通用動力 (GD) 2012 Q4 法說會逐字稿

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

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

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

Later we will conduct a question-and-answer session.

(Operator Instructions).

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

I would now like to turn the conference over to your host, Miss Erin Linnihan, Director of Investor Relations.

Please proceed.

Thank you, Carissa, 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.

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

Good morning to all and thank you, Erin.

For those of you who do not know, Erin is our new Director for Investor Relations.

She has replaced Amy Gilliland who has been assigned to a broader portfolio reporting directly to me.

I'm not going to spend a lot of time on the fourth quarter which is dominated by the charges; you are going to hear more about that from Hugh Redd.

I do intend to spend time -- some time giving you a sense of my thinking about 2012 and then spend a bit more time on 2013.

I will try to keep my remarks somewhat brief to provide sufficient time to address your questions.

With respect to the fourth quarter, I would focus you on that revenue drop versus the same quarter a year ago, the single largest cause of which is the revenue decline at European Land Systems.

This is a salient fourth-quarter impact that carries over into 2013 which we will talk about in a bit more detail.

For the full year 2012 let's first talk about Aerospace.

The Group had notable growth; sales and earnings increased by double digits.

At Gulfstream both revenue and earnings were strong with revenue up over $800 million and earnings up $110 million.

There was some decrease in margin as the result of a mix shift toward early production G650 and 280.

Of course we had higher default penalties in the prior year that somewhat insulated the 2011 margins.

Gulfstream also brought to market two clean sheet aircraft that entered into service pretty much on the schedule we first announced back to you in 2008.

Jet Aviation performed better than 2011 with revenues up almost 10% and earnings better than last year without regard to charges.

The management team at Jet has addressed the underlying operational performance issues in completion and their processes are dependable going forward.

In all Aerospace had a good year and delivered on its promises.

Combat Systems -- sales as reported were lower by over $800 million and earnings before nonrecurring charges were down $215 million compared to the prior year.

75% of the sales decrease and 75% of the earnings decline were attributable to European Land Systems.

In the North American-based businesses sales were down somewhat at our shorter cycle businesses, but Land Systems' sales, earnings and margins were higher.

And each of our US businesses maintained double-digit margin.

So what can we deduce from this?

First, in recognition of European fiscal realities we are restructuring our European business and taking costs out to position us for the future.

Second, our North American-based businesses performed extremely well given the current budget environment, particularly the biggest business, Land Systems.

Let's move on to the Marine Group.

Sales were down less than 1% on timing of submarine and surface ship programs.

Earnings were up 8.5% on good performance across all three of our shipyards.

I particularly like the story at Electric Boat, the largest business.

Revenue was down very modestly and we had a 50 basis point margin improvement.

NASSCO had outstanding performance and superb profit contribution on the T-AKE program.

IS&T -- as we reported, the Group lost $1.2 billion of sales year over year and approximately $400 million of earnings before nonrecurring charges.

C4 Systems' sales decline was about 75% of the Group's total decline.

The earnings decline at C4 was about two-thirds of the Group's earnings decline driven by lower revenue in general and a volume reduction in some of their higher margin products in particular.

Our GD UK business accounted for approximately 20% of the sales decline as reported and 20% of the earnings decline before charges in part from reduced volume and in part from some performance issues.

Literally we are not pleased with the considerable decline in margins in this Group, about 270 basis points without regard to charges.

In addition, the impact of dramatic sales and earnings decline in C4 and GD UK created a mix shift in the Group to our lower margin IT services.

Conversely, wrong second-half orders including orders at C4 for WIN-T HMS Rifleman and Manpack radios help stabilize C4 moving forward.

Think about it this way, C4 had a book to bill for 2012 greater than 1. The margin decline in this Group is as explicable, but the performance was disappointing at best and will be addressed.

In summary, for the entire entity, cash performance was strong.

I liked Aerospace's excellence growth in both revenue and earnings.

Combat Systems' North American businesses performed well in the middle of a tough budget environment.

The European combat vehicle business was a negative, but, as you can see from the charges, we are addressing their cost structures this year.

Marine remained steady with good operating performance.

IS&T did not perform as anticipated and we are going to work that hard in 2013.

Our large powerful core platform businesses, Electric Boat, Gulfstream and Land Systems continue to perform at very high levels generating EBIT, EBIT margins and cash.

So let's turn to 2013.

With respect to revenue our plan rolls up to somewhat less than a 1% sales increase over 2012 led by 16% growth at Aerospace, offset in part by a 3% to 4% decline in our Defense business.

Combat and IS&T are each contributing about 50% of the decline with Marine growth offsetting the decline somewhat.

A reasonable range for sales this year is flat to up 1.5%.

Operating earnings should be essentially flat when compared to 2012 results before nonrecurring items.

The plan contemplates an overall operating margin in the mid 11% range reflecting a slight compression compared to 2012 before nonrecurring items.

Aerospace and IS&T margins are planned to be better than 2012 margins before nonrecurring charges offset by a decline in the Marine Group margins and a slight drop at Combat Systems.

Here is how we plan to perform across our groups in greater detail, first Aerospace.

Our plan reflects a 16% sales growth led by Aerospace.

Operating earnings are planned to increase 19% when compared with 2012 results before nonrecurring items.

This represents increased margins of 40 basis points compared to 2012.

Aerospace has additional revenue and earnings potential beyond the plan.

Jet has stabilized its operations; additional revenue opportunities in completions, if realized, would provide some improvement in profitability, though we remain properly cautious about this market.

At Gulfstream margin improvement over plan is dependent on 650 performance.

There is upside if we can beat planned cost performance on G650 manufacturing and completion.

Combat -- revenue is planned to be down approximately 6% when compared with 2012 Group revenues as reported.

The decline is attributable to a reduction in combat theater-related services and in our shorter cycle US businesses.

The Group's operating margin is anticipated to be in the mid-13%.

Marine Group -- sales in the Group are highly predictable and are planned up almost 2% from 2012.

Earnings, however, are down on margin compression as a result of mix shift at NASSCO caused entirely by the end of the highly successful T-AKE program in 2012.

Plan anticipates a Marine Group operating margin of approximately 9.4%.

This is still industry-leading performance by no small measure.

That said, we will seek to improve these anticipated margins as we go forward through the year.

IS&T -- revenue is planned to be down against 2012 by almost 5%.

Margins, however, are up 20 basis points against last year's performance before nonrecurring items.

The margin increase is the result of improved performance primarily at C4 Systems and at AIS as their plans have stabilized and they drive cost out of their business.

In summary, at COO I worked with our business units to develop realistic operating plans based on a comprehensive analysis program by program and our best assessment of risk and opportunity.

We only recently finalized our operating plan to capture the current outlook as best we could.

The plan contemplates a full year's continuing resolution and is reasonable subject to some risk on the sales side in the event of sequestration and more draconian budget cuts than currently contemplated.

Due to its short cycle businesses and O&M exposure, the IS&T outlook will remain most sensitive to any additional budget cuts that may occur.

Our margins have been good apart from recent IS&T performance, but there is plenty of room for improvement.

We will be working cost cutting initiatives across all of our lines of business.

I will have more to say about that later in the year.

The opportunities for upside, and they are significant, are on margin improvement, cost generation and driving performance side of the equation.

We will focus this year on operations, drive cost out of our businesses and improve performance.

But I do not intend to guide you to higher operating margins than are currently embedded in our plan because we have yet to earn them.

I will now turn over the mic to Hugh Redd to provide you detail on the charges and other items.

Thank you, Phebe, and good morning.

I intend to discuss in detail the charges in the quarter including goodwill impairment and a few other miscellaneous financial items before the question-and-answer period.

Before I discuss the goodwill impairment I would like to address other discrete charges which impact the fourth quarter by segment.

First impacting the Aerospace Group, we recorded a $191 million impairment of intangible assets associated with Jet Aviation's maintenance business.

Jet's business, particularly in Europe, has been impacted negatively by recent economic conditions and an increasingly competitive marketplace where we are seeing OEMs perform maintenance work that was previously performed by third parties like Jet.

As a result of these market trends, in the fourth quarter we reviewed the long-lived assets associated with Jet's maintenance business and eliminated the remaining value of the intangible assets.

We have repositioned Jet's maintenance business to match anticipated future demand and, as a result, expect it to remain profitable in the future.

Next impacting the Combat Group, we recorded a charge of $405 million related to our European Land Systems business.

Included in this amount is $292 million for accruals for contract disputes primarily related to our contract with the government of Portugal for 260 Pandur vehicles.

During the quarter we were notified by the Portuguese Minister of National Defense that the contract was terminated for an alleged breach of contract.

Subsequent to that notification the customer has drawn $73 million on bank guarantees related to the contract.

While we have asserted that we are not in breach of the contract and that the termination of the contract was invalid, we have reserved the receivables and inventory on our books and accrued an estimate to satisfy remaining obligations to close out the contract.

We filed a demand for arbitration to protect our rights, but the outcome is difficult to predict given the customer's behavior to date.

The other significant items in the charge for our European Land Systems business are $98 million of restructuring-related costs and $50 million of inventory write downs.

Late in the fourth quarter we committed to a restructuring plan to eliminate excess capacity and align the size of our European business with future demand.

This amount consists primarily of severance costs which are expected to be paid in 2013.

The next two discrete charges in the quarter impacted the Information Systems & Technology Group.

In the quarter we recorded a $110 million impairment of intangible assets associated with a prior acquisition in the optical products area of the business.

As a result of competitive losses and award delays in the fourth quarter we reviewed the long-lived assets of this business for impairment and eliminated much of the remaining value.

Also in the quarter we recorded $38 million to write off obsolete inventory, primarily ruggedized computers and associated parts inventory, as projected sales are not likely to materialize.

The goodwill impairment also impacted the IS&T segment.

During the fourth quarter we conducted the required goodwill impairment test, just as we do every year.

For three of our segments step one of the test resulted in estimated fair values far in excess of book values as of 12-31-2012.

For IS&T, however, the book value exceeded the estimated value.

Accordingly, we performed the very detailed step two of the test for the IS&T segment, which resulted in a $2 billion impairment loss, which has been recorded in the fourth-quarter results.

Some further background on this non-cash charge.

Since its formation in 1997 our IS&T segment has completed 38 acquisitions.

The goodwill associated with these 38 acquisitions totaled $8.1 billion at the end of the third quarter of 2012 and represented 58% of the total Company goodwill.

As we've been discussing for several quarters and as Phebe outlined, IS&T has expressed continued top-line pressure resulting from slowed defense spending in their markets and margin compression due to mix shift and cost performance.

In fact, from its high point in 2010 revenues in IS&T are down almost 14% and margins have declined 270 basis points.

Accordingly, our projection of future cash flow from IS&T has been impacted, leading to a lower estimated fair value than we have calculated in prior years.

The impairment charges reduced the carrying value of IS&T goodwill by 25%.

Leaving the segment charges behind, net interest expense was $41 million for the quarter versus $38 million in 2011.

For 2012 our interest expense for the full year was $156 million, right in line with our prior estimates.

For 2013 we expect net interest expense to decline to approximately $90 million, reflecting the full-year impact of our $2.4 billion debt refinancing which we completed in December of 2012, as you know.

That refinancing lowered our weighted average interest rate on our outstanding debt to 2.2% and extended our average maturities by seven years.

There was a charge of $123 million included in other expense in the quarter related to the bond redemption premium for the refinancing.

At the end of the quarter our balance sheet reflects approximately $600 million of net debt, a reduction of $400 million from the prior year.

The reported effective tax rates are somewhat meaningless for comparative purposes and with that in mind I will address them.

The effective tax rate was negative 2.8% for the quarter and a positive 161.4% for the full year.

The fourth-quarter rate and the full-year rate were impacted significantly by the fact that the discrete charges had either reduced or no tax benefit.

For 2013 we expect an effective tax rate around 32% -- taking into consideration the retroactive extension of the R&D tax credit, the impact for 2012 and 2013 being recognized in the 2013 rate.

The operating costs attributable will to corporate were $69 million for the full year 2012 versus $77 million for 2011.

The amount for 2013 will be closer to $90 million.

During 2012 we contributed approximately $530 million in cash to our pension plans.

For 2013 our funding expectation is approximately $600 million with 60% of that funding occurring during the third quarter.

Finally, we ended the year with $3.3 billion in cash and, as I said, net debt of $600 million.

We remain committed to maintaining a strong balance sheet and strong credit ratings.

Our commitment will be evidenced by a disciplined capital deployment strategy throughout 2013.

That concludes my remarks and I will turn it back over to Erin for the Q&A.

Tanks, Hugh.

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

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

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

(Operator Instructions).

Myles Walton, Deutsche Bank.

Welcome, Phebe; I'm sure this is not the roll-out you were always envisioning, but nonetheless welcome.

The question I had was on IS&T margins.

And you talked about up 20 basis points on a clean compare in 2012.

I just went to make sure that is 8.2%, is that roughly the range?

Yes.

Okay, and could you talk about what the step-down has been structurally, where is the long-term margin opportunity?

And then maybe for Hugh, was there an amortization -- or is there an amortization benefit that's coming in 2013 to IS&T that is in that 8.2%?

Let me give you a little bit and then we will let Hugh answer.

Let me give you a little bit of color on 2012 margins and then 2013 margins, all right?

We had, as I mentioned, about a 20 -- 270 basis point compression in 2012 margins and the way I think about margins is here is what's going on.

We talked about C4 in 2012 and we are confident that their reset plan reflects their market reality and shows considerable improvement year over year.

The IS&T services have become an increasingly large segment in IS&T -- the IT services, and GD IT is a lower margin business than the other IT businesses.

Going forward there are two main drivers for 2013, C4 sales and earnings and margins are up in 2013 as against 2012 before nonrecurring charges and their margin expansion is around 80 basis points.

We've also addressed the operational problems at GD UK and we have some stabilization there as well.

Offsetting that margin improvement is IT services has about a $350 million lower revenue target and margin compression of about 50 basis points.

So net-net that is how we are rolling up to about an 8.2% margin.

Hugh, you want to address the amortization?

Yes.

Miles, there will be less amortization in 2013, I think the number is probably $25 million, maybe slightly more.

That has been reflected in the projections that Phebe has and the guidance she has given you.

Okay, I will stick to one, but, Phebe, is there a longer-term margin expansion story for IS&T or is this kind of what we should think about as the business?

There is a longer term and let me take this opportunity to explain that.

One of the things that ought to be clear is that we have reset the IS&T plan across each one of the businesses.

And we have done a very, very realistic program-by-program analysis that drove our revenue estimate by about 5% lower.

And to fire test those assumptions as part of our planning process we used a parametric analysis based on several benchmarks including book to bill, established budgets and backlog.

So the result of where we are guiding you to in IS&T seems reasonable to me in both program assumptions and by application of the benchmarks, the history tell us a reasonable parametric test of our assumptions.

So when I think about IS&T, and let's talk about C4 in particular, this is a superb management team that given a realistic and reset plan and given their order book has margin potential.

I'm just not going to lead you there -- margin expansion potential, I'm just not going to lead you there yet.

And that goes into -- that is relevant for 2013 and 2014.

What we see over our long range plan for IS&T is margin expansion across the board, but it's going to be slow and deliberative.

Okay, thanks again.

Cai von Rumohr, Cowen.

Yes, Phebe, welcome.

So Gulfstream, could you give us some color on how many 650s did you deliver in the year?

How many completions?

And give us some color on the delivery assumptions behind your comments on Aerospace for 2013?

Yes, look, we -- as I highlighted and we highlighted in our press release, we delivered 37 aircraft to customers in the quarter including 31 large cabins.

And we are not going to break out aircraft deliveries by model type and I certainly don't intend to going forward.

I can tell you that based on what we reported before we had six G650s enter into service in the fourth quarter.

Let me give you a little bit of background on margins.

Let's take 2012, okay?

Starting in the third and fourth quarter margins were impacted by higher cost of goods sold in connection with the completions and retrofit work for the G650.

As a result we had a temporary disequilibrium between green production and completions as we accommodate some retrofit work out of cycle.

We've got to work our way through that over the year and so let me -- that leads me into 2013 and let me talk to you about margins in 2013.

There are two things driving, one is the mix shift with a larger proportion of 650's and 280's with lower margins, at the moment, compared with 450's and 550's.

It's also about 650 production, which I alluded to.

And we have factored the green and completion production rates to account for the balance -- this imbalance in production flow from green completions, it will take the duration of the year to resolve.

Let me give you -- I think it might be helpful for you to understand where we are and it will give you some color, I think some real detail on how we are seeing our rates and our margins.

So let's talk about 650 manufacturing.

Overall the manufacturing of these aircraft is going well.

However, not surprisingly, due to the prolonged FAA certification process, and our decision to continue manufacturing G650's during that process, there is currently this dis-equilibrium between initial and final phase manufacturing.

And that disequilibrium is the result of retrofit work mandated by changes to the configuration of initial G650 green aircraft after they were manufactured to conform with FAA approved configurations.

So as I say, we have got through -- the margin guidance we've got in 2013 anticipates taking the majority of the year to rebalance our initial phase and final phase production.

We have some opportunity there, but I'm not willing to call it yet.

Terrific, thank you very much.

David Strauss, UBS.

Welcome, Phebe.

I wanted to talk about cash.

Cash relative to adjusted earnings for the full year came in below 100%.

Can you talk about a couple things, cash conversion in 2013 and then how you plan on -- your plan in terms of deploying the cash?

Obviously relative to some of your peers your dividend yield is a little bit lower, share repurchase you haven't been as aggressive, focusing more on acquisitions.

Just wanted to hear what you were thinking in terms of deploying that cash.

And it looks like your guidance for the year doesn't assume anything for share repurchase if I'm correct?

That's correct.

Okay.

So let me give you a little bit on cash.

And you have seen this in 2012 and we're going to see it again in 2013.

Our cash generation in the underlying business continues to be superb.

We have considerable CapEx in 2012 and again in 2013.

In 2013 we are planned at about $618 million, this is primarily at Gulfstream.

And I can tell you we are going to work that number very, very hard.

We also have some headwinds in cash with respect to pensions and, as I mentioned, higher CapEx.

But let me talk to you a minute about a subject that is near and dear to my heart and that is capital deployment.

I think what should be clear from what I have told you is that I'm going to remain, and as is our management team, focused on operations in 2013.

I can tell you there are almost no acquisition candidates and the current pipeline.

I also believe that the acquisition process at GD is somewhat broken and I will not venture back into that market until we have re-established the discipline in this process.

And I can give you a little bit more color on this.

If you consider the acquisitions that were made in combat, Force Protection in particular, and the repair businesses and Marine they were excellent.

(technical difficulty) IS&T acquisitions haven't been so far.

Regarding dividend and share repurchases, I'm just not going to get ahead of my Board, guys.

All right?

Thank you.

Carter Copeland, Barclays.

Hi, Phebe, welcome.

I have just a broader question.

I mean, it seems that after a lot of these changes you have conducted a very broad business review here.

And I wondered if you might discuss the scale and the scope of those actions and anything it may have revealed broadly about the business, its structure, its competitiveness outside of the weakness that you've obviously called out in AIS and C4 Systems and ELS.

Anything you sort of learned that you intend to apply to how you want to run the Company in 2013 and beyond?

Yes, that is a very good question.

It ought to be clear from the charges that in some respects we took our eye off the ball.

Some of our business units performed superbly, but that benefit hasn't accrued to the benefit -- or that value hasn't accrued to the benefit of our shareholders.

And you can better belief that we are going to be focused like a laser beam on that.

I can tell you that I have -- I'm very close to our business unit presidents, I know their business, they know their business and we are completely aligned with the prime directive.

And that prime directive is drive cost out of our business, generate earnings and cash, expand our margins and reassure our shareholders that we are wise stewards of their capital.

We are going to be focused on operations and you're going to see that across every single one of our businesses.

Let me tell you something else, too, as I think about our business.

One of our key jobs is to manage and mitigate risk and classical risk theory argues to diversification.

And one of the things that I think we need to understand about GD is we have diversification in two respects, first and clearly we have diversification in counter cyclicality with Aerospace and Defense businesses, right, it's pretty (inaudible) matter.

Second, however, within our defense businesses we are somewhat counter cyclical with the Navy and the Army, our exposure to the Army and the offsetting exposure in the Navy portfolio.

So, while I see some contraction in our Army market, the Navy tends to be, as a result of tactical changes in the budget, the Navy tends to be more strategically driven and vary, depending on whether we are in a hot war, that balance between the Navy and the Army.

So as you look at that -- even within the defense portfolio I like our balance.

That's great.

And just as a follow-up to that, Phebe -- as you think about the portfolio -- you made the comments around M&A and the deal process being broken in some fashions.

As you look back over some of the deals that were done is there the scope for portfolio transformation and divestiture at some point or is it too early to say at this point?

I'm not looking at reshaping our portfolio at the moment.

I don't see any compelling reason to do that.

We have reset our businesses, some of the acquisitions that we've made I'm not a particular fan of and had I been consultant wouldn't have done.

But that said, the teams that we have got around each of these acquisitions are well poised to do -- to perform well -- they are poised to perform well.

And I've got a lot of confidence in these guys, I've got to tell you.

Great, thank you, Phebe.

Howard Rubel, Jefferies.

I want to follow a little bit on Carter but turn the twist a little bit.

And how are you thinking about, well, kind of bidding and approaching market opportunities?

Because the defense budget, while it's north of $500 billion, in many cases there are great opportunities to take advantage of things you know well in Electric Boat for undersea UAVs as an example.

Or we saw the other day you are looking at teaming with an aerospace company to go after a trainer.

And then I have a follow-up to that.

Yes, so, look -- let's take that in several parts.

What you are going to see us do is pursue -- and I can't say this enough, pursue margin expansion and generate cash and earnings.

We are not going to chase revenue.

We are going to stick to our knitting and do what we know how to do.

This Company has a long history of operating excellence and it is perform, perform, perform.

Now that said, we have got -- if you look across the portfolio we have got some real opportunities for organic growth.

And I would point you to the Marine Group.

When you look at the two per year Virginia class, as well as the Ohio replacement program, we've got frankly unprecedented growth in the modern era in Marine and that to me is, again, all about performance.

I like where we are in Combat Systems.

It is interesting, nobody has asked me this question, but I'm going to answer it anyway because I'm itching to.

The story in Combat Systems over the last few years has really been about Europe, it's not about the domestic -- or it's not about our domestic companies.

They are pretty stable.

And Land Systems, the big gorilla there, is extremely stable on its vehicle orders and on its vehicle backlog and they know how to do what they do.

So I like where Combat is, I like where Marine is, Aerospace we've got to take advantage of the growth in Aerospace.

And in IS&T we have repositioned, we have reset their plans, their backlog is stable and those guys know how to do what they are going to do.

So, I think we are very well positioned to deal with any changes that we see in the defense budget because -- let me tell you something, that all comes down to agility, right?

What I want to know is, give us the balls and the strikes and we are going to react.

Tell us what the spending is going to be, allocate any cuts across the various portfolios and then it is our job to right size our businesses, drive costs out and perform for our customers and our shareholders and our people.

And I mean, I think that's goes to sort of being careful about contracting.

I mean that's performance is part of it, but --.

Hey, you've got that right.

Hey, listen, you know if you think about GD, one of the things that we do very, very well, it is all about contracts.

If you get bad T's and C's in a contract you are so far behind the power curve that it takes you a long time to dig your way out of that hole.

We are absolutely ruthless in our attention to our contracting.

And we have got some terrific estimators and some very, very good contract people.

And that is -- by the way, that is the foundation that we built this business on.

I see it -- the development programs for the Zumwalt I guess really speak to that, (multiple speakers).

Don't they ever.

Thanks, Phebe.

You know, that program is doing better than anyone could have expected.

And I will tell you, this is just my own little view, but when those ships hit the fleet I think they are going to have a profound impact.

I'm out of my league when I talk about that but that is just my intuition.

Thanks, Phebe.

Robert Spingarn, Credit Suisse.

Good afternoon and welcome, Phebe.

You talked earlier in your opening a bit about the defense cuts embedded in your guidance.

Perhaps you could give us a little bit more specificity there?

And then I'm wondering if you could apply your expectations maybe a little longer term, Phebe, to the segments, particularly to Combat and IS&T and where you think the trough is in those businesses, at least from a revenue standpoint, whether it is 2013, 2014, 2015 how you think about that?

As I see the defense market at the moment I think IS&T has gone through its trough.

I don't see anything in my current projections that would suggest that we've got considerable revenue decline in that business.

That said, as I mentioned earlier, because it is a shorter cycle business and we've got a fair amount of O&M exposure there, they are more vulnerable and more susceptible to dramatic changes in the defense budget.

But as of now, and even if I look at -- you can make some estimates about planned cuts, I think we have seen the trough.

But let me move to Combat for a minute because I think understanding our order book will help you a little bit.

We have anticipated a number of significant international opportunities that we are very well positioned for, but that is really all I'm going to say about that at the moment.

You should see some of those opportunities drop into our backlog in the first quarter.

But let's think about Combat's backlog more broadly.

It's about 1.2 times sales at year end.

And if I look at the book to bill for the entire Group, it is been largely increasing quarter over quarter in 2012 and Land Systems' book to bill has increased significantly and in the fourth quarter approached 1 to 1. And to give you a touch more color on that, what I'm looking at for 2013 is sales growth in the international realm of about 44%.

So when I step back and say, okay, if I look at my order book, I look at my book to bill, I look at how I'm positioned, how our Company is positioned in Land Systems as well as some of our shorter cycle businesses, we ought to be able to do extremely well here and we are reflecting that in our plan.

And by the way, when I say plan I've got a 2013 plan, but I see possibility for margin expansion and earnings and cash generation well into 2013, 2014 and 2015.

We've got a nice balance here.

So, given the book to bill in 2012 in Combat and the sales guidance you have got there, at what point in the year will we need to see these international orders before you would find that solidify?

I think you ought to see them drop into our backlog in the first quarter.

Okay.

And then just lastly on the (multiple speakers).

By the way, I would not be leading you implicit in the guidance that I have given without a fair amount of confidence in these various orders.

Well, and that brings me to just the final part of the question, which is the guidance range is fairly narrow at a dime.

And just given the last couple of years why not a slightly wider range?

Well, the way I think about this -- here is kind of what we have done.

We have cleaned up our business, 2013 is our reset year and I'm going to be pretty conservative here.

But don't get out ahead of me, but I'm going to be pretty conservative here and I think that is prudent.

We've got some potential budget cuts coming our way.

I've got -- the business unit presidents and I are aligned in taking cost out.

But I'm going to stay in a fairly narrow band here and a range that I feel comfortable in guiding you to at the moment.

If I see some upside in the year I'm going to come back at you.

Fair enough.

Thank you very much.

Sam Pearlstein, Wells Fargo.

Just a quick follow-up on that is in the past there's been a target for International Combat being about 40% of the total Combat Systems revenues.

Do you still see that as a target?

I think we are going to be slightly in excess -- look, I don't have a target, I'm just telling you what I am seeing in our pipeline and in our book to bill, in our backlog.

But I'm not -- I think it's in the -- getting -- approaching the mid-40%s.

Okay, and then I guess the bigger question is just in thinking about the different things you have said and the acquisition discipline, et cetera, is there any change in any of the incentives?

And I guess the focus historically has been earnings, free cash and ROIC.

With respect to the charges and everything that went into 2012, how do you see the real drivers and key things that you and your management team need to focus on for incentive compensation changing?

Yes.

No, listen -- the issues with respect to what I consider to be a somewhat broken internal process we will address and you can bet your bottom dollar we are going to address it.

But I want to incent this management team to do what we are telling you we are going to do and the value proposition for GD, margin expansion, earnings and cash.

That -- focused on the basics, perform, perform, perform, meet our plans and deliver that value to our shareholders and our customers.

Can't be any more simple than that.

Okay, thank you.

Ron Epstein, Bank of America-Merrill Lynch.

So when you think about -- this is kind of maybe a big strategy question here -- about how -- where the budget is going, how your portfolio is positioned, you yourself having been in OMB and knowing how downturns go, I mean how is that flavoring, if you will, or coloring how you think about the portfolio, how you think about the business?

And when I think about General Dynamics three years from now, four years from now, when you have been in that seat for a while -- I mean, what do I have to look forward to?

I mean what's -- can you give me some color on that?

Kind of think strategy.

Look, I'm going to focus on operations in 2013 and we are going to continue to do what we're capable of doing on the operations side.

And I think you couple that, that discipline that we've had and we are capable of with very prudent and shareholder friendly capital deployment.

Hey, listen, one of the things we need to do is reassure our investors that we are wise stewards of their capital.

We will intend to do that.

So I will be very cautious going forward, shareholder friendly, continue to perform, focus on our customers and our people and lead this -- it's interesting, you both lead and serve the management team and the Company.

And I've got to tell you, we are a very, very tight cohesive management team and I've got an awful lot of confidence in them.

Can I ask one follow-on as a part of that?

Besides the operations, that is kind of clear and you've talked a lot about that.

But strategically what do you see as your biggest challenge ahead of you?

Look, strategically what we need to do is manage defense, the defense businesses in a slightly -- in a down market or in a declining market.

And in my mind we ought to be able to make money, in fact we should make money as a good cyclical in a down market.

And what does that mean?

It means that you stay focused on the things that I've talked about and that you perform agilely.

You've got to be agile, you've got to be able to react quickly to the balls and strikes that come your way.

It's all about agility.

And it's -- that is what a good cyclical does -- it's what we're going to do.

So I look at that as a challenge.

And the opportunity is to take advantage of the growth where we've got it.

And that is clear at Gulfstream and in parts of our other businesses where we are going to have organic growth.

Okay, great.

Does that answer your question?

Yes, I think so.

I mean I guess the question is how about parts of the business where you don't have growth?

What do you do with those?

Then you are going to drive for earnings and cash, aren't you?

I mean there is no point chasing revenue or pretending that one is in a growth market when you are not.

I think what you want from us is realism, putting a mirror up to our face and saying here is what we see.

And based on what we see delivering on our promises.

Okay, great.

Thank you, thank you very much.

(Operator Instructions).

Peter Arment, Sterne, Agee.

Yes, good afternoon, Phebe.

A question regarding Combat Systems again back -- but in particular in the backlog you saw a 10% drop in kind of the funded backlog.

Maybe you could just give us a little color, exactly what the moving pieces were there.

And back focusing on I guess the international piece, at the end of 3Q, 42% of the mix was tied to the wheeled vehicle area in terms of the portfolio.

What gives you kind of the confidence that -- is it the indigenous manufacturing aspect of kind of where these operations are that you are going to continue to sustain that and we're not going to be hit with what I think could be some choppiness as you have kind of indicated?

Look, the vehicle -- let's talk about Land Systems.

The vehicle market is a year over year from 2012 to 2013, our vehicle line of business, that is both track and wheeled, is essentially flat.

And it is a mix of domestic production and international.

And I think we have -- in fact, we have reflected declines in our -- decreases in our domestic Army customer's requirements and we're balancing those with international orders.

It's just that simple.

And that business -- so given that balance and given what they have got in their backlog and given what you are likely to see in the first quarter in terms of additional backlog, I like that balance.

I think that is a diversified and frankly risk-adjusted portfolio.

Okay, and just I guess what I was alluding to was more the timing aspect.

So the award is coming through for the first quarter that you kind of -- it basically sounds like you can already see kind of offsets that, the pressure that we kind of already understood on the domestic side?

That's right.

Okay, thanks again, Phebe.

Yair Reiner, Oppenheimer.

yes, I think you mentioned earlier that the defense outlook you have is based on the full-year CR.

Now it looks as though the budget for 2013 could be a bit smaller than the CR.

How should we think about what happens if that budget does get passed?

And then also it does seem as though the potential of sequestration could hit may be increasing.

How are you thinking about that today?

Thank you.

The budget that we see for 2013 we have factored into our plan and we have sustained within the current planning -- cuts across the portfolio.

If they get at the level of sequestration or some of sequestration and I take a look at 2013 and 2014 and they need to come back and rebalance and reassess our guidance I will.

But I've got to tell you, even if we've got some pretty significant cuts in 2013 we see very, very little impact as I walk through each of my businesses on the defense side.

So absent some -- as I mentioned earlier, draconian cuts, I think we're going to be all right in 2013.

Thank you.

And, Chris, I think we have time for one more question.

Jason Gursky, Citigroup.

I wanted to just focus on Gulfstream for a minute and get a sense of the current demand in the marketplace both on what you would describe as your lower end as well as the higher end.

And maybe just walk us around the world on how demand is shaping up.

And really specifically maybe give us a sense of where we are from a backlog perspective in number of months, particularly for your large cabin aircraft ex-G650?

Let me preface my answer with giving you some details about our production rates.

We are planning 139 green deliveries, 113 large cabin and 26 mid cabin.

And to my point earlier about the re-baselining of completions and manufacturing, we are going to -- our rates reflect about a 50% increase in outfitted deliveries.

So look, what does that tell you?

If you know us what you know is that we have historically used our production rates to adjust with respect to our -- reflecting our backlog and that is exactly what we have done here.

Everything that I see in the backlog as well as in our current pipeline makes me very comfortable with those production rates.

We still have demand for our 450, 550, 650, the 280 is coming on strong and we are well positioned this year.

As I told you, the big issue here is at this moment not about our production rates.

And look, if you know us and you know us over time and you've watched us over time, if we see a -- if something happens and some exogenous factor happens in the overall economy, we will adjust our production rates and we will come back at you.

But I am not seeing that at the moment.

This is very realistic and doable.

Okay, and just specifically on kind of regional demand and how it is shaping up.

Yes, so, interestingly the largest demand we saw was in our -- within the Fortune 500 is they are replenishing their fleet.

And then I think if you think about the demographics across our portfolio, Asia was down, not surprisingly.

And regarding the details about who makes up what percentage, approximately 30% was from individuals, 30% from private and 40% from public companies.

But one of the things, again, I like about that backlog and our order book is that it is balanced.

We've got North America, we've got Europe, we've got Middle East, Asia and they tend to ebb and flow, somewhat counter-cyclically.

One of the very good things that I see is that the Fortune 500's are back into the market.

Thank you for joining our call today.

If you have any additional questions I can be reached at 703-876-3583.

Thank you and have a great day.

Thank you very much.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.