諾斯洛普·格拉曼 (NOC) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome toll Northrop Grumman Corporation's third quarter conference call.

Gaston Kent, Vice President of investor relations, is the host for today's call.

At this time I will turn the call over to him.

Mr. Kent?

Thank you very much, Nicole, and welcome, ladies and gentlemen, to our conference call.

I hope you've all had time to review the release.

Regarding our decision in the third quarter to sell the Component Technologies businesses, we will provide no commentary nor respond to any questions concerning the timing or terms of such sales.

Other than to say that we expect any transactions to be completed within a year.

Results are now categorized under operations along with those of the two businesses we sold during the quarter.

Today's commentary will be on the continuing operations of Northrop Grumman without consideration for the pending acquisition of T.R.W.

Previous quarters' financial results have been restated to reflect discontinued operations.

We'll be reviewing third quarter results and providing guidance for 2002 and 2003.

Before we start we would like you to understand that some matters discussed in this call will contain forward-looking statements within the meaning of the private securities litigation reform act of 1995.

These statements reflect the company's views with respect to future events and prospective financial performance.

Forward-looking statements involve risks and uncertainties and the actual results of the company may differ materially from the results expressed or implied by the forward-looking statements.

More complete explanation is in the forms 10-k and 10-q among others.

We announced an agreement with T.R.W. whereby we will exchange for each share of their outstanding stock 60% per share of value of Northrop Grumman stock within the established color.

The waiting period has expired and we've agreed with the department of justice to give them proper notice before closing.

We received E.U. approval yesterday.

We have not set a date for the shareholder meeting but continue to expect this acquisition to close in the fourth quarter.

The directors, certain executive officers, and other employees and representatives of Northrop Grumman may be deemed to be participants in the solicitation of proxies for the meetings of shareholders relating to the proposed merger.

Copies of the joint proxy statement and prospectus should be obtained and read.

On the call today are Kent Kresa, our Chairman and CEO;

Ron Sugar; our President and COO; and Dick Waugh, our Chief Financial Officer.

At this time I'd like to turn the call over to Kent.

Thank you, Gaston, and thank you all for joining us today.

I'm sorry that our release for this quarter was so complicated, but there were lots of moving parts to discuss.

Although we had a couple of disappointments, the most important message for the quarter is that sales, margin and earnings growth in our ongoing businesses are on track and very bright.

I'm also pleased that we can confirm 2003 economic earnings guidance relating to our ongoing businesses, and that the company is extremely well-positioned for the future.

For the quarter, sales increased 24% to 4.2 billion dollars.

We booked 4.1 billion in acquisitions versus 2.5 billion last year and closed in the third quarter with a $21.5 billion funded backlog.

Economic earnings increased 54%, totaling $154 million versus 130 million last year on 115 million shares versus 86 million shares last year.

For your comparison purposes, economic earnings with discontinued operations and before contract adjustments, both positive and negative, would have been $203 million or a 69% increase.

That would have been $171 per share.

Third quarter cash from operations was very strong at 459 million and more than 900 million year-to-date.

I want to underscore that this strong cash generation points to the strength and discipline of our operations.

It's tangible evidence that we're successfully integrating last year's acquisitions.

To date, we paid down $400 million in debt, and based on closing the announced sales of two businesses in the fourth quarter, we're raising our 2002 estimate of cash available to pay down debt to more than 500 million.

Our core defense businesses are performing well, posting solid and consistently strong financial results.

Again, we record several this quarter which Ron and Dick will discuss.

However, I want to comment on the charge we took on the F-16 block 60 program.

Obviously, we're never happy to report writeoffs, but strategicly speaking, the technologies encompassed in this program have great potential in application to other programs and platforms.

Incidentally, on wedgetale, the other inning international program in our electronics sector that we've been carrying at 0 margin I'm happy to report we expect to record margin in the fourth quarter.

We continue to actively manage our portfolio to meet 21st century needs of the U.S. military.

A divestiture of C.T. is part of that strategy as were last-month's sales of electron devices that were acquired with litton although excellent, well-managed businesses, these discontinued businesses don't fit our long-range strategic plan on concentrating on mission-enabling electronics.

We believe we're right on target and we will continue to actively assess our portfolio going forward.

Looking towards the future, it's clear that Northrop Grumman has assembled the core capabilities and technologies to compete for the highest priority 21st century national defense and homeland security programs.

Technology is enabling the development of network centric warfare and today's pressing global threats heighten the urgency of executing this revolution in military affairs.

We're in the development phase of key transformational programs, such as f 35, D.D.X., Global Hawks and Deepwater.

I would also put L.P.D.17 in the transformational category with its ability to deliver expeditionary forces rapidly around the forces as well as the C.B.N.X.at Newport news and the Hawkeye 2000 at integrated systems.

Integrated systems is also in development on r-tip which is intended for use on next-generation I.S.R. platforms like M.C.2 A., a potential $2 billion near-term program.

The M.C.2 A.is a 767-based multi-mission command and control aircraft with missions of airborne ground surveillance and cruise missile defense.

This platform is the next generation beyond joint stars.

The successor to the Hawkeye 2000, the advanced Hawkeye with its next-generation radar is currently in development and will provide realtime I.S.R. to an integrated network of land, sea, air and missile defense systems.

On the international front, the NATO ground surveillance initiative that has been under study for several years is on the agenda for decision at the NATO ministerial meeting in practicing next month.

This program similar to an advance joint stars on a different aircraft platform, represents another exciting possibility.

The old three defense appropriations bill has been approved by both houses and is almost 18% above the 02 level.

The longterm prospects for defense look brighter than they have for many years and Northrop Grumman last the talent and technology to compete for and win the transformational programs entering development now and in the future.

We have a foundation of great performing mature programs, production programs, that smooth the transition to the next generation production.

Regarding the T.R.W. acquisition, Gaston mentioned the status of approvals and our agreement with the D.O.J. to provide notice regarding our intent to close the transaction.

Further, we congratulate T.R.W. on their excellent third quarter and key program wins and really look forward to starting the integration process before year-end.

Again, with the exception of the two negative charges, we are pleased with the overall solid results generated by our businesses and excited about the outlook going forward.

As I said at the beginning, we are very upbeat about the future and believe we are well-positioned to continue to create value for our shareholders.

Now I would like to turn the call over to Ron for some further discussion on our quarter.

Ron?

Thanks, Kent.

I'll briefly go over the operational highlights reach of the sectors.

Sales in electronic systems rose nearly 10% to $1.3 .

I also want to point out that electronic systems acquisitions were out standing this quarter, nearly double last year and included a win on the F.-15 radar in Korea, very large international contract for surveillance and communication systems as well as a win on the joint threat emitter and major participation in the S.A.I.C.-led trailblazer team.

Kent mentioned the charge we took on the F-16 block 60, a $1.1 billion fixed price development program that runs through 2007.

You will recall that we have been booking sales on this program at 0 margin.

During the third quarter, we finalized the design of the integrated electronic warfare system portion of the sensor sweet.

This part of the avionic suite advanced microelectronics.

The complexity of the final design and material costs associated with it exceeded our original estimates and required the additional investment we recorded this quarter.

Having finalized the design significantly reduces the risk of executing detailed development and production on the balance of the program.

I'm pleased to report our $338 million wedge tail program for the Australian Air Force is on plan.

It consists of associated electronics and support activity for six aircraft and runs through 2008.

We're currently in the E.M.D.transition and production phase.

We're achieving milestones and expect to begin recording a low margin rate in the fourth quarter.

Moving on to ships, third quarter revenue totaled $1.1 billion versus $528 million last year.

Obviously, reflected in the acquisition of Newport news.

I want to talk a little more about how we arrived at the higher estimate to complete on the polar tankers and where we stand on the program going forward.

A recently-completed review was based on the earn value and scheduling system that was recently replicated in New Orleans.

The new EAC showed that the learning achieved between ships one and two measured in vessel labor hours was not being achieved on ship three, primarily due to high employee turnover.

As a result, our delivery schedule has moved to the right, resulting in $64 million in increased cost to complete and a one-time schedule penalty of $23 million.

The third tanker was launched last quarter.

It is in the water now, and is scheduled for delivery in the summer of '03.

Ships four and five are 50% and 15% complete respectively and are scheduled for delivery in the second and fourth quarters of 2004.

This is not an integration problem.

We have strengthened the senior management team at ships.

They've commenced extensive facilities improvement and upgrades across the board and are implementing lean manufacturing in six sigma initiatives.

They are very focused on improving performance and delivering these polar tankers to the customer as quickly as possible.

Also during the third quarter, we were extremely pleased that we were able to sell the partially-completed commercial cruise ship along with all associated equipment and materials acquired for the program.

The sale also allowed us to mitigate the costs of vendor terminations.

Most vendor terminations have been negotiated at this time, and those that remain are nearly completion.

Based on these events we are able to reverse $69 million of management reserves, established to meet obligations on the closeout of the contract.

Our military ships programs are on track.

We delivered the 17th destroyer three weeks ahead of schedule and the Navy awarded us a $1.9 billion contract for the last four D.D.G.s, bringing the total number of ships in this program to 28 with 11 still to be delivered.

With the D.D.X.and deepwater awards firmly in hand we've begun staffing these programs.

Work on LHD-8 is progressing well.

Lpd 17 ship construction is 45% complete and the 7th and final ship is scheduled for delivery in the first half of 2003.

Newport News successfully completed testing on the number-one catapult on the C.V.N.-76 Ronald Reagan aircraft carrier which is scheduled for delivery in March 2003. 24 was their second catapult test which is a essential part of the overall ship delivery process.

They are on schedule for the several thousand-person crew to move aboard the ship at the end of this month.

An excellent progress is continuing on the Virginia class submarine program.

Information technology sales increased 5% to $1.1 billion.

I.T. had several win this is quarter.

A Northrop Grumman team led the global transportation network for the 21st century win or G.T.N.-21.

This is a contract worth up to $200 million to develop and implement a next-generation replacement for the U.S. transportation command system to track worldwide movement of military cargo and passengers across all services.

Another Northrop Grumman team was awarded the Army's land information warfare activity, or LIWA, contract to provide information operations, technical and management support.

This contract is worth more than $300 million over the next five years.

And we won an important immigration and naturalization service contract for more than $200 million over five years.

Although we have not yet begun to see the growth we'd expected in the reseller business, the strength we're seeing in government information technology and technology services is oversetting this.

Integrated systems had another great quarter.

Sales rose 12% to $807 million, up from $718 million due to increased revenues in the f-35, unmanned vehicles and the f-a, 18 programs.

I.S. delivered the joint star aircraft six weeks ahead of schedule.

It provides integrated commercial off the shelf onboard signal processing capability.

We continued to upgrade the top ten star aircraft to the 20 configuration and the radar technology program is progressing very well with potential use on Global Hawk, M.C.2 a and other platforms.

Also during the quarter we issued into an agreement with the Air Force that will enhance support of the b-2 weapons system by a joint government contractor team.

Year-to-date program performance across integrated systems sector continues to be outstanding with early deliveries in several programs.

Component technologies is now being reported as discontinued operations.

Sales for the third quarter were $130 million versus $142 million last time, and continue to be adversely affected by conditions in the telecommunications market.

Again, I want to stress that our nontelecommunications businesses are doing well and are generating healthy operating margin.

As we said last quarter, our strategy during this downturn has expanded our global reach to places like China, eastern Europe, maintain our investments in technology and aggressively reduce infrastructure.

We are a confident all these actions will leave these businesses very well positioned going forward.

So in summary with the exception of polar tanker and f-16, we're very pleased with program performance across the entire corporation.

Our defense operations continue to turn in excellent results.

I'll now turn it over to Dick Waugh.

Dick?

Thank you, Ron, and good morning.

I'll spend a little time this morning discussing the contract adjustments recorded this quarter, sector operating margins, below the margin line items, cash fully, our expectations for 2002 and 2003, as well as pension issues.

In my discussion of the sectors, my remarks will be as adjusted for FAS-142.

Overall segment operating margin for the quarter was $311 versus $239 million, up 30%.

Segment margin rate for the quarter was 7.4% versus 7% last year.

Overall, before contract adjustments recorded this quarter the segment margin rate was 8.9% versus 8.5% last year.

Before the charge on the f-16 block 60 contract, electronics systems margin was 140 million or 10.8% versus 119 million million or 10% last year.

So exclusive of the U.A.E. program the sector did have impressive margin expansion.

Kent and Ron spoke about wedgetail, and all I would add is that the margin recognition expected in the fourth quarter will be conservative but significant as it signals our confidence that we'll be performing within the price terms of the contract.

For the year, we'd expect a margin rate for E.S. to come in around 8.2%, including the block 60 charge or 9.4% excluding it.

Sales remain on track to come in at around 5.4 billion.

And we are confirming our previous 2003 targets of double-digit sales growth with a margin rate between 9.5 and 10%.

Shifts margin for the quarter was 64 million or 5.8% excluding adjustments on the polar tankers and cruise ships, margin would have been different.

Because of the charge for polar tankers we expect the margin rate for the year to be between 7.5 and 8%.

And we are now targeting a margin rate of 8-8.5% for 2003 driven mainly by mixed changes cue to the deepwater and other programs, and cancellation of the C.B.N.-77 advanced warfare system mitigated somewhat by an enhanced overall performance.

On the sales side, we tend to target double-digit growth.

Our team margin was 89 million, which included the benefit of restructuring a technology services contract, including the charge are to the California contract in the second quarter and this quarter's upward adjustment.

We expect to end the year between 5.5 and 6% with sales of approximately 4.2 billion.

For 2003, we are still targeting 10% sales growth with margin rates approaching 6%.

Integrated system margin was 83 million versus 82 million or 10.3% versus 11.4%. 2001 included a $20 million positive adjustment on joint stars and downward adjustment on unmanned vehicles.

This quarter reflects continued excellent program performance allowing us to capture incentives and award fees.

Margin rate for the year should approach 10%.

We will probably beat the higher end of the 3-3.2 billion range we set for revenue at the beginning of the year.

Looking ahead to next year, we are still targeting double-digit sales growth due to the ramp up on F-35 and unmanned vehicles with margin rate declining accordingly to between 8 and 8.5% due to mix.

I also want to comment on component technologies.

As we've been saying over the last few quarters, we are aggressively managing costs in these businesses.

Though reported in discontinued operations, we've posted a small profit this quarter, which is outstanding in this business environment, and would expect a similar performance in the fourth quarter.

As you all know, 142 calls for an imparity-only approach to good will.

Last quarter we completed the first step of the initial test for potential impairment of the goodwill.

We -- that we had recorded as of January 1, 2002.

As we reported last quarter, these initial results indicated a potential impairment for the reporting units in the component technology segment.

During the third quarter, we completed the goodwill impairment measurement in component technologies and as a result recorded a noncash charge of $432 million, due primarily to the weak telecommunication and computing markets.

These businesses are now discontinued operations, and in accordance with GAAP, this quarter we recognize the $208 million potential after-tax loss on disposal of some of these businesses.

This also could be partially offset by future gains recorded on the sales of other businesses.

Any such gains would be recognized at the time of sale.

Although these businesses don't support Northrop Grumman's long-term strategy, I want to emphasize that they are well-managed and well-positioned businesses.

The company as a whole, we expect 2002 total sector margin for the year to be in the high 7% range due to this quarter's contract adjustments or more than 8% without those items.

And we are now targeting the mid 8% range for the next year on strong sales growth.

Looking at the items below sector margin, corporate expense was 21 million in line to reach 70 million for the year.

Pension income was $23 million with expected income of $90 million for the year.

Other income was a negative $9 million and reflects legal fees related to the Honeywell settlement which were offset by royalties of $2 million.

Net interest expense was 106 million down from last year, and in line with our projection of 425 million for the year.

The affected tax rate for the quarter for both economic and gap earnings was approximately 29%, and the effective rate for both in 2002 is expected to be 31%.

Cash from operations was well above the plan at $459 million dollars, bringing year-to-date cash from operations to $932 million which includes the $220 million payment from Honeywell.

To date we've reduced net debt by 400 million, significantly above our estimate of 100-200 million for the year.

We ended the third quarter with 36% net debt to total capital.

Based on what we see for the fourth quarter, including proceeds from the sale of businesses, the total debt reduction for the year should be more than 500 million.

Capital expenditures, including capitalized software costs, were 73 million in the third quarter and 209 million year to date.

For the year, capital expenditures should be approximately 500 million, including 30 million for capitalized software costs.

Obviously, we're running a little under that pace for the first nine months, but we expect to reach that 500 million dollar number.

Revenues for the year, considering discontinued operations, should fall between 16.5-17 billion, and we're reducing our economic earnings guidance to $6.10 to 6.20 per share to reflect the charges and upward adjustments.

To get back to our previous guidance for this year, take $6.10 per share, add 36 cents for the net effect of the contract adjustments, and add 15 cents per share for discontinued operations that.

Gets you to $6.61 per share.

Our previous guidance was the low end of 6.60-7.10 range.

The corresponding GAAP numbers would be in the 5.65 to 5.75 range.

We're targeting revenue growth to 19 billion for 2003 per share from 7.60 to $8.10.

Again, walking you to our previous guidance, take that $7.60 per share and add 58 cents for discontinued operations.

This gets you to $18.18 per share.

Our previous guidance was 8.15-8.65.

As you can see, the only change we have made to our guidance is to adjust for discontinued operations.

If anything, we increased the bottom of our range by 3 cents.

Due to the uncertainty of pension asset return for 2002 and potential changes to assumptions the company cannot provide an estimate for 2003 pension income or expense and therefore, cannot provide reliable 2003 gap guidance at this time.

As I said before, we don't know what our 2003 pension income or expense will be until we mark the market to plan assets during the year and make changes, if any, to existing assumptions.

Based on current pension assets and assumptions, each 1% variance from our assumed asset return for year-end 2002 will affect our 2003 noncash pension income or expense by $21 million.

Our overall return through September for all of our plans is a negative 11.6%, which is 4.6 better than our benchmarks.

As you know, the equity market has experienced a significant rebound since that point in time.

Furthermore, a 50 basis point variation from the current assumptions notice expected long-term return on assets will change 2003 pension income or expense by approximately $60 million.

A 25 basis point variation in the discount rate used to value plan liabilities will change 2003 pension income or expense by approximately $30 million.

Please note, and I want to emphasize, contributions to the plans, that is cash contributions to the plans in 2003 are not expected to vary materially from 2002, regardless of this year's actual return or plan assets or changes, if any, in actual assumptions for calculating pension expense or income for 2003.

Additionally, almost all of any increases in 2004 cash contributions would be captured in the pricing of future contracts as the operations affected did not have a large backlog of fixed-price contracts.

Now turning to the balance sheet.

If on a plan-by-plan basis the value pension assets is less than its accumulated pension benefit obligation at year-end, we will be required to recognize a noncash reduction to retained earnings of 1.2 billion dollars.

Alternatively, we could make a cash contribution to maintain pension assets in excess of the accumulated benefit obligation but such contribution would not be an allowable cost in the current period on our government contracts, nor would it be currently deductible for tax purposes.

More importantly, however, the adjustment to shareholders equity will have no impact on our income statement, cash flow, or bank covenants.

Therefore, we don't believe a cash contribution would be a good use of company's cash resources, simply to avoid this accounting phenomenon.

And please note that this is an all-or-nothing adjustment, and if we are required to make the adjustment for this year, and the plan assets exceed the accumulated benefit obligation at the end of 2003, we would reverse in full this adjustment on December 31 of 2003.

In 2003 we are assuming amortization of purchase and tangibles of about 165 million and an effective tax rate of 29%.

As we said, next year will be a transition cash year because of purchase accounting, new business requiring working capital, and the B.2 payment. 2004 and beyond should be strong cash years as earnings increase and purchase accounting adjustments end.

Now, I think Kent has some closing comments before we begin our Q&A.

Kent?

Thank you very much, Dick.

We apologize for this sounding like drinking from a fire hose.

There's an awful lot that happened in this quarter, as I said before, but I hope from all of our comments, it comes through clearly that the outlook for sales margin and earnings growth are really on track, and really very bright.

We're actively managing our portfolio of businesses for the benefit of our shareholders, and I believe that this company is very well positioned for the future.

Okay.

Thank you.

Gaston, I'll turn it over to you.

Nicole, we're ready.

Thank you.

Ladies and gentlemen, if you wish to ask a question, please press star 1 on your touch tone telephone.

If your question has been answered or you wish to withdraw your question, please press star 2.

Questions will be taken in the order they are received.

Please press star 1 to begin.

Our first question is from Sam Pearlstein of Wachovia.

Your question, please?

Thank you.

In terms of the wedgetail being profitable in the fourth quarter, is that a change in your assumption?

I guess I'm trying to figure out there would have been an offset as to why that wouldn't help your earnings for the remainder of the year.

Well, again, as I said, the amount of margin we're going to be booking is going to be small.

This is Dick.

So it's not going to move our assumptions.

Let me say, it was sort of in our assumption.

We believe that this program would be operating positively, and we had an important milestone which was to take some of this hardware into test, which has occurred, and therefore, we are able to be able to go forward.

But we've been -- we've been confident on this program all along and it is included in our views.

Dick, in terms of pension, I guess the one assumption we didn't talk about is has your experience in terms of wage rates been in line with your assumption?

Do you envision the ability to potentially change that as maybe an offset at all?

Sam, let me say I really haven't focused on that that much, but I don't know what much has happened over the year that would change that assumption going into next year.

Okay.

And then in terms of the backlog in ships, what I guess changed when it came to the ship swap?

I mean, I would think you would have d-booked some of the destroyers and added in the LPDs.

Can you talking about the moving pieces there?

Well, Sam, we actually did that.

Quite frankly, you'll have to deal with Gaston on what that mix is, but we did d book and we did book the swap.

So it is in there?

Also, this is Ron.

Let me just say that the near-year impact is not as significant in the next few years beyond '03.

There will be a swap-out.

That's where most of the change of work occurs in the following years.

Yeah.

In terms of acquisitions on the LPDs going forward.

I might point out, it's a net plus.

A net plus, meaning that the margin in general should be higher going into '03 than it would have been before?

No.

I thought we were talking about backlog.

I know for backlog it is because you'd have more content than for the destroyer.

Exactly.

Let me say, we don't talk about particular program margin rates.

All we can say is what I gave in you terms of guidance for ships for next year.

That swap has been in our plan for sometime, Sam.

It was there when we talked back in February.

Okay.

Thank you very much.

Our next question comes from Ky VanRomer.

Your question, please?

You've had two adjustments on polar tank and the F-16.

Do you have any programs that are kind of coded yellow or that we should feel concerned about, and why do you feel as confident as you do on wedgetail giving Boeing took a $100 million charge yesterday on their 737 A.E.W.?

Let me take a first cut at that, Ky.

Obviously, these are the programs that we have the most concern about.

That's why we've made the provisions.

We have thousands of contracts, and we watch all these things carefully.

At this point in time, we don't see anything else significant.

Otherwise we would have told you about it.

With respect to wedgetail, our contract structure, the way our cost is bid, the kind of technical challenges we have, we understand those.

I can't really address what Boeing's overall contractual position is.

We know where we stand, and we're increasingly comfortable with what we have.

Okay.

Getting back to the two you did take a right off on polar tanker.

When does the second shift deliver, and the F-16, what are the other milestones we should look for to feel come comfortable that, in fact, you've really taken the last writeoff on that one.

First of all on the polar tanker, the second ship has delivered.

The first two ships have delivered and by the way, they are fabulous ships.

They are working extremely well.

The customer is delighted with them.

The third ship we're talking about delivering next year.

I'm hoping somebody has the note.

First quarter, I think.

First quarter, so that ship is very well along.

It's been launched into the water.

It's in the final stages of work and preparation, and then we have two more to send out in '04, I think, in the second and fourth quarters respectively, and the fourth ship is about half done now.

So we are on the downhill slide on this thing here.

We, frankly, had hoped to see learning ship to ship, which might have been more traditional in the past, but we've had some difficulties in attracting and retaining skilled craftsmen in the large numbers we need in that yard, and as we go forward, we basically adjusted our assumptions in order to reflect more conservatively the realness of the situation.

In parallel, we're making an aggressive move to recruit and set up apprenticeship and training programs so that over the next year we'll be able to make sure this is not a problem going forward relative to the current assumptions.

L.P.D. is essentially predominantly an AvonDale situation.

Should we be concerned about turnover on that and what is the -- kind what have has happened to your turnover rate?

Can you give us some...

Let me just say that actually LPD is going to be jointly produced between the two yards.

The units, the large blocks, and the assemblies that are done are being done in both yards.

Actually in three yards, including our gulf port yard.

So there is a division of work there.

The content of steelwork on a polar tanker is enormous. ates huge ship.

The LPD content is the not as large.

The LPD-19 which is the first of the swap ships will be erected at Inningals.

So we have a split of work and frankly at that point in time we're well on the downslope of the labor demands.

Right now what we have going on, Ky, is the last ship to get out and we're basically over the hump now in terms of production levels on the tankers.

So as the LPD production for 18 and 19 come in we don't foresee a problem.

Ky, let me observe our LPD contract is currently a cost-type contract.

Yes.

Last question.

Then I'll let someone else jump in. 29% tax rate is a little lower than I think we've been thinking for next year.

Is that going to be a sustainable rate?

Sustainable rate to what, in future years?

Excuse me? 29% tax rate.

I think you mentioned for '03.

Right.

Is that a sustainable tax rate or should we expect closer to the statutory rate in years after '04?

I would say it would trend-up, Ky.

Thanks.

Our next question comes from George Shapiro of Salomon Smith Barney.

Your question, please?

Yeah.

I just wanted to pursue a little further on the polar tanker.

What learning curve were you assuming before the charge and now what learning curve are you assuming you'll experience for the rest of 4 and 5?

George, I don't have those numbers with me and of course, it's a set of numbers on ship to ship.

But I will tell you in general that what we have now are a conservative set of learning assumptions for the last two ships.

We're basically done with the third one for all practical purposes going forward.

We can get you those off line.

I don't have them at my fingertips, George.

Okay.

And then, Dick, with the electronics system margin as high as it was in the quarter, is there anything unique since the expectation is it will be a little bit lower?

No.

It's actually up fairly much across the board, George.

Okay.

And then, the guidance you gave for next year excludes T.R.W.

Would you make any change to the guidance that you've previously given with T.R.W., given it looked like they had a pretty strong space in defense quarter yesterday?

Well, George, I don't want to be in a position of revealing a number.

We're not ready to do so.

Obviously, things have been moving with T.R.W. that we don't fully understand.

I would just say that on our side, obviously, you've got to take C.T. out of the equation going forward.

On a combined basis, I'm hesitant to do so.

Okay.

And then just -- do you care to provide any color on what might be going on in a potential transaction for the automotive business at T.R.W.?

No.

We really don't want to comment on that at this time other than to say that, you know, we do not -- we hope not -- we will not be operating that.

We're going to separate that business, and therefore, we're working real hard at it, period.

Okay.

Thanks.

Our next question comes from Joseph Nadle of J.P. Morgan.

One more comment.

I can observe T.R.W. had an excellent quarter and had some great program wins.

Okay.

Go ahead.

It's Joe.

Hi, Joe.

Hi.

My first question is on the F-16.

I think this is actually asked before but I just want to drill down on milestones on the F-16 radar.

The press release mentions that I think you'd gotten somewhere during the third quarter but what should we look for in future quarters to make sure this is the last charge.

Let's see, Joe.

This is Ron.

Let me tell you where we are.

First of all, the program has a number of parts to it, and the part that we drilled down on is the one part in the program that's been giving us some difficulty and that's the electronic warfare piece of it, also known as falcon edge.

What we've done on that program, we're a couple years into the program and we have firmed up the design.

We have completed CDR-1 which is the critical design review and the design we proposed has now been accepted by the customer.

So you typically will see a significant amount of variation until you get that CDR locked down.

We are in the process of the brass board stage.

We'll be building the hardware next year so over the next year or so we'll see hardware coming out.

We have about 65% of this program is purchased, materials and purchase orders.

We basically negotiated or pretty close to finished negotiating them in almost all of their firm fixed price with our suppliers.

We think that with the charge that we've taken, we've made adequate provisions for the normal development issues we would expect over the next couple years as we finalize the design, but over the next year or so we'll be seeing hardware coming out.

So is it fair to say, then, that the cost overrun was on the design portion which has now been completed?

No.

The cost overrun was actually not so much on the design portion, Joe, but the design matured and it was reflected into what we thought the next several years -- the remainder of the program's hardware production costs would be.

Okay.

Those represent to date our best cumulative guess of the entire program from here to the completion of the program in '07 and as I said, it's based upon now the fact we have finalized the design.

We have negotiated basically almost all the material on a fixed-price basis.

So we now know pretty much where we stand.

You never know about these things.

Programs are tough.

That's why we're in the advanced technology business but what we have here is a charge that reflects the program going forward as we know it.

I might also point out that all the C.D.R.s now are completed, so we've got this -- we've got a solid design here, and as Ron said, we now understand the material bill.

On the radar portion of the program, is everything on track there?

Yeah.

It's going great.

It's a fabulous radar advanced fire control.

One thing I should mention, Kent touched on it but the technologies that we're putting to baron this program which is actually for a foreign customer, the U.A.E., are going to have significant impact and benefit for us on a number of our mainstream U.S. defense programs, not only the electronic warfare sweep we're working on here with this new unplanned investment but it is an investment nonetheless, but also the technologies in the fire control radar are absolutely state of the art.

Okay.

And then just switching gears for a moment to cash flow, I guess first of all starting with '02 you raised your guidance 3-400 million for cash to pay down debt.

I was wondering, Dick, if you could walk us through manager the reasons for the change in the guidance, how much of an impact are the divestitures for l 3 and on from there.?

Let me say, we've not stated what the price was for the L.-3 and significances and therefore, we're not at liberty do that.

All I can say is the only sales businesses that are contemplated to close by this year, although others might, are those two divestitures, and those are in the year-end forecast at this point.

That's included in our 500.

I would just say on balance, the others, clearly with regards to the A.M.C.V. cruise ship, reversal of $69 million associated with that program, that was all cash.

It was expected to be either paid out or -- to the vendors by the end of this year or, if you will, the proceeds we got from the ship itself was not previously expected.

So that is a significant piece of the cash.

Okay.

And I would say the balance is, obviously, we've done a little better in our performance on our programs and we're clicking off miles stones for purposes of payments.

Our cash generation is excellent because much what we're achieving on our programs in terms of deliveries.

Okay.

And then looking into '03 and '04, you had given a previous number for '03.

There's no pull-forward, and would you say that your previous guidance is intact?

Well, I didn't speak to it because we haven't gone through our year-end formal detailed planning analysis at this point.

And normally we give that forecast when we release our year-end earnings and I would feel much more comfortable doing it at that point in time.

Okay.

Okay.

One more small one.

On the other income line, you machines that had there were Honeywell settlement legal fees in there.

Is it fair to expect that to revert back to the 10-15 million plus range in future quarters?

Yeah.

That's a one-time.

So it's like a $25 million hit?

Pardon?

It was a 20 or $25 million hit.

No.

That was it.

Right but you had been positive in previous quarters to the tune of $10 million, $12 million in Q1, 13 million in Q2 owe the swing was over 20 million dollars.

I'm sorry.

That cost will not be in our next quarter and you should expect to see next quarter more or less what the first two looked like.

Okay.

Thank you.

You're welcome.

Our next question is from Byron Call of Merrill Lynch.

Good morning, gentlemen.

Good morning.

a Broader philosophical question, you guys have stepped back and looked at any need to review how you plan so maybe some of these contingencies that are going to be a natural part of the business are actually baked in the forecast?

You are developing complex products.

You know, these things are going to happen from time to time, but I just wonder if that's something that's crossed your consideration here.

Byron, we do take this into account.

We do plan and we could track these things very clearly.

We have, as Ron mentioned, you know, we are managing high-technology programs, but we have appropriate reserves.

We look at this thing in a virtually real-time basis, so we don't foresee, you know, this is something that would occur in any other way.

But we have a, he will earn value measurement system so we have good visibility here.

I think these two particular things that came up are very clear and I think the important thing is that we now, unfortunately, there was no earned value measurement system in in the early days in AvonDale.

One of the this innings we did when we acquired the company was to dramatically put the two yards together as we remember.

We finally got that whole process together and this is our first bottom's-up review.

We think we're going to have this under control a lot better in the future so we feel comfortable going forward, but let me say, you know, we're managing high-tech stuff and sometimes it's a limb better and sometimes a little worse.

Okay.

Byron, let me -- just because it is long-term contract accounting that we're doing, if we in our planning think there's an also on our contract, we have to take it as a cumulative just like we did here.

We can't put it into the books on an amortized basis, if you will.

Yeah.

That's the nature of our accounting.

Okay.

We can't reduce the margin on a continuing basis but take the whole shot now.

If we think we're going to make more money we take it, I guess, as we go forward.

Right.

So it's a little unsymmetric just to add on something Kent says, the company has a disciplined program bidding and risk management process.

We bid thousands and thousands of programs and I think almost most of the time we get it right.

A couple of times we don't.

These are very painful.

They are extraordinarily focused issues within our company.

Management is heavily involved in these things.

We don't like these things any more than you do.

Okay.

Just two more things.

First, ship systems, the organic growth year-over-year in the latest quarter, was that basically flat or what?

Newport news came in, about go ahead, your comment on that.

Was there any growth on that business?

It was basically flat.

The new business kicks in next year.

Okay.

You guys gave us funded backlog.

I think in the past you may have given us unfunded backlog?

No, no.

That's not our accounting practice.

Okay.

Good.

Good.

Okay.

Then lastly, just to kind of square away, does look like, you know -- well, capital expenditures is also a minor contributing factor to this.

It looks like a little bit better cash flow expectation.

Is there anything that's kind of changed looking at just the core Northrop Grumman businesses capital expenditure-wise for 2003?

Or does, you know, a slightly letter number for 2 ln 2 imply there will be a letter number for 2 in 3?

Well, Byron on, I think I gave you in my prepared comments 500 million for next year.

I had 540 from the July 17th conference call.

That may have been my error.

That sound like it was coming in lower than planned.

Just round off.

Yeah.

I'm not sure it was it was just round off.

We said 540 before and 500 this time.

As Ron said, it's sort of rounding and it hasn't been spent.

It's an estimate of how much can be spent by year-end.

Byron, the Cap Ex came down a little bit and that's mainly associated with their expectation which is less for next year.

The other way of asking this, how much of this would have been related to the --

I'm sorry.

People are pointing me.

That's associated with this year.

That's why it's down.

Okay.

Lastly looking at electronic systems, maybe the question was asked earlier.

I'll throw it out a different way.

Can you give us kind of any risk milestones that you have on things like -- well, joint strike fighter, you know.

There's preliminary design review on that, mid 2003.

You get critical design review in 2004.

Can you give us anything to watch on that program since that, I assume, is as complicated if not more so than F-16?

Let me point out we're in the cost plus environment on those programs.

Great.

Okay.

And the answer is we can get you the milestones going forward.

We're off to a great start both on the electronics side and also the integrated systems side, but they are cost plus programs.

Okay.

I would say the major milestone on those kind of programs is watch the funding.

Yeah.

Okay.

The appropriations in Congress because we'll get our proportion of it which is probably 20% prior to T.R.W., and more with T.R.W..

Okay.

Let me turn the call over to someone else.

Thanks.

Thanks, Byron.

Our next question comes from Chris McCarey of deutsche Bank.

Your question, please.

With regard to the 58 cent elimination from component technologies, it would seem --

Byron, would you shut your phone down, please?

He was on with me.

With regard to that 58 cent it implies $95 million from e-bit from component tech which would be about a 17% margin.

Am I on track there?

It's component tech and the other two businesses.

And the -- oh, the 58 cents included the divest at this divestures of the other two as well.

Yes.

Can you remind us more or less what the sales look like there in total?

I'm sorry.

What did you say?

What were the sales.

Roughly 150 million, give our take for those two.

Okay.

Fine.

Chris, could you say your question again?

I'm sorry.

I was just referencing the reduction from '03 from the divestitures and it looked like component tech had a large contribution I wasn't aware of.

Let me say it does, and that is the -- most of the 58 cents is with regard to C.T.

Well --

Again, you know, you can guess as to what the turn-around is going to be and what that's going to bring in for a given year, and as you know, there's very high leverage in the margin in the commercial business, depending on your volume.

And again, don't forget that's prior to amortization because we're using economic earnings.

The backup, the amortization associated with C.T. when you're doing that analysis.

Okay.

Fine.

The other thing I note is with a 29% tax rate, you pick up about a $50 million income contribution versus our old models, at least on a GAAP basis.

Is there some offset to that if you maintain guidance with note change otherwise?

I mean, where do we take it out of the model?

Your model.

You know where the tax rate assumption was going into the quarter and you're taking that down by 4%, I believe on a gap basis which picks you up 50 million bucks.

Am I wrong there?

Yes.

Chris, hang on just a second.

Chris.

Yeah.

Are you -- okay.

We took a quick look here.

You know, it's a little bit everywhere but it's primarily in ships and we told you we were bringing that down.

So I guess 8, 8.5 would compare?

I don't have it in front of me but were you 8.5 or 9% or something?

Yeah.

We were a little higher.

That's mostly mixed because they won both D.D.X.and D-Porter which are cost reimbursable contracts.

So profit on R.&D. work bringing down the mix.

It's cost type r&d.

That's helpful.

Thanks.

You're welcome.

Our next question comes from Steve Binder.

The guidance for sales was it $19 billion?

Is that correct, excluding, and obviously for ongoing businesses?

Yes.

As a round number, yes.

Because it was kind of 20, 20.5 billion range so you're taking out roughly a billion dollars of sales.

Just wondering when you look at that outlook for '03 kind of what's changed, you know.

Believe me, it's very very subtle but I'm just saying it seems like a little bit -- you've gone to the low end of the range where you were at before.

Well, again, we've got C.T. and we've those two electronic businesses that we sold.

I know.

I'm saying you're at 20 to 20.5 billion, and C.T. plus those two businesses are less than a billion in sales.

Well, it's about a billion.

Let me say, these are rough approximations, so I wouldn't get all caught up with the -- we don't really see sales that different going forward than what we previously had.

Because you know, if you look at...

Except for these two -- for these sales.

Just trying to get at like if you look at electronic systems in isolation your previous guidance was 5.5 to 5.7 billion for '02, correct and if you take out the two businesses your sales is 140 million you're now at 5.4 so you're at the low end of the range.

I'm just wondering with respect to program funding, scheduling issues, you know, just take E.E.S., you know, by itself, is there anything slippage in funding on any individual contracts that might be causing the revenues to kind of come into the low end of your range this year and next year?

Steve, there hasn't really been any kind of significant change.

It can be rounding with each of the sectors and how you add the rounding up.

There's just not anything dramatic different.

Nothing.

Mm-hmm.

Okay.

And the other thing, Dick, is you know, obviously the issue for '02, '03 230r funding but when you move into '04 where you'll have funding, correct, and you'll have some coffee in '04, from positioning standpoint, how are you going to position this with respect to economic earnings and the economic earnings outlook?

Are we going to change the definition again or how do you view that?

I would sure like to know what your advice is on that.

Again, I don't have a point of view.

Maybe if the market comes rushing back we won't have to worry about that question, but again, I don't know.

I know that if the one conference I mentioned we may choose to back off that but I know a number of people said well, that's not what we'd like to do because we think it's a better measure.

I don't really have an answer to that except to really recognize that our pension cost for F.A.S.B.Y. has nothing do with our cash contribution and/or the impact on the underlying economics of the business if you're pricing all your cash contribution into your contract.

So I guess I need a better answer to that but maybe I'll have a better answer at the end of this year.

The other thing I'll mention is we're going to fin to give you both numbers and you know, continue to give you numbers and make your own decisions.

We're going to be as open as we possibly can with all the data.

At this time we had a problem because of the pension stuff to be able to talk about what '03 will be, which makes it tough to do a projection, but that's why economic earnings is such a nicer way to do things.

But we're going to give you everything we got.

All right.

Maybe Kent, you can talk on the extension in the review process.

Can you maybe talk in broad terms on what you see as some of the issues?

I mean, the fact that the government needs more time?

Oh, this T.R.W.?

Yeah.

Well, I can't speak to the government process.

I believe hopefully we're coming to a conclusion here soon.

We're still positive, believing that we can close in this quarter.

But you know, this is their process, and, you know, I don't want to get out in front of their process.

And since we're on -- just what's your view on the '04 budget, the way you see things, you know, developing with respect to the funding and the amortization accounts?

Going forward is a little hard to say yet, Steve because the process has just started.

The '03 we did very well relative to the conference committee and there may even be a supplemental or something mid year.

We're, obviously, working hard.

There's going to be some hard decisions made for '04.

The good news is that I think the balance of our portfolio or bulk of our portfolio is in the programs that we know are franchise programs the country has to have.

It's a little early yet to say what's happening overall with the top line or even how the programs are going to be divided.

Maybe Kent has a different view or another view?

I think you just said it.

Into thanks very much.

Our next question is from Joseph Campbell of Lehman Brothers.

Your question, please?

Good morning.

Good morning.

It seems like there's been a lot of discussion about, you know, whether or not we can put the fixed price development of the charge on change in the estimate to complete the U.A.E. program and then with some sort of generic questions about what else is out there.

Maybe just -- you said it was a 1.1 billion dollar fixed price development program.

Is it -- is that to both due to the design and some building of hardware or is that just the design effort?

That's total.

That's the whole program, Joe, including the production of all the quantities.

So if we were to sort of divide it up into the part that you think is to do the design and the part to do the -- where are we along the design process, and how far through it are we, and how much of the billion one is sort of still to go?

I don't have the current cost to go on it, but we're through the critical design review.

What does that mean roughly in terms of -- I mean, does that mean we're two or three hundred million dollars through this or are we $500 million through this?

Probably the former.

More like the former but I can't give you a specific number.

I just don't have it at the tip of my numbers, Joe.

I think, you know, there's been a kind of pattern, I mean, that sort of every now and then these things pop up and it's an issue for everybody, but it seems that you have so much growth, and you've won so many wonderful programs and now one on T.R.W., that I think you've got everybody's enthusiasm for all the exciting programs.

The flip-side seems to be now we've seen one of these new development programs kind of give us a little bit of a start, and I think it would be really helpful if we could maybe just take -- see if we could put some more meat around why it is that you're comfortable.

And then Ky asked the question about yellow programs.

We said if we knew any that were red we'd tell you.

Maybe the answer is you don't really have that many transitioning fixed price.

You point out that the f-35 was cost plus and you've given us some assurances that you're feeling good about wedgetail because you're going to, you know, record some profits.

You also mentioned, for example, back to the U.A.E. program that the radar part as opposed to falcon edge was in really great shape.

So again, anymore color on these things would really nut to rest, would be really helpful.

Joe, let me provide some thoughts here.

Clearly, nobody likes fixed-priced development programs and as a practice for this company, we don't knowingly take on risky fixed price development contracts.

I can tell you this is one that got through the screen because there were some questions in terms of some of the underlying physics what have we actually proposed two or three years ago.

Most of the programs we have coming in are cost plus during the critical development phases, and the -- I can't speak in detail to the wins at T.R.W. but I believe those are cost plus programs also.

Let me just reemphasize that, that the majority are clearly cost plus.

Both of the two critical ones that we tell you up front when we bid, we have one and we're bidding 0 margin, it's because we really want to understand where we are in the program.

If they are a fixed price development.

We only take them if they are absolutely critical to the future.

The F-16 block 60 is clearly one of those, as was wedge tail.

To win wedgetail and move out in that business was clearly very important.

The good news on wedgetail I think as we're telling you, that, you know, we've got this thing we feel very comfortable about it.

I think we feel comfortable with the F-16, U.A.E. where we are with this charge.

So as a policy, you know, we just don't take high-risk things.

Every now and then we have this one.

We had a little bit of a problem with it, but this is, you know, hopefully an anomaly.

We've been working.

We worked this real hard, Joe.

And Joe, we tried, as Kent was saying, we've tried to give you the visibility all along.

Well, you certainly have ranked this issue and it shouldn't surprise us understanding the strategic importance of it.

Right.

To find that it goes a little over.

It's -- what about the -- your own funded efforts on U.A.V.s?

Are there any issues here where you might have to go over the budget and where it would not show up as an overrun but simply a bit more of your expensed R.&d?

How are they going.

I think pretty well.

Do you want to comment, Ron?

Let me just say certainly the big play here is global hawk and global hawk is now into the initial production ramp up and that's several hundred million dollars.

That's the dominant play in our business and that's again a cost plus as we move into and we'll go into cost sharing and then ultimately in production runs to fixed price.

We have development, under development a helicopter which we have in previous times indicated some investment that we've decided to make.

We're in flight tests now.

We're pretty much ending that phase.

Program.

We don't see anything forward on that program.

So in general, we don't see anything in the realm of what we talked about on falcon edge.

We have pegasus to go but we think that's pretty straightforward and we feel comfortable about that one.

Joe, I don't see any big things here.

Terrific.

Just one last thing.

Joe, one other comment.

Whether we spend our R.&d there or somewhere else it's all fungible.

It's a question of whether we have the appropriate budgets for the tote amount we're spending and I believe we do.

Terrific.

I mean because I think you're real knee great shape if people can get comfortable with these guidance numbers if they are going to make it through the various technologies, and one way we'd all be safe is just if we understood that there were mostly cost type as opposed to mostly having to guess that, half confidence that the big numbers Newt future are known well.

Let me say, we always advise when we have -- you know, the two programs that we identified as being fixed price development has been F-16 and wedgetail and we've been talking about that.

Again, we have a policy if you look at our annual report, our accounting policy -- not our accounting policy, our operational policy is not to accept high-risk fixed price development contracts.

Traditionally any kind of high risk project is done under a cost type contract.

Occasionally that's under a fixed price and more times than not we'll turn those down.

But as both Ron and Kent said, one of them kind of got through the wickets.

These were absolutely strategic for the future.

They were essential.

As you recall, now wedgetail looks like, you know, it's obviously the way the world is going for the future but that was not the case when we started this thing.

These are strategic -- very strategic programs.

The U.A.E., a very strategic win with a whole bunch of technology that made all kinds of sense for the future, so I mean, I'm not -- you know, as I said, yeah, we are not happy to have to do this but these are bounded, and we don't have a lot of them, and you know, we're in control here.

Terrific.

Lastly, on the ship programs at Newport news, I know you have the Ronald Reagan whose delivered delivery is coming up then we've got some refuelings in between and then hopefully another, I guess, yet-unnamed C.V.N. added a couple of years ago.

What's the phasing of Newport news and what's got to happen in the budgets to keep Newport news from having any sort of gaps or holes in the revenue profile between ships?

Let me take a first cut at that.

You're right.

Reagan is moving toward the delivery here in the spring.

C.V.N.77 yet unnamed is the follow-on ship and we're in full swing on that.

We have a couple of refuelings and overhauls.

The ship after 77 will go on for a number of years.

The ship after that is C.V.N.X., a program where we are talking about an official start, an official funding start, in I think '07 but the fact is, it's being funded at the rate of several hundred million dollars a year now.

These ships have very long lead cycles.

We'll be doing substantial and are continuing to do substantial design work in advance of the, quote, funding date.

I think the concern we would have is that if as a result of some decisions that would cause the C.V.N.X. to move out significantly, that would create some kind of a bathtub in would, three or four years or five years from now in the yard and that's an issue we obviously pay a lot of attention to not only with our customers because we are concerned about maintaining skills but also with our political constituency that has a vested interest in employment in the tidewater area.

Joe, let me also point out that we're fighting right now the issue of a lot of work, and making sure we can do it all.

As you know, we're actually doing work at one of the Navy piers because we have so much overhaul work to do.

This goes through an oscillation in various times.

Right now we're really grunting to get it all done.

So you know, Ron made the point.

I mean, the big issue is about five years out that we have to -- but we've got to look at this as long-range business and, you know, that's sort of when we have to make -- when the decisions get made in the next year or two on next-generation carriers will impact that.

We know when the overhauls are coming in.

They are all scheduled.

The only thing I'd say is we're assuming one submarine is year is the total production rate.

In the next few years there may be a move to go to two submarines a year which would increase the workload for us.

Terrific.

Thanks again.

Thank you, Joe.

Our next question is from Brian Jacoby from Morgan Stanley.

Your question?

You guys got most of them but just a quick question on your rating.

Is there any color you can give us with respect to when you hope to have that removed and get it confirmed?

Are they waiting on completion of the T.R.W. transaction?

I would assume they are pretty happy with the cash flow they are seeing this quarter.

Can you give us any color in that regard?

I guess the color I can give is yes, you are right with your comment.

It's hard for them to make a move when there's some moving parts, and clearly, once we -- you know, as noted before, they are looking to see what happens with T.R.

W., and just as importantly, what happens with the divestiture of T.R.W.auto.

There are things tat have to be accomplished.

A lot of things we did this quarter gets us to an it iser steady state.

One other thing, too.

If you could just repeat what you said earlier regarding the potential for a reduction to retain earnings.

What was that number again?

The number is 1.2 billion with a b.

Okay.

Thank you.

You're welcome.

Our next question is from Don Sung.

Your question, please?

Hi.

Good achievement I just want to reiterate something I heard on the phone.

I'm not sure if it's right.

Number one, the guidance for north Northrup is 19 million for revenue and 1.5 something like that in upwarding margin and secondly, I probably missed the part, you gave an update on the auto business.

If you don't mind, reiterate that.

That will be very kind.

Thank you.

You're right on those two numbers, that you've got that right with respect to the auto business.

We only made clear that we're working very hard on the situation, that we clearly do not want to operate that business, and we are going to separate that as rapidly as we can.

We're working very hard at it but we're to the giving any other guidance.

Thank you very much.

Thank you, Don.

Our next question is from Keith Darcey.

Your question, please?

It's already been covered.

Thank you.

Ladies and gentlemen, Kent to closeup.

Okay.

Thank you all.

Let me say, as you all have noted and we appreciate your opportunity to be here and letting us go through and give you much more detail on what we believe is a very positive quarter, but you know, it was very complex set of things that were occurring, and we believe that we've got a great future, and we think that the cash and all the characteristics of the quarter were great and we're going to have a great year.

And again, we're happy to reiterate our numbers for the ongoing businesses for the future.

Thanks so much for being with us.

Thank you, ladies and gentlemen.

Thank you for your participation in today's conference.

This concludes the program.

You may now disconnect.

Good day.