General Dynamics Corporation (GD) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 General Dynamics Earnings Conference Call. My name is Jeff, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Amy Gilliland, Staff Vice President of Investor Relations. Please proceed, Ms. Gilliland.

Thank you, Jeff, and good morning, everyone. Welcome to the General Dynamics first 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. And 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 quarter marked by strong operating performance. This performance is particularly notable in light of the dynamic environment that the lengthy fiscal year 2011 continuing resolution created. Revenues in the first quarter were $7.8 billion, up modestly from the first quarter of 2010 due to growth in our Marine and IS&T businesses. Operating earnings were $929 million, and earnings from continuing operations were $618 million in the quarter, up slightly from the same period last year. Operating margins improved 10 basis points from the year-ago quarter to 11.9%, as 3 of the 4 groups delivered improved earnings and margins. Earnings per share from continuing operations were $1.64 on a fully diluted basis, up 6.5% when compared with last year. Free cash flow after capital expenditures totaled $266 million, better than last year's first quarter. Consistent with prior years, I would expect our cash trajectory to be back-half loaded. In terms of capital deployment, we repurchased 3.1 million of our shares in the first quarter. And in March, our board increased the dividend 12%, the 14th increase in as many years. First quarter orders remain healthy in our Aerospace business, as backlog expanded for a second consecutive quarter. Defense orders, however, were somewhat light. This lower defense order intake is in part a timing issue caused by the prolonged resolution of this year's Defense Appropriations Bill. With its recent passage, we expect healthier order activity in the coming weeks and months. At the end of the quarter, backlog totaled $57.6 billion down from year end. Timing of marine orders drove 3/4 of this reduction in backlog. Total potential contract value, which includes backlog, unexercised options and indefinite delivery, indefinite quantity contracts totaled $78.2 billion. Now I'd like to focus on the performance of each of our business segments, starting with Aerospace. Before I address the quarter, I want to update you on the status of the G650 program. As you know, on April 2, the G650 test aircraft was lost in a tragic accident that took the lives of 4 dedicated Gulfstream pilots and flight engineers. The National Transportation Safety Board is in charge of investigating this accident, and Gulfstream is fully cooperating with their team. A preliminary report was published by the NTSB on April 6. As the NTSB investigation continues, Gulfstream is moving forward with all other nonflying certification and production work on the G650. We are working closely with the FAA in consultation with the NTSB to determine when it is appropriate to resume test flights. We look forward to continuing the rigorous testing required to achieve type certification. I remain confident that the G650 will take its place atop a long line of safe, reliable, high-performance business jets on which Gulfstream has built its superb reputation. With that said, I understand that all of our stakeholders would like and deserve a much more fulsome briefing on what lies ahead for the G650 program. Given where we are in the investigative process, however, there is really nothing more I can add at this time. When we have more clarity and can provide an informed update, rest assured, we will do so. Now let me address the Aerospace group's first quarter. Aerospace delivered another very strong quarter, marked by particularly good operating performance at Gulfstream and robust demand for new aircraft and aircraft services. The group's revenues approximated last year's first quarter at $1.4 billion. This result reflects growth in aircraft service demand, offset by lower completions work at Jet Aviation and the absence of preowned aircraft sales. First quarter revenues were up nearly 7% over the fourth quarter of last year due to additional Gulfstream new aircraft volume and growing global demand for aircraft services. Gulfstream green deliveries in the first quarter included 4 additional aircraft when compared to last quarter. The group's operating earnings were $230 million, and margins were 17% improved when compared with both last quarter and the prior year period. The group's better-than-anticipated margins derived from Gulfstream's improved productivity and from liquidated damages recognized following the cancellation of aircraft options by a fractional customer. We continue to see improved conditions in the business aviation market, including healthy new order interest, declining pre-owned inventory levels and robust aftermarket demand spurred by further improvements in aircraft utilization. To that last point, Gulfstream flight hours are now approaching 2008 levels, 2008 levels. Gulfstream participated in another quarter of notable order intake with international orders continuing to dominate the order book. Orders from the Asia Pacific region were particularly strong this quarter, including an order for 5 large cabin aircraft that will further expand our footprint in China. First quarter orders favored all 3 of our large cabin aircraft models. Gross new aircraft book-to-bill was 1.2x on a dollar-denominated basis in the quarter. Orders continued to significantly outpace defaults which were at their lowest levels in the quarter since the downturn began. This helped the group's backlog to grow for a second consecutive quarter. At $17.9 billion, backlog continues to keep us in the 18- to 24-month window from newer aircraft order to delivery for our 450 and 550 large cabin aircraft. Pre-owned inventory levels across the Aerospace market reflect modest improvement. We took 2 pre-owned aircraft in trade this quarter, with one of these aircraft available for sale at the end of the quarter and the other under contract for April delivery. Aircraft maintenance, repair and overhaul demand was solid in the quarter, with both Gulfstream and Jet Aviation posting their strongest revenue quarters ever. We are working diligently to expand our global service footprint as our international installed customer base grows. For example, Jet Aviation has just upgraded its MRO and FBO location in Singapore. Eventually, this Singapore facility will include a second hangar capable of accommodating numerous Gulfstream G650s and an engine overhaul shop that will dramatically reduce the cost of shipping engines to the United States and the United Kingdom. While Jet Aviation experienced continuing demand at its Service business, the Completions business remained challenged due to lower OEM completions volume, following the economic downturn and throughput delays at its wide-body, narrow-body facility. As a result, Jet is taking steps to restructure this business, reduce overhead and enhance Completions productivity. For the year, I'm still guiding to 15% to 16% top line growth and 15.5% to 16% margins at Aerospace. Now let's move to the Defense businesses, starting with Combat Systems. Combat Systems is off to a good start, with each of the 4 Combat businesses contributing to the group's solid operating margin performance in the quarter. Revenues were nearly $2 billion, essentially flat when compared with last year's first quarter and in line with our plan for the year. Revenues in the quarter reflected increased international vehicle volume, including growth on a major LAV export program and work on a number of wheeled vehicle programs for European customers. This additional international work helped to mitigate a decline in U.S. vehicle revenues caused by fewer domestic Abrams tank upgrades and less Expeditionary Fighting Vehicle development work. Volume was essentially flat at our Weapons and Ordinance businesses. Combat Systems delivered $277 million of operating earnings in the quarter, up slightly from last year's first quarter. The group's operating margins were 14.2%, 80 basis points higher than last year. Cost savings and continuous improvement initiatives across the segment drove margin improvement, with additional benefit from a favorable program mix that included less vehicle development work. Combat Systems backlog declined modestly from year end to $11.4 billion. Despite this decline in backlog, there were several notable awards in the first quarter, including contracts to produce armored personnel carrier hulls for a foreign government, provide 120-millimeter mortar ammunition for the Marine Corps' expeditionary fighter support system and demilitarize several types of munitions, including cluster bombs. We anticipate improved order activity at Combat Systems as the year progresses. Several awards expected before year end include funding for the first tranche of an FMS tank upgrade program; additional Stryker Double-V vehicles and an opportunity to participate in the initial phase of a Ground Combat Vehicle development program. Several additional award opportunities that may happen this year, but are not integral to our 2011 results, include additional MRAP upgrade opportunities, the production award for the Canadian LAV upgrade program, another tranche of FMS LAVs, the next increment in the Egyptian tank program and the Spanish 8x8 vehicle program. While we have not yet seen any international opportunities come off the table, we remain very mindful of the impact that dynamic, political and economic developments can have on the timing of international awards. For the year, I continue to expect Combat Systems to deliver approximately $9 billion in sales and around 14% operating margins. My revenue guidance reflects a stable outlook for our Weapons and Munitions businesses, some decline in U.S. vehicle programs and growth in our international vehicle markets. As I've previously highlighted, we expect sales and earnings to grow in each of our 4 combat businesses every quarter, resulting in a particularly strong second half. Next, I'll discuss Marine Systems. Marine Systems continued to perform admirably in the first quarter. Group revenues were $1.7 billion, while operating earnings were $167 million; both up slightly compared to a year ago. The earnings increase is particularly notable in light of mix shift within several of the group's programs. Marine's top line reflects higher submarine, auxiliary and repair volume, offset by lower destroyer and commercial work when compared to last year's first quarter. The higher submarine volume relates to our work on both the Virginia class, as we move to 2 boats a year, and the Ohio class replacement. This program passed a major Pentagon development milestone in the quarter, enabling it to enter the technology development phase. Lead ship procurement is planned for 2019. And the Navy shipbuilding plan reflects the significant funding increase over the next several years to support that schedule. Electric Boat is the design agent for the program and is working closely with our Navy customer as this program moves into the next phase. Marine Systems' 10% operating margins were a 20-basis point improvement from last year's first quarter. This margin is driven by NASCO and particularly noteworthy performance on the T-AKE auxiliary program. We launched the 12th T-AKE USNS William McLean into San Diego Bay 2 weekends ago and remain on track to deliver the ship later this year and the remaining 2 T-AKEs, numbers 13 and 14, next year. The group's backlog totaled $18.7 billion at the end of the quarter, down from year end 2010. This decline in backlog is primarily a timing issue, as we continue to anticipate adding several Navy ships to backlog this year. With the CR behind us, we expect to receive the contract modification for the second FY '11 Virginia class submarine very shortly, enabling us to move this submarine from unfunded to funded backlog. We remain in negotiations with the Navy on the Mobile Landing Platform, MLP, and the 2 remaining Zumwalt Class destroyers, DDGs 1001 and 1002. While negotiations have been slower than we had anticipated, we continue to expect to move these ships into our backlog this quarter. We also expect to finalize the contract for the first of the DDG 51 follow-on ships at Bath later this year. In addition to our Navy work, we continue to see interest across the range of Jones Act commercial shippers and believe that we will leverage our Product Carrier success to win new commercial work as these potential customers start awarding new contracts. Marine Systems remains on track to achieve my guidance of relatively flat sales this year. As work begins on several new ships and we experience further mix shift in our surface combatant workload throughout the year, I continue to anticipate margin compression that should lead -- should result in full year operating margins in the low 9% range. Next, IS&T. The Information Systems and Technology group delivered a good first quarter, particularly in the face of the prolonged CR. Group revenues grew 2% to $2.8 billion from the first quarter of 2010 due to higher volume on several programs in our IT service business. IS&T's earnings were $276 million, and operating margins were 9.8%. While both earnings and margins were down from last year's first quarter, this decline was due in part to program mix as this year's first quarter represented a higher percentage of IT service program volume when compared with the prior year. While IT service work provides an excellent return on investment, profitability on these types of programs is generally lower than more product-intensive programs. IT service margins also reflect the competitive dynamics of this marketplace, particularly as IDIQ multiple source contracting vehicles have become much more prevalent over the last 18 to 24 months. IS&T's backlog was $9.7 billion at the end of the quarter as the group achieved a book-to-bill of 0.9x. This indicates continued demand for the group's products and services despite resource constraints and delays in contract awards imposed by the CR. This quarter's order activity was especially strong at our Tactical Communications and IT Service businesses, demonstrating continued success in capturing business in faster growing market segments, such as Battlefield Communications, Cyber and IT Emission services. We had a number of notable IS&T awards in our Tactical Communications business this quarter, including a contract for our core Warfighter Information Network Tactical, WIN-T, program. The nearly $300 million WIN-T Increment 2 award in the quarter, fund network development to another 5 brigade combat teams and represents the customer's dedication to rapidly deploying the significantly enhanced on-the-move broadband capability to the Warfighter. WIN-T provides the network that our JTRS radios will leverage to enhance soldier communications on the battlefield. Our HMS Rifleman and Manpack radios underwent further successful field testing in the quarter, where they proved their ability to provide significantly enhanced situational awareness and connectivity to soldiers at the company and squad level. We anticipate a Low Rate Initial Production decision on Rifleman radio soon and on the Manpack before year end. When combined, backlog and estimated potential contract value under IDIQ contracts totaled $24.8 billion, providing IS&T ample opportunity for continued growth. IS&T remains well positioned to achieve my guidance of approximately 3% to 5% sales growth and low to mid 10% margins this year. Although in recent periods, IS&T margins have been somewhat consistent throughout the year, we expect them to increase throughout 2011 as contract mix reflects increased tactical communications volume in the second half. In summary, our first quarter provides a solid foundation for a successful year. As is our custom at this early point in the year, I am reiterating my full year guidance of $7 to $7.10. This guidance presumes second half G650 deliveries. However, it does not include or anticipate the results of capital deployment. As we look ahead, we remain focused on executing on our backlog and continuing to identify new opportunities. General Dynamics' key programs did very well in the FY '11 budget recently passed by Congress. Program funding included $1.2 billion for Stryker, $521 million for Abrams, $223 million for EFV, $591 million for WIN-T, $787 million for JTRS and support for all of our ship programs, including DDG 51, Virginia-class submarines and the Mobile Landing Platform which received $500 million for an additional ship beyond what was in the President's budget. Our programs are also well supported in the FY '12 budget request. There is clearly significant angst and uncertainty surrounding the level of future defense spending, particularly given President Obama's recent remarks. We recognize that as the country deals with the urgent requirement to reduce national debt, previous predictions regarding defense spending are changing. While it is impossible to know what will come from the administration's roles and missions study and the President's announced intention to find more savings in the defense budget, there are a few things that remain evident. First, in this pressured budget environment, it is very likely the case that defense top line spending will begin a slow, steady decline. I believe the programs most at risk are likely to be the new development programs. As such, incumbency is particularly salient. While we continue to pursue new development programs, we remain focused on leveraging our incumbency to help our customer identify solutions that affordably improve the warfighting capability of existing platforms. Second, the world remains a dangerous place, and current force structure is sized to this threat environment. Going forward, our nation's tolerance for risk must continue to acknowledge the global threat. That should mean only modest adjustments to force structure. Secretary of Defense Gates has already warned that deep defense budget cuts would be calamitous. His eventual successor will confront the same national security reality. As General Dynamics plans for the future, we will continue to evaluate the long-term defense spending environment realistically. GD is well positioned to sustain our business in a declining defense top line environment, given our current footprint in Army and Navy force structure and the opportunities inherent in our Aerospace business. Our lean, agile business model, solid balance sheet and ability to generate earnings and efficiently convert them to cash afford us great flexibility to deploy capital to further enhance our business. With that, I'll now ask Hugh Redd to touch on some additional financial highlights.

Thank you, Jay, and good morning, everyone. I'd like to make a few observations about debt, interest expense, taxes and pension contributions. At the end of the quarter, we had just over $430 million of net debt, up slightly from year end, and this is after returning over $470 million to shareholders in the form of share repurchases and dividends. Our next scheduled debt maturity is $750 million of notes due in July. As we get closer to July, we will make a decision to either repay that debt from cash on hand or to issue new obligations. Our net interest expense in the quarter was $34 million, down from $44 million a year ago. This resulted from repayment last year of $700 million of fixed rate notes. For the full year, we expect interest expense to be around $130 million, that assuming of course that we don't refinance the notes that are due in July. With respect to income taxes, the first quarter effective rate of 31% was consistent with our expectations and with our current outlook for the full year. Finally, we remain on track to make a voluntary contribution of $350 million to our pension plans in the third quarter of this year. That completes my remarks. Amy, I'll turn the time back over to you for the Q&A.

[Operator Instructions] Jeff, could you please remind participants how to enter the queue?

[Operator Instructions] Our first question of the day comes from the line of Ron Epstein with Bank of America Merrill Lynch.

Just to maybe start off with a Gulfstream question, the order activity in the quarter, can you characterize at what part of the world it came from? What was going on with the mid-sized aircraft if you're starting to see a pickup there, and if there was any impact to Gulfstream due to the instability in the Middle East?

Okay. I'd be happy to take that question. The order activity, Ron, was -- I would say very well spread across the product line. Large cabin dominating, yes, but we're also taking mid-cabin orders. The demographics of that are very heavily weighted to international, pretty consistent with what we've been saying in previous quarters. But actually in this quarter, it was even more so -- I mean, like 70-some percent international. A large portion of that came from Asia Pacific, probably half of that at least came from Asia Pacific and, as I mentioned, China being a major part of that. So it was a good dispersion, if you will, on the international space across the product line. Mid-sized activity continues. I would not characterize it as robust but certainly, improving the pre-owned inventory that's out there is working its way through the system. There's still more to come as I think you know. But for us, we are seeing continued mid-cabin activity, and we are taking orders to include our G250. The Middle East, I would characterize it as being about 10% of our backlog at Gulfstream, and that's proceeding. I would say that the order activity has probably slowed somewhat in the Middle East, as you'd probably expect but nothing drastic in terms of falloff or cancellations or what have you there.

Our next question comes from the line of Joseph Campbell with Barclays.

It's actually Carter Copeland and Joseph Campbell. Just a quick question on your comment about the 650. You said you were moving forward with the nonflying test activities and production. Is there a point in the NTSB investigation and how long that stretches out, where you have to change that sort of strategy in terms of production and what's going on? Do you reach a point where you need to slow that activity down, and when might that be? How are you thinking about that?

Well, I mean, I guess the answer would be there would be a point. But that's not something that is of immediate concern here at all. It's a very deliberate process as both of you know, and the NTSB controls that process. But rest assured, Gulfstream is working with the NTSB and the FAA, as I said in my remarks, to analyze, to determine, to move forward as smartly as we can. To put a specific time line on that right now is just not something that I can do. But I would tell you that just to reaffirm, we are proceeding with all nonflying activity as it applies to the 650 program and our other programs as you’d expect. But specific to the 650 and at this time, reflected in me not changing my guidance, I don't see any impact to the year. We'll see how that goes obviously. But I don't want to presuppose anything from the NTSB. They have a very tough job to do, and we're helping them as best we can, and we'll get to a resolution here and return to flight at some point. I'm just not going to try to put a time line on that, except to say that I believe it's being treated as you would expect it to be treated very seriously with great discipline, with great analysis on both Gulfstream's part and the other entities. And we'll come to a safe decision here as soon as it's practical to do so. I realize that probably doesn't satisfy your desire for specifics, but that's about as specific as I can be right now.

I think it's less on the conclusion that the NTSB may draw and when they will draw them and more internally how GD is -- how Gulfstream is proceeding with production, and what your views on that which you do control outside of the NTSB investigation.

Well, I've said very consistently that we anticipated about a dozen green deliveries this year, and we're proceeding along that pathway. And we are unencumbered on that pathway at this point with the exception of, quite obviously, type certification for the aircraft. So at this time, we continue to proceed. And at such time that we have to modify that, we'll make those adjustments and tell you. But that's certainly not the case now.

Our next question comes from the line of Peter Skibitski with SunTrust.

Jay, can you just talk to us about the pricing realized at Gulfstream during the quarter on new aircraft versus the pricing in backlog, and maybe you can give a differential, large versus mid-sized?

I think the way I’d characterize it, Peter, is the pricing is very, very firm on the large cabin and a little bit softer in the mid cabin, which I think is consistent across the industry right now, just as a function of mid-cabin inventory that's out there. But the large cabin pricing is very strong and holding.

Okay, okay. And then can I ask you that there's a lot of reports about potential for an Abrams line break, I think in 2013? Can you talk to us about that and then also the outlook for Stryker as well?

That part of the first question? I'll take it because somebody else will ask it. But listen, there is work to be done as it applies to Abrams to your point. And we know that, and the customer knows that, and everybody knows that. If you look at the Army's lay down of heavy brigade combat teams with some 24 of them with 60 Abrams apiece, that and the industrial base issue that's attendant to that beautiful facility out in Lima, Ohio, we all realize that we've got some work to do to get from the multiyear that completes next year to the next phase, which some are saying doesn't need to start until 2016. So there’s -- filling that space with valid work is, I would characterize, a work in progress right now. Everybody is realizing that we've got something to do.

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

So Jay, your R&D was down fairly substantially in the first quarter, and you delivered 2 more large biz jets than we’d assumed on a pace to do 80, and yet you really said you’d do 78 excluding the G650. Is R&D going to be building as we go through the remainder of the year at Gulfstream, and can you do more than 78 non-650s? And lastly, if you don't know what the problem is, how can you still feel you're going to do 12 650s for this year?

The R&D is net, and we had more alliance assistance in the first quarter, I think is the first answer. And as to the incremental production on the in-production large cabin, Cai, we do have some opportunity there to add an airplane or 2 as we kind of talk about every year. So there's some maneuver space there. And look, I'm not going to go into much more than I've already said about the 650, except to reiterate that at this point, I said we would deliver approximately 12 green 650s this year, and I'm still in a place in the year where I believe we can do that. And obviously, the type certification and the FAA restart with the NTSB authorization is elemental to that. But at this point, I'm quite comfortable suggesting that we carry out the plan.

Our next question comes from the line of Jason Gursky with Citigroup.

You mentioned that you were having some throughput problems on the Completions business. Can you provide a little bit more detail as to what the issues are there and the time frame for completing the restructuring that's going on there and the impact that, that might have on margins for that business over time?

Well, I think the way I’d characterize it, Jason, is it's a number of things, and I mentioned some of that in my prepared remarks. But you've got an OEM, how do I characterize it, shortfall, I guess, as a result of completions activity resulting from an economic downturn. The valley of that, that we're dealing with which then when you butt it against the narrow-body, wide-body work that's out there, the flow and the rhythm and the volume and the overhead and all of those things kind of come together. And you'd say, you know what, we may need to retool this business a little bit given the new scope of activity that we are seeing. That's probably the easiest way to say it. The margins I would anticipate would improve throughout the year. We're working very diligently to do that. And as I mentioned also, the other parts of Jet Aviation which really is what we bought Jet Aviation for – the global footprint, the service, the MRO -- is coming along quite handsomely.

Great. And then to the one thing that you haven't mentioned about the G650, and sorry to ask a second question, but what's the customer feedback then at this point?

The customer feedback has been very supportive, very concerned in terms of the losses that we've suffered and basically reaffirming their desire to get their airplanes.

Our next question comes from the line of Richard Safran with Buckingham Research Group.

Jay, I heard your comment about international vehicle awards, that they're not coming off the table. But some defense companies are noting that some international customers aren't taking deals off the table, but they are sliding planned purchases to the right. Was wondering if you just might comment on whether you're seeing similar trends for Combat.

We have seen some of that indeed, Richard, and we talked about some of that last year, and there was movement to the right. Yes, indeed, we still see that, I mean, the Spanish 8x8s are probably the most talked about example of that. We still believe that the Spanish 8x8 based on what everything the Spanish government is saying, the MoD is saying, will come to a decision this year. But we haven't seen it yet and that's why I mentioned I think that, that's not integral to our sales plan for the year. So yes, we are seeing some movement to the right. Having said that though, we’ve still got a lot of work ongoing. We're in production on -- development on the Specialist Vehicle in the United Kingdom where we're doing the first tranche of FMS tank upgrades at Lima right now and expect the production contract later this year. So we're doing between the FMS LAVs and the FMS tanks, there's lots of activity still apace with more to come that perhaps could be delayed. But right now, we've got a lot that's already in train which is good.

Our next question comes from the line of Noah Poponak with Goldman Sachs.

Jay, you started to talk about Gulfstream in China, and I wanted to ask you to elaborate on that just because there's obviously a great long-term opportunity there, and the debate is timing. And I think most think it's pretty long dated and there are some hurdles there. We were just out there. We met with some of your folks actually and were surprised with the comments that the Western companies out there were making about how quickly that is actually turning now. And so I wanted to get your kind of personal stance on that topic. And then strategically, if you feel like you need to do anything there to have a bigger presence than you already do, whether it’s JV-ing or moving facilities there or whatever.

Your latter first. I mean, that is a very active market, and the pacing I think is picking up to a degree that perhaps -- I won't use the word surprised, but I mean it's accelerating, shall we say. But as I have said before, we're very mindful of the need to match the product support with the sales. So we're working very diligently with -- and to your last point about JVs and partnerships, that's the way you do business over there right now. So we're working diligently with partners over there to enhance the Product Support business as we sell airplanes into it. And also, if you heard my remarks, you heard me mention Singapore as a major, basically a major maintenance overhaul hub in Asia. All of that ties together to be able to capitalize on this growing market in China. We believe it will be a very robust market, and we just want to make sure that we're measuring ourselves properly into that market so we don't, as I like to say, overdrive our headlights and risk diminishing the premier brand that we have in Gulfstream.

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

My question is you had mentioned in Combat that you've got like $1.2 billion in Stryker orders, $500 million in Abrams. But the reality is, I mean, your Stryker sales are a lot above the $1.2 billion and Abrams is 2 to 3 times what you got. So how do you not have this sector go down fairly substantially over the next several years?

Say the last part again, I'm sorry.

Abrams you got $500 million in orders like you said, which is probably maybe around 1/3 of what the sales are currently running. So given that Stryker and Abrams are the 2 biggest programs in this sector, how do revenues not go down substantially over the next several years?

Well, I think the numbers I gave are production numbers. And you've got in addition to that, as you know, you've got modernization, which is particularly significant in Stryker land and also will be in Abrams. You've got reset. You've got combat logistics support, which is ongoing. So there are more elements to it than just the production, I guess, is probably – it’s the safe way to say it.

Our next question comes from the line of Joe Nadol with JPMorgan. Joseph Nadol - JP Morgan Chase & Co: Just want to follow up actually on that same track. Jay, you gave some good color on what's in your Combat guidance, the $9 billion for this year and what's not. And I think you only mentioned one international order that's significant that is in there and most of the rest of these things, Canadian LAV, Egyptian, Spanish, et cetera, seem to be now upside to your guidance. I just want to confirm that. And then secondly on the back of that, you said in the past that this is a business that you anticipate growing modestly from this level in future years. Is it fair to say that you do need these things to hit -- that these are really more important for next year and the year after than they are for this year anyway?

Yes, concur your last, Joe, that's exactly right. I mean, we've got a pretty good -- not pretty good, we've got very good visibility on the year, which is why I reaffirmed about $9 billion in sales. We're less dependent than we were last year on sales coming into the book. So it's a better circumstance. But you're exactly right. I mean, the order book for next year is dependent on a lot of these things -- not dependent, but these would have more impact next year than they do this year, I guess, is the way I'd say it. Joseph Nadol - JP Morgan Chase & Co: And the one order you need to get this year, you mentioned it was FMS tank. Is that into the Middle East?

Yes, it is. And we're already working the front end of that, if you will, in Lima, and we anticipate a production contract later in the year. And we've got Stryker in the budget. We think, as I mentioned, we're going to get probably more Stryker. The Army wants more Stryker. We've got the double-V hull. We've got the reset on the -- not reset, sorry, the redo on the other 7 brigades that aren't double-Vs. The only -- the comment I'd make in addition to that, I mentioned in my remarks about Ground Combat Vehicle, that's one of the new development programs. So I would attach some risk to that to be pragmatic about it. But that's in the plan.

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

Actually, I also have a Combat question, sorry, Jay. A 2-part question there, I wanted to understand what percentage of Combat sales is going to be international this year versus last year.

About the same, 23%, 24%, Heidi. That's all in, okay, FMS 2, okay?

Okay, great. And then you said the force is sized correctly. But actually some of us have been talking to folks down in DC, and they want to get an update as to how many Stryker brigades you see likely ahead. I mean, is there a world given the FCS cancellation, and again, you admit that GCV could be vulnerable? Could that be filled in with more Strykers?

Well, my answer to that would be, certainly, yes. As you’d expect me to say. So I guess, I mean, honestly, you know we're deploying #8 and realistically they're looking at #9. So I guess my answer would be 9 to 12.

Our next question comes from the line of Howard Rubel with Jefferies. Howard Rubel - Jefferies & Company, Inc.: I want to focus on strategy for a minute, Jay. Two things that sort of struck me. One is that you announced the sale of a small business the other day out of Combat. And then second, if we look at the environment, it's changing to a more austere world. Can you affect that change through either coming up with more competitive solutions that exist outside the normal procurement channels? I mean, the Pentagon seems to want some of that. And could you give us maybe a couple of examples of maybe how you solve the GCV as one instance, or maybe what you're doing in submarines as a second instance that sort of allow you to kind of take advantage of your incumbency and your technology?

Well, I mean, the GCV is up for technology demonstration phase, as you know within, I'd say, any day, within a month or 2. And I think that will be very telling. We believe that, that will be delivered, seen through. And then decisions on GCV would probably be made after the technology demonstration phase. So that's why it's in our plan. We believe we'll be competitive as 1 of the 3 to be selected. So it's in our plan there. And the risk attached to GCV in my view comes later on as TD phase evolves or completes. The submarine piece is very, very dynamic and very strong in my opinion. In addition to the Virginia class, and we've talked about this, that’s 18 boats of at least a 30-boat requirement. Okay? Block III, we're on 3 of 8, Block III boats in the build right now, take us out to 2018. We are looking for and working with our customer on Block III. We are also, as you know, working the FSB and the Axle higher replacement. And in that in particular, I think the word as you were alluding to, the need for innovative build strategies and solutions is going to be extremely important because you know that about 2018 to 2019 as FSB and VNX requirements build in the next decade, the Virginia class requirement does not mitigate. So there's going to be a lot to be done and the need to be innovative and creative in how you source these and how you meet the requirements is going to be ever more important.

Our next question comes from the line of Doug Harned with Sanford Bernstein. Douglas Harned - Sanford C. Bernstein & Co., Inc.: I had a question on Marine, and you've got great margins in Q1. But you're heading into the program transitions in this year, both at Bath and at NASSCO. Can you talk about what needs to happen there in terms of the size of the workforce and any changes in operations you're looking at? What are the things you're looking at going forward there?

At the NASSCO, okay, this will take away from your question, Doug. But Amy is my truth serum here, and I need to go back to Heidi Wood's question just for one second for all of you. As it applies to Combat international sales, I stand modestly corrected here, in that the sales actually are going to be higher this year than they were last. And I think I gave you 23 or 24. It's actually the Combat international sales will be about 28% this year. So just to set the record straight. Okay, let's talk about Bath and NASSCO. We are complete -- let's take Bath first. At Bath, we anticipate the contracts for the 2 DDG 1000s #2 and #3 ships on anytime. We're working very diligently with the customer now to bring those to closure. The DDG 1000 itself is well into the build, about 40% complete on the manufacturing. It's in the Ultra Hall facility right now and being put together. It's a beautiful, huge ship. So that's coming together. We are in the last 2 builds of DDG 51s there right now, 1 11 and 1 12 by hull number and in the '11 budget will be a contract for another DDG 51. So you're going to see DDG -- you're going to see volume up as the 1000s come in, as the next 51 comes in. And then you're going to see margins compress, as I said, because of trading the maturity as the DDG 51 program for the impact of the first of the 3 DDG 1000s at a cost plus, and then #2 and #3 will eventually come in at fixed price, and we'll readjust the margins. By that time, I should also point out, we anticipate more DDG 51s as the Navy puts into reality the ballistic missile defense block of DDG 51. So that will be a steady stream of work, albeit, there’s some work to do to smooth the flow of those ships as I just described, okay? It's probably more than you needed. But that's kind of -- that's where we are at Bath. In NASSCO, I mentioned the T-AKEs. We do magnificent work at NASSCO building those T-AKEs. We've got the last 2 to finish next year. The MLPs are coming in now, okay, and we've got the Navy -- we're working with the Navy right now, and they've put them in sequence, which is much more efficient for both the taxpayer and for us on the build. And everybody likes that. That's in stride now. So you'll see T-AKEs starting out at the end of next year. We hope to start the build on the first MLP in May. We anticipate a contract any day, okay? And then the Navy has also pulled forward the requirement for the TAOX which is the next generation of oiler into -- I think it's about 2014 now, so there's still some work to be done there. But at any rate, on the Navy side, we see longer-term good opportunity at NASSCO. The commercial side is still lagging, as I mentioned. But there’s great interest in that market, the Jones Act market. It just hasn't translated quite into contract reality yet. As a result, and this applies to all our yards, but most specifically in NASSCO right now, that's why we put out warn notices, that's why we've resized that great workforce out there to continue to manage for profitability because if we don't have the work, we won't keep the workforce at idle. So the NASSCO longer-term is very bullish in my view. But we've got some work to do right now to get MLP into reality, which will happen. We're confident of that and to return to commercial work. Remember too whenever we talk about NASSCO and the other yards, but particularly here since we're talking NASSCO, the Repair business is a significant part of their book and at least 1/4 of the top line on last year and they're the only full service yard on the West Coast, so the Navy needs their capabilities and uses it a lot. So that will continue to be a fairly significant part of the business.

Our next question comes from the line of Peter Arment with Gleacher & Company. Peter Arment - Gleacher & Company, Inc.: Jay, I guess maybe, since no one’s asked, I guess, how are you talking about capital deployment, just in general when you look at your defense portfolio? You've got stability, some challenges, but a lot of opportunities too. How are you thinking about M&A? You've been consistently buying back stock but just maybe some broader and where the investment priorities are?

I think it's fair to say, Peter, the operative word for us as it relates to capital deployment is balance. We take a very balanced approach to it. The M&A opportunities are out there. It's been fairly dormant, shall we say, for the last 18 months as the economics went south. But there are opportunities out there. We continue to work some of those opportunities. I don't have something to announce to you today. But rest assured, we’re looking at opportunities in the Defense space, as well as in Aerospace. I mentioned in my remarks, on the Aerospace side, the global opportunity or the global footprint expansion, we see great opportunity there and expect to take advantage of it going forward. So there are M&A opportunities. We don't restrict ourselves in terms of -- we're very decentralized as you've heard me say before. I've got 13 businesses out there, each of which is tasked to continue to grow their business and look for opportunities inside their core or in adjacencies or in dual use in commercial defense, and that's exactly what they do and roll them up to us and then we make our assessments and either go or no go. The same is true on divestitures, by the way. So we look to shape our portfolio all the time, which is why you just read about us making a divestiture. That was a great book of business. But quite frankly, we didn't have the scale, and it will work better for somebody else than us. And so we don't hesitate to do something like that. We've also increased the dividend, as I mentioned. That's a significant part of our deployment, 14 years in a row. We're very much committed to dividend growth. And our share repurchase is done practically as we said and will continue to be done in that manner. So we've got pension requirements as you heard Hugh mention earlier. So it's a very balanced approach to capital deployment. But we do not believe even as a flat to declining Defense market, we do not believe there are no opportunities in Defense space, quite the contrary.

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

Jay, first a clarification, the size of liquidated damages in Gulfstream, were they similar to what you had in the first quarter of last year, greater or smaller? And then as a follow-up...

About the same, Myles.

Okay, great. And then the actual question was more on how you're looking at the DDG 1001, 1002 contracts. It sounds like you're coming to final Ts and Cs there, and my guess is HII's spend had something to do with the delay. But I'm curious if there's any sticking points in respect to the Ts and Cs, how you're limiting your risk, given you're only 40% through the DDG 1000, and we're seeing some creative cost -- or some creative contract structures on these new transitions to fixed-price contracts. I'm just curious how you're setting this one up to protect on the downside.

Well, let's just say, we believe we know how to contract, and we also know how to price in risk. And so I would, at the risk of putting words in the mouth of my negotiating team, I'm sure they are attending to all of that and working it very diligently. So I think we're actually getting fairly close.

Ladies and gentlemen, this concludes the Q&A portion of the call. I would now like to turn the presentation back over to Ms. Amy Gilliland for 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.

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