General Dynamics Corporation (GD) Q3 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 General Dynamics Earnings Conference Call. My name is Derek and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host, Ms. Amy Gilliland, Staff Vice President of Investor Relations. Please proceed.

Thank you, Derek, and good morning, everyone. Welcome to the General Dynamics Third Quarter Conference Call. As always, any forward-looking statements made today represent our best estimates regarding the company's outlook. These estimates are subject to some risks and uncertainties. Additional information regarding these factors is contained in the company's 10-K and 10-Q filings. With that, I'd like to turn the call over to our Chairman and Chief Executive Officer, Jay Johnson.

Thank you, Amy, and good morning, everyone. General Dynamics delivered another solid operating performance in the third quarter with sales of $8 billion nearly 4% better than the same quarter a year ago. Operating earnings of $966 million were up 10.5% over the year-ago quarter. Company margins improved 80 basis points to 12.1%. Earnings per share were $1.70 on a fully diluted basis, $0.22 better than last year's third quarter. Third quarter free cash flow, after capital expenditures, was $784 million, 121% of earnings from continuing operations. This includes a voluntary payment of $270 million to our pension plan. In terms of capital deployment, we used $700 million in the quarter to retire our 4.5% fixed rate notes. We also purchased 2.7 million shares of General Dynamics' stock in the open market for $163 million. Year-to-date, we have spent $726 million to repurchase 11.2 million shares. Through share repurchases and dividends, we have returned almost 90% of year-to-date free cash flow to shareholders. Third quarter orders were the strongest we've seen this year. Aerospace and IS&T's book to bill exceeded 1:1 while Combat's book to bill was nearly 1:1. At the end of the quarter, total backlog stood at a robust $61.8 billion. Now let me turn to the results and outlook for each of our groups, starting with the largest of our four businesses, IS&T. IS&T enjoyed strong orders, sales, earnings and margins in the third quarter. Sales were nearly $3 billion for the second consecutive quarter, an 8% increase over last year's third quarter. This is healthy growth in light of the fact that last year's third quarter was the group's highest sales quarter in 2009. Year-to-date, sales are up 7%. The group's third quarter earnings were $306 million up 3.4% year-over-year. Operating margins were 10.4% in the quarter, essentially in line with my 10.5% full year guidance. The group's book to bill exceeded 1x for the third consecutive quarter causing backlog to increase by $230 million. If the group maintains this win rate, as I expect, 2010 will stand as the 12th year that book-to-bill has been at or above 1x, an excellent track record for a business of this size and diversity. Award activity in the quarter was particularly strong at our tactical communications and IT services businesses. Several of these contracts are detailed in today's earnings press release. Total estimated contract value, which adds the potential value of IDIQ contracts to total backlog, stood at $24.9 billion at quarter-end. This represents well over 2x expected 2011 sales and a 5% increase above the year-ago value. Fourth quarter sales and margins will be essentially in line with the third quarter. For the full year, I expect group sales to increase approximately 8% to 8.5% over last year driven by double-digit sales growth in our Tactical Communications and Information Technology Services businesses. Margins for the year will remain around 10.5%. As we look to the future, IS&T is particularly well positioned. I want to spend a few minutes this morning giving you a sense for why. First, a few facts that highlight the group's diverse business base. Group sales are derived from thousands of contracts at any given time with no single contract totaling more than 2% of company sales. Approximately 40% of sales come from civil agencies, restricted, commercial and international customers. Product and systems integration dominate the group's efforts, representing over 50% of sales. The remaining sales consist of approximately 25% high-end engineering services and 20% pure IT service work. Nearly half of sales result from fixed price contracts while approximately 38% are cost plus and the remainder, time and materials. Over the past decade, we have evolved the group's products and services offerings into a balanced portfolio that remains at the forefront of Defense and Federal spending priorities. Let me briefly review the three key pieces of this business. First, Tactical Communications and Battle Space Management. This segment represents approximately only 45% of the group's sales and comprises a U.S. and a smaller U.K.-based business. The group's products and services provide critical command and control capability and enables secure, continuous communications all the way to the dismounted soldier. Programs include the Army's battlefield network, known as WIN-T and the new handheld software defined Joint Tactical Radio System unknown as JTRS HMS. We have dramatically diversified our overseas C4 business from a purely U.K.-based avionics house to a provider of vehicles, force protection, security, avionics and C4I products to a global clientele. Earlier this year, GD U.K. was awarded the development contract for the British Army scout reconnaissance vehicle. This program remains a top funding priority and was included as a component of the Army's future land forces in the U.K.'s recent strategic defense and security review. Next, Information Technology and Mission Services. Our IT services unit comprises a little over 1/3 of the group's sales. This business enjoys excellent market positions in the Defense Department and the intelligence community as a provider of IT infrastructure, simulation and training services and key mission support. This business also provides an array of IT Healthcare Services to military, federal and commercial customers. And finally, Intelligence, Surveillance And Reconnaissance, ISR systems. Comprising about 20% of IS&T sales, this business specializes in signals intelligence, tactical imagery and information collection, processing, exploitation and distribution. In 2009, as many of you know, we added Access to this unit. As a best in class supplier of high-performance electrical optical and infrared sensors and systems, Access provides sensor components that enhance the ability of war fighters and government agencies alike to provide timely, actionable intelligence. Although not a designated business unit within IS&T, Cyber security encompasses core capabilities resident in each of our businesses including encryption and information assurance, network security and forensics. General Dynamics is a market leader in the cyber arena with approximately $2 billion in 2009 sales across a diversed customer base, including the Pentagon, homeland security and the commercial markets. As prime contractor on many sophisticated national Cyber security programs, we employ more than 50% of U.S. cleared digital forensics investigators. Government agencies and private corporations alike will spend billions to protect and defend their networks in the years ahead. General Dynamics will be a major part of that fast-growing market. The IS&T group, by leveraging its current capabilities to capture new business in faster growing market segments, has the opportunity to deliver steady growth over the next several years. Each of the group's businesses remain focused on maintaining their competitive edge by aggressively cutting costs, encouraging continues improvement initiatives and selectively pursuing those opportunities that offer the most attractive returns. Combat Systems. Combat Systems sales were $2.1 billion in the third quarter. This result represented less volume than the year-ago quarter primarily in vehicle modifications, combat logistic support and development programs. Year-to-date, over 50% of the group's sales decline is related to last MRAP volume and less engineering work which is largely the result of the cancellation of future Combat Systems. Despite a reduction in sales, earnings were essentially flat with last year's third quarter as margins expanded in several of our businesses. The 150 basis point year-over-year margin improvement is the result of strong operating performance and less engineering and development content. Total backlog for Combat Systems was essentially unchanged from second quarter at $12.8 billion. Notable orders in the quarter included approximately $475 million for Stryker vehicles and Abrams tanks, $80 million for Iraqi tank logistic support, $260 million for reactive armor, guns and biological detection systems and a $120 million award to supply ammunition to the Canadian Armed Forces. Because of the success of Stryker double-V hull testing, we received another series of orders for the new hulls subsequent to the quarter. Double-V modifications of the current Stryker fleet remain another promising opportunity. We were also notified earlier this month that our U.S. Vehicle business was selected to negotiate a contract to produce Merkava APC main hulls and kits for the Israeli government. We expect to add this program to backlog in the first half of next year and we'll deliver these hulls over the next overall years. We made progress on several international programs in the quarter delivering the first of 140 Iraqi tanks, finalizing preparations for FMS LAV productions and progressing through Canadian LAV upgrade engineering work. Despite these progress, international sales are coming more slowly than anticipated but should grow more significantly in 2011. Consistent with my earlier report, a number of international programs have been slowed by their country's financial status, but none have been canceled or withdrawn. Combat expects to book several additional international orders in the fourth quarter including an FMS LAV order totaling $250 million, the first production contract for an FMS tank upgrade program totaling $300 million and a $100 million order for German EAGLE vehicles. In the first half of 2011, we expect to add the first tranche of production funding for the $850 million Canadian LAV upgrade program to the backlog. The pacing of U.S. awards has also lagged our expectations this year. Some of the awards expected in the first half including armor and biological detection systems came late in the third quarter and will result in lower sales than previously expected in 2010. Other program awards, most notably the ground combat vehicle competition, will push out until 2011. Looking forward for the group, sales in the fourth quarter will be this year's strongest by far. For the full year, I expect the group's sales to be around $9 billion. My expectation for the group's full-year earnings remain unchanged. Margins, therefore, will be around 14%, 40 to 50 basis points higher than my prior guidance. This margin performance is the result of strong operational execution in the first nine months of the year and a favorable program mix that includes less development and initial stage international work than originally anticipated. As we look ahead, combat's international opportunities, combined with current backlog, provide relative top line stability as international workflow mitigates some slowing in our U.S. programs. The group's mature program mix will result in attractive margins and cash flow for the next several years. Marine systems. The Marine Systems group had another good quarter with sales of $1.7 billion, up 12% over the year-ago period and 4% sequentially. Earnings totaled $169 million, up 9% over last year and consistent with last quarter's results. Sales and earnings growth were driven by growing Virginia class volume and SSBN replacement design efforts. The group's third quarter operating margin was 9.9%, down modestly from both the year-ago period and the prior quarter due to mixed shift in our surface combatant programs. With that said, this operating margin exceeded my expectations due to particularly good performance at Electric Boat and NASSCO. Electric Boat's third quarter delivery of USS Missouri is representative of the focus on execution resident at each of our three ERs. EB delivered this submarine in a record 65 months, five months faster than any of the six prior Virginia class boats. Missouri required 600,000 fewer labor hours than EB's last Virginia class sub and was 8% under target cost. Marines backlog totaled $20.6 billion at the end of the third quarter down 3% from the end of last quarter. Despite this decline, the group booked several key orders in the quarter including funding for Bath Iron Works to continue providing management, engineering and detailed design developments for the DDG 51 program. NASSCO also received funding for advanced engineering and long lead materials for the new mobile landing platform, MLP. And in final contract negotiations with our customer, we expect to add several construction contract to vast backlog in the first half of next year, including, the DDG's 1001 and 1002, the second and third of the Zumwalt Class and the DDG 115, the restart of the DDG 51 program. Looking forward to the fourth quarter, group sales will look similar to the third quarter with operating margins in the mid-9% range as the surface combatants mix shift of Bath Iron Works becomes more apparent. For the full year, sales should be up approximately 5% compared with last year and margins will be in the high-9% range, slightly better than my prior guidance. Looking ahead, our shipyards enjoy a healthy backlog and an attractive opportunity set. In addition to our Navy work, we continue to see renewed interest across the range of commercial shippers and anticipate that we can leverage our excellent commercial tanker performance to win new commericial work in 2011. Over the next two to three years, you will see the potential for margin improvements as surface combatant fixed-price work builds, commercial ship building opportunities materialize and construction on two per year Virginia is realized. Aerospace. The Aerospace group's third quarter results were marked by improved order activity, service volume and operational performance. Group sales were nearly $1.3 billion, up 15% from last year's third quarter due to more green aircraft deliveries and higher services volume. Earnings were $199 million, a nearly 60% increase over the same period last year while margins were 15.4%, a 420 basis point improvement. When compared with this year's second quarter, sales, earnings and margins were down due to the two-week furlough at Gulfstream, which caused fewer green deliveries and the timing of R&D cost. I expect sales, earnings and margins to show improvement in the fourth quarter. The business jet market, particularly in the large cabin long-range segment, continue to make strides toward recovery in the third quarter, including further reduction in preowned aircraft levels. Gulfstream took one preowned aircraft and trade this quarter and sold two aircraft for a modest profit. At the end of the quarter, Gulfstream had no preowned aircraft in inventory. Customer interest remains healthy as Gulfstream booked more orders in the third quarter than in any quarter since the economic downturn began in mid-2008. On an absolute basis, dollar-denominated book-to-bill was a 1.2x. Orders handily outpaced defaults resulting in a modest 1% decline in the backlog from the end of the second quarter. The group's backlog remains a robust $17.6 billion. In addition to current backlog, our pipeline of new opportunities remain strong. We continued to experience strong international order activity and interest, particularly in the emerging markets. In the quarter, Latin America and Asia-Pacific represented nearly 1/3 of order activity and now comprise over 40% of backlog. Recent orders span the entirety of our in production and new aircraft portfolio. Flying hours improved again this quarter, a reality that helped Gulfstream service facilities enjoy their highest quarterly volume ever. Year-to-date, Gulfstream's service business is up 18.5%. Beyond improved utilization figures and a growing installed fleet, Gulfstream service volumes reflects their unwavering commitment to provide a best-in-class support. In the quarter, Gulfstream's large cabin business jets were voted number one for the eighth consecutive year in the annual AIA Product Support survey. Jet Aviation Service business has also enjoyed healthy growth this year, up nearly 10% year-to-date. As the international install fleet grows, we are adapting by growing our Product Support organization, which is the largest in the industry today. Jet continues to enhance its service offerings across the globe with particular emphasis in Asia, a region whose installed base promises to grow rapidly over the next several years. Although Jet's service related sales were up in the quarter, overall volume was down modestly from last quarter on lower completion revenue. Business jet completions work has been lighter this year as OEMs delivered fewer aircraft. Conversely, the narrow-body wide-body pipeline remains robust. And Jet signed agreements to complete three more of these aircraft in August. Jet continues to take steps to improve probability including consolidating its U.S. completions and MRO operations at its Skokie, Illinois facility near St. Louis. Planned deliveries for large cabin aircraft are on track at 75 this year. Mid-cabin orders were more plentiful than anticipated in the quarter and I now expect the total approaching 30 this year, several more than I guided you to in July. We continue to make exciting progress on the product development front. With three G250 aircraft and four soon to be five, G650 aircraft in flight test, we are on glide slope toward 2011 FAA IASA certification for both aircraft. In fact, recently, the fourth G650 test article and the first ever Gulfstream test article with a fully-outfitted interior, flew the fastest ultra range, long-range flight ever flown by a business jet. This is a compelling demonstration of the G650's exceptional high-speed cruise capabilities. That was 5,000 nautical miles at 0.9 mach in nine hours and 45 minutes. Both aircraft flew to NBAA in Atlanta, Georgia last week, with the G250 making its maiden transatlantic voyage en route. For the full year, I expect the Aerospace group sales to be up mid-single-digit above last year, slightly higher than my prior guidance due to better than anticipated service volume. Operating margins will also be better than previously anticipated, close to 16%. As we look to the future, the group will enjoy steady top line growth, driven by new product introduction and improving service volume. We will continue to manage this business with great discipline on the up cycle as we did through the down. In summary, General Dynamics continues to perform well and remains positioned for a good fourth quarter. For the year, I expect earnings per share from continuing operations to be $6.70 to $6.75, an increase from my prior guidance. As we look toward 2011, the defense and Aerospace markets remain dynamic. Amidst the uncertainty of a fast changing market place and budget adjustments, we remain focused on execution as we believe this will enable us to leverage our incumbency to win new opportunities. Our defense backlog already includes a solid order book for next year and we are encouraged by the Congressional support our programs have received in the 2011 defense budget appropriations process. Consequently, as we look to the future, I believe General Dynamics will offer a sustaining Defense business with excellent operating margins and strong free cash flow. In addition, our Aerospace business will be the growth engine throughout the near and intermediate timeframe. We are aggressively managing our businesses for profitability, with continued emphasis on earnings growth and efficient conversion of earnings to cash. Our strong balance sheet and excellent cash outlook afford us to tremendous flexibility to continue deploying capital in a balanced manner in order to create the greatest long-term value for our shareholders. And with that, I'll now ask Hugh Redd to touch on some additional financial details. Hugh?

Thank you, Jay, and good morning, everyone. I'll start with some observations about our cash performance and financing activities. As you know, we experienced growth in working capital through the first half of the year due to timing of contract payments, particularly in our IS&T business. Continued focus on this area has begun to yield positive results. In the third quarter, we reversed the trend and trimmed 2010 OWC growth by 1/3. You can see the impact of that effort and the impact that had on strong free cash flow performance in the quarter. In addition, as Jay noted, we repaid $700 million of fixed rate Notes in the third quarter. As a result of strong free cash flow and debt repayment, we've reduced our net debt by almost $400 million in the quarter. This leaves us at the end of the third quarter with a strong balance sheet and a debt to equity ratio of just under 24%. With the third quarter debt repayment, we're expecting net interest expense for the year of between $155 million to $160 million, consistent with our previous guidance but probably toward the lower end of that range. I should point out that in 2011, we're planning a $750 million debt repayment and a $300 million pension contribution, very similar to the debt repayment in the pension contribution made in 2010. Finally, a quick note on our tax rate, I previously guided you to a range, which was as low as 31.2%. That range was predicated largely on a then in process of 2009 tax return. As we finalized the return in the third quarter, we identified some additional R&D tax credits that drove the rate to the lower end of our range. At this point, we're forecasting an effective rate of 31.2% for the year with some opportunity to improve. That compares with the full year rate of 31.5% last year. The tax rate in the third quarter reflects the true up to the reduced full year rate. That completes my remarks and I'll turn it back to Amy to begin the Q&A.

Thank you. As a quick reminder we ask participants to ask only one question so that everyone has an opportunity to participate. If you have additional questions, please get back into the queue. Derek, could you please remind participants how to enter queue?

[Operator Instructions] And we have the first question coming from the line of Robert Stallard from Royal Bank of Canada.

Just a quick question on the Aerospace side, and how demand for the G650 and G250 has been tracking over the last quarter, have you see any interesting moves in the back of them?

Rob, I would say that activity has been very steady and encouraging on both aircraft types. The 650 backlog, as you know, has been very strong all along and we are now up at about 200 orders and looking good. The 250 is taking orders as well. We've talked about that before. It was a little early to give it to the order book, it shows well that NBAA and the people are actually seeing the airplane now, it's doing well in-flight test so that order book is starting to develop as well and so we're very bullish on both of them.

Are you able at this space to give it a little bit more clarity on how you expect the G250 to ramp up?

It will enter into service late next year, as you know and we'll ramp it up as the market dictates, but we think our timing relative to recovery in the mid-cabin market, looks pretty good at this point. So we'll see how it goes but as I said, the order activity and the general interest in that 250 aircraft is increasing essentially week by week. So like I say, we're pretty bullish on that one and you know we are on the 650.

Your next question comes from the line of Robert Spingarn from Credit Suisse. Robert Spingarn - Crédit Suisse AG: Jay, that was a great amount of detail, and much appreciated, on IS&T and you talked about the sub businesses there, could you perhaps, given what's going on inside the Beltway, talk about the longer-term growth trends for each of those businesses and maybe highlight some of the pressure points on sales or margins?

Well, the areas that I highlighted for us are all growth opportunities. I mean the battle space management, technical communications piece, as I described, which is what, 45% of the business, really in one instance is the core network communication systems for the United States Army in the 21st century going forward. So that will be an ever-growing and you know we're passing through LRIP and WIN-T and we're expecting an LRIP decision on JTRS here within the next two quarters, I think. So that business will continue to mature and develop going forward. The IT services piece for us is very, very good business, both in the infrastructure, the support, the healthcare, IT. So we've got many opportunities across what I'd call a diverse growth portfolio in IT. And with that, we've got our ISR that I talked about which is 20% of the portfolio but again, it recognized and necessary fast current in both DoD space and frankly, in agency space and commercial applications. All around that, cyber, which will take a big tent with lots of players in it for as long as the eye can see, we believe, and we're well grounded in cyber, as I mentioned in my remarks. I see all of that and more giving us tremendous opportunity in IS&T going forward.

Your next question comes from the line of Howard Rubel from Jefferies & Company. Howard Rubel - Jefferies & Company, Inc.: Jay, could you talk a little bit more about, I mean you talked a lot about combat but just sort of the evolving change that's occurred, one would have expected a lot of this hard metal to pretty much be in place for third quarter and some of it seems to have slipped, maybe you can sort of talk about what sort of your marching orders you're expecting from that group going forward?

The first thing I would say about combat in terms of the year is that the execution at the business level has been outstanding in all respects. So we've got a great team doing superb work across a global scale here. I'm very proud of them. Now as to the sales, a tendency of that performance, we had as you know, a very, what I would call with a clarity of hindsight, a very aggressive sales plan at the start of the year, which has been softened by the reality, mostly timing realities of the world scene. So I would tell you that the first half of the year, in terms of sales growth, if you will, pretty much happened the way we thought it would and I think I've been saying all along that we were heavily loaded to the second half of the year, which is not terribly unusual for combat, but it was more so this year than I think perhaps historically. So we we're heavily loaded to the second half of the year. I would tell you, in addition to what I said in my remarks about year-over-year comparisons with MRAP volume growing away and NCSD being canceled, a lot of what we are seeing, Howard, is just the timing of these programs. The indigenous vehicle programs we are seeing the European sovereign debt realities impact us in Spain with the 8x8 competition that was going to happen this year has been moved into the mid year of 2011 but reaffirmed by the Spanish Ministry of Defense has being essential to the Spanish Army. so we believe that one will still come. There others in Portugal and other European countries that have pushed out a little bit, prolonging contract negotiations. I am sure things, if you will, the Canadian LAV is probably the best example of that, $850 million, I mentioned it in my remarks. It's happening, as we speak, we're in development, contract execution right now. We'll get the production contract in 2011 and off we go. And by the way there, Howard, I should just mentioned on the Canadian side, when we talk about that LAV upgrade, we also talk about the technical Armored Patrol Vehicles and the CCV as a downrange programs that are coming, but just in the last few days, it's been reaffirmed by my source with the Army chief up there, basically ties this as a family of land combat vehicles that will all be, the RFPs for TAPV CTV are going to happen this year according to him and so we'll be in production, whoever gets that will be in production from 2012 to 2015. So it's coming, it's just not here this year. With the UK scout vehicle, which in contract right now on development but it will be more to follow in the coming years. The international vehicle export business we've talked about before, the FMS LAVs and some of the tanks, we've got some of them, we've got more to come. Some of them we expect here in the fourth quarter. Would I bet everything on the fourth quarter, no. But if it's not in the fourth quarter, it will be in 2011. So it's all coming. The U.S. vehicle business, we've had D-scope on some of the programs that we've talked about earlier in the year, Cougar MOD is one of them, the remote weapon system for Stryker is another one that comes to mind. We've had to lay our new programs like the GCV as I talked about and honestly, a little bit of lumpiness, I guess you could say, in kind of the reset and modification work on Stryker and Abrams as the force reconstitutes or repositions itself in some measures. And then on the weapon systems business, we've seen some delay as well. Armor is a classic example and then we had some softness in the commercial axle market and some of the aftermarket that goes with that actually is coming in now but anyway, I think that's probably more than you ask me for but to sum it all, I would say it was also a very strong order quarter for combat which also bodes well, I think, for the rest of the year and for 2011. Historically, European Land Systems has been the strongest in the fourth quarter, I expect that to happen again this year.

Your next question comes from the line of Heidi Wood from Morgan Stanley.

We've got this U.K. strategy defense and security review and I want to get some clarity as obviously, there was a bit of surprise in terms of delays in 2010, which is probably going to affect your guidance in 2011. Can you give us some color on what effect you see tightening of European budgets in terms of its potential effect on 2011 sales and time of expected awards?

With absolute precision, I can't do that, Heidi. But my sense is, I mentioned for example, the Spanish 8x8, we believe every indication we have says that, that decision will be rendered by mid-2011 and the U.K. piece is proceeding at pace and we're in at development contract of like $750 million, I think, to develop the first seven or so vehicles, all that is going. So for us, the strategic defense review in the U.K. was, we came out of that quite nicely, actually, between the scout vehicle decision and the implications that it has for our program over there, et cetera. So we'll see program movement to the right in 2011, again I'm not naive enough to believe that won't happen but as I've told you before nobody has pulled any cards off of the table yet, it's just the question of positioning in so that they can deal with them respectively in their countries given their financial status.

Your next question comes from the line of Myles Walton from Deutsche Bank.

It looks like the default activities in the quarter ended up $400 million, can you just give us some color on the level of liquidity damage and also should we expect to see a slowdown in that through the rest of the year?

The default activity, honestly, was modest, shall we say. The order activity was really strong, the liquidated damages, Myles, were de minimus. I expect the order book to continue to grow. I expect the default activity to continue at a small or a low, but steady, as we've talked before, level. People move in, people move out, but remember, our discussions about backlog and sweet spots in large cabin, we're still looking at an 18-month backlog for both G450 and G550. And if I seem distracted it's because we're having a horrendous storm right now I can barely hear myself for the rain hitting the windows, and I apologize. But the backlog is strong and you know with the order book is like on the G650 and now the 250 is building so we're bullish on all of that.

Your next question comes from the line of Cai Von Rumohr from Cowen and Company.

Jay, you gave us the gains in services year-to-date. Could you give us some color on what the two services businesses were up both sequentially and year-over-year. And secondly, update us on the expected green deliveries of the G650s for next year?

I can't pull that number off out of my head, Cai. Give Amy call about that. I wanted to say, did I say was 18.5% year-to-date but we're very -- the service is improving as the flight activity increases which is happening out there certainly in the Gulfstream. But the green deliveries on 650s will start late next year, how many, I'm not exactly sure yet probably 10 to 12 is kind of the hip pocket number I got in my head right now. And then you know I think I've talked before about the production rates on advertising right now in 12, 13 and 14 of 17, 33 and 33, which before someone asked me, yes, we would look forward to accelerating past that but we're just not ready to do that, yet, although we are encouraged by everything we see and experience with the G650.

Your next question comes from the line of David Strauss with UBS.

Jay, could you talk about your thoughts on potentially raising additional debt in the current low interest rate environment and then second, on pension. I know it doesn't impact you guys like it does the other defense companies, but talk about maybe what impact it could have on 2011, given what we're potentially seeing on the discount rate side?

I'll take the last part first. Frankly, you said our pension exposure right now is very much under control. We paid $270 million this year, we think we'll probably pay $300 million next year and it won't get in the way of anything else we need to do as far as capital deployment goes. And so we don't anticipate any cosmic changes there in terms of what our requirement will be. As to do debt market, I know it's a favorite question that we get a lot, but I would just tell you that truly keeping with the way General Dynamics does business, which I'd like to think is very disciplined, we kind of don't go to the debt market unless we have a specific reason for going to the debt market. If I got a purpose in mind that we need to go, we've got plenty of access to go there but we don't do it just to get some cash. We've got $2 billion in credit facilities, we're great cash generators, we have lots of cash on hand right now and so we'll continue to generate more. It gives us the flexibility we need to be acquisitive, which we historically as you know have been and will continue to be as opportunities present themselves. So we're not inclined to go to the debt market for good deals because actually the commercial paper market right now, which we have got great access to, would give us more attractive rates than the debt market. We also retired our $700 million notes this year at par with essentially no economic cost to us. So we think we're managing that size in a pretty balanced manner.

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

Just back on the Combat Systems, can you just talk a little bit about, it sounds like the mix in terms of the development and engineering which helps you this year, should I be thinking about as we go into next year that, that's going to put some pressure on the margins and then your number for this year implies something on the order of $2.8 billion in the fourth quarter, I know European Land Systems helps, but does that imply something closer to a double-digit type of growth rate next year from the lower base this year? As things start to move in?

I'm not ready to really speak to next year yet, Sam, but clearly, the fourth quarter will be the strongest quarter and I think, if I didn't say this earlier, I think I meant to. But at any rate, it will be -- it's always strong in combat, ELS is a large part of that reality, but this year it will be stronger still and that kind of was the plan all the way along and the way things are coming to fruition, it will indeed be the plan for the rest of this year. So the margin attachments to that, the margins we received that we gained this time are outsized, shall we say, a little bit. I would think of this wonderful business that we have in the Combat Systems as kind of a 13% steady go business going forward.

Your next question comes from the line of Ron Epstein from Bank of America.

You said about 13% margins on a go forward basis, so what we saw this quarter was a little bit of an anomaly in terms of the strength of the margins in Combat Systems?

A little bit, yes.

And what drove that?

One, I'll say it again, but one is not an anomaly and that's the performance of the team in Combat Systems. But some of it has to do with mix shift, some of it has to do with just timing of the products in our portfolio and the way they come to us and all of that kind of coalesced to give us more uplift in kind of a perfect storm that we're up right now. But for calibration purposes, I think I would bring my head in around 13% up or down, a little from that. And engineering, too, by the way, did I say that?

On the Gulfstream front, can you just give us an update on how flight test is going on both the 650 and the 250?

You, bet. In a word or two words, very well. The 250 there are three birds in flight test right now. I mentioned that one of them, which I finally got to see, touch and sit in, in Atlanta flew obviously, transatlantic from Israel, but then was going to do a number of its test points here in the United States before going back to Israel. Everything is looking good. I talked to the pilot, test pilots in both aircraft, we're very happy. The 650 continues to, shall we say, outperform in all corners of the flight envelope. It's magnificent. I would also take this opportunity to mention that -- I said it before but it's worth foot-stomping, I think, the test bird that was down in Atlanta at NBAA was a full interior as the same bird that we used to get the 5000-mile .9 mark, nine hour and 45 minutes. So we're simply taking a service bird into the test regimen and getting all or more than we expected out of it. If you can't tell, we're very pleased.

Your next question comes from the line of Joe Nadol from JP Morgan. Joseph Nadol - JP Morgan Chase & Co: Just from a high-level. It's a tough environment. I think is in Washington is the consensus in the defense broadly and some of your peers have noted that the last week or so in their calls, and your Combat business has seen the impact of that in terms of the guidance coming down the last couple of quarters this year. I'm just trying to reconcile some of the commentary on a sort of go forward numbers not only in combat but IS&T, steady growth the next several years, some of the comments on Marine which was are bullish, do you think GD is just -- these businesses are just much better positioned than the industry? Or and I try to reconcile I guess the environment in your commentary, it's good to be optimistic, but how do I get comfortable with that guidance given the environment.

Well first of all, I'm not giving guidance for next year or beyond. But I think if you look at the portfolio, if you look at the relevance of the businesses, I mean the Marine group is going to be building Virginia class submarines for a long time. As we've talked before, the Navy will need surface combatants of scale that we build for a long time, so that the work flowed in the repair appended to that will be, certainly, I would categorize is as steady, if not some growth going forward. And I'm being realistic in terms of how I think of defense, it's not going to grow like it has been, very obviously. But we do believe that there maybe some modest growth opportunity in there and what I cited in the past calls in IS&T, are a classic example of that. On the combat side, that's a steady business as we see it right now. We see a lot of 2011 already in program or record. And if you look at the United States Army, for example, and look at the 20-some heavy brigade combat teams and the seven going to eight and probably going to nine, Stryker Brigade Combat Teams with the former at 60 Abrams per brigade and the latter at 330 plus Strykers per brigade, that kid is not going to change until you see a fundamental change in the fore structure of the United States Army. So we try to think of it in pragmatic terms, thread based and core based, if you will, and that really I think performed the core basis of my comments as much as anything, Joe. And on the Aerospace side, that is clearly a growth engine for everyone, I would say, in the industry but particularly when you're driving the premier brand, the Gulfstream with new products about to hit the street with 200 plus airplanes in the G650 queue, et cetera. So put all that together and you've got, I believe, a very steady, sustaining Defense business. Could things change? That depends on budgets and all the realities, but I still believe with everything I've got that the threat and the appetite for risk taking at a national strategic level will drive the defense budget as much as anything. Will there be pressure? Is there pressure? Good lord, yes. Will it tighten, it already is in every segment we deal with. There's no question about that so we're not denying any of that. But we deal with it day by day, contract by contract, platform by platform, system by system and we think we deal with it very well.

And, Derek, I think we have time for one more question this afternoon.

The final question will come from the line of Jason Gursky from Citi.

I just wanted to focus in on a very specific question on IS&T. If you have much exposure to GP Comm the closure is that one of those 2% programs that you talked about, you didn't have any programs larger than 2% in IS&T. And someone asked earlier what the revenue outlook was and you did a great job of explaining that for IS&T but I think you were asked about the margin outlook and I don't think you had an opportunity, yet, to address that so I wondered if you would do that now?

The margin piece, it's a double-digit margin business. If you're talking about IS&T, right?

Yes and the outlook, going forward.

We'll be double-digit in IS&T. We lever that right now, we're proud of it and we have every reason to believe we'll sustain it. The GP Comm piece, I won't go into the whole, you know the story, you know the story, I think Jason, but for us, the impact for us, we have I think probably 300 folks attached to or working with the joint forces command down there in Tidewater. I mean we'll see what happens, how this shapes out. But I believe, what we're hearing and feeling now is as GP Comm stood down or reported somewhere else in some way, shape or fashion, not all of those missions are going to be eliminated and we would expect to move with wherever those missions are translated to. So all that said, it's not a major impact on us, certainly, and we'll go with the mission. If the mission moves, then we'll reconstitute somewhere else if all parts of it is eliminated.

At this time, I'm showing no further questions. I'd like to turn the call back over to Amy Gilliland for any closing remarks.

Thank you for joining our call today. If you have additional questions, I can be reached at (703) 876-3748. Have a great day. Stay dry.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.