Good day ladies and gentlemen and welcome to the second quarter 2014 General Dynamics Earnings Conference Call. My name is Glen and I will be your operator for today. (Operator Instructions). I would now like to turn the conference over to your host for today, Ms. Erin Linnihan. Please proceed.

Thank you Glen and good morning everyone. Welcome to the General Dynamics' second quarter conference call. As always, any forward-looking statements made today represent our 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 would like to turn the call over to our Chairman and Chief Executive Officer, Phebe Novakovic.

Good morning. I’m pleased to report that we had a very strong quarter at General Dynamics with revenues of 7.47 billion, an income from continuing operations of 646 million. We reported EPS from continuing operations of $1.88 per diluted share, $0.07 ahead of the year ago quarter and $0.11 per share better than consensus. While revenue was 360 million lower, 4.6% than the year ago quarter income from continuing operations was 6 million higher on the strength of 12.7 operating margins, a 40 basis point improvement. Sequentially revenue was up 209 million in earnings from continuing operations were up 50 million on a 70 basis improvement in operating margins. You will note in this quarter that we took a 105 million after tax charge and discontinued operations for the planned sale of our axle business. Let me turn briefly to the first half of 2014, revenues were down modestly 2.7% against 2013 however earnings from continuing operations were up over 2.6% and diluted earnings per share from continuing operations were up $0.17 or 5%. In short we’re off to a good start ahead of our internal plan and ahead of external expectations leading to an improved outlook for the year. With respect to cash we had 791 million of free cash flow from operations in the quarter about a 122% of net income from continuing operations. We had 1.132 billion for the first half, 91% of income from continuing operations and we fully expect a very strong third quarter. With respect to share repurchases in the quarter we repurchased slightly less than 10.7 million shares for approximately 1.2 billion. We have purchased somewhat in excess of 25 million shares in the first half however do not expect share repurchase activity at this level in the second half of the year.…

Thank you Phebe. Good morning. I will touch on just a few miscellaneous financial items before the question and answer period. As Phebe mentioned the results for the quarter include a charge of a $105 million in discontinued operations. In the quarter we engaged in the plan to sell the axle business in our Combat Systems Group. This action requires that we assess whether the price we expect to receive for this business is sufficient to cover the carrying value of it's net assets including an allocation of goodwill. This assessment resulted in the charge you see in the quarter in discontinued operations. The estimate will be trued up when the sale is completed which we expect to occur by the end of the year. Net interest expense in the quarter was $24 million versus $18 million in the second quarter of 2013. We had additional interest income in 2013 that reduced the net interest expense in that period and for 2014 we expect interest expense to be approximately $90 million. At the end of the quarter we’re in a net debt position that’s debt in excess of cash of $69 million. This reflects a $450 million swing from a net cash position in the prior quarter due to our activities on the capital deployment front which I will address just in a minute. As a reminder we have $500 million of notes maturing in January of next year and we will make a decision as we get closer to the end of this year as to whether to repay or refinance those notes. Our effective tax rate was 30.2% for the quarter slightly lower than expected as a result of higher international earnings which carry a lower tax rate. Based on our experience so far this year and the growing impact of international earnings we’re now expecting the full year effective tax rate to be at the low end of our previous guidance of 30.5% to 31%. We continue to expect cash contributions to our pension plans for 2014 to be around $550 million, as a reminder most of that funding is scheduled to occur in the third quarter of the year. With respect to capital deployment in the quarter we continued our commitment to deploy capital to our shareholders while maintaining a strong balance sheet. Phebe gave you the details of our share repurchases a few minutes ago and in total we expended almost $1.5 billion on share repurchases and dividend payments in the quarter. And over the past 18 months we returned over a 115% of our free cash flow to our shareholders. At the end of the second quarter we have $3.8 billion of cash on the balance sheet and are well-positioned to continue to execute our strategy and achieve the objectives that Phebe has articulated for 2014. Erin that concludes my remarks and I will turn it back over to you for the Q&A.

Thanks Jason. As a quick reminder we ask participants to ask only one question so that everyone has a chance to participate. If you’ve additional questions please get back into the queue. Glen could you please remind participants how to enter the queue?

(Operator Instructions). And your first question comes from the line of Robert Spingarn with Credit Suisse. Please proceed.

I wanted to ask you Phebe on the Aerospace. You’ve done so well with the margins here and you’re guiding down a little bit on mix and R&D I think in the second half of the year but given that you’ve traditionally level loaded your R&D even if you should come out with a new program in the fall, might we expect that this guidance continues to be a bit conservative especially with continued improvement at Jet.

Let me walk you through that a bit, as you quite rightly point out we anticipate seeing some margin compression from mix shift and higher R&D and that’s net R&D because we do not anticipate the same level of launch assistance so that is -- we level it low at our R&D but launch assistance drives some variability. Say fewer jet contributions going forward. But I think it's a good opportunity to spend a moment on Aerospace margins a bit and to give you a little bit additional color on what drives the variability quarter-over-quarter in these lines of business. The fundamental principle that I think we have to keep in mind the underlying operating performance of each of these businesses is getting better quarter-over-quarter and if it weren’t I would tell you. So what does that mean? Well this means that there are other factors in these very complex businesses that impact margin, not one of which is necessarily material but in combination they can have some impact on a quarter-by-quarter basis. You know we have got mix shift between large cabin and mid cabin and service mix that mix. Also on volume by the way and it depends on the kind of service volume. The more complex service work, you get the higher margins you carry and for Gulf and this is true both at Gulfstream and Jet. For Gulfstream as an OEM the more parts that they sell out of warranty, the higher the margin. So there is even within the inter-service business some various margin variability. With respect of Jet Aviation you get margins that are quarter-over-quarter, somewhat driven by where we’re in contracts. Think about Jet as a construction contract and what they do particularly with respect to completions. With newer contracts we start off with lower margin and then build as we come down our learning curve. So again that drive some variability. Sales expenses of both business has changed and as I noted launch assistance is lumpy and of course as you all well know preowned is almost always a zero margin business. So I think -- I thought it was worth just spending a little bit of time talking about why it is that we see some variability. I emphasize again though that the operating the fundamental operating performance remains improving quarter-over-quarter.

I wanted to ask if also with the 650 are we at the point where that’s margin accretive and you mentioned better order flow there, obviously you’ve been sold out for long time. Is the order renewal or the -- what I would consider new momentum maybe it's not. Is this a function of a change in the end market or is it because the other guy is now probably fairly sold out so availability is no longer a differentiator.

Well availability is a differentiator to the extent that you actually have product. I think the way to think about, you had a couple of questions here but let me answer your last one first. I think the way to think about 650 demand is that we continue to see demand for that airplane, new demand and we have added not in large quantities as you would expect when there was a four year wait. But we have added almost every single quarter 650 orders. So that continues, there is a lot of interest in that business and by the way as we have worked through on that line of business in that airplane, as we work through the backlog we have accelerated the availability dates by about two quarters. So that’s a benefit to our customers as well.

So that’s higher rate?

It's a higher rate and you would expect that as we have come down our learning curve and as we continue to move green airplanes through the manufacturing line and then into the completion centers. With respect to margins I believe that 650 margins, I believe that I told you -- I told the Street maybe last quarter that we have exceeded the 450 and are working our way up to the 550 but that’s probably several quarters away.

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

Phebe on IS&T you did revise the revenue guidance off now down 15% but still calls for a pretty significant larger decline in the second half of the year, can you just talk about what’s driving that? And then on combat margins, it looks -- if I got it right, it's 15% margin guidance? It looks like it's implying a pretty big pick up in the back half of the year if you can just comment on that as well. Thanks.

Yes. So let me address your last question first, I told you all in the first quarter that combat margins was significantly and quickly recovered and they did and they were even more. I mentioned in my remarks that we took a $29 million restructuring charge in Q1 at ELS and with that behind and that business hits 10% margins this quarter and we expect them to continue to improve over the course of the year and both of our businesses continue their strong performance. So it's pretty much in-line with what we had anticipated. Going forward they are just doing better than we had thought and that’s why we’re raising our margin guidance for the year. With respect to sales on IS&T we had believed that the frontend would be, the first half of the year would be somewhat frontloaded and it does imply some sales slowdown in the second half and that’s consistent with what we had anticipated. We were pleased that the sales decline was less intense than we had thought and by the way that was across an entire spectrum of the businesses in both our IT business and Intel Business and coms business. So that was a nice sales performance in the first half and then some of the decline in sales that we anticipated that I think I told you guys before that this was -- we were risk adjusting our plan for army exposure and then that has happened but I would note that some of those we’re seeing indications that some of those lines of business are beginning to stabilize. For example in our tactical ISR comps, computing, modeling and simulation were all -- we took our decline but they are holding up pretty well. IT services worked for the army is also holding up nicely. What continues to be a weakness and a weakness that there isn't a whole lot that we can do anything about is in the sustainment and repair business. The army is taking all their work into the public depots [ph]. So as a result we’re doing almost nothing for the army in that line. So I think that addresses both of your questions.

Your next call comes from the line of George Shapiro with Shapiro Research. Please proceed.

Two quick questions, mix was worse in Q2 than Q1 but the margin was a little higher in Q2 to -- versus Q1 in Aero. So I was just wondering what your explanation for that was and then the other one is I assume the book to bill would have been above one if I took out the fact that it was probably below one for the 650 and you are still expecting a 118 large deliveries for the year. Thanks.

I had a little trouble following the puts and takes on the first part of your question but let me address the orders because I think that’s kind of what you were getting at a little bit. We had a book to bill of about nine times and it was really a good, good strong order quarter for us. We had said that -- what we’re seeing is a lot of interest in the pipeline. It's just taking longer to close and so we have found that we have some variability in our order intake quarter-over-quarter and that’s what has happened. This quarter a lot of those orders came to fruition. So it was a nice quarter. By the way I have been tracking for you all the 450 and 550 which is where we look for these, where we would like to see in the moment. The order activity and once again for 450 and 550 they were 75% of the order book. The 280 was also strong. With respect to our green deliveries, we set a target every year that is right at the plan around how many green deliveries that we intend to have in the quarter or in the year and it's primarily driven by a host of factors. We have frequently taken it upon ourselves to sometimes rephase those deliveries. So you noted that we had slightly fewer deliveries in the second quarter than the first quarter but that we were -- we anticipate upticks in particularly the large cabin orders in the deliveries in the second half of the year. So all of that is meant to say that some of the timing -- some of the deliveries on green has been a question of timing and we have rephased that. So I think we’re looking at the moment which could change in about a 116 versus a 118 and again simply driven by timing. You would be surprised how frequently customers ask for flipping the green delivery or the completions delivery into the next quarter subsequent quarter or the subsequent year. So again it's nothing but timing.

On the first quarter what I was getting at was you had 29 large and six mid-sized versus this quarter, 26 and seven. So I figured the mix was worse this quarter yet the margin this quarter was 19.2% versus 19% in the first quarter so you kind of overcame the mix maybe because of 650 productivity.

You got it. That’s it. Improvement on the 650 and also on the 280 but you got it, 650 did very well.

Okay so why won't that continue in the second half?

Well because of all the reasons I have just explained. We have got a mix shift among those three kinds of categories, large cabin, mid cabin and service and we have got higher R&D and Jet’s contribution while good, is going to be less. So those three factors are a compression on margins.

Your next question comes from the line of Cai von Rumohr with Cowen & Company. Please proceed. Cai von Rumohr - Cowen & Company: Could we shift to NASSCO, maybe tell us a little bit about the commercial ship building business, how it's doing and the prospect you’ve for new orders.

For a number of years we talked about the impending return of the Jones Act market and it came and since that market has picked we have contracted for 10 Jones Act ship. It remains a very attractive market to us and the pipeline remains fairly robust and we’re in constantly communication and dialogue negotiations with potential customers. It's a good market, it's a price competitive market as you might imagine but I would note that this is not a place and not a market in which compete solely on price and are willing to use price as a differentiator, it's just too much risk in our profitability. So, we’re in the midst right now of ramping up a member of our new commercial orders and that has some -- you didn’t ask this question but it's implied, margin compression in the group but again that’s simply a question of moving from mature MLP and coming up the learning curve down the learning curve on commercial. So it's a nice market, it fills out NASSCO work flows very, very well. We have learned to build these ships efficiently. So I like it. Cai von Rumohr - Cowen & Company: Given that basically you’re building essentially the same ship, should we expect the margins there to improve so this becomes a mix process as opposed to currently a mix negative?

Overtime absolutely but you would expect that from the shipyards, right? Cai von Rumohr - Cowen & Company: Yes, okay. And I mean --

By the way these are not exactly the same ship, so don’t think about it as a serial production on exactly the same specs. But there are differences but that said this yard will perform -- better and better performance as the programs mature.

Your next question comes from the line of Joe Nadol with JPMorgan. Please proceed. Joe Nadol – JPMorgan: Phebe on the AxleTech divestiture, this is I think one of the first portfolio decisions you’ve made after -- you mentioned last year you were overhauling the M&A procedures internally. So I was wondering if you could comment on the process you went through in deciding to divest why you’re doing it and whether you’re looking at further divestitures, if this sort of opens the gates to lot of more portfolio activity.

Sure. Just to give you a little bit of retrospective, AxleTech was for many years a very, very good business, as we were the merchant supplier for almost all of the variances of MRAP. We made a lot of money on that acquisition years ago. As the war wound down and the government decided not to initiate a program to repair or retrofit MRAPs the fundamentals of that axle market changed dramatically and now the -- what we see is think about it this way, a complete inversion of the demand curve on commercial with the demand curve of defense work. So that told us that and we believe by the way that’s a systemic change. So that told us that the value proposition really no longer obtained for us and that we believed and I still do that a commercial facing owner could be could be a better steward of the company. So I think you can expect us to respond as a market when we believe that there have been systemic changes and reacting according to our shareholders best interest. We have done a number of little pruning through like very small lines of business really limited in products just as again we changes in the market. But when we put together ATP and OTS we did a strategic analysis of every single one of our lines of business and what was core and where we thought that we could add value and this was one of those businesses that we felt could do better with a different parent and a different home. So I think you would expect us to react to our market. I don’t see any major divestitures on the horizon. We have tinkered within the IS&T portfolio but nothing that changes the nature of that portfolio. So these will be opportunistic as we proceed and make these decisions fairly deliberatively and we have a very disciplined process for executing the sales. So I think this was a wise move and it's good for all. Joe Nadol – JPMorgan: Can you provide us with the expected level of proceeds from the divestiture?

Well not yet, everybody who is a perspective buyer would be listening. So, we will disclose how we do after we finish the transaction.

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

You’re in a position at Gulfstream where you’ve got G650, a unique position in the market. You’ve said that the 550 has strong interest yet right now you’re at the lowest level of backlog in aerospace in one in five years and I’m just trying to understand how to fit that level of backlog with the program strengthens you’ve?

So Doug, I’ve tried to articulate this before. Think about our backlog as driven primarily by and predominantly by the 650 order book that we took in 5 or 6 years ago. That backlog provided for five or six years of sales activity on the 650. We’re drawing that down and I think that’s indicative as we would expect and totally wholesome and I believe that that’s an implied from the acceleration in the availability times by about two quarters which I just told -- we just discussed a few minutes ago. So we had a book to bill of 0.9. I don’t worry about the level of the backlog given the duration of that large program. I think it's very wholesome. There was nothing that we see in the order activity that causes us concern. Our pipeline is very robust, it's robust on the 650 as well. I think the customers and potential customers will be happy that they don’t have wait for quite such a long time for their airplanes. So I don’t worry about this. This is not some harbinger of a market issue at least with respect to us that I think we need to be worried about or our shareholders need to be worried about.

Well do you see a point here as you start to -- as you increase that availability take rate up. Should we expect the backlog to eventually turn up the other way as you start to increase rate or is this something where you see this kind of level as sort of the right level going forward?

Well look a lot of depend on a number of factors, all right? Including how we think about new airplanes that we may bring into the market. So you know the right level of backlog is the backlog that you can that sustains reasonable sales growth and allows us to continue to be a very profitable company and I think that we have got that now and I don’t see any sign that that’s going to be particularly troubling. I don’t have a target backlog. That ebbs and flows. The 650 was such a large order that you have to think about it more like some of the big ship orders. It was big and it was binary, that’s unusual in the business Jet Aviation market, right? So it is pervaded [ph] that backlog but if you look prior to the 650 announcement our backlog was pretty consistent driven by the economic environment and as we have added more airplane models we have increased that backlog and then the 650 just changed the nature of that backlog. So I think we have all gotten used to seeing it but it was an anomaly, because rarely do you ever see I don’t think ever has anybody ever seen that kind of big and binary change, more like the ships right?

I understand, it's just that when I look at the numbers today and you think of sort of backlog to revenues the numbers are actually even lower today than they were prior to the 650 launch in terms of that ratio. So I just wanted to understand if you saw an issue there but it sounds like you’re seeing things as pretty much where you want them to be in terms of demand.

Yes and absolutely and let me just also say that I think the entire industry right around the run-up to the great recession. The market was unhealthily overheated. I look to see -- I look at backlog to ensure that we have enough in our order book to sustain a growth in sales and a growth in profitability. I’m very comfortable where we’re now and I see no signs in our market that it's superheated or that we’re experienced any particular anomaly or something that we should be concerned. That’s why I have been reporting to you all where we look every quarter in our backlog as a 450-550 orders because you can’t add materially to the 650. That dynamic with respect to the 650 will change as we shorten the availability times, right?

That absolutely makes sense and certainly that’s one of the things that we have looked for is that you’ve this upward pressure to see when you can take those rates up and even get more availability.

And there you’ve it. But we’re not about pre-announce that, we make our rate decisions based on very disciplined analysis those of factoring a whole lot of independent variables right? So that’s within our I think in our to-do list, right?

(Operator Instructions). Your next question comes from the line of Howard Rubel with Jefferies. Please proceed.

First I actually want to ask Jason a question, I figured you didn’t want him to be there or neglected and it looks like the way you bought back stock it was very much backend loaded when we look at the share count so that we should expect to fairly sharp decline sequentially in shares outstanding in the third quarter versus where you were in the second. Is that correct?

When you say at the end of the third quarter or is it at the end of the second quarter?

Excuse me, I apologize. It appears as if you have bought most of the shares towards the end of the second quarter because the difference between the weighted share count in the period and the share end number is fairly significant.

I wouldn’t necessarily go to that conclusion. The activity was spread right throughout the quarter and what you maybe seeing as the offsetting impact of stock option exercise activity and other factors that go into the weighted average calculation but no anomaly driving the share count or the repurchase activity towards the end of the quarter.

We did an accelerated share repurchase in the first quarter but the second quarter was just steady eddy throughout the quarter.

And then second Phebe, you’ve focused a lot on making a difference cost as an effective competitive tool. Could you address a little bit of how that’s helped you either win some business or positioned you to win some business both at combat systems and at IS&T?

Absolutely. One of my favorite subjects. Let me give you the easiest and the most glaring frankly example. At ELS we had a cost structure going into 2013 that was so high it made them anti-competitive, just couldn’t win any orders. So we needed to get after that cost structure and we did it quickly, in a disciplined fashion. We did the same thing at GDUK and the results we’re seeing is in GDUK we actually had a C4 [ph] owns GDUK. We actually had a contract that we had been disqualified from because of high cost. We opened for us to go back into the competition because we had lowered our cost so dramatically and in a head to head competition with multiple other suppliers we won. I mean that is a simple and I think powerful example of what right sizing your business can do. It's a right thing to do for your shareholders, for your customer so that we can provide the services at competition rates and the same thing is happening in European Land Systems. So those were the two obvious examples but we’re seeing that throughout as C4 Systems has reduced it's business and restructured it's business dramatically since the fourth quarter of 2013. They have increased their order activity particularly in their overseas market, Canada and the Mid-East and to the extent that they are going in head to head competition. We have been doing very, very well in our capture rate. The same thing is true with our Intel business and the same thing is true with our IT business. So I’m very pleased with the performance of the company as we have focused getting back to the basics of operating excellence and they have got more to go but they have made progress. Combat Systems has had a long track record of disciplined response to their market and anticipating changes in their market and getting after their fixed cost quickly. There is no such thing as we say as fixed cost, they will ultimately turn into variable. So they have right sized their business even in advance of the change in their market conditions and I think you can see the result of that in their margin improvement, and in their margin performance.

Just to follow-up on land systems or combat, I’m still sort of looking at sort of the market color for opportunities. Can you either geographically or product line or some way characterize how there has been very specific interest?

So we continue to see within our land force as U.S. Land Forces line of business. Interest in terms of sustainment levels right? So we anticipated that and we see that, it's not a lot of -- I don’t believe new opportunities on that front. We’re however engaged in a number of international opportunities with all of the three businesses in our combat systems. The timing of the clarity around timing of international orders has been a little elusive, so I’m not about to speculate but our negotiation on several potential contracts and we will see how those turn out but there is still a lot of interest. The world hasn’t gotten any safer.

And your next question comes from the line of Sam Pearlstein with Wells Fargo. Please proceed.

Just wanted to follow back up on the AxleTech discussion. Can you just size that business and I’m trying to just think about how much of the original sales decline was because of that business and then the absence of it how that’s playing into the combat outlook for the year?

You can sort of infer that from the restated sales number but that business has for the last really year undergone a precipitous decline in sales and the inversion of demand. So, I’m not going to parse out exactly the size but you can -- when we get around to selling it we will in disposing of it and finalizing the contract will give you a little bit more clarity but it was responsible for some of the decline clearly, you can see that.

And then you had mentioned about risk adjusting for the U.S. Army business. If I remember right going into the year, you implied kind of a 40% reduction year-over-year, can you talk about where you stand year-to-date and what you’re expecting now from U.S. Army business?

Yes, so that business is consistent other than the sustainment of that line of business which really hits the IS&T business units more than it does the combat systems business units. We’re down to around 20% and declining.

Your next question comes from the line of Carter Copeland with Barclays. Please proceed.

Just question regarding announcements made by peers yesterday on two fronts the first obviously you’re partner on the Canadian Maritime Helicopter Program took a pretty sizeable charge with the completion of that and renegotiation with the customer and they have lengthened out the entry in the service dates on some of those aircraft. I wondered if you could speak to the impacts that you may see from that and how you will go about evaluating that and then secondly, Lockheed who is a set contractor on the scout vehicle to you, he was talking about a pretty sizeable award they were excited about from a potential standpoint from the UK and I wondered if you could speak to timing and size or just general color about that opportunity and what it could mean for GDUK? Thank you.

Yes let me talk about MHP. For the first time in many years this program has a stable way forward and has upside opportunity. We did not take charge on that program, we don’t intend to take a charge as a result of the renegotiation. We’re the supplier for Sikorsky. We have developed over the years a very good relationship with our supplier. We have been very supportive with our prime. We have been very supportive of them and this was a very significant risk reduction result for us and we have stabilized it and going forward there will be some upside. So that was very, very good move. On the SV vehicle -- Lockheed may have more information than we do but I have, this is one of the many, many markets that we continue to investigation and we’re there. We’re at the prime and on the SV [ph] - the development of the SV and how the British government and the Ministry of Defense chooses on a going forward basis to think about the production contract, it's something we start to work out with them but they are going to make that call.

How would you think about the significance of that order relative to some of the other big orders you’ve talked about in combat in the past?

Well it would be a nice order and again that is entirely driven by the druthers of that customer and what they want to see in near term production. So, the developmental program went from a very risky position to one that we have stabilized that and we have gotten it back on track technically scheduled wise and we’re -- we have done a good job and land systems team did a very good job. I’m a big believe that if you don’t build the platform you can’t integrate it. So they build those platforms, they know them, it's our core competency that’s probably one of the best in the world if not the best in the world at that and they were able to turn around a very broad program. So it's an opportunity going forward but that will be dictated in its entirety by our customer.

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

On Gulfstream just to maybe follow-up on some of the previous questions. The increase in activity that you’ve seen, you’ve mentioned in your prepared remarks about the G550. Can you speak about regionally where you’ve seen it? Is it out of the emerging world? Is it out of Europe? Is it out of the U.S.? Where are you seeing maybe the tick up in demand?

In each one of our airplane models what we have seen is North America is the 50% of the orders for the last 18 months. So pretty consistent North America involvement and activity in ordering. Sometimes that small fleet, corporate fleet replacement or individuals but I got to tell you the vast majority of the orders are from Fortune 500 and both primarily North America, public and private companies but also international public and private companies.

Okay. And in the midsized market have you seen much of the pickup there yet or is that still kind bouncing along?

The 280 had a nice quarter and that airplane gets overshadowed by the 650 but it is a terrific plane in it's space and it's in niche and it's doing well. It's fits a discernible need with great capabilities.

Your next question comes from the line of Robert Stallard with Royal Bank of Canada. Please proceed.

Phebe, also related to your peers it does seem that a couple of them have been picking up their M&A activity since the start of the year. Are you in any way tempted to get back involved in this game?

We have seen -- look I’m not going to speculate on that we have seen a bit of a trickle but a trickle is not a trend mix so it's hard to know the maturity of the M&A market but so far we’re not there.

And then as a second question, really a follow-up to Ron’s question. Have you seen any changes in the pricing dynamics for new aircraft?

No our prices are holding up nicely. But the corollary to your question is we’re not winning these airplane orders on price, it's factor but it's one of many.

And your next question comes from the line of Myles Walton with Deutsche Bank. Please proceed.

Maybe talk about the capital deployment for just a second. I know you have made a mention of the $500 million note coming due in January and your decision has been made to refi or repay yet. And I just wonder that in any way going to play into how you’re going to deploy free cash flow for repurchase. It looks like it's about a $1 billion after dividends of free cash flow you will have in the second half of the year to maintain this neutral position you have now on net debts. I think about that as your repo target unless I’ve to think about the refinance or repayment of the note as well. So if you can maybe -- are those two connected?

Well I think if you think about it that note is due in January. We really haven't gotten -- we really haven't put our -- focused our attention on 2015 capital deployment but you can rest assured we intend to be shareholder friendly as we have in this year.

And then clarification are you still holding 40 midsized deliveries in ‘14 or is it just picked up in the midsize in terms of demand or maybe it's a little bit less.

We have had a couple of move around so nothing particularly material.

Your next question comes from the line of Jason Gursky with Citi. Please proceed. Jason Gursky – Citi: Phebe just a quick question on margins. I wonder if you can just give us some updated thoughts on what you think normalized margins at Jet Aviation are going to be over the longer term and then same for combat systems. Just long term structural margins in that business over the next several years is, you look at all the cost activities that you’ve taken over the past couple of years and make the business going forward.

Jet Aviation has been a story all about walking out of the shadow of the valley of death and they -- their margin performance has been increasingly positive quarter-over-quarter. They have some variability but on a quarter-to-quarter basis but the underlying operations have done very, very well and will continue to do well in every indication we see all of the metrics we watch, the EACs we built. Everything I see is on the upper trajectory and I think it's too soon to have for me to give you a definitive where out there sustaining margin to be. I have an aspiration that I’m fully confident that Jet will make but that’s an internal discussion that we have to have but they are on the right path. Now combat, I think combat -- you know combat is all going to be about their orders which they have stabilized their order and then their performance on those orders and these lines of businesses have demonstrated that they are very good operators. So I don’t want to get ahead of myself for 2016 but we ought to see some nice margin improvement in combat. There is nothing structurally that’s keeping them from not continuing to build their operating efficiency and add to it. And operator I think we have time for one more call.

And your last question comes from the line of Pete Skibitski with Drexel Hamilton. Please proceed.

Phebe, I just want to ask you about 2014 guidance overall especially the defense revenues you’re forecasting. It looks like all the congressional appropriations committees have reported out but it looks like maybe won't create a bill until after the November election. I was just wondering if you feel like there is any risk to your guidance from a CR [ph] that goes to November - December?

Not anything we can materially see. Most of what we have got is in our backlog upon which we have projected our guidance to you.

Okay. Thank you.

All right. I think that’s it for today. Thank you so much for joining our call. If you’ve additional questions I can be reached at 703-876-3583. Have a great day.

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