通用動力 (GD) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 General Dynamics earnings conference call.

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

(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.

And you have the floor, ma'am.

Thank you, Jeff, and good morning, everyone.

Welcome to the General Dynamics first-quarter conference call.

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

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, and good morning, everyone.

Let me start by noting that today marks the 60th anniversary of General Dynamics listing on the New York Stock Exchange.

Generations of employees have helped to make this great Corporation successful over the past six decades.

Our exceptional people continues to drive GD through their innovations, operational excellence and commitments to continuous improvement.

I am proud to be their CEO.

Before speaking to the quarter, I want to address the current defense budget environment.

On the fourth-quarter call in January, I mentioned the potential for complications to 2012 budget execution from the combination of upcoming elections, the likelihood of another continuing resolution and the threat of sequestration.

These potential complications have, indeed, revealed themselves to us in the first quarter, particularly in our shorter cycle IS&T business as looming budget cuts negatively influence Department of Defense and federal government acquisition execution.

While it is still early in the year and we are in no position to know the full effect of these complications on the year, anxiety over these issues will almost certainly escalate as we move into the summer months and election campaigns roll into high gear.

Washingtonians are seemingly unified in their belief that sequestration will not happen as currently legislated, although no one can explain how avoiding the severe cuts will be achieved.

In recent weeks, Pentagon leadership has reiterated that no plans are in place to deal with sequestration while stating that they expect further guidance from the Office of Management and Budget this summer on how to begin planning.

This will certainly spawn increased rhetoric and speculation as details emerge on how cuts will be administered, making it even more difficult to overcome our customer's reticence to commit resources.

In the midst of this uncertainty or the fog bank as I often refer to it, the FY 13 budget has begun the Congressional approval process.

While there are some puts and takes across our portfolio as you would expect, there were no real surprises for General Dynamics in this budget request, and we were generally pleased with the support for our shipbuilding and tactical communications program.

As expected, the future disposition of Stryker and Abrams programs will be the subject of ongoing discussions with all stakeholders.

As we look to the rest of the year, in much of our portfolio contracts are in hand, and we are on our way to achieving our expectations.

In other parts of our portfolio, particularly our short cycle IS&T product and services, risks remain.

We are doing everything we can to jumpstart the expenditure of previously appropriated funds.

And, with this as prologue, let's talk about the quarter.

Revenues in the first quarter were $7.6 billion, down from the first quarter of last year due to lower defense revenues, particularly in IS&T.

Operating earnings were $860 million, leading to Companywide operating margins of 11.3%.

Net earnings were $564 million, which resulted in earnings per share of $1.57 on a fully diluted basis.

Revenues, earnings and operating margins were negatively impacted by $67 million of non-cash out of period adjustments recorded at Combat Systems European subsidiary, European Land Systems, ELS.

In total, the corrections at ELS reduced the Company's fully diluted earnings-per-share by $0.13 in the quarter.

These adjustments were not a function of program performance, but rather were related to shortcomings in our accounting department at ELS.

Following a thorough analysis, we determined that certain transactions were not properly reflected in prior periods.

The corrections have been made and the underlying causes remedied.

Free cash flow after capital expenditures totaled $324 million or 57% of earnings from continuing operations, better than last year's first quarter.

In terms of capital deployment, we repurchased 1.4 million of our shares in the first quarter and acquired a FBO at Houston Hobby Airport, the fifth most active US business aviation airport to further expand aerospace service network.

We also invested $90 million into our businesses to include the continuation of a $500 million seven-year program to ensure Gulfstream's Savannah campus is sized to accommodate an expanding global customer base.

And in March our Board increased the dividend 8.5%, the 15th increase in as many years.

First-quarter orders were stronger than the first quarter of 2011 due to healthy in our Marine Systems group.

At the end of the quarter, backlog totaled $55.2 billion.

Total potential contract value, which includes backlog, unexercised options and indefinite delivery and definite quantity contracts totaled $82.2 billion.

Now I would like to focus on the performance of each of our business groups, starting with the defense businesses.

First, Combat Systems.

Combat Systems revenues were $1.9 billion, down modestly from last year's first quarter and in line with our plans for the year.

Revenues in the quarter reflected increased international vehicle volume, including growth on two significant LAV and tank export programs, improved axle sales and the addition of force protection.

This upside helped mitigate lower US and European vehicle and ammunition volume, as well as the sale of the detection systems business, which was completed in the second quarter of last year.

Combat Systems delivered $203 million of operating earnings in the first quarter.

The group's operating margins were 10.6%.

Without the previously discussed accounting adjustment at ELS, the group's margins would have been approximately 350 basis points higher, reflecting good execution across our three US combat businesses.

And we continue to work on improving ELS's profitability by divesting non-core assets, reducing the number of operating locations, moving its headquarters and better integrating the four entities that comprise the business.

These actions positioned ELS to compete more effectively in the broader global market, particularly given the present challenges in their more difficult European home market.

Combat Systems backlog declined from year-end to $10.7 billion.

Despite this decline, there were several notable awards in the first quarter, including contractor-produced Stryker Mine Rollers and Foxhound vehicles, and to continue to demilitarize a variety of munitions.

We anticipate improved order activity at Combat Systems as the year progresses, including over $1.5 billion in Stryker and Abrams awards and several production awards for an FMS tank upgrade program.

Last week, in fact, we received an award for the 46 Abrams step upgrades funded in the FY 12 budget.

Additional award opportunities that may happen this year but are not integral to our 2012 results include election to compete in the next phase of the joint light tactical vehicle JLTV competition, additional Stryker Double-V hull vehicles, and new LAV and tank export programs for an array of international customers, including nearly 200 tanks for Morocco.

In March our general tactical vehicles team delivered our proposal for the JLTV competition for the Army.

This combat proven off the shelf vehicle, Eagle by name, has already been deployed successfully in Afghanistan by German forces.

It incorporates the unparalleled protection of Double-V hull technology and is a reliable, operationally cost effective, low risk offering, which aligns with the Army Secretary's priorities for faster, smarter, cheaper and better solutions.

For the year, I expect -- I continue to expect Combat Systems to deliver around $8.5 billion in sales.

Full-year operating margins will be pressured due to the impact of the adjustment made this quarter and will likely be closer to the high 13% range.

Next, I will discuss Marine Systems.

Marine Systems revenues were $1.6 billion, down 4% from last year due to less T-AKE and Littoral Combat Ships volume as these construction programs near completion and lower Virginia class sales as we transition from the second to the third block of submarines.

Increased ship repair revenues following the October 2011 acquisition of Metro Machine, now known as NASSCO-Norfolk, helps to mitigate the decline in construction programs.

Operating earnings were $185 million, up nearly 11% compared to a year ago.

Marine Systems 11.5% operating margins were 150 basis point improvement from last year's first quarter.

The favorable earnings in margins are due to improved performance on the T-AKE and Mobile Landing Platform MLP auxiliary program.

The 13th T-AKE, Medgar Evers, successfully completed sea trials last month and was just delivered to the customer yesterday.

The 14th and final T-AKE, Cesar Chavez, will launch in May and deliver before year-end.

The first MLP, Montford Point, now 51% complete remains on schedule and budget to deliver in May 2013.

This ship is demonstrating the value of completing ship design before starting construction.

We began construction of the second MLP, John Glenn, last week and received a contract to build the third ship, Lewis B.

Puller, in the quarter.

In addition to these NASSCO programs, we continue to see the group focus on cost efficiency, overhead management and risk reduction in our other two shipyards.

At Electric Boat, Mississippi, the ninth Virginia class submarine, recently completed Alpha and Bravo sea trials and is due to be delivered to the customer nearly one year ahead of schedule and under contract costs.

At BIW, the first Zumwalt-class destroyer, DDG-1000, is over 60% complete, while the second ship, recently named USS Lyndon B.

Johnson, is 30% complete, and fabrication of the third ship has just begun.

We remain focused on ensuring construction success and are working closely with the Navy and other major suppliers on ship integration efforts.

The Marine group's backlog totaled $18 billion at the end of the quarter.

Our shipyards added several key orders to their workload in the quarter, including an additional DDG-51 and that third MLP.

The Navy's updated 30-year shipbuilding plan provides several opportunities to enhance the group's backlog over the next few years.

This revised plan includes a multiyear procurement for nine DDG-51s between 2013 and 2017, and a block buy of nine Virginia class submarines known as Block IV between 2014 and 2018.

We expect the Navy to award these contracts next year.

As part of the new shipbuilding outlook, we will also continue to work on several development programs, including the Ohio ballistic missile submarine replacement effort and a new program called the Virginia payload module, which will provide additional payload capacity for Block V Virginia class submarines.

The Navy's outlook also includes an additional MLP ship, the fourth in the class, planned for FY 2014.

Marine Systems remains on track to achieve my guidance of revenues slightly below 2011.

Also, as the T-AKE program winds down through the remainder of this year, I continue to anticipate some margin compression.

However, given the group's strong first-quarter performance, I anticipate margins will be closer to the high 10% range for the year.

Now IS&T.

The Information Systems and Technology Group had a challenging first quarter as many of the negative trends that we experienced in 2011 persisted.

Group revenues were $2.4 billion in the quarter, down primarily as a result of weakness in our technical communications portfolio.

Volume in our IT service business was flat year over year as the addition of several businesses in 2011, including Vangent, offset lower workload on several major IT infrastructure support projects that are concluding.

There are several reasons for the continuous softness in our communications business, including further award delays in our shorter cycle products, especially encryption hardware; slower than anticipated ramp in programs moving from development to production like JTRS and WIN-T, and the slower than anticipated transition of some legacy contracts to new awards, particularly Common Hardware Systems-4, CHS-4 programs.

In each case, we expect gradual improvement to activity as the year progresses.

As it relates to encryption, the system and dynamic threat to vital national networks require continued upgrades and updates to encryption equipment.

Because of the mandate for regular investment in these products, we view this shortfall as largely a timing issue.

On development programs, our JTRS HMS and WIN-T programs continued to demonstrate their capability in the first quarter, including deployment of our HMS riflemen radio to Afghanistan with the Army's 75th Ranger Regiment.

In the past six months, WIN-T Increment 2 has made great strides through its former milestones, including successful government productions and reliability testing.

Both JTRS and WIN-T remain on track to progress through further testing and acquisition milestone decisions this year.

Additionally both programs were well-funded in the FY 2012 budget and received strong support totaling nearly $2 billion in the FY 2013 request.

We expect to receive FY 2012 funded awards for WIN-T, as well as riflemen and Manpack radios later this year.

With respect to contract transition, CHS-3 was very successful program that exceeded its original ceiling cap value several times.

We were awarded a $3.7 billion, five-year single source ID/IQ contract for the CHS-4 program last summer.

CHS-4 is an extremely flexible contract that purchases from across the military and other government agencies can use to acquire the latest ruggedized commercial computing and communications technology.

Following last summer's award, we had limited activity under the new CHS-4 contract.

We are now finally beginning to receive some orders.

IS&T's lower sales volume impacted earnings and margins, which were $218 million and 8.9% respectively.

While both were down from last year's first quarter, the margin decline was due primarily to program mix.

With the addition of Vangent in late 2011 and the continued top line pressure in our communications product portfolio, services now represent the largest component of our IS&T portfolio.

While IT service work provides an excellent return on investment, margins on these types of programs are generally lower than more product-intensive programs.

The IS&T group continues to aggressively manage its cost structure to protect profitability and competitiveness through actions such as facility consolidation, workforce reduction and discretionary spending reductions.

These actions should afford some operating leverage when delayed volume returns.

IS&T's backlog was $9.6 billion at the end of the quarter.

While order activity improved from the fourth quarter, it was not at the level of prior years.

We did, however, book several awards, some of which are detailed in today's press release, which highlight our ability to capture opportunities in high-priority growth areas, including cybersecurity, cloud computing, health IT and IT emissions services.

When combined, backlog and estimated potential contract value under ID/IQ contracts totaled $32 billion.

For the reasons I just outlined, we anticipate award activity to improve as the year progresses, and in point of fact, we have already seen some positive indications in April.

For instance, earlier this month we received a four-year $173 million Rescue 21 sustainment award.

Also, last week our technical communications business received a 10-year ID/IQ contact with the FAA worth potentially $400 million to deliver radios to enhance air traffic controller communications.

And we recently received long-lead funding to provide security systems for buildings and infrastructure in Saudi Arabia.

This is the beginning of a multiphase several hundred million dollar project.

Awards are starting to break free, albeit slowly.

In light of IS&T's slow start to the year, we now expect group sales to be approximately 5% lower in 2011 with margins in the mid-9% range.

Revenues and earnings will be back-half weighted.

Now let's talk about aerospace.

Aerospace growth continued in the first quarter with revenues of $1.6 billion, up 20% from last year's first quarter.

This healthy topline growth was driven by more large cabin deliveries, including G650s and continued growth in aircraft service demand.

The additional large cabin deliveries also drove double-digit improvement in the group's operating earnings, which were $271 million.

Margins were 16.7%, down modestly when compared with the prior year period because of lower liquidated damages and higher R&D expense.

Earnings and margins were up sequentially due to improved performance at Jet Aviation.

Gulfstream orders were good this quarter, representing demand for products across our portfolio.

Customer interest remains strongest at the upper end of our portfolio, although we are seeing improved interest in the G280 as entry into service approaches and the mid-cabin market slowly improves.

Orders from our North American customers comprise the largest percent of orders in the quarter, a noteworthy development spurred by corporations taking steps to re-capitalize their fleet.

We also continued to see strong demand from Asia Pacific customers.

First-quarter gross new aircraft book-to-bill was 0.7 times on a dollar-denominated basis.

Orders continued to significantly outpace default.

Default activity was driven by a few additional G650 cancellations which spilled into 2012 from customers who were billed for milestone payments following the aircraft's provisional type certification late last year.

Consistent with my fourth-quarter remarks, the G650 defaults are in line with our expectations.

And even in light of G650 deliveries and defaults over the past two quarters, we still have close to 200 in backlog.

At quarter-end, the group's backlog was approximately $17 billion, down from year-end due in part to the G650 default activity I just mentioned, but still very robust by any measure.

Because new orders for the G650 currently have a five-year entry into service date, we don't expect orders to match planned deliveries in the near-term.

Continued demand for our G450 and G550 products keeps us in our target 18- to 24-month window for new aircraft order to delivery for these aircraft.

The decline in aerospace's backlog in the quarter also reflected the cancellation of a widebody Jet Aviation completion project following the death of a customer.

Aircraft flight utilization trended up in the first quarter with a particularly strong March finish.

This positive trend enabled service revenues at both Gulfstream and Jet Aviation to post gains over last year's first and last quarters.

We continue to make investments in our service network to better correlate our footprint with growth in the installed global base.

For instance, Gulfstream recently announced the planned opening of Gulfstream Beijing, a joint venture which enables Gulfstream to be the first business jet manufacturer to offer factory service in China.

This facility complements an authorized Gulfstream repair center in Hong Kong, as well as Jet Aviation's newly upgraded MRO and FPO locations in Singapore.

Similarly Gulfstream and FlightSafety International have teamed to open a new flight simulator in Hong Kong.

This center will train Asian operators on G450 and 550 aircraft, enabling them to complete training much closer to home.

In addition to the stronger service volume I just discussed, Jet Aviation's completions business made positive progress in the quarter.

We delivered one of the three narrowbody, widebody aircraft that had experienced significant cost growth.

We will deliver the second shortly, actually almost any day now, and we expect to have the third aircraft delivered by the end of the second quarter.

The new Jet leadership team remains focused on capturing narrowbody, widebody completions opportunities, while simultaneously optimizing the business to better align with today's market conditions.

Gulfstream's G650 and G280 development programs continued to make progress in their respective flight test programs in the first quarter and remain on track for type certification in the midyear, perhaps moving into the third quarter.

We are in the final stages of testing with the FAA, so the exact date of type certifications will really be determined by their schedule.

Rest assured, however, that we are getting close, and both aircraft continue to perform extremely well.

Entry into service for these aircraft, particularly the G650, continues to drive my aerospace guidance of approximately 15% topline growth.

Given the strong performance in the first quarter, particularly at Gulfstream, aerospace margins will likely be somewhat higher than my original guidance, probably in the mid-15% range for the year.

In summary, given the environment I have detailed and our current outlook, I am reiterating my full-year guidance of (technical difficulty)-- [$7.10 to $7.20].

With that said, in light of the Company's first-quarter results, we will most likely come in at the lower end of this guidance range, and as I detailed at the group level, the composition of the earnings has changed slightly.

I would remind you that this guidance does not anticipate the results of capital deployment.

As we look to the rest of the year, there remains a great deal of uncertainty in defense.

However, our businesses are focused on execution and remain agile and well positioned to adapt to the dynamic defense environment confronting our industry.

Meanwhile, our Aerospace group is well situated to continue a steady growth trajectory fueled by demand for our large cabin in-service Gulfstream aircraft, the entry into service of our new G650 and G280 aircraft, and increased global demand for the group's aircraft services.

Our diverse portfolio, healthy balance sheet and cash outlook afford us great flexibility to further enhance and strengthen our business.

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

Hugh?

Thanks, Jay, and good morning.

Before we start the question-and-answer period, I would like to cover a few additional financial items, including some more detailed discussion of the $67 million adjustment in the Combat Systems segment.

Let me start there.

This adjustment is the result of human error, which we caught and have now corrected.

We have accounting policies and procedures and systems in place throughout all our operations.

Unfortunately sometimes individuals fail to follow them.

I should mention that this was limited to an isolated in our European Land Systems Switzerland-based vehicle business.

Beginning in late 2010 and spread over every quarter in the interim, there were two central accounting issues.

I want to remind everyone that there were accounting issues, not performance issues.

First, revenue was recognized in excess of the contract value on three contracts due to foreign exchange costs that were improperly accounted for.

And, second, revenue was recognized on costs that were not properly recorded to cost of sales but rather remained in TIP.

We have evaluated this adjustment as a quantitative and a qualitative impact of the adjustment on the current quarter, prior quarters and the full-year earnings, and we have determined that it was not material.

Moving on to net interest expense, net interest expense for the quarter was $39 million versus $34 million in 2011.

For 2012 we expect net interest expense to be at the lower end of our range of $155 million to $160 million.

At the end of the quarter, we had just over $900 million of net debt, down just over $100 million from year-end.

The effective tax rate was 31.3% for the quarter compared with 31% in the first quarter of 2011.

For the full year, the effective tax rate should approximate 32%, rising slightly over 2011 due primarily to the lack of an extension at the R&D tax credit.

We plan to contribute $500 million to our pension plans in 2012.

The funding will be the greatest in the second and third quarters, the first installment of approximately $100 million having been made in early April.

Finally, now that we have seen one quarter of run-rate, we are lowering our forecast of corporate expense, which is shown in the segment detail of operating earnings in Exhibit B of the press release.

We are revising that forecast to $70 million, down from the $80 million we were forecasting at the beginning of the year.

Amy, that concludes my remarks, and I will turn the time back over to you for the questions and answers.

Thank you.

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

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

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

(Operator Instructions).

Robert Spingarn, Credit Suisse.

Could you talk a little bit more about the sensitivity at IS&T?

You have adjusted the guidance given the pressure.

How do we think about a CR in the fourth quarter, how that might further affect things?

First of all, as I think we have probably talked before, we see the likelihood of a CR very high.

So I think that will be the reality we deal with later in the year.

But I will say that we have had a slow start as I described in IS&T, but we are starting to see award activity.

My guidance assumes the resumption of my terms here, what I would call more normal activity as the rest of the year progresses.

We have indications that that is still going to be the case.

The encryption business, as I described, will have to move here at a certain time because you just cannot put that off but so long.

So that was the basis of my timing statement.

The communications programs, specifically WIN-T and JTRS, are in the test at NIE, what, next month, and we expect LRIP-II decisions that are in the plan.

We have every indication that is going to happen here May/June timeframe or slightly thereafter.

That's 6000 Rifleman radios and more Manpacks.

So we feel pretty confident that that is going to happen.

So what am I saying?

I'm saying that we see enough daylight ahead of us, even in front of the fog bank, and feel that a CR at the end of the year based on what we have already appropriated, if you will, in 2012 will put us in pretty good shape to go through that fog bank with the guidance I've just delivered.

Would you characterize IS&T as having greater uncertainty than combat at this point?

I think, yes, of course.

Why do I say that?

Because, again, it is a shorter cycle business, and it has been the one that has been, shall we say, most exposed here through the CR's -- look at it this way.

I don't want to overdramatize here and say perfect storm scenario, but in a way you could almost make that case when you say, look, we have had two CRs in the last year.

We are likely to have another one.

We have got the reality of award delays.

We have got because of that or part of that is protracted acquisition cycles.

You have got this fog bank of sequestration out there, and then we have got programs that were mature and very successful concluding and Pentagon renovation, Rescue 21, CHS-3, you know the Walter Reed here in DC.

So that is being replaced by other programs that are good programs, but they are slow to pick up the ramp, if you will, and the margins will probably be a little challenge relative to the old mature programs until they get rolling.

But still in all, that scenario I can see it through what is appropriated in 2012 in a way that makes us confident that the guidance is very achievable.

Could it change?

Sure, it could change, but right now the best vision we have says we think we can get there.

Heidi Wood, Morgan Stanley.

Yes, actually I wanted to put a finer point on the other question.

Can you just help us reconcile a little bit, Jay, what seems to be conflicting puts and takes between you are talking about budget cuts affecting execution and anxiety escalating, and then revenues and margins in IS&T being back-half weighted and award activity improving.

I would also love if you could touch on top of that talk to us about what is happening with awards fees in general?

Where are you today versus a year ago and versus maybe two or three years ago?

Okay, let's see.

We do believe that it is going to be back-half weighted.

I mean one of the reasons I took the guidance down was because of what we are seeing so far.

So, if you take my guidance down 5% as I just did, and then you look at the rest of the year as I just described to Rob, is there uncertainty out there?

You bet you, but, again, if the appropriated funds are obligated, we believe this is a good piece of guidance for IS&T.

As we have discussed and we will continue to discuss I am sure as the year goes on, the fog bank becomes more real the closer we get to it.

But, again, I was -- to be very honest with you, three weeks ago I was more concerned about it, it being 2012 execution, than I am today just because we are starting to see some award activity that was frankly absent in the first part in the majority of the first quarter.

So am I enthused about that?

I am gratified by it, and I am hopeful for it, but the check is in the mail to a certain extent here until we see, as I mentioned before, more sustained "normal activity" going forward, and that ties back to the obligation of appropriated fund.

So it is going to be a very, I think, dynamic is probably a fair way to say year, particularly in the shorter cycle IS&T business, but I'm giving you the straightest we have right now on the view that we see forward.

The award fees in general, and that I don't see, frankly -- I guess the comment I would make would be the competition you see in particularly the IT service business is as intense or more intense than it has ever been.

So there, I think, is where you are seeing a lot of that.

That accounted for -- the IT service business is probably about a third of the decline in my forecast.

The tac communications business was probably 50%, 60% of that decline, and part of that decline in IT service, frankly, is bids lost -- my term -- in this hypercompetitive environment, which gets to your point on fees.

Just one last follow-up, Jay, when we -- so I guess when you talk about the 5% guidance down and obviously we wonder whether that is sufficient, could we at least have the understanding that you have baked enough cushion in the other divisions that could have potential offset to what we are seeing or a potential worsening in IS&T?

Yes, I think I mean answer to that is yes.

If you look at -- I see up opportunity and just a little guidance in aerospace and Marine both, and I'm very at this point I feel good -- confident about Combat Systems in terms of absorbing the impact of what happened with the accounting issue at ELS.

But the three US businesses were essentially on and on.

So I think yes.

That is a long yes to your answer.

David Strauss, UBS.

Jay, back on IS&T, you talked about service being a bigger portion now, and that impacting the margins.

Can you give us a breakout of service versus product?

Given the bigger portion of service now, are normalized margins when IS&T gets back to somewhat normal here, are normal margins going to be more in the 9% range on a go forward basis?

9% to 10% is probably what I have in my head right now as a fair answer.

To your earlier point, we are talking right, given the, shall we say, pull back or delay in the tactical communications and the product business in IS&T, the service side of it takes 40%, 45%.

It becomes -- you are approaching half of the IS&T book is in the service business with great business, as I said in my remarks, great return on the investment but at a lower margin.

And then at Gulfstream, you commented that North America was pretty strong.

Can you give us the breakout of how much North America actually -- how much of total orders were North America in the quarter?

For the quarter, it is about 60%.

I have talked about that some in the past, but I think it is really good for everybody to see that coming back.

And even better when you match that to the other statement I made, which is it is not North America replacing rest of world, rest of world is still doing great, but North America is also coming back now, which is I would say a good sign for everybody.

Robert Stallard, Royal Bank of Canada.

On the Aerospace division, I was wondering if you could comment on the pricing situation in the quarter, whether you have seen any improvement there and how it differs from model to model or even region to region?

Pricing did you say?

Yes.

Okay.

Right now the pricing is very strong on the large cabin.

That is a consistent statement.

That has not changed, and frankly, I don't see it changing, both 450 and 550, for us.

The mid-cabin market, as we see it, based on the activity levels and listening and talking to the other OEMs, I think for us it is improving, but still a bit challenged, I guess is a fair way to say it.

We are seeing 280 activity.

The 150 activity for us was slow in the early part of the quarter and it picked up in the latter part of the quarter, so that is a good thing.

I hope that is responsive to your question.

Yes, just to follow-up, with this strong pricing and the continued strength in the backlog for the 450 and 550, at what point do you think we can anticipate production heading higher?

We have got a pretty good chance of having it about right now because, as I mentioned, we are still in kind of the 18- to 24-month sweet spot backlog.

As long as that is the case, I think we have got the production rate about right.

Doug Harned, Sanford Bernstein.

It is [Finn Barshiki] for Doug.

Jay, as you mentioned earlier, in Washington there seems to be broad agreement that sequestration would be bad, but no clear path to avoid it.

At what point during the year do you need to have contingency plans in place just in case they actually don't manage to avoid it, and how do you think about what sort of actions you could take, especially given that sequestration, if it ever happens, could be quite short-lived or not?

That is a tough one to give a crisp answer to because we don't know the frame of the template that we are going to be dealing with.

Suffice it to say that as I have said previously here, I think the challenge for us, the responsibility really for all of us, is to stay committed to executing the appropriations that have been laid forth for the year.

If we can continue to do that, there is reasonableness in entering, as I say, that fog bank called sequestration out there.

How it manifests itself, nobody knows.

How do you prepare for that?

It is really tough.

But what you do is you maintain your agility, you keep running your business, you control your costs as best you can, you stay focused on execution, and you don't overcommit yourself with capital, I think, in that kind of environment.

And that is about the best protection I believe you can give yourself coming into something that is as unknown as what we are seeing right now.

Great.

And just a quick follow-up on a specific aspect.

You mentioned about restructuring in European Land Systems.

Can you give us a sense for the scope and scale of that, sort of how far you are along in it and whether it -- whether the restructuring costs might be a drag on margins this year?

No to your latter, and it has been a work in progress, quite honestly, for quite some time.

An example would be the movement which we executed late last year of the ELS headquarters from Vienna to Madrid.

So we are attending to that basically all around, and it is continuous work.

It will continue to occur as we move forward, but it is not impacting our margins right now.

Sam Pearlstein, Wells Fargo.

Jay, I guess I want to take a different tack, which is that, if I look at your guidance and I see marine margins up, aerospace up even with the volume cut at IS&T, you mentioned interest expense on the lower and corporate expense on the lower end, it would seem as though actually you should be higher not at the low end.

So I'm just trying -- are you forecasting a contingency of the continuing resolution as a haircutting that IS&T could be worse?

Where are you hedging because it would seem like you actually should point higher, not lower?

I appreciate that, Sam.

I would just tell you that I think, particularly as it applies in IS&T, we like what we are seeing, we just have not seen enough of it.

That is a fair way to say it.

I mean it is early in the year.

There is starting to be movement.

We are starting to obligate the appropriated funds.

We are starting to see that.

That is a good thing.

If that continues, okay then maybe I can feel differently, but right now in terms of where within the [$7.10 to $7.20] band we are.

But right now, to be honest with you, I have not seen enough of that goodness, and I have got the $0.13 divot that just was the reality here in the first quarter.

That is what puts me at the low end.

I would love to outperform that and I'm hopeful that we can, but I'm just not ready to write that check yet.

Okay.

And just secondly, it sounded like when you mentioned the 650 and the 280 type certification, that perhaps it flips into third quarter.

What has happened there?

It just seems like it has moved a little bit to the right.

Yes, it has, I mean to be fair.

It is, frankly, just a matter of scheduling and executing a very detailed test regimen with our partners in the FAA.

That is it pure and simple.

And may we do it better than that?

Yes, but right now with the testing we see, if they want to have, I'm just hedging it a little bit.

I'm not worried about it.

It is just a matter of -- and it is not just a matter of getting type certification.

You get type certification, then you have to get the simulators certified, then you have to get the crews for the airplanes that are entering into service type rated, etc., etc.

So it is a fairly complex set of realities that have to be dealt with starting, of course, with getting the type certification.

So if it happens second quarter or third quarter, to me I'm happy either way.

It is coming.

The airplanes are performing beautifully, and there is great enthusiasm for them out there.

So I'm not hedging it because I see a problem; I am just hedging it because of the reality of the testing and the pacing of that testing.

This is not the only thing the FAA has to do either, so I'm just being sensitive to that.

George Shapiro, Shapiro Research.

On that score with the G650, have they done the tests that caused the problem, that caused the crash last year?

Yes, we have done those.

Yes.

I mean we have done most all of the, as I would characterize it, Company testing.

But the protocols are such that you do it, and then you analyze it, and then the FAA works with you and you do it again.

So it is a series of sequential events that has to occur here.

So that is, I think, the answer that you are looking for.

And then a quick follow-up, were forfeitures at Aero around $20 million, and does the Jet completion business still have a loss this quarter?

Sorry, I missed the first part of that.

Were the forfeitures at Aero about $20 million from the G650 cancellations?

I don't quantify that.

But I have been very consistent here in saying that we expected a number of G650 cancellations once the TPC call was made, and we got basically what we expected.

So Gulfstream piece of that is in line.

The reason I brought up the other for the Aerospace and backlog is because it was a big jet that fell out of the backlog because of, frankly, the death of the customer.

And did the completions business have a loss yet in the first quarter?

No, the completions business is doing -- is on plan.

And I will take the opportunity to say that you did not ask this, but I mentioned we have delivered one of the three aircraft.

I would tell you that just reaffirm to everybody and to my folks at Jet, that the feedback I'm getting first-hand on the quality of those airplanes and what they have done is spectacular.

Jason Gursky, Citigroup.

Just a quick follow-up on Jet Aviation.

You talked about the deliveries of some of the challenged planes going forward.

Can you just talk a little bit more in detail around the timing of the margin recovery at Jet?

Just kind of update us on where we are and when you think that Jet will reach normalized margin rates, and what do you need -- what more do you need to get that done?

Well, as I have said, I think before that what I expect out of Jet this year is essentially breakeven, and then we ramp from there.

Right now I feel pretty good about it.

In fact, I feel very good about that.

The real challenge in the completions business, quite honestly, will no longer be our ability to manage the throughput; it is to fill the skyline.

So what am I saying?

I'm saying if the business is out there, we have got the protocols and process these in place now to really nail that business, okay, which is good news for everybody.

I'm really proud of what they are doing.

Now the challenge will be if the customer demand is there, and we are working that very seriously as you would expect.

Carter Copeland, Barclays Capital.

Just a quick one on Jet on the widebody cancellation.

Was there any P&L impact as a result of that in the quarter, or was it just the backlog?

Mostly backlog, maybe just a smidgen on the quarter.

To be honest with you, I don't even have the number in my head, but it is not material.

It is mostly just backlog.

I just did not know if there was a big forfeiture or anything one-time.

Secondly, I know there is a lot of discussion on the Hill about Abrams and the facility and the budgeting there.

I wondered if you might provide us an update with how you see that playing out and what risks there may be in the guidance should you not see the plus up you guys were trying to get similar to last year?

I mean I think I'm not worried about the 2012 piece.

We have got work to do, as I mentioned before, in 2013.

But I would say that it is pretty consistent here in terms of the concern that Abrams has generated with JSMC-Lima regarding the whole issue of defense industrial base going forward.

We have had as recently as yesterday I think I read in the clips this morning 170 members of Congress signed a letter to Secretary Panetta expressing their concern on this issue, which says, frankly, this defense industrial base as we go into this full fog bank and deal with the new realities that everybody is challenged with, the defense industrial base is elemental to that discussion.

So from our standpoint, of course, we think that is totally appropriate and must be part of the calculus, and we are very encouraged by it.

Joe Nadol, JPMorgan.

You had some pretty significant management announcements over the last several weeks.

Jay, I'm wondering if you might comment on a) on how you and Phebe will be working together in her new role, how do you envision this role, and any update you can provide given this announcement on succession plans for the Company and also any comments you might have on the new head of your shipbuilding business?

You are not trying to push me out the door, are you, Joe?

Not at all.

I just want to get the update.

It is a pretty big announcement.

No, listen, first of all, just to refresh, next week the second of May to be precise, Phebe Novakovic does become the President and CEO working directly for me.

As you would expect, that is the start of a very disciplined succession rhythm here, if you will.

She and I are spending a lot of time together as you would hope, and I am very anxious to get started here, frankly.

We have spent a lot of time with my direct reports now, Executive Vice President, Senior Vice Presidents with Phebe.

And so the transition is beginning, and we are very encouraged by all of that, and we will continue to work very closely together as you would hope.

Likewise, Phebe is in the process, as we speak, of turning over the Marine Systems group to John Casey, who was currently President of Electric Boat, and then John will be turning over EB to Kevin Poitras, as you probably know.

In every one of those moves, we are very well served, and John is going to do a superb job as the EVP and Kevin will do likewise as the President of Electric Boat.

So it reaffirms, frankly, the bench strength of General Dynamics and how seriously we take the succession business, and we feel very comfortable with all of that, Joe.

Okay.

Are there any comments you can make on just how you and Phebe will be working together day-to-day on running the Company?

Are you going to maintain a focus on different areas than her, or are you going to make joint decisions?

How do we think about how you are going to divide executive responsibilities?

Well, one of the things she will be doing first order, of course, as you would expect is spending a lot of time with the other executives -- the Executive Vice President, if you will, and the businesses getting herself, shall we say, re-familiarized because she has fairly been total focused in the Marine group as was her task to get her now snapped in, if you will, re-snapped in to the other three business groups.

So, as first order of business, that will be elemental to what she is doing, and she and I will work very closely throughout all of that as will the rest of the leadership team.

So this is teamwork underlined.

I think we have time for one more question this morning.

Cai von Rumohr, Cowen & Co.

So you had very strong large business jet deliveries in the first quarter.

Could you comment, what are you looking for for the year?

Is there upside given that very strong first quarter, unless it was bloated by huge forfeitures, which you are seeming to suggest that is not the case.

Isn't 15.5% a conservative number?

Yes.

I always give you conservative numbers, but I mean it is a pretty reasonable number from what I see today.

Is there some upside to it?

I certainly hope so and I think there probably is, but I think that is reasonable today, quite honestly.

I mean you have not told us -- I mean are you looking for more large business jet deliveries?

You said that completions were on plan, but you did not say whether it was in -- Jet was in the black.

You say you expect it to only breakeven for the year.

So it's a little hard to kind of see the rollout from here.

I think that completions, the production rate as I think I always say can be -- it is unchanged today.

Can it be tweaked a little bit?

Yes, as we go through the year.

Will it be?

It is too early to tell.

That is the fair answer.

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.