諾斯洛普·格拉曼 (NOC) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Northrop Grumman third quarter earning's conference call.

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

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

We will be facilitating a question-and-answer session towards the end of today's conference.

If at that time you wish to ask a question please key star, 1 on your touch-tone telephone.

Again, ladies and gentlemen, to register your question please key star, 1 on your touch-tone telephone.

If, at any time during the call you do require assistance please, press star, followed by 0 and a coordinator will be happy to assist you.

As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Gaston Kent, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Rachel.

Good morning, ladies and gentlemen, and welcome to Northrop Grumman's third quarter 2004 conference call.

We've provided supplemental information in the form of a PowerPoint presentation that you can access at our Investor Relations Website at NorthropGrumman.com.

This is available as an accompaniment to our conference call.

The presentation will be available for a limited time and should be viewed in conjunction with today's commentary.

In addition we are filing our 10-Q for the third quarter simultaneously with this conference call.

One housekeeping note this quarter you'll notice that our earnings per share from continuing operations in the third quarter reflects the reclassification of some operations out of discontinued operations and into continuing operations.

These are three unsold component technologies businesses that were classified as discontinued ops beginning in the third quarter of 2002.

Before we start please understand that as shown on slide 2 some of the matters discussed on this call constitute 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.

A more complete expression of these risks and uncertainties is contained in the company's SEC filings including the Form 10-K and Forms 10-Q among others.

During the call we'll discuss third quarter results and the outlook for the remainder of this year and for 2005.

Guidance will be GAAP measures of sales, cash from operations and earnings per share.

On the call today are our CEO, Ron Sugar and our CFO, Chuck Noski.

At this time I'd like to turn the call over to Ron whose comments are outlined on slide number 3.

Thank you, Gaston.

Good morning everyone and thanks for joining us.

I'll briefly discuss our results and update you on some of our programs and new contracts.

This was another quarter of solid double-digit growth in sales, operating margin, and income and earnings per share from continuing operations.

All of our business segments reported higher sales and operating margins with mission systems, integrated systems, ships, and space technology each generating strong double digit sales growth.

Operating margin and income from continuing operations rose on higher sales and profit from our operating segments, lower pension expense and a reduction in shares outstanding.

Net cash provided by operating activities increased 85% to $739 million bringing year to date cash from operations to $1.6 billion.

Just after the close of the quarter we completed the $700 million share repurchase program that we announced in August of 2003.

In May we increased the dividend on the common stock by 15% and yesterday our board authorized a new $1 billion share repurchase program which we expect to complete over the next 12 to 18 months.

We recently announced an agreement with TRW Auto and the Blackstone group that will monetize the payment in kind note we received at the time of the auto sale.

The agreement also represents the resolution of the remaining substantive outstanding contractual issues surrounding the sale.

One of the operational highlights for the quarter was the christening of the submarine USS Texas at Newport News.

This was the second ship of the first flight of Virginia class submarines and the first submarine to be christened at Newport News in nearly a decade.

And after sea trials described as an absolute success the submarine Virginia was commissioned last weekend, the first of the Virginia class built by a Northrop Grumman/General Dynamics partnership.

We also christened the destroyer Forest Sherman DDG-98, and we laid the keel for the USS New York, LPD-21.

The fourth polar tanker was delivered ahead of schedule and within our established reserves.

The fifth tanker is currently more than 70% complete and is scheduled for delivery in late 2005.

The first highly elliptical orbit payload, or the SPIRS program was delivered and the second EO payload is in its final phase of acceptance tests and will be delivered in the first quarter of 2005.

We made significant progress this quarter on the F-16 block 60 program.

On the AGILE-B radar we've fully qualified all four radar line replaceable units and production and software deliveries are on schedule with excellent flight test results.

We've qualified three of the four line replaceable units on the internal FLIR targeting system and we're achieving our production targets.

On the Falcon Edge electronic warfare system we've completed the majority of the qualification testing with minimal hardware modifications.

Yields on the micro electronic components have improved and we delivered more than 200 production line replaceable units in the third quarter.

The Falcon Edge hardware-software integration is now underway and is progressing according to plan.

So we continue to make solid progress on the F-60 program -- F-16 program.

In addition to strong performance from our existing program base we had some important competitive wins this quarter.

The Air Force selected us for the $300 million Battle Management Command and Control system for the E-10-A.

This is the backbone of the program and this competitive win confirms our position in the Airborne ISR market and puts us in a good position to offer similar technology for future platforms.

DARPA awarded us a $1 billion five-year contract to continue work on the joint unmanned combat air systems demonstration program.

Under this award we will produce and flight-test three vehicles with the first flight planned for the third quarter of 2007.

We were one of the contractors selected for the five-year $9 billion IDIQ net sense program which will assist the Air Force in modernizing its infrastructure as it moves towards more network centric solutions.

We expect this to be a very significant program for us in the future.

We were also awarded NASA's $400 million Jupiter Icy Moons Orbiter contract, or JIMO.

This is a long duration, deep space exploration mission using nuclear reactor-powered spacecraft.

We think this competitive win is another example of the strength of collaboration.

Space technology is the lead sector on this program.

Newport News brings the nuclear expertise to the program, and we think this element was a differentiator in the award decision.

So it was a very strong quarter in terms of new business.

Contract acquisitions were up $364 million over last year.

There were many large contracts awarded over the summer and fall and we continue to have new opportunities.

We don't expect defense spending to grow at quite the rate we've seen in the last few years.

However, regardless of how next week's election turns out national security spending will be a high priority as we continue to wage the war on terrorism and secure our homeland.

So to summarize, we continue to view the future with a high degree of confidence.

All of our operations delivered higher sales and operating margin along with solid cash generation.

We continued to win the programs we need for future growth and we're generating financial returns that allow us to deliver value to our shareholders as today's new share buy back announcement demonstrates.

Now I'd like to turn the call over to Chuck Noski for a discussion of the financials.

Thanks, Ron, and good morning everyone.

My comments today begin on slide 4 and will include a brief overview of our segment results, discussion about what we expect for the remainder of the year and our current outlook for 2005.

Looking at the segments: electronic systems third quarter margin increased 10% on sales growth of 2%.

Although sales growth was modest the operating margin rate expanded to 11.4% from 10.6% last year primarily due to improved program performance in defenses systems.

Slide 5.

Ships third quarter margin rose 16% on sales growth of 14%.

The DDX, LPD, and LHD programs continued to be revenue growth drivers as they have been throughout the year and the Virginia-class program also contributed a solid double-digit revenue increase.

Slide 6, information technology operating margin rose 11% on sales growth of 8%.

Major source of growth in the IT sector continues to be government information technology which has been the case throughout the year.

Slide 7, mission systems operating margin increased 22% on sales growth of 21%.

The strength continues to come from command control and intelligent systems as well as missile defense.

Slide 8.

Innovative systems operating margin grew 13% on sales growth of 18%.

The margin rate contracted slightly to 9%.

Again this quarter reflects the higher proportion of lower margin development programs that we've been describing over the last several quarters.

Slide 9.

Space technology operating margin increased 8% on sales growth of 11% which reflects higher software defined radios, intelligent surveillance and reconnaissance, civil space, and satellite communications revenue versus last year.

On slide 10, we have some additional reporting as Gaston mentioned as a result of the reclassification of three unsold component technologies businesses into continuing operations.

You will recall that we have sold four of those businesses already, and these three Legacy Litton businesses consist of a complex printed circuit board and assembly manufacturer, an electronic connector manufacturer, and a European-based marketing group.

We believe that current market conditions don't reflect appropriate values for these businesses which we believe will continue to improve and we think we can create more value over time by running them as continuing operations, so we've suspended our efforts to sell these businesses at this time.

Slide 11.

Total Company operating margin rate for the quarter was 7.3% versus 5.9% a year ago and for the year to date the operating margin rate was 6.7% versus 5.8%.

Both comparisons reflect higher sales and operating margin from our segments which include the effect of the reclassified businesses in the prior period as well as lower pension expense which was partially offset by higher unallocated corporate expenses.

Slide 12.

As Ron said it was a solid quarter.

We're well on the way towards achieving our 2004 financial targets.

We're increasing our guidance for sales to reflect a reclassification of the former CT businesses and we're narrowing our guidance on earnings per share from continuing operations to a range of $2.95 to $3 per share.

We generated $739 million of net cash provided by operations in the third quarter which included an $81 million payment for the Allison legal judgment.

Year to date net cash provided by operations was $1.6 billion, and based on these results we're revising our estimate for the year upward to approximately $1.8 billion.

Capital expenditures for the quarter were $157 million and $424 million year to date.

For the year we expect capital expenditures will be approximately $750 million.

We're also using net cash provided by operations to strengthen our balance sheet and our credit profile.

During the third quarter Fitch upgraded our outlook to positive.

In the fourth quarter we're retiring $600 million in debt.

We've called $250 million of 9 3/8 bonds due in 2024 and retired 350 million 8 5/8 bonds that matured on October 15, as a result our interest expense will decline in the fourth quarter.

We also expect to have a reduction in interest income beginning in the fourth quarter reflecting the foregone noncash interest we have been accruing on the TRW Auto note.

Slide 13.

Looking ahead to 2005 we expect sales to grow to approximately $31 billion.

We continue to expect margin expansion and we expect earnings per share from continuing operations to grow in the mid to high teens range.

Assumptions underline next years EPS growth include the reduction in noncash interest income from the TRW Auto note and a lower share count to reflect the share buy back program.

Our estimate also assumes that our FAS and CAS pension amounts are unchanged from 2004 estimates and the estimated range does not consider changes in accounting for stock-based compensation expense.

Estimates of 2005 pension amounts will be based on actual 2004 planned returns which we won't have until the end of the year.

As most of you are aware unlike most of our competitors we use the mark to market method of pension accounting which is the preferred method under generally accepted accounting principles in the U.S.

Accordingly we won't be in a position to provide those estimates until next quarter's call.

So in conclusion, we're pleased with third quarter results, it was another solid quarter in terms of sales, operating margin, and cash provided by operations, and we have excellent momentum as we move through the remainder of 2004 and into 2005.

And with that I'll turn the call back to Gaston for the Q and A.

Thanks, Chuck.

Rachel, we're ready for the questions now.

Ladies and gentlemen, as a reminder if you wish to ask a question at this time please key star, 1 on your touch-tone telephone.

We'll take our first question from the line of Byron Callan of Merrill Lynch.

Good morning, gentlemen.

Ron, I know you talked about some of the accomplishments in ship systems but there seems to still be a fair amount of turmoil as far as Navy budget plans, you had a management change at Newport News.

Can you just kind of step back and put this all into perspective for us?

How do you see this market shaking out in the next two to three years?

Sure, Byron.

Let me separate them into two pieces.

First of all, Tom Sheilabin who is an outstanding fellow, and he joins us as you know from Newport News when we acquired Newport News has been with us over the last three years.

He decided he wanted to take early retirement, he's been thinking about this for some time and this was a purely personal decision.

We have made a succession decision which effective 1 November puts Mike Petters in charge of that sector, Mike is a 17-year veteran of Newport News, he's worked carriers, he's worked submarines, he's a very capable guy.

So the management change was strictly a personal issue.

Had nothing to do with outlooks for ship building.

With respect to the larger question of the outlooks for ship building obviously we all read in the newspapers the various thoughts about what the future of the Navy might be.

I will tell you that there will be ships built, there will be big ships built.

The process of budgeting for ships is apparently one which over the years has always been quite a wild ride.

What really matters at the end of the day is what's appropriated.

If you take a look at our revenue flow, Byron, it's really the aggregate sum of the appropriations decisions over the current and the last three or four years.

So if, for example, in any given year a few less ships is appropriate or a few more ships are appropriate, that's interesting.

What's most important to us is the aggregate accum impact of the appropriations over the last few years so the guidance we've given you is net of all the effects that we see going forward.

A follow-up if I may.

Chuck, you talked about the pension, and I recognize, you know, that you're not going to comment specifically on pension for 2005.

But can you comment on plan performance year to date and is there any kind of metrics you might give us in terms of sensitivity or change based on discount rate assumptions or return on assets, how that might change pension expense in 2005?

Well, two comments, Byron.

With respect to our year-to-date performance and our pension funds it's in the 4 to 5% range.

With respect to next year, as I mentioned, unlike all of our other major competitors we mark to market, and so until we see the fourth quarter performance of the pension fund it's pretty difficult to give you any kind of a reliable prediction on '05 pension expense.

If you recall, if you had asked me this question a year ago I would not have anticipated the outstanding fourth quarter pension plan performance that we achieved and frankly that the market delivered to all pension plans and all investors.

So I think we would have been wrong by a lot which reflects our reluctance and perhaps our optimism about the post-election market.

But with respect to metrics I'm really not comfortable giving that kind of data because I think there are a lot of different movements again in part reflected by our pension accounting but we are very comfortable with our pension assumptions.

We review them annually.

We think they're very much in line with others in our industry, and frankly the broader S&P 500.

So we don't anticipate anything dramatic happening, notwithstanding the heightened interest that pension accounting is getting in recent weeks.

Great.

Thanks.

Nice quarter.

Thank you.

Thank you, sir.

Our next question comes from the line of Cai Von Rumohr of SG Cowen.

Thank you.

If we could follow up a little bit, Lockheed on their call yesterday kind of indicated that their CAS number might be going up more than expected and they made a relatively large contribution to their pension plan.

Could you talk about CAS and any thoughts you might have or, you know, would it make sense for you to make a contribution, what sort of impact would that have on next year?

Well, Cai, I'm familiar with what others have commented.

Appreciate that unlike financial accounting standards, in cost accounting standards there is the -- a more pronounced impact of smoothing than you see in the way that we account for FAS and really the key impact or the key issue with respect to earnings is the spread between FAS and CAS.

I'm not sure I can really give you any additional color there.

In terms of contributions we are doing, I think, a much improved job in terms of generating cash.

As you heard today we are deploying a billion dollars over the next year or so to share repurchases.

We have said in the past that we will regularly revisit our dividend policy.

So I think you're seeing the behavior that you should expect from us.

To the extent that we evaluate our year-end cash position and determine that we might want to increase our contributions to the pension plans beyond that, that we've disclosed in the 10-Q we're filing today, I think that's a decision in front of us.

It would only be favorable, in my view, Cai, in terms of the impact, the favorable impact it might have on 2005 operating results.

Okay.

And last one, I'll let someone else go, your margin performance was good in the quarter in particular in ISG, you moved up to 9%.

Consistently you've been talking about the adverse mix shift.

Could you just kind of go through your areas?

Were there any favorable adjustments of note or negative adjustments in any of your programs that would be worth mentioning in the third quarter?

Cai this was a pretty straightforward quarter.

We're obviously pleased with the performance of all of our units.

I don't think that there was anything unusual that comes to mind we're trying to be conservative but prudent without being overly so.

We've not taken any large provisions of note in any of our units.

I think that the guidance that we've given you for segment by segment operating margin, we're still quite comfortable with and we have some optimism that we might do a touch better.

Thank you very much.

Thanks, Cai.

Thank you, sir.

Your next question comes from the line of Joe Nadol of JP Morgan.

Thanks.

Good morning.

I guess, first of all, on bookings, Ron, could you comment on your bookings year to date?

A little bit below your revenues year to date, your backlog has been kind of flat to down a little bit.

You won some competitions in Q3.

Do you expect you're going to have a good quarter in Q4?

Well, Joe, as you know, the bookings tend to be a little bit erratic in time spacing and you almost have to stand back and look at them almost over a year basis.

We're very happy with the competitive wins we've had and we expect the bookings to support the sales prospects we have for next year, so I don't have any issue with that.

We see sometimes we have surges in bookings and sometimes we're time lagging bookings.

Let me ask Chuck or anyone else -- I don't see anything remarkable here, Joe.

I think we are very pleased about the competitive wins.

Keep in mind that the major portion of our business over the next couple of years is the result of direct follow-on work which is not competitive win related.

Competitive wins represent a small portion of the '05, '06, that kind of sales numbers.

Okay.

Following up on that, are there any competitions, competitive wins, keeping in mind that it's a smaller percentage of your business overall that we should be focused on over the next six to nine months that you think are important?

Yeah, let me give you a couple of them.

Of course these will all be subject probably more to budgetary timing issues than anything else.

We're looking at the broad area maritime surveillance program with the Navy, the unmanned combat armed roto craft with the Army, we're looking at a bid on the Treasury Communications Enterprise with the Department of Treasury.

We're looking at some opportunities developing in the Department of Homeland Security with a program which appears to be called America's Shield.

As you know, we recently announced partnership with EADS on a helicopter called Personal Recovery Vehicle.

And, of course, we have an expectation that in next year's budget we'll see some increased funding over this previous year in transformational communications and space-based radar to space systems which were very significantly cut in funding for the '05 budget.

We expect that they'll come back to life in some form.

Of course, we're actively pursuing the contract for the NATO air/ground surveillance systems.

So there's a variety of things out there in the pipeline, but as I said the vast majority of our backlog and our sales will come from the programs we already have and the program fundings in those programs.

Okay.

Thanks for that.

Just two quick ones for Chuck.

First of all, just want to confirm that the pick note discount was reflected in other income -- or other expense during the quarter.

Yes.

The 9 million.

Okay.

And then secondly --.

Continuing operations, Joe.

In continuing operations.

Right.

Okay.

So that was a couple cents off your -- a hit to your number?

Yeah.

And then on cash, could you talk a little bit about where in working capital you were able to generate the extra cash and where you see the opportunities that you mentioned in Q4?

Joe, frankly, we had a very strong quarter as you saw in the third quarter.

We have been putting a real emphasis on not only working capital as well as just simply focusing on managing cash better but we're also working quite hard to improve our predictability.

So what you saw through three quarters is about $1.6 billion in cash from operations which is certainly better than we had expected.

I think in the fourth quarter you're not going to see a continuation of that rate that you saw in the third quarter simply because we've got some year-end payments to make, there are a variety of different things going on with respect to milestone billings in the third quarter that won't repeat in the fourth quarter.

So we've raised our guidance, as I mentioned in my prepared remarks, from 1.7 to 1.8 billion for the full year.

We might do better than that, but I think at this stage I think that's a good measure of our expectations.

Okay.

Thank you.

Thanks, Joe.

Thank you, sir.

Your next question comes from the line of Nick Fothergill of Banc of America Securities.

Good morning gentlemen.

Two quick ones if I may.

First is, margin expansion in 2005 that you talked about.

Primarily which segments will those come from, and if you can give us a little bit more detail on that.

Well, Nick, the margin expansion that -- I don't have a segment by segment measure but if you recall during our May investor conference we did go through segment by segment, sector by sector, if you will, and review the expectations for margin enhancement for each of our sectors in 2005.

I think it's pretty well across the board.

We would see certainly improvement in our ship building businesses.

I would expect to see some modest improvement in our information technology and mission systems businesses.

As we've talked in terms of integrated systems we're in the -- a bit of a trough, if you will, in terms of the mix of development programs.

That will continue in '05.

And I would see it improving in terms of margin after '06.

But I think you'll see integrated systems improving modestly but again we've got a tremendous amount of new development business that Ron touched on that we think is a terrific foundation for the future but we have to perform on it.

It is generally cost-plus, and as you might expect has slightly lower margins than the big production programs that IS also enjoys.

Okay, Chuck.

Thanks.

Following up on that, what is the percentage across the whole group now that is associated with R&D or cost-plus programming compared to fixed price delivery contracts, let's say in 2004, and how might that mix shift change in '05 and possibly even '06?

I think it's about 60% at integrated systems today, total, for the Company.

Yeah.

And my expectation is that that's going to decline sort of in 10% increments over the next couple of years.

Great.

One very last one.

National missile defense, across a number of your different segments, what's your overall exposure by revenue across the group to national missile defense?

Roughly in the half a billion dollar range.

Probably currently around that, and probably growing over time with the increasing funding of the Kinetic Energy Interceptor and some of the work we're doing on STSS, and we've had obviously some work winding down on work we're doing on the Ground-Based Midcourse, as we've got the operational deployment underway in Alaska.

Great.

Thank you very much.

Thank you, Nick.

Thank you, sir.

Your next question comes from the line of David Gremmels of Thomas Weisel Partners.

Thanks.

Wanted to ask you about steel prices.

I know you can largely pass these through on your government contracts but wondering if there's any impact on the commercial side.

I know, GD specifically talked about exposure on one of their commercial programs.

Is this an issue for Polar Tanker?

No, it is not.

We've delivered four of the five tankers.

The fifth one is 70% done.

All the steel was bought a long time ago.

That's not an issue.

For much of our ongoing work now the steel has been bought.

In the future, obviously, upward pressure in steel prices will hurt us to some extent, although I must tell you that the dominant portion of the cost of the ship is related to the labor and the equipment as opposed to the raw steel.

Okay.

And different topic.

You mentioned some factors contributing to higher unallocated expense in the quarter, legal cost, environmental, some things like that.

Are any of -- did any of those items come out greater than anticipated?

Are you still thinking about 250 million for the year now, or should we be modeling something north of that?

David, I'm comfortable with your full-year estimate.

I think the fourth quarter is going to look a lot more like the second quarter than the third quarter in terms of our level of expenditure in that area.

Thank you.

Thanks.

Your next question comes from the line of Steve Binder of Bear Stearns.

Good morning.

Couple of things.

One was cash flow.

Cash taxes, what was the cash taxes in the quarter, and are you still expecting 500 million for the year?

I think we've disclosed in the 10-Q what it is for the quarter, Steve.

I don't have that on the tip of my tongue.

For the full year we had been projecting about 500 million.

I think we'll do a bit less than that.

If you look at the fourth quarter, I mean, traditionally it's the strongest quarter, you touched on some items that could basically hurt cash in the quarter, but it is a strong quarter historically.

And it looks like you're currently in your projections assuming a $300 million working capital use in the quarter, it seems conservative.

You touched on it before.

You mentioned -- what's going on in Q4 to really hurt cash?

I think it's all the things I mentioned earlier, Steve.

We're going to be paying taxes.

We are increasingly a taxpayer, versus where we have been in the past.

We are also -- we've got some payments we need to make to vendors on certain programs that, again, are milestone based.

Then I would say cutting against us are there are some milestone payments we've received in the third quarter that I don't see repeating in the fourth quarter.

So we think this is a pretty balanced revised projection.

You also touched on favorable performance in defensive systems in the quarter.

I think the question was asked earlier were there any accum adjustments, but were there some accum adjustments in that slice of electronics systems?

I would say there were modest pluses and minuses throughout electronic systems, but, again, I don't think any of them are particularly notable.

We had indicated last quarter that we expected the last two quarters of the year for electronic systems to be at 11% operating margin, or perhaps a touch better, and that's what we're seeing.

Okay.

Lastly, Ron, if you look at the last couple of years and you look at the TRW businesses there does seem to be some lumpiness and almost seasonality in the bookings where the first and fourth quarters have been strong and Q2 and Q3 kind of weak.

Even with IS there's been some seasonality which seems kind of silly but I'm just wondering is there some seasonality at the Company right now, such that Q1 and Q4 should be your strongest quarters or is it really very random at this point?

Yeah.

Well, Steve, it is seasonal it does tend to go with how the government funding is released on some of the larger programs but it's not something that I'm particularly concerned about or have any issue with.

I mean I really couldn't give you any better answer than that.

We do tend to see a lot of acquisitions at the end of the fiscal year and at the first of the fiscal year from the government and then it just sort of fades in the middle, and that's really what you're seeing there.

Okay.

Thanks very much.

Thank you, sir.

Your next question comes from the line of Miles Walton of CIBC World Markets.

Good morning.

Thanks.

Or good afternoon.

It looks like you've had about a 13 million jump in your CAS reimbursement in the quarter, quarter over quarter, which I guess is a little atypical.

Usually it's a pretty steady state throughout the year.

Does that affect your 320 reimbursement guidance for the full year?

Some of it relates, Miles, to some of the smaller plans, not the major Northrop Grumman Legacy plans.

I think there is some opportunity for better than projected performance in our CAS number for the full year but we're still looking at that.

Okay, great.

Just a quick question on the reclassified other segment.

As a kind of go-forward basis to think about it, is it a kind of a 200 million annual sales on zero margin or given the lack of kind of benchmark, could you give us a little hand on that one?

Sure.

These are businesses that are doing about, in the aggregate, about 50 to $60 million a quarter.

You saw in the prior year we took some charges to write off goodwill and the like in connection with the discontinuation of those businesses but I would say you're looking at margins that are probably -- of course, given the size, they're probably in line with our overall margins, maybe a little bit lower.

Okay.

Great.

Thanks, guys.

But these are businesses that are improving.

Okay.

Thank you.

Thank you, sir.

Your next question comes from the line of George Shapiro of Smith Barney.

Yeah, Chuck.

It seems to me that your guidance of 2.95 to 3 is still probably a nickel or so low because it implies, and I'm assuming you're using fully diluted numbers, so the 2.23 versus the 2.25 for nine months so that would imply 72 to 77 cents in the last quarter, yet this quarter you've got maybe a 2-cent abnormally high corporate expense number.

You've got 2 cents from the PIC that you won't have, and normally the fourth quarter is always stronger than the third quarter anyway, so, what -- one, either you're being conservative or there's something that I'm missing that's going to be in the fourth quarter.

So can you explain it?

Sure.

George, as you saw, we raised the bottom end of our guidance from 2.90 to 2.95.

We wanted to communicate to investors that some of the risk we saw in earlier quarters we think has been managed away.

I think it is fair to say that when you think about the range we have, my expectation is we would be at the upper end of that range.

I think that there is the potential for us to overperform but there's a lot of things that go on in a quarter.

We're quite confident with respect to the year to date EAC adjustments.

We've made out our major programs so we're not anticipating any surprises there.

And I think it's fair to characterize, as we did in our investor conference, our intention to be a bit on the conservative side but I feel good with the guidance that we have and there are no matters looming out there in the fourth quarter that we haven't discussed today.

Okay.

And another one.

I think Steve had asked about the lumpiness in orders but particularly in the space business, the sequential backlog dropped fairly dramatically.

I mean is there anything unique that happened in the space area?

George, no, there's nothing unique.

Also, a lot of the work there is classified work and we don't really publicize it also but we do have lumpiness there in terms of when awards are made but fundamentally the business is a long-term business with long multi-year programs where funding comes in incremental drops.

If you'll notice their total backlog is quite significant in relation to their sales, all that we really show in acquisitions is funding.

If you just looked at the sequential backlog it dropped quite a bit in that sector.

That's what provoked the question.

Okay.

Okay.

Thanks.

Thank you, sir.

Your next question comes from the line of Joseph Campbell of Lehman Brothers.

Good morning, all.

Thanks for taking the question.

I wondered if on the share repurchase announcement whether you could share with us how you -- how you're thinking about the dividend and the share repurchase.

I mean, I tend to think of them in terms of sort of pay-out ratios in the old fashion, how much of the money that you made do you return and how much do you need to keep.

And I wondered if you could talk about your philosophy there or whether we should think of the share repurchases as sort of regular but not commitments in the way that dividends are, or maybe there's an intent to give a certain amount of the money to the shareholders, then to optimize it across dividends and share repurchases.

Then maybe just how much of the share repurchases are kind of needed to do to offset share creep.

Wow, Joe, that's a mouthful.

I would say, as we've said previously, our expectation is that we will be reviewing both our dividend and our buyback policy and practices regularly.

As Ron mentioned we increased the dividend 15% in May.

And I think we -- at the time we did that we indicated that we were going to try to maintain a consistent payout ratio for dividends.

That would also provide a competitive yield to our investors.

So I think -- I don't know that I can say more than that at this stage.

The board will review it regularly.

We are predicting an increase in earnings per share in 2005 and so I will let you connect the dots.

With respect to the share repurchases, as you know, we announced in August of last year a $700 million buyback program that we said we would complete between August of '03 and February of '05.

We completed that early in the first week of October of '04, and felt it was appropriate given our outlook to reinstate an additional and larger share repurchase program.

We expect to do that over a 12 to 18-month period.

I wouldn't be surprised if we complete that earlier than planned but this will be something that we will review periodically.

We also have indicated that we want to use our balance sheet to strengthen our credit ratings and we've made some good progress this quarter, I would hope to make better progress in the fourth quarter.

We mentioned we're paying off $600 million of debt, some of it early in October, and I would think that we're going to continue to look for opportunities to strengthen the balance sheet and sort out our debt maturities.

We have in excess of a billion dollars in debt maturities in 2006.

We want to address that in a rational way as well.

Thanks.

Chuck, one last thing, can you just comment on, there was some talk about, or maybe even a bill passed, but I don't know if it means anything to you, ship yards, about allowing the ship yards to return to the completed contract method of accounting for tax purposes.

I wondered if you could just sort of bring us up to date on what's going on and what it means.

Sure.

Obviously we're very pleased to see some tax advantages provided for this segment of our business.

As you know, Joe, these rules come in effect when the President signed the bill and only relate to new contracts awarded after that date.

So our existing backlog and the taxability and the tax payments associated with it are unaffected by this legislation, but going forward as we get new contracts and new awards those will be subject to the new tax laws.

We don't, as a result, I see this phasing in over time.

I think it will have a modest impact in 2005 and will ramp up a bit more in '06, '07, and '08.

But I don't think you should expect anything significant in terms of '05 impacts.

Well that would be great, can we get it for everything else?

Well, Joe, as you recall, those were the good old days, but we're not holding our breath on that.

Thank you very much.

Thank you, Joe.

Thank you, sir.

Your next question comes from the line of Troy Lahr of Legg Mason.

Thanks.

Wondering if you could talk a little bit about ship systems?

I think in the second quarter call you'd mentioned how some sales were getting pulled forward into the first half of this year, -- and then it seems like you were talking a little bit about sales growth kind of leveling off in the second half but then in the third quarter you posted pretty good sales growth still.

Can you talk about what's going on there, kind of what you expect in the fourth quarter?

Is it starting to level off now, or are things still getting pulled forward from 2005 into this year?

Troy this is Chuck Noski.

It's leveling off a bit.

Having said that I think our guidance was high single-digit growth.

I wouldn't be surprised if that translates for the full year into low double digits.

Okay.

And then just so I'm clear, on the Falcon Edge, is the risk phase pretty much completely behind you now or do you still have some room to go there?

Yeah, we still have some things to go yet.

By the end of the year, in the December time frame we're expecting to have a number of key tests and flight demonstrations which will give us a strong sense of being over the hump.

So we're obviously watching it very closely.

The risk is not over yet.

But I was very pleased with the progress we've made this last quarter.

Okay.

And just one last question, I guess your product to service mix is around 70/30.

Do you see any changes over say the next 12 to 18 months in that ratio, or is that pretty set?

Troy, I think it's pretty set.

Having said that, we do expect our information technology related businesses to grow faster than our product businesses.

But we have -- we have big positions in our product businesses so I would see that percentage changing modestly but not dramatically.

Okay.

Thank you.

Okay.

Ladies and gentlemen, with that, we're going to wrap up.

We have to get off for some interviews and such.

Ron.

Yeah, let me just wrap up here.

This is another strong quarter for the Company.

We increased our guidance.

We're very, very pleased with the competitive wins that we've had in the recent quarter.

The announcement on the share repurchase also defines a continuing commitment to shareholder value.

All in all, very pleased with the progress of our Company and our future outlook, so thank you all very much for joining us.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude your presentation, and you may now disconnect.

Have a wonderful day.