Well, as you've heard me say many times, we do believe in a balanced capital deployment philosophy here.

But specifically to your point, Rob, on the dividend, we've been very proud to increase our dividend for the last 14 years.

We gave it a 12% increase last year.

We deal with that and have that on the agenda for our Board meeting on the first week of March.

And rest assured, we will have a very thorough discussion of that, and we'll see where the board goes.

But I would anticipate dividend activity to come out of that.

Beyond that, I certainly -- it would be inappropriate for me to comment.

Maybe just as a follow-up to that with regard to other cash deployment and acquisitions -- how do you see the M&A market as it stands today, particularly with regard to pricing in the defense area?

Well, I think there will be opportunities to acquire defense properties at good value going forward.

I'm not sure we're there right now, but as this market tightens, I believe that there will be defense-based opportunities, and having a lot of cash in your rucksack as we do gives us the opportunity to take advantage of some of that, as we did with Force Protection, whereby we got a good strategic asset at a very fair price.

Peter Arment, Sterne, Agee.

Just a follow-up to the acquisition question.

The backdrop that you painted regarding defense, and the cautiousness, and the uncertainty regarding sequestration, how do you really approach having any kind of comfort level regarding M&A on the defense side?

Well, I think, again, you have to look at your criteria for acquisition and be very disciplined in how you analyze, assess, and actually then act on the potential acquisition.

Does it enhance your portfolio?

Does it give you a fast current?

Does it give you a return on your investment?

And that will be, perhaps, more challenging as this environment tightens, or perhaps it will become even more clear that this is an obvious GO or a NO GO.

So I think -- look, it comes down to the discipline by which you execute these acquisitions.

And we have a very good internal process for it.

We risk-adjust everything we do based on the type of business it is, so I feel like we've got the rigor we need to fairly assess what's out there and make good judgments on whether it makes sense to acquire or not.

But having said all of that, I'll go back to where I was a minute ago, that I believe there will be acquisition opportunities going forward in the defense space if, for nothing else, just as a result of the tightening of the defense market.

Yes.

And Jay, just as a follow-up to that, how do you weigh that against the maybe commercial manufacturing opportunities, just given your history and exposure to commercial markets with Gulfstream?

We wouldn't restrict our scan pattern to one or the other.

Okay helpful.

Thank you.

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

Jason Gursky, Citi.

Just a clarification on the G650.

Can you remind us how many planes you could produce on an annualized basis with your current installed capacity?

Well, I don't think -- there have been numbers out there.

They haven't come from us.

But let's just say that the 650 production will be gauged by the purpose built facility in which it is being constructed, and our ability to put airplanes through there, which if you look at what we're doing now versus when we started, it was good when we started.

It's really good now.

It's only going to get better.

So once we get the supply chain flow, the vendor flow, which is coming nicely, you're going to see very, very strong production levels of G650.

But as I said earlier today, I'm not ready to give you numbers outside of what I've already committed to.

Okay.

And maybe just a quick follow-up question on the 650 and just the competitive environment that's out there today.

If a customer -- a new customer were to approach you today, when could you deliver the plane to them?

And if it's in the same timeframe of when they could go and get a plane from a competitor, doesn't there seem to be as a pretty strong incentive for you to speed up the production rates so that you can get those planes to the customers sooner, and perhaps create that as a point of differentiation from a competitive perspective?

Well, Jason, the way I look at it is, if you've got 200 airplanes in the backlog, you want to get them to the customers as soon as you can do it.

But when you're dealing with the premier brand and the premier aircraft that's going to be out there very shortly, you want to make sure it's done correctly, and that the customer has complete satisfaction when the product is received.

Therefore, you don't want to over-accelerate yourself, as I say, overdrive your headlights.

We're not overdriving our headlights.

The production is very, very measured and very solid, and we'll wick it up when it makes sense to do so and when we hit steady-state production.

The supply chain, everything is feathered in and flowing beautifully.

Then we'll wick up the production.

But right now, the answer to your question is, you'd get an airplane in 2017.

That's how big that backlog is.

And we'll be producing more every year as we go forward and until we hit a steady-state backlog.

But we are very bullish on the 650 and so is our customer base on a global scale.

At this point at this time I'll turn the call back over to Amy Gilliland for closing remarks.

Thanks, everyone, 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 presentation.

All parties may now disconnect.

Good day.