通用動力 (GD) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2013 General Dynamics earnings conference call.

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

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

We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

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

I would like to turn the call over to Miss Erin Linnihan, Director of Investor Relations.

Please proceed.

Thank you Sue, 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 outlook.

These estimates are subject to some risk 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.

Thank you, Erin.

I hope to be reasonably brief this morning.

The press release and related charts are pretty straightforward and tell a rather compelling story.

We reported revenues for the quarter of $7.4 billion, operating earnings of $824 million, and overall operating margins of 11.4%.

This resulted in diluted EPS of $1.62 compared to consensus $1.50.

Free cash flow was fairly strong across the business, particularly for a first quarter, at $429 million, or approximately 75% of net income.

This was considerably better than the cash performance in the first quarter of 2012 and considerably more than we had anticipated in our plan.

Given the defense market environment, this quarter compares favorably with the first quarter last year.

Revenue is down modestly 2.3%, operating earnings are essentially flat, margins are up 10 basis points, net income is up $7 million, and diluted EPS is up $0.05, or 3.2%.

On a sequential basis, there is significant improvement even if we look at the fourth quarter before nonrecurring charges.

On a non-GAAP basis, without charges, the operating margins in the first quarter were 10.1% compared to 11.4% this quarter.

Let me give you a little bit of detail on the results of our operating segments and hopefully provide you some color.

First Aerospace.

Aerospace revenue is up $155 million, almost 10% against the year ago quarter and profit is up $39 million.

14.4% on a 70 basis point improvement in operating margins.

I am pleased to report that Jet Aviation made a contribution in the quarter.

In short, nice operating leverage.

From a market perspective we're seeing adequate interest in both new and existing product lines.

The backlog and orders in the quarter make me comfortable with the revenue projections I gave for Aerospace for the year.

We have some opportunity to outperform our guidance, so far, so good.

At Combat Systems, revenue declined $358 million against the year ago quarter but operating earnings were up $12 million, almost 6% on 13.8% margins.

However, it is well to remember that there was an accounting charge in the year ago quarter for this segment.

On a non-GAAP basis, ignoring charges, margins were flat.

Sequentially, even after the fourth quarter non-GAAP adjustments, margins improved by 130 basis points.

From my perspective, a very good operating performance despite reduced revenue and continued struggles in Europe.

With respect to backlog, the significant international order activity we expected in the first quarter has slipped to the right.

We are still actively negotiating these transactions and have confidence they will close.

We expect Combat Systems revenue to improve steadily during the year, quarter-over-quarter, but still fall short of the revenue guidance I gave you at the beginning of the year.

On the other hand, operating margins will be better than my earlier guidance.

Margins for the year should be in the range between 13.5% and 13.8%.

But, could be somewhat lumpy on a quarterly basis depending on the timing of further restructuring charges in Europe.

Marine group.

The marine group continues to perform effectively.

Compared to the first quarter of last year, revenue is up $21 million, 1.3%.

And, earnings and margins are down, as expected, as a result of the conclusion of the highly profitable T-AKE program last year.

In all other respects, program earnings held steady or are up slightly.

Operating margins are at a respectable 9.8%.

This group is expected to be highly consistent during the remainder of the year with respect to both revenue and operating margins.

At IS&T revenue is up modestly $7 million but earnings are down against the first quarter last year on lower operating margins.

This was as planned.

The operating earnings at 7.6% represent a significant improvement over the fourth quarter last year on a non-GAAP basis ignoring the charges.

We are working diligently to improve margins and expect stronger margins in the second half of the year.

Our order activity remains good with a book to bill of 1 to 1.

Let me conclude my remarks by saying we had a strong quarter.

We beat consensus, and frankly, beat our plan.

We're offer to a good start and our internal focus on operations is gaining traction.

I'll turn over the mic for a few minutes to Hugh Redd and he can provide a bit more detail.

Thank you, Phebe, and good morning, everyone.

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

First, net interest expense was $23 million for the quarter versus $39 million in 2012.

For 2013 we expect net interest expense of approximately $90 million reflecting the full impact of the debt refinancing completed late in 2012.

At the end of the quarter, we had only $165 million of net debt, down about $450 million from year end.

The effective tax rate was 30.7% for the quarter which reflects the impact of the retroactive extension of the R&D tax credit for 2012 which was recorded in the first quarter of 2013.

For 2013 we still expect an effective tax rate approaching 32%.

Finally, with respect to pensions, we continue to expect cash contributions to the plans to approximate $600 million for 2013.

The bulk of the funding is expected to occur in the second half of the year.

That concludes my remarks.

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

Thank you.

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.

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

Thank you.

(Operator Instructions)

Joe Nadol, JPMorgan.

On the Aerospace side I was wondering, Phebe, if you could give us an update on the market demand as you're seeing it and really honing in on the 550 and 450?

Where backlog is today and just color as you see demand going the rest of year?

How are you thinking about production in that context?

Thanks, Joe.

As you all know, our book to bill has been below 1 to 1 but I think this is important to understand, with respect to Gulfstream, that data can be misleading.

It's the mix of orders that are important.

And a significant, in fact a preponderance of the orders in this quarter were for the G550 and G450, where we need them.

We carefully watch that portion of the order book to determine production rates.

We're solid for the year and have not made a judgment about next year's rate on these aircraft.

To the extent the rate is down for next year on the 450, 550, and we have no reason to believe at the moment that it would be, but to the extent that it is, it will be overcome by increases in the 650 and 280.

In general, we are very comfortable with where we see our backlog and our new order activity.

Very good.

Thanks.

Carter Copeland, Barclays.

Hello?

Just -- I'm going to resist the urge to ask about the Aerospace margins and instead ask a bigger picture question, Phebe.

You've now had another quarter under your belt here to do business reviews, think about what you want to do with the Company from a strategic perspective.

And, I wondered if you might share with us your perspectives on risks and opportunities you've identified over the last quarter or how things are shifting in your mind?

And, just your general high level thoughts on what direction you want to take the Company in.

Let me answer that by giving you an overview of how I see our portfolio and businesses developing through the long range planning process.

Gulfstream will grow significantly in that time frame and their margins will have improved.

Marine group will grow on increased revenue in submarine market throughout that period.

IS&T has, obviously, significant margin opportunity.

And, for Combat, we have sufficient international interest to bridge to a more robust Army spending when the Army needs to re-capitalize.

In general, I like where we -- I like the offsetting cyclicality that we have embedded into our businesses.

And, in all respects, we see a very clear way forward.

Does that answer you?

Yes, it does.

Jason Gursky, Citi.

Good morning, everyone.

Good morning.

Just a couple of quick questions.

One on the sequester and just generally talk about your thoughts on sequester.

And then, secondly, on cash deployments and update us there on your thoughts.

Well, I think that there is an enormous amount of specificity in the press about sequester and the machinations that are going on in Washington.

There isn't much specifics that I can add other than to give you clarity about our business.

Getting the full year FY'13 funding bill was a major upside event for our planning.

That said, the final sequester impacts by program have not been communicated to us by our customer.

If I think about where, at least for 2013, we're likely to see some impact it would be in the Combat Systems shorter cycle programs.

And, that's why I think that revenue may be a touch softer than I had anticipated.

But, in general, we do not see sequester as a significant threat to '13.

Most of our sales are in our backlog.

Cash deployment -- thanks, Erin.

I think about cash deployment in three basic buckets.

Dividends, and this is for this year, dividends, share repurchases, and strengthening our balance sheet.

In March, the Board announced a 10% dividend increase, the 13th consecutive year of dividend increases that yielded a 3% yield.

I think that was very wholesome.

And, with respect to dividends, what you need to expect from us is consistency, predictability, and sustainability.

I think that that's important.

Share repurchases, you're going to see us throughout the remainder of the year act accordingly in shareholder friendly ways with respect to share repurchases.

And then, given the charges in the fourth quarter, we need to strengthen our balance sheet a touch.

I don't see any acquisitions on the time -- on my current time horizon, but that doesn't mean that there's something small and in our core that we wouldn't be interested in looking at it.

But, at the moment, I've got nothing and that's fine.

We continue to want to focus internally.

Thank you.

Yair Reiner, Oppenheimer.

Great, thank you.

I can't resist asking about the Aero margins.

Can you talk about the puts and takes in the quarter?

Obviously, you had a very strong performance there.

And then, how we should think about the trends sequentially for the balance of the year?

Thank you.

There were two primary drivers of our performance.

One, Jet had a good quarter and made a good contribution in excess of their plan.

And, second, we made progress on the 650 manufacturing margins and dealing with the retrofit issues that we talked about during the last call.

As we begin to smooth the transition between green deliveries and outfitting, we'll continue to see better margin improvement.

So, as I think through the year, it's premature to increase our guidance.

We need to work through the remainder of our retrofit issues which ought to clarify by the end of the second quarter.

And, with respect to Jet, they have remedied and fixed their underlying operational problems.

The key there to a long-term value proposition is volume and completion.

So, that is how I'm thinking about the quarter-over-quarter and for the year.

We've got some up side but we're not ready to declare it yet until we get through some of the retrofit issues.

Okay?

Thank you.

Doug Harned, Sanford Bernstein.

Hello?

Please, go ahead, your line is open.

You may be on mute.

Please, go ahead, your line is open.

Let's take the next caller, please.

Robert Stallard, Royal Bank of Canada.

Good morning.

Your line is open, Robert.

Thank you very much.

Actually, I thought I'd rather follow up on Joe's earlier question on Aerospace and the demand environment.

I was wondering if you could comment on the pricing, particularly for the 450 and 550?

And, also, what your lead time is for an order today?

Because, I think, in the past you've said you would feel comfortable with an 18 month lead time on those jets.

Thank you.

Our pricing is holding up nicely on both the 450 and the 550.

And, we have sufficient visibility into the year to be very comfortable with our production rates.

And, as we move into next year, we've got to assess where we are in terms of the 450, 550.

But, to date, we're very comfortable.

So, we're slightly underneath the window of 18 to 24 months but not materially and not to any extent that would make us concerned.

As I mentioned earlier, it's really the mix.

And, we analyze that portion of the back log in order to determine our production rates.

So, so far it's steady as she goes.

Has there been improvement on the G280 pricing?

We have some improvement.

As we begin to move that in -- that airplane into the market more robustly, we've got a fair amount of demand there.

And, we like where we are.

G280 is generating an awful lot of interest as we expected it would.

Thanks very much.

Robert Spingarn, Credit Suisse.

Phebe, if we could go back to Jet for a moment.

I'm wondering with all the restructuring there if you can frame for us what the business looks like today, the mix of business, between corporate jet MRO and completions and relative size versus what it looked like when you first acquired it?

And, how that should then trend going forward?

So we have a better understanding of how that's supposed to look.

Sure.

So, Jet is a smaller business than when we acquired it, primarily because we failed to integrate Jet in a timely fashion.

We have now solved all of the underlying performance issues, particularly -- and not on the MRO side, but particularly on the completion side.

The mix of business going forward there -- this is how I think about it, there's always a fair amount of volatility, particularly in Europe, with respect to maintenance.

And, you saw that we restructured that maintenance business to reflect the demand.

And, so far, the demand for service is holding up fairly well given our expectations.

So, going forward, the issue for us is completions.

Both of the corporate -- of corporate jets and then the large body and narrow body major completion projects that we're perfectly capable of executing.

And, now that we've got the Gulfstream discipline embedded and inculcated throughout Jet we're likely to perform very well on.

I'm optimistic about where Jet sits.

Is there a way to think about the mix of completions versus MROs?

Since you bought the business, clearly some of the other corporate jet manufacturers have gone elsewhere.

But, you still have your captive business, you still have the heavy jet business.

We do.

And, I think you'll see completions becoming a larger part of the backlog going forward.

And, that has -- I like that because it's got additional margin and cash generation opportunities.

So, as a mix, we're likely to move more into completions.

And, with a steady undercurrent and undergirding of service, which I -- the service industry or the service business, which I think we have right sized appropriately.

When do you think you'll hit your target margins there?

I think we've got to bring in some additional revenue.

And, when we do that, we'll -- probably in the next year or two we ought to be able to see some real up side.

Thank you very much.

Noah Poponak, Goldman Sachs.

You're line is open.

Hi, can you hear me?

Yes.

Hi, good morning.

Good morning.

Phebe, I wanted to try to dive into combat a little further.

Perhaps you can walk us through the major moving pieces that drove the larger than expected revenue decline in the quarter?

And then, when you sit back and look at the longer term view on this segment, it's come down somewhat significantly off the peak, but it's still a much, much larger business than it was a long time ago.

When you consider all the different inputs to the scenario analysis, maybe you could share with us a range of potential outcomes for where you think this business bottoms given what could happen with sequestration and what you're expecting internationally, et cetera?

Thanks.

Yes, so revenues for the quarter-over-quarter for the year, first quarter '12 versus first quarter '13 were lower.

But, I have to tell you that was well within our expectation.

And, with respect to both earnings and revenue, Combat Systems outperformed their plan.

So, our plan was built on a presumption of softer orders and -- so softer sales in the first quarter and then building through the year.

I have factored in now the impact of sequestration into Combat estimates.

And, we may see a touch lighter overall sales for the year, but not much.

I think we have stabilized with respect to our current order book.

And, the key for us is executing and delivering into our backlog some of the large international orders that we're continuing to work.

Once we get those in, then it will be a little bit easier to give you some additional view on others, some additional clarity around the long-term prospects.

But, Combat, we're not going to chase revenues, and I think I mentioned that to you all on the last call.

And, we will rightsize our business to the revenues that we have currently, hence our good margin performance.

What we'll promise you all is margin expansion and cash generation.

And, you got to meet the market where the market is.

That said, we have very, very nice and robust international orders that ought to bridge until the Army begins to re-capitalize.

Sam Pearlstein, Wells Fargo.

Good morning.

Good morning.

Just quickly, I guess, on the Combat, I just wanted to ask a question.

You haven't explicitly said it, but I assume you're still comfortable with your current earnings outlook that you provided back in January.

And, when you say a touch lighter for Combat, how does that vary to the minus 6% you talked about back in January?

And then, I just wanted a little clarification of the international order because I thought it was really one order but the way you referred to it was multiple transactions.

Can you help us think through some of what you're pursuing there?

Sure.

We're looking at about perhaps around an 8% versus 6% decline for the year.

And, I'm very comfortable with that estimate.

I think we've derisked with respect to sequestration.

If you recall, it was not part of -- sequestration and the impact of it was not part of our original guidance.

Operating margins are expected to be higher and so it's going to leave us pretty much on track with respect to operating earnings.

We have a series of transactions, international transactions, that we're continuing to work the T's and C's on.

And, while I'm a little reluctant to give any specificity on when we expect to have them closed, we see no reason that they won't close.

And, hopefully, and most probably, it will be in the second quarter.

Thank you.

George Shapiro, Shapiro Research.

Hi, George.

Hi, Phebe.

I wanted to pursue Gulfstream a little bit more -- a little more detail.

I assume there weren't any -- wasn't any forfeiture income this year?

And, if you could compare the Jet profit to what it was last year?

And then, I'm guessing the book to bill was above 1 if you just looked at it for 450s and 550s?

And then, just if you could tell us how many 650 deliveries there were?

We had fewer defaults in this quarter than we did in the first quarter of '12, which then reduced our liquidated damages for this quarter which is a good thing in my mind.

The 450 and 550 continue to be at around 1 to 1. So, we're comfortable in the quarter with where we are with respect to that.

And, your final question was -- remind me.

650.

We're not going to give you breakouts on our large cabin of what constituted the large cabin sales by line.

I don't think that's healthy or helpful.

Because we end up in a giant variance analysis.

But, I will tell you the preponderance of orders in the quarter, about 80% of them, were in the 450, 550 for large cabin.

I hope that helps you.

Yes.

And then, the other part of the question was how did Jet's performance compare to last year's first quarter, the completions business?

How much better was it?

Outstanding.

We were breaking even last quarter and this quarter we made considerable amount of money, so -- for Jet.

I'm very pleased with where they are.

Just to keep it going.

You don't want to quantify considerable anymore?

No.

Okay.

Sorry.

Okay.

Thank you.

David Strauss, UBS.

Good morning.

Phebe, on sequestration, you obviously talked about 2013, not much of an impact, because most is in backlog.

It would look like you've still got about 25% that you have to secure through the course of the year that could be subjected to sequestration, if you could comment on that?

And then, as we think about 2014, any initial thoughts on what we could be looking at in terms of the revenue environment for the defense businesses given sequestration?

Sure.

For '13 I have given you my estimate of the impact from sequestration.

While we haven't had a lot of specificity from our customer, what we've been able to see is we've got a touch softness in Combat.

If you step back, both with respect to IS&T and almost the entirety of our platform businesses, the sales are in backlog.

So, '13 is looking solid.

And, I don't see much of a risk to that at all.

With respect to '14, the President's budget request was good for us in several respects.

All of our ship building programs were well supported.

And, the support for Stryker, the Double V-Hull exchange, over the next five -- or over the five year plan was especially encouraging.

Also, the Army's communication network modernization appears to be budgeted at a higher level than it has in the past.

So, while there is no way to estimate the extent of sequestration, or additional budget cuts, since who knows how that's all going to play out.

But as we stand now, we like what we saw in the President's request.

And, I'll tell you something.

When I think back -- putting my old budgeteer hat on, there are two kinds of programs that tend to be impacted in a down environment, a revenue constrained environment.

Those are troubled programs and developmental programs.

And, with respect to both, we are in very good shape.

Our programs are all green, very, very good, solid performance.

And, that's, frankly, the best antidote to the budgeteer's scalpel.

And, in addition, new starts, we are comfortable where we are in the programs that are moving from development into production.

So, I've got to tell you, I think we're pretty well positioned.

As I said, performance sells.

Your next question, please.

Cai von Rumohr, Cowen and Company.

Yes, thank you very much.

Good performance, Phebe.

Thank you.

So, to get back to the Aerospace margins, I mean pretty clearly you had -- while you didn't give us the numbers, you're going to have had more deliveries in the three G650s you did so you had an adverse mix shift.

I'm just backing through an estimate of the numbers, it looks like profitability would have been better year-over-year on the large biz jets.

Maybe give us a little more color.

Is that -- given presumably you're in the midst of rework there on the G650.

It looks either the 450 and 550 margins improved for the fourth quarter or the G650 was considerably better.

Is that correct?

And, maybe just --.

Yes, let me walk you through some of that.

The 450 and 550 are mature programs but we're continuing to reap the benefits of process improvements.

Our margins will continue to -- they have increased and they'll continue to increase.

With respect to the 650, we're moving down the learning curve in the green manufacturing process which is exactly what we anticipated.

And, the uncertainty, where we don't have great clarity yet, is what is the running rate on margins and completions.

But, with respect to 450, 550, margins were better.

And, the 650, on the green deliveries, we're coming down that learning curve very, very nicely.

And then, we'll stabilize going forward as we work that retrofit imbalance through the completions process.

Thank you.

Peter Arment, Sterne, Agee.

Good morning, Phebe.

I guess my question was very similar to Cai's.

Another way to characterize it is, I guess, when your rework imbalance is completed in the second quarter, should we think that -- and not to get ahead of ourselves on margins, but the mix in the second half of the year should look better than the first?

Is that fair?

We will build through the course of the year, yes.

But, I'm not -- I don't want to get you guys there until we have really worked through this retrofit.

Because there's still risk out there.

We're confident that we've worked through the majority of it, no surprises.

But, until we rebalance green with completions we're just not ready to give you a higher -- or change our guidance.

And, we'll take a look at doing that at the end of the second quarter.

I appreciate that.

If I could just squeeze in one last one just on -- unrelated.

What is left on the share buyback authorization?

9 point something million shares.

Thanks very much, Phebe.

Congratulations.

Thank you.

Bill Loomis, Stifel.

Thank you.

Phebe, just to be clear, the $6.60 to $6.70 guidance you gave which did not have sequestration in January, that that's post sequestration.

And, the impact, which you said, is mostly some portion of Combat, that now that would include sequestration?

Yes, because, as I pointed out, the softness was in -- is in revenue.

But, our margins will expand in Combat and so our earnings will be -- operating earnings are going to be right on mark.

And, on the IS&T side on some of the shorter cycle like services business, you don't see a sequestration impact or any pullback in business on the short cycle services side?

No.

And, in fact, our services businesses is running better than 1 to 1, book to bill.

And, I like how they're positioned.

Let me give you a little bit more color with respect to services.

For the most part we find competition is very, very wholesome.

But, there's a phenomenon that's occurring in the service business that can be fairly troubling to the overall customer satisfaction.

And, that is competition for price.

We were not going to be -- participate in a race to the bottom.

And, in those instances where we don't believe there is sufficient price permitted in a particular bid or contract we're going to walk away.

We've done that on occasion.

But, we're continuing to provide our customer with very good services and products.

And, it's awful hard to do in an abnormally constrained price environment.

In those instances where we can't live up to our promises, we're going to walk away.

And, I think that's appropriate and healthy.

Okay, fine.

Just a quick one on Combat.

You said a portion of combat is going to be impacted by sequestration.

Obviously, not the longer cycle stuff.

Can you just give us a little more detail on what is that portion that might get impacted by sequestration that you're concerned about?

It's going to be in the shorter cycle products.

Some that fluctuate with the demand for the war.

Those tend to be more at risk if the supply is in excess of the demand.

But, as I say, it's not material.

And, does not affect our overall performance and operating earnings.

Great.

Thank you.

Myles Walton, Deutsche Bank.

Thanks.

Good morning.

Good morning.

I was hoping you could give us some color maybe on the sequential pattern of revenue through the course of the rest of the year just so we're on the same page.

I think, your top line is something we've been struggling with for a few quarters now.

Maybe, just to baseline, what the profile, in particular, of Combat is through the course of the year to get to that $7.4 billion?

And then, secondly, Phebe, is it fair to think that you're now comfortable with the portfolio and with what sequestration's impact is so that share repurchase would really get restarted here with more aggressive fashion?

With respect to Combat, we are, as I mentioned in the first quarter, above our revenue plan and our earnings.

And, what we had anticipated performing to throughout the course of the year was a building quarter-over-quarter of revenue.

You may see some lumpiness in margins as we take the rest of our restructuring charges in Europe.

But, we'll see a nice solid build quarter-over-quarter.

With respect to where we find ourselves in the cash and the balance sheet and the risk in the environment, as I said, we had anticipated a very light order for cash.

It came in much stronger but toward the end of the quarter.

Once we were comfortable that the cash was being generated as we were anticipating toward the end of the quarter, then we ventured back into the market but fairly late in the quarter.

Going forward I think you can expect us to participate in share repurchases in a shareholder friendly manner.

Okay, thanks again.

Ron Epstein, BofA Merrill Lynch.

Good morning.

Good morning.

Maybe a bigger strategic question around Gulfstream.

You've gotten a lot of questions so far on that.

When you think about the 450 and 550 line, as you probably know, there's been some noise that there's been some discussion about updating those planes or replacing those planes with something.

How do you think about that?

When's the right time to do it?

If you can give us any color on how you think about that challenge?

As you know, we, several years ago, instituted a fairly disciplined R&D program to refresh and replace our platforms, our airplanes, as we move forward.

We'll continue -- we are continuing that and we will make announcements about any potential new planes when we're ready.

When we know that with great certainty that we can give you clarity around what it is, and more importantly, when it will be available.

And, we're not there yet and I'm not going to speculate.

I don't think that does anybody any good.

Yes, I'm sure.

And then, maybe just one last question.

On the mid-size, this quarter you guys delivered five compared to two last year.

Can you give any description around what Gulfstream is seeing in the mid-size market?

Is there any pick up?

Does it just happen to be timing and a little bumpy and that's why we got more?

What's going on there?

No, I'll tell you, the 280 is generating an awful lot of customer interest.

It's a great airplane that fills that niche.

And, frankly, we've got very robust sales pipeline and we like what we see.

So, I anticipate 280s to grow throughout the year.

Okay, great.

Thank you very much.

Howard Rubel, Jefferies.

Good morning, Phebe.

Good morning, Howard.

You resized the corporate staff, cut it by about 10%.

And, we've seen one or two other business units that have followed suit.

Do you expect most of the other business units to take this mandate and run with it as well?

And, could you elaborate a little bit on what you're doing on the cost side to make the business more affordable?

Both at the corporate headquarters and throughout our businesses, each one of our businesses, we have an obligation to, through continuous improvement and some restructuring internally, to drive costs out.

And, we've done that at the corporate headquarters and fairly significantly.

Many of our business units are already in the process of undertaking efficiencies in their back office functions as well as in their production lines.

But, overhead, going after overhead is critical to margin expansion in the down environment.

So, you can believe, and better believe, that we're going to be very, very focused on taking costs out and we've done it.

And, we'll continue to do it.

Just to follow-up on that.

Does that lead to more business opportunities?

And, maybe you could highlight one or two?

Or does it end up showing up on the bottom line?

Well, I think it's both.

It clearly helps margins, but the extent to which you can bring down your prices you're increasingly competitive.

And, we have done that across every one of our portfolio -- across all of our portfolios in almost all of our lines of business.

So, I see cost cutting and continuous improvement efficiencies as central to our ability to win more business and increase our margins and, frankly, provide a superior product to our customer.

Thank you, very much.

Sue, I think we'll take one more question, please.

Neil Dihora, Morningstar.

Thanks.

I guess my question is more of long term.

I think GD is one of the few companies that has head count reductions over the last five years.

Just wondering if the next three to five years is going to be materially different from that perspective?

Thanks.

We reduce head count in response to the business environment that we're faced with.

So, certainly won't preannounce any restructuring, but you can rest assured that we will tackle our -- all aspects of cost as we go forward.

Thank you, everyone, for joining our call today.

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

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