諾斯洛普·格拉曼 (NOC) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Northrop Grumman fourth quarter earnings conference call.

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

(Operator Instructions).

I would like to turn the conference over to your host for today, Mr.

Paul Gregory, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Steve.

Good morning, everyone.

Welcome to Northrop Grumman fourth quarter 2009 conference call.

We provided supplemental information in the form of a PowerPoint presentation that you can access at www.northropgrumman.com.

Before we start, please understand that matters discussed on today's call, constitute forward-looking statements pursuant to Safe Harbor provisions of Federal Security laws.

Forward-looking statements involve risks and uncertainties which are detailed in today's press release and our SEC filings, and may cause actual Company's results to differ materially.

During today's call, we will discuss fourth quarter and full-year 2009 results, and our guidance for 2010.

We will refer to non-GAAP measures which are defined and reconciled in our earnings release and the supporting materials posted on our website.

I want to point out that the divestiture of our Advisory Services business, known as TASC, was completed December 18th.

On the income statement, TASC sales, operating income, and net gain on sale are accounted for as discontinued operations for 2009, and for all periods presented.

On the call today are our CEO and President, Wes Bush, and our Chief Financial Officer, Jim Palmer.

So I think we're ready to go to slide three.

And at this time, I would like to turn the call over to Wes .

Thanks, Paul.

Good morning, everyone, and thanks for joining us.

As Paul said this morning, we'll discuss our fourth quarter and our full-year results as well as Northrop Grumman's outlook for 2010.

We had a solid finish to 2009.

Earnings per share totaled $5.21, exceeding our guidance of $5 to $5.15, and we had outstanding cash results.

Cash from operations and free cash flow were very strong, and when adjusted for discretionary pension contributions and taxes that we paid on the TASC sales, we are at the high end of our guidance, and comparable to last year's record levels.

During 2009, we continued to deploy cash to create value for our shareholders.

We raised the dividend by 7 .5%, and we used $1.1 billion, to repurchase more than 23 million shares of our stock including 8.4 million shares repurchased in the fourth quarter.

At year-end, we had $924 million remaining on our share purchase reauthorization.

As we previously announced, the most recent increase in the authorization was funded by the net proceeds from the TASC divestiture.

Another 2009 highlight is our year-end back log of more than $69 billion.

Total backlog continues to represent more than two years of sales, and includes $32 billion of new awards captured in 2009.

We're very pleased that despite delays on several competitions, our book-to-bill ratio for the year was 96%.

We continue to capture high quality, competitive contracts.

Turning to results for our businesses, Aerospace Systems continues to perform well.

Sales grew 7% for the quarter, and 6% for the year.

Our unmanned and manned aircraft programs, along with our restricted work were the drivers for the quarter and for the year.

Volume increases on programs like BAMS, Global Hawk, F-35, F-18, and the B-2 have more than offset declines in some of our missile and space programs.

We expect continued strength in both manned and unmanned programs.

During the quarter, we received a $300 million contract for five Global Hawks.

This fixed-price incentive fee contract runs through 2011.

We also introduce the first Euro Hawk unmanned vehicle, marking first international configuration of the Global Hawk.

Aerospace also continues to improve their margin rates, with expansion to 10.5% for the quarter, and 10.3% for the year.

Electronic Systems also had a strong quarter in year.

Sales increased 2% for the quarter, and 9% for the year, with solid margin rates for both periods .

During the fourth quarter, the Australian Royal Air Force accepted initial delivery of the first two Wedgetail aircraft.

And we reached an agreement on delivery requirements.

Final delivery and full acceptance is expected later this year, and delivery of all six aircraft is planned by mid 2011.

With Wedgetail development complete, an agreement reached on contract requirements, we believe the financial risk on Wedgetail is behind us.

For Information Systems, fourth quarter sales were comparable to prior year, and full-year sales increased 5%.

Margin rates for the quarter and year, were impacted by state income taxes resulting from the TASC sale, and lower performance on the Virginia outsourcing contract known as VITA.

These two items offset the positive margin rate trends generated in our intelligence and defense businesses, which now account for about 75% of Information Systems sales.

These two profitable growing businesses are very well positioned in their markets, including cyber security, and C4ISR.

They will be the performance drivers for the sector.

As a result of strong business capture during the year, IS grew backlog by nearly $480 million or 6%, to $8.8 billion.

During the quarter, Information Systems won the five year $580 million IBCS program, which is the first step towards enabling joint and combined air and missile defense capabilities.

In Shipbuilding we continue to focus on improving performance in the gulf, through new operating system we put in place last year.

We're making good progress.

The new operating system is providing increased visibility into work flow, and it's enabling us to better sequence work to reduce cost growth that results from work performed out of sequence.

Currently, we are addressing two quality issues that received some attention in the press, and I wanted to address each of them individually.

Regarding pipe welds, we have been closely with the Navy since last year, when it was discovered some of our pipe joints may not have met specifications.

Beginning in the second quarter of 2009, our EAC's were updated to include expected cost to repair the pipe welds.

We believe we understand what is required to correct the piping.

Late last year, LPD 21 experienced problem with its main propulsion diesel engines.

We're working hand-in-hand with the Navy to identify and understand the root causes of the engine problems, and to support implementation of the appropriate corrective actions.

Based on what we know today, we do not believe the actions represent significant financial exposure for the Company.

We are confident that quality and performance will continue to improve, as we refine and mature the operating approach that is now in place in the Gulf coast.

The new processes for providing better information, on a more timely basis and have helped us address some of the cost issues we face on our Gulf coast programs, particularly, the LPD.

Today we're under contract for four remaining LPDs, which will be delivered over the next three years.

As a result of the LPD issues that we described over the last year, we expect minimal margin on these ships.

And the pace of our margin rate improvement and ship building will be impacted by the substantial sales volume on these contracts over the next three years.

In Technical Services, sales increased 11% for the quarter, and 10% for the year.

And the margin rates also expanded for both periods.

Business capture was outstanding this year.

TS won some major competitive awards, such as the $3.8 billion KC 10 program.

And at the end of the year, they captured the Saudi Arabia National Guard contract, which has a potential award value of $550 million.

For the year, TS backlog increased 10%.

So now let's talk about our priorities for 2010.

Northrop Grumman has a tremendous range of capabilities that are well aligned with our customer's spending priorities.

And we have outstanding human, technical, and financial resources.

Our number one priority is to achieve sustainable performance improvement.

That's the message I convey to senior management team at the beginning of the year.

Our goal is to instill a true culture of performance across the entire organization.

This will shape our decision-making, the way we set our strategy, and the way we measure and incentivize our team.

Our leadership is driving improvement with a real sense of urgency.

Change will not occur overnight, but we will succeed at this.

I'm excited about what I believe the team can achieve in creating value for our shareholders and customers.

Earlier this week the administration released its proposed FY 2011 budget and provided details of the QDR.

The release of the budget process is a first step, in a very long and dynamic process.

In general, Northrop Grumman programs are well supported, which reflects their relevance and importance to current and future national security requirements.

In the days and weeks ahead, additional budget details will be available, and the deliberative process in Congress will begin.

As that process moves forward, specific program challenges and opportunities will be more defined.

At this early point in the process, we don't want to speculate on the final outcome of any individual program.

But in the aggregate it appears Northrop Grumman's portfolio continues to be well aligned with the nation's security needs.

We're very well positioned in high priority areas such as unmanned systems, cyber security, C4ISR, long range strike, and logistics.

But we recognize that the investment accounts, like all government spending will face increasing pressure.

In terms of new business opportunities, we're pursuing high quality growth.

Our stance on the tanker complication is a prime example.

Among other issues, unless the final RFP is restructured to provide a best value competition, one that recognizes value for performance, that exceeds minimal capability threshold, and one that enables improved financial terms, this program is not an attractive opportunity for Northrop Grumman.

Northrop Grumman's greatest opportunity to generate value for shareholders is by improving our performance.

Our primary objective to is to create value through bottom-line performance, and strong cash generation.

Consistent with this, our guidance for 2010 calls for modest sales growth, with an improved operating margin rate.

Our guidance for 2010 EPS from continuing operations is $5.70 to $5.95.

And primarily reflects combination of segment margin rate expansion across the businesses, lower net pension expense, and continuing share repurchases.

Our guidance contemplates these improvements will be somewhat offset by a higher tax rate.

We also expect continued, robust cash flows.

Cash from operations is expected to range between $2.5 billion and $3 billion, and free cash flow is expected to range between $1.7 billion and $2.2 billion before discretionary pension contributions.

As a management team, we're firmly committed to realizing positive performance improvements in all of our businesses.

So now I would like to turn the call over to Jim for a more detailed discussion of our 2009 performance and our 2010

Thanks, Wes , and good morning, ladies and gentlemen.

My comments begin with slide four.

I'll discuss our 2009 results, and include some detail on the financial impact of the TASC sale, and then update you on the trends underlying our 2010 guidance, including pension.

I would echo Wes 's comments regarding 2009 performance, and add on a pension-adjusted basis, earnings per share from continued operations increased 24% year-over-year, after adjusting for the goodwill impairment charge in 2008.

Cash generation was also very strong, essentially comparable to last year's record levels, when you consider the impact of the discretionary pension plan contributions, and the taxes paid on the TASC divestiture.

As you know, in 2008, we had outstanding cash results that were driven by substantially reduced working capital, while sales in 2008 increased by 6%.

This year's cash results before taxes related to the TASC sale, and the voluntary cash pension contributions reflect relatively stable working capital, while sales again grew by 4.5%.

So the positive trends in cash management were maintained in 2009, allowing us to continually balance cash deployment strategy that calls for returning cash to shareholders, investing in the business, and funding our pension plans.

The strong financial results were accomplished while addressing several major operational initiatives.

First was the realignment of seven sectors into five business sectors last January.

In addition to establishing a more customer-focused business structure, the consolidate -- consolidation also allowed us to reduce overhead, and to streamline operations.

We have also expended a tremendous amount of effort to improve our Gulf coast operations with the new operating system that Wes discussed in his remarks.

And obviously the TASC sale was successfully executed.

This activity was initiated in response to our customers' change in initiatives on operational conflicts of interest or OCI, and required considerable effort in achieving a very good market price for the business, while at the same time ensuring a successful future for the business.

When we announced the sale, we indicated that TASC operating results for 2009 would be reported as discontinued operations in our 2009 and prior financial statements.

Not all of the analysts' estimates on our financial results were updated to reflect that accounting treatment that was reported today.

So in order to help you reconcile your models to result, we provided pro forma reconciliation, that's on slide five.

It reconciles our reported results with the pro forma results, if TASC has been part of continuing operations for the entire year.

The highlighted top row shows consolidated pro forma results.

And then the -- under the discontinued operations caption, the first row shows TASC operation results classified as discontinued operations.

Through December 18th, the date of the sale, TASC.

had sales of $1.536 billion, and operating income of $147 million, which translates into $0.28 of earnings per share moved from continuing to discontinued operations.

The next line is simply the net gain on the sale, which totaled $0.05 per share.

Moving to the continuing operations captions, state income taxes directly associated with the sale, totaled $106 million of which $87 million were directly allocable to our continuing operations.

Of that amount, $50 million impacted sales, and $37 million impacted Information Systems operating margin.

The $50 million is recoverable under our cost type contracts, and is therefore recognized as sales, while the $37 million was allocated to our fixed-price contracts, and directly impacted that has reduced the IS operating margins for the quarter and the year.

These one-time state income taxes reduced earnings per share by $0.08.

Finally in 2009, we paid $508 million for federal and state taxes on the transactions.

So cash from operations and free cash flow reduced by commensurate amount.

However, for financial reporting purposes, these taxes are recognized as cash from operations in the cash flow statement, while the cash proceeds on the sale are recognized in the investing activities section of the cash flow statement.

So adding back the taxes to the reported free cash flow, gives us a free cash flow number of $1.9 billion for 2009, that essentially our business generated from "its normal operations." This $1.9 million is -- has been reduced by the $462 million of after-tax effect of the additional voluntary pension contributions to our plans, pension plans in 2009.

Now I would like to take a few minutes, and talk about 2010 guidance on slide six.

We expect 2010 sales of $34 billion to $34.6 billion.

Our sales guidance reflect growth for Electronic Systems, Information Systems, and Technical Services in the range of 2% to 4% each.

Stable revenues for Aerospace Systems, and a 3% to 4% revenue decline in shift building as a result of lower carrier repair and overhaul volume in 2010.

Our outlook for Aerospace system does contemplate our understanding of the potential restructuring of the MPOs and F-35 programs.

We have not received any formal contractual direction on either program at this point, but for MPOs, our customer has asked us to participate in a restructuring of the program, and the path forward will involve over the next several months.

For the F35, we anticipated a potential change in the program fee structure in the fourth quarter, and adjusted our financial assumptions accordingly.

We expect 2010 segment operating margin rate to improve to the low 9% rate from this year's 8.7%.

The improvement will be driven by margin rate expansion across the businesses.

And Shipbuilding we are booking minimum margins on the LPD program, as Wes mentioned.

And we expect ship buildings 2010 margin rate to be in the 5% to 6% range.

This represents a modest, incremental improvement from 2009.

But in my view, it's the right level of expectation, given where we are on the LPD program.

Until we see that our operating system's improvements are generating sustainable performance improvement, and that our program mix improves as LPD revenue contribution declines from the deliver of these ships currently under construction, margin rate improvement in Shipbuilding will be gradual and modest..

In the appendix of today's presentation, we provided 2010 sales and operating margin rate guidance for each of the five businesses for your information.

For the Company in total, we expect 2010 operating margin to expand to the mid 8% range from 7.4% in 2009.

This reflects the operational improvements that I just described above, as well as the substantial improvement in the net pension adjustment.

Our earnings per share guidance, also assumes a lower share count, which is offset somewhat by the higher estimated tax rate of 34.5% for 2010.

Moving to cash metrics, as Wes mentioned, we expect cash from operations of $2.5 billion to $3 billion, and free cash flow of $1.7 billion and $2.2 billion.

Both of these estimates are before the impact of planned discretionary pension pre-funding And on slide seven, we provided a bridge from our 2009 earnings per share from continuing operations, to our guidance for 2010, so you can see proportionally on an EPS basis, where the improvements are coming from.

The largest improvements are operationally driven, and from lower pension expense, somewhat offset by lower other net items.

and then the higher estimated tax rate for 2010.

And finally, our guidance includes a reduction in the average shares outstanding, as we used the proceeds from the TASC sale to repurchase stock.

In summary, we expect a 17% to 22% increase in earnings per share from continuing operations for 2010.

Slide eight provides some additional detail regarding pension accounting from continuing operations for 2010.

We expect 2010 net pension adjustment to be an expense of approximately $35 million or $0.07 a share.

This is an improvement of about $275 million over 2009, and the year-over-year improvement is detailed on the chart, and is driven by several factors.

In 2009 plan assets earned more than 15%, substantially higher than the 8.5% projected long term rate of return.

in 2009, we also made $800 million of discretionary contributions to the plan.

so the combination of these two factors significantly reduced our projected FAS expense for 2010.

In addition, our CAS recovery improves by about $25 million in 2010.

Those positive factors were offset by 25 basis point reduction in the discount rate from 6.25% to 6%.

And our assumed long-term rate of return on plan assets is unchanged at 8.5%.

You can also see on the chart that the funded status of the plan improved to 88% at the end of 2009, compare to 84% at the end of 2008.

The improvement reflects the cash contributions, the healthy plan returns, and some adjustments to actuarial assumptions.

And those positive impacts were possibly offset by lower discount rate, which increased pension obligation by approximately $700 million.

For 2010, we have a $57 million mandatory funding requirement.

And our current cash deployment plans call for approximately $300 million of discretionary pension funding in 2010.

So Paul, I think with that introduction, we're ready for

Outstanding.

Thanks, Jim.

Steve, I think we're ready to go to Q&A.

Yes, sir.

(Operator Instructions).

Your first question comes to David Strauss with UBS.

Please proceed, sir.

Good morning.

Good morning, David.

Wes , you noted the long tail with LPD 17.

Given that, can you just talk about upside opportunity there is in ships over the next couple

Certainly.

As you know, our ship building business has two major components to it ,one, the nuclear business and Newport News and surface business in the Gulf.

Clearly LPD represents a challenge, as I mentioned earlier, and as Jim also described in his remarks as we go forward.

But when we look more broadly across the portfolio, there are also good opportunities that we're addressing.

For example, the increase in the submarine procurement to two per year, starting fairly soon, that is well-supported in the budget.

That will represent very nice opportunity for our Shipbuilding business.

And I would say broadly, as we looked at the budget coming through earlier this week, the President's recommending a good strong support for Shipbuilding.

So as we look at the horizon, we see our nation continuing to recognize the imperative for a strong naval force structure.

And given our position in Shipbuilding, that should represent a good opportunity for our business over the longer term.

But all that being said, I would reinforce what we communicated during our remarks, given that we do have a substantial sales volume on LPD at a very low margin rate, it will represent a downward tug on the rate at which we can improve margin rates here over the near term.

Okay, that's great color.

As my follow-up, could you just address the outlook on the Information Systems side?

Obviously the president talked about freezing nondefense discretionary spending, and what kind of impact you think that could have on the business?

And then also, where you are today with VITA, and how does that run out from here?

Let me take the first of those, and Jim, you may want to give a little financial flavor on VITA.

With respect to the positioning of our Information Systems business, as I mentioned in my remarks, the defense and intelligence components of that business today represent about 75% of the sales.

And as you could see, and looking at the budget requests, those areas are very well supported with respect to what the administration is requesting.

and quite frankly, we believe with respect to Congress will support going forward.

The other roughly 25% of the sales is the area that we described as civil business, within Information Systems, that is a mix of federal civil business and state and local.

We've been fairly clear in our prior communications, that we are stepping back from the state and local IT outsourcing market, a market we do not deem to be particularly attractive.

And as a result, that is causing that aspect of the business to reduce over time.

The civil federal market, the market on which we participate, continues to represent some very good opportunities for the Company.

So while our overall civil business is not looking at substantial growth, because of the focus in reducing our exposure in state and local outsourcing, the component of that marketplace that deals with other departments of government, beyond defense and intelligence, we continue to see as representing good opportunities for us going forward.

On the financial side, the VITA contract represents a drag on our earnings at this point.

As you know, we've from all the press reports, we have been in conversations with the state, the commonwealth, over potential changes to the contract that we think are warranted.

Those conversations continue.

I wouldn't want to speculate on what that outcome might be, in terms of the operational activities.

We continue transitioning a number of the agencies.

And we continue having conversations with the commonwealth about whether certain agencies should be outside the scope, or have a different scope associated with their transformation.

From an exposure, financial exposure perspective, I mentioned in the past, that I see this type of contract having two major element of exposure.

One is the cost of transformation.

At this point I think we have a fairly good handle on that, subject to resolving the exact scope of some of the agencies.

On the other issue associated with these types of programs is the future revenue strain associated with the total contract life.

At this point, I would characterize that as largest variable in our thinking about this program.

But I think our financial assumptions at this time are reasonable, and reflect that variability as well.

Thanks for the color.

All right.

Your next question comes from the line of Howard Rubel with Jefferies & Company.

Please proceed.

Good morning, gentlemen.

Hi, Howard.

Good morning, gentlemen.

Thank you.

First, just a follow up and try to translate Jim's comments on VITA, Does that mean you're losing money on the contract today?

We are losing money today, Howard.

And there's a probability you can at least get to break even, or something better than that?

We're working very hard to achieve that, yes.

And then just to go to your outlook for one moment, when you talk about stable for Aerospace and modest growth in some of the other categories, could you sort of highlight a couple of the puts and takes that get you either -- that gets you to where you are, and where we may see some upside or some risks?

Let me -- let me start with Aerospace, and Wes , you can jump in any time you want.

Our forecast is for stable revenues in Aerospace.

And clearly as you know, it's a portfolio.

And so there are a number of programs that are growing.

And there are another set of programs that are actually shrinking.

So on the growing side, we see programs like F-35, the F-18, BAMS, and some of our restricted activities continuing to grow.

And then, on the downside, programs like KEI and TSAC that were canceled, obviously have smaller or no revenues in 2010 when they had revenues in 2009.

The E2C is essentially transitioning, and completing much of its production activities.

And the E2D is on the front end of the ramp up in production.

And so there's an evolution or decline in E2 revenues in total.

And then UCAS has some lower revenues in 2010, as compared to 2009.

Shipbuilding is largely -- the decline is largely driven by the amount of carrier overhaul work that we anticipate in 2010, compared to 2009.

And then the Technical Services growth is largely related to the successful new awards that they won in 2010, or 2009 rather.

Information Systems, the growth largely is coming out of the intelligence and defense divisions, which continue to grow with the civil division shrinking somewhat on a year-over-year basis.

And then Electronic Systems, just the growth is across the portfolio with, again, some programs up, and others down.

But on an overall basis, very well diversified portfolio

Thank you very much.

That's great.

Thanks.

All right.

Your next question comes from the line of Doug Harned with Sanford Bernstein.

Please proceed.

Good morning, Doug.

good morning.

Good morning.

just following on the Aerospace side, I was interested in understanding the puts and takes, because the programs you outlined -- if I were to go to 2010, taking KEI and TSAC out, you're in the transition on E2.

I mean, this to me, I can't see into the restricted programs in space, but it sees to me you've got a pretty strong growth trajectory coming out of 2010.

Is that fair?

And also it seems to be shifting towards production, from development at the same time.

Doug, is your question in 2010 or coming out of 2010?

No, no.

The 2010 -- flatness in 2010 appears to be due to some things -- that these aren't secular trends, these are things that are changes that won't be repeated in 2011on the downside.

That's true.

On the upside, actually may get better.

That's true.

That's a good reflection of the situation, Doug.

The other down in Aerospace is the missile programs, IPIC and those kinds of things.

Right, right, KEI and IPIC together, in terms of the missile areas represent meaningful down.

But if you look at the portfolio, and the areas where we see the administration recommending continued investment, and growth in investment, the unmanned platforms are certainly an area of substantial focus.

The manned platforms that we build, do a lot of work in ISR in particular, and we see those being well very supported.

And of course, as we look across the whole set of restricted activities, there's some nice opportunities there as well.

So I think your perspective is right.

The puts and takes always vary from year to year with the budget ups and downs.

But when we look at Aerospace, we are quite pleased with what we have.

And then, just as a follow on, you talked about the tanker, and the position you're taking with respect to the structure of the contract.

And if it's structured in an unfavorable way with too much risk, that's not something you want to pursue.

Now, you've announced you're going to compete on the recompete on ground-based midcourse defense.

I'm curious how you look at that one, given there's an incumbent who obviously has a lot of knowledge about a very complex program.

How will you look at competing on that one, in terms of the risk you would take and the kinds of structures that would be acceptable in that kind of a bid?

Doug, let me give you an explanation of tanker to make sure that the full picture is well represented.

We, of course, have provided the departments a lot of commentary around the financial terms and conditions that were resident in the draft RFP.

And there were a variety of issues there that we identified, that represented a risk profile that we did not find acceptable to support our bid.

There are other issues associated with tanker beyond the financial terms.

And as I indicated, we're also, quite frankly displeased with the approach, where value beyond threshold requirements is not really well-recognized in the scoring methodology for the proposal.

So as structured, it really does not represent a meaningful, competitive opportunity for our offering, which inherently is a larger aircraft , and inherently provides more capability, but a bigger airplane inherently costs a little bit more.

So without that value recognition methodology, in the final RFP, we are fundamentally disadvantaged in the source selection evaluation process.

So there are a variety of factors that go into our conclusion, that unless we see some major restructuring in this final RFP, this is simply an unattractive proposition for our Company to pursue the bidding on.

So that's a perhaps a little broader picture on tanker, than just the financial terms and conditions.

But certainly the financial terms and conditions are very, very important.

And every single one of the new activities that we're going to assess bidding upon, we're going to take a very careful look at financial terms.

And we're going to be very candid with the procuring organizations, as to our perspectives on those.

And we're early in taking a look at GMD.

We're not particularly concerned about competing against incumbents.

We have been quite successful at doing that in the past.

So simply because there is a long, entrenched incumbency does not necessarily mean that you cannot have a very effective opportunity.

We demonstrated that last year in our win of the KC-10 Contractor Logistics Support Competition.

So GMD is one, we are taking a very careful look and we are certainly going to be highly engaged in working with missile defense agency in assessing the procurement terms in giving them our feedback.

I belief they are looking for a good, robust competition here, and we are interested

Your next question comes from the line of Robert Spingarn of Credit Suisse.

Please proceed.

Good morning.

Good morning, Robert.

Just to stick for Aerospace for a moment, and some of the moving pieces in there, can you give us a little better fidelity on what kind of revenue you're flowing on Joint Strike fighter this year, and then MPOS at the same time as well.

Yes, the -- our plan would call for JSF revenues or F-35 revenues to be up, maybe a couple hundred million dollars over the 2009 level across the total Company, not just Aerospace, but Aerospace, Electronic Systems and Information Systems.

So a few hundred million dollars, associated largely with LRIP portions of Joint Strike Fighter, as opposed to the SDD portion of F-35.

How is that total, Jim?

With a couple hundred million up, what kind of total are we looking at?

We haven't talked about the total.

Let's just say we're up a couple hundred million.

Okay.

And then on MPOS, our plan is kind of the $0.5 billion dollar range for MPOS.

Okay.

And then maybe this is for Wes.

On Global Hawk, Wes, we have seen unit funding come down over the past year or two, in the budget, at least in the base budget.

We did seven a couple years ago, and we're now doing four.

what is the long-term trend here?

I think we're going to see it fluctuate year-over-year.

It varies across these blocks.

As you know, each of the blocks has a different configuration with respect to the mission capabilities.

We see Global Hawk continuing to be very well supported, continued demand for it in theatre.

And we also see continued new applications.

We announced last year, that the BACN capability, these battlefield communications network nodes, were added to Global Hawk, and we're going to be putting BACN on two of the Global Hawks going forward.

So we see it well supported.

I think we will always see some ups and downs, year-to-year in the count, depending on the block capabilities.

Okay, and then just moving over to Shipbuilding, particularly Newport News, you talked about some of the movement.

You or Jim talked about the carrier overhaul diminishing a little bit in 2010, but based on the funding we just saw on Monday, should we expect a reversal in 2011?

To me, that looked very solid carrier funding across the board, new and overhaul.

I basically see our Shipbuilding business about a $6 billion business for the next few years.

Okay.

Puts and takes.

Would you say that you -- how did you react to funding that you saw on the carriers?

Positive.

Yes.

Thank you.

Your next question from the line of George Shapiro with Access 342.

Please proceed, sir.

Hello, George.

How are you, Jim?

Pretty good.

First question for you -- what caused the big drop in unallocated expense this quarter versus last year?

Also versus the $55 million in the third quarter quarter?

Every quarter we take a look at different accruals, and we adjust those accruals.

And so it's just that normal accrual process of just looking at the environmental accruals, and true up of prior overhead rates, and just a number of those different factors, George.

I wouldn't characterize it as anything unusual, and essentially our unallocated in total, was pretty much as we thought it would be for the year in total.

Okay.

And then just maybe a more general one for you or Wes, -- how do you contrast such difference performance in the sales side now in your Shipbuilding versus General Dynamic's shipbuilding business, given that there are some common programs?

Yes, George, this is Wes .

What I would reflect on there, is while there are some common programs, there are some very, very different mixes.

Certainly we share production, if you will, on the DDG class, and we have some -- obviously a partnership on Virginia class.

But we have some very big programs in our portfolio, not in theirs, and vice versa.

We are the ones that build the carriers.

We do the expeditionary warfare ships, the LPDs, LHAs.

So those are big differences, and contribute to a different outcome with respect to what is getting budgeted year-to-year, and what the magnitude of the future profile is going to look like.

So, the common part is important but not the majority by any stretch of the

George, I would add -- I would expect that GD's revenues on DDG 1000, for example, are ramping up.

Ours are not.

Right.

LCS is another one of those differences.

There are a number, as Wes said, meaningful differences on programs on a company-to-company basis.

Okay, and then Jim, just a simple one -- what were the fully diluted shares outstanding at the end of the year?

302?

In the release.

Is it in the release?

Sorry, I'll look in the release, then.

315.

That was the average.

Was that also the end of the quarter?

I think we'll have that at the K.

You will see it in the K.

So that should be out soon.

Okay.

Thanks very much.

Thank you, George.

Your next question from the line of Myles Walton with Oppenheimer.

Hello, Myles,

Hey, good morning, guys.

I was hoping I could probe a little bit on the outlook for Electronic Systems.

So first on the sales gross side, could you reconcile the kind of outlook for 3% to 4% growth, but the funded backlog thats kind of on a -- at least in near term down trend line.

And secondly, could you talk about the international piece of that business, where it is today, and where you think it will be the next couple of years?

International pieces always very lumpy.

That's part of the downward trend that you observed.

We are continuing to work a number of major international opportunities.

They always take quite awhile to bring home.

And so and the timing will affect that revenue, both the revenue and the backlog profile.

We continue to, as you know, the Electronics Systems continues to be the portion of our business that has the most international revenue.

We really see a relatively stable international profile for that business over the next few years.

Okay.

Could I squeeze one in on --

Sure.

-- tax rate.

You said 34.5%.

Right.

Does that include R&D, or not?

Does not.

include R&D.

The possibility of a R&D credit being reinstated.

And what is the impact again?

About $16 million tax credit , so about $0.05

Okay, thank you.

Your next question from the line of Cai von Rumohr with Cowen and Company.

Hi, how are you doing, guys?

If I could follow up on George's question, I mean, I guess some of us missed on allocated, and if it hits your plan, it was down year-over-year.

As we model 2010, what sort of a number should we use for general corp that is non allocated?

I'm just going to continue with the guidance I gave, that top level.

I didn't get into the line-by-line details, so I think it's pretty much consistent with that.

Well, it is consistent with that, but the problem is, a couple of bps is a big number, and this is why presumably you should have some visibility.

I mean, if we model it about 150 -- is that or is it 200?

Or a 100?

because it was about -- it was closer to 100 in 2009.

Remember, Cai, in 2009, we had the resolution of the HBT and the settlement of the TSAM claim, which had an impact, favorable impact, in unallocated of about, as I recall, $60 million in the second quarter.

Okay.

So that's not going to continue, obviously, in 2010.

No, but I'm pushing you here.

So are you saying it could be closer to the 200 --

I'm not going to give you a number.

Okay.

Okay Great.

You mentioned the F-35 adjustment in the fourth quarter, and the adjustment for next year, Specifically, could you give us a little more color on what the adjustment was, and what you're assuming on the F-35 for 2010?

And for any cost sharing that would be asked to do?

Yes, as I tried to say in my comments, we anticipated a restructuring of the fee in our fourth quarter close, so we did reduce our recovery assumptions on SDD.

As you may know, we share fee on SDD in Aerospace Systems, not in the other two operations of the Company that have F-35 work.

And largely our activity in 2010, is associated with LRIP activity as opposed to SDD activity.

So we lowered our fee assumption, where we think it's appropriate and reasonable at this point in time.

I don't know that we have a lot of exposure going forward.

Excellent.

And then you have a very broad range of cash flow -- $500 million range for 2010.

Why is that ran song broad?

And what has to happen to get you to the upper or lower end of that?

The range is the same range we had at the beginning of this year in terms of cash flow, the big variable is working capital.

And we work really hard to manage working capital, as I said in my comments.

We had two really good years of working capital management.

But frankly that comes down to the last couple days of the year, when some customers, both the government and other primes, decide whether they're going to pay us in December or January.

So it's the variability largely around working capital that is accounted for in that range of cash flow.

And you said you would use all the proceeds of the sale of TASC, to buy back stock, is that the after tax proceeds?

Because I assume you would have bought stock, excluding TASC.

So as we think about this year, how much should we think in terms of how much stock you're going to buy?

Well, essentially on the chart that walks from 2009 earnings to 2010 earnings, I had given you an estimate of that earnings per share impact of the repurchase program of $0.30 to $0.35.

If you go back, when we announced the TASC sale, we increased the share repurchase authorization by $1.1 billion, essentially the net number.

And so, all our guidance reflects that consistent operation of that information.

Okay.

Hey, thank you very much.

Okay.

Your next question from the line of Sam Pearlstein with Wells Fargo Securities.

Hey, Sam, how are you?

Good, how are you?

Just a couple of things, one is on that corporate overhead line, I just wanted to ask about move of he headquarters from California to Washington.

How are you thinking about any one-time charges getting absorbed within the 2010 guidance that don't recur in 2011?

Yes, I think in terms of one-time costs related to the move, since the move was planned to occur in 2011, that's more of an issue for 2011 than 2010.

I don't know that we're going to incur a lot of costs on the move in 2010.

Okay.

And then can you just talk about the order outlook in 2010?

Do you assume that your book-to-bill will be above one?

And what are the major competitions that you're going after this year that we should see?

Sam, let me address that.

In terms of the major competitions, there are a couple that are in process right now, where we hope to hear the outcome later in the first quarter.

One is the GPS OCX program out of our Information Systems sector.

And the other is out of IS, the Kings program.

In both of those cases, we've had our proposals in, been working through the final proposal update processes, and believe that the government is on track for awards later in the first quarter.

There are several others that we're focusing on that appear to get continuing support in the budget process.

We talked about GMD a little bit earlier.

Just to kind of add to some of our earlier discussion on that, as you know, we have been the IPIC contractor for over 50 years.

And so we have a tremendous legacy of excellence in supporting the sustainment and continued evolution of those weapons systems.

We believe that brings a strong competency to compete on GMD, so we're looking at that one very carefully.

The EMARS program, which is another one of the ISR platforms intended to provide some more near term support in the battlefield, is an area we're also focusing on.

I believe we have a number of strong capabilities that would position us well on EMARS.

JSPAC, is another good example, that is the joint space operations center, we're taking a look at that.

We -- here again, have a very substantial set of capabilities in managing space systems and also in large-scale operations centers, and we're looking at that one very carefully.

So if we look across our businesses, we see a wide variety of opportunities.

And as the administration is continuing to focus in the ISR arena, C4ISR more broadly, certainly in cyber security, and some of the other areas I mentioned in my remarks earlier, such as unmanned, we see a very robust set of opportunities.

I would say, though, just to put a little bit of flavor on that, we are driving a degree of discipline into our system, around the evaluation of opportunities that is a notch or two beyond where we have been.

So we're we're going to look at each one of these very carefully, to make sure successful capture of the opportunity, supports our objectives for improving our margin rates, continuing to drive the overall performance of the Company.

So when we look at the opportunities, we're not thinking about scale.

We're thinking about performance.

Okay.

Thanks.

And just one last one for Jim -- when you think about the progression of earnings in 2010, is there anything unusual in terms of how much we see in the first quarter versus the other quarter?

I think on from a quarterly profile perspective, what you've seen in the past, which is essentially builds as we go from first quarter through the year, is what I expect we would have again in 2010.

So, first quarter with lower revenues, and then lower cash obviously.

And then building as we go through the year.

Okay, thank you.

Let's do one more question, if we could.

Yes, sir.

Your last question from the line of Robert Stallard with Macquarie.

Morning.

Good morning, Robert.

Quickly, pension, Jim.

There's a big drop off in 2010.

If you were to hit your return targets, discount rate didn't move, you had these assumed payments this year.

Where do you think pension could head in 2011 -- directionally?

I thought nobody was going to ask that question.

It's worth a try.

Here is everything you want to know about pension.

In 2010 -- again, the details in the presentation.

As I look forward, and rob, you're right -- you have to make a lot of different assumptions.

But assuming we hit our 8.5% long-term rate of return, discount rate doesn't change, we fund what we anticipate, I would see in 2011, a relatively constant FAS expense.

Our cost accounting -- or CAS expense goes up significantly.

So that the net difference improves by about the same amount as the 2010, over 2009.

That increase in cost accounting or CAS expense, is largely reflecting the amortization of the 2008 losses.

And so it's being reflected in our CAS expense as we go forward.

And in terms of funding in 2011, probably a comparable level including the voluntary amounts, at least at this point, to what I anticipate in 2010.

And then if I carry that forward one more year, probably CAS stays -- CAS and FAS stay fairly constant.

And cash probably goes up, I don't know, $300 million, $400 million, $500 million, that kind of range.

Okay.

And as a follow up -- just a final question -- you mentioned in the press release you included some contingency for program performance risk and opportunities.

I was wondering if you could give us an idea how big that contingency might be?

I would say I have a similar amount as I had in the prior year at the beginning of the year of 2009.

And that, to Cai's probing question, that is part of my unallocated, at this point in time.

Okay.

That's great.

Thanks, Jim.

all right.

Okay, thank you very much.

That concludes our call.

Thank you for your participation.

Have a good day.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.