Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

General Dynamics Corporation (NYSE:GD)

Q3 2008 Earnings Call Transcript

October 22, 2008 11:30 am ET

Executives

Amy Gilliland – Staff VP, IR

Nick Chabraja – Chairman & CEO

Hugh Redd – SVP, CFO

Analysts

Ron Epstein – Merrill Lynch

Cai von Rumohr – Cowen and Company

Joe Nadol – JP Morgan

Heidi Wood – Morgan Stanley

Myles Walton – Oppenheimer & Co.

Richard Safran – Goldman Sachs

Rob Spingarn – Credit Suisse

Harry Nourse – Banc of America

Operator

Good day, ladies and gentlemen and welcome to the third quarter 2008 General Dynamics earnings conference call. My name is Shaqwana and I will be the coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards end of this conference. (Operator instructions)

I would now like to turn the call over to your host for today, Ms. Amy Gilliland, Staff Vice President, Investor Relations. Please proceed, ma’am.

Amy Gilliland

Thank you, Shaqwana and good morning everyone. Welcome to the General Dynamics third quarter conference call. I want to remind listeners that 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 filing.

With that, I’d like to turn the call over to our Chairman and Chief Executive Officer, Nick Chabraja.

Nick Chabraja

Thanks, Amy. Good morning ladies and gentlemen. This review of our third quarter performance takes place in what has been and continues to be a tumultuous period in the markets and dislocation in the financial services sector in particular.

As a result, some of you on the call have changed name plates, have new employers, and a few of our regulars and friends on these calls are no longer participating. Accordingly, I want to wish you all well in the time ahead as we go forward.

Our result is pretty straightforward. Main [ph] quarter, General Dynamics had a really strong performance in the third quarter. Compared to the third quarter of 2007, sales increased 4.5% to slightly over $7.1 billion. Operating earnings increased 16.5% to $933 million with operating margins of 13.1%, a recent high. I thought that was an all time high, but we did a little research and we found that we’ve done slightly better back in 2001 in one quarter, but nevertheless, a great result.

Earnings per share this quarter were $1.59, up 18.7% year-over-year and significantly better than consensus. This quarter, we generated almost $750 million in free cash, approximately 118% of net income. Importantly, we have cash and available securities of over $2.8 billion. It's a great time to have cash and a strong balance sheet.

This quarter’s performance builds on the strength of the prior two quarters this year. Year-to-date sales have increased 8.7%, operating earnings have increased 21.1%, and earnings per share have increased 25.3% when compared to the first three quarters of 2007.

Let me spend the next couple of minutes giving you some perspective on our operating performance focusing first on the defense segment and then concluding with aerospace and maybe making some forward-looking statements particularly with respect to the last quarter of this year and some of the implications for next year as well.

Let me start with Combat Systems which performed very well in the quarter. The businesses in this group had great margin performance, each and every one of them. Margins increased to 14.2%, that's 200 basis points better than a year ago on the strength of improved productivity across almost all of our major programs. The result of this productivity was a 14.9% increase in operating earnings even though sales volume is essentially flat against the same quarter last year. However, year-to-date sales have increased 13.8%, and operating earnings have increased 35.4% over the same period in 2007.

In the fourth quarter, I think sales volume will be up significantly over this quarter. But margins should be back in the 12%, 12% plus range. For the year, sales growth will not be as high as I have previously forecasted. I have been talking to you about 9% to 10%. But margins will be significantly higher than the 12.9% to 13% that I have previously forecasted. So, in the final analysis, I think Combat Systems EBIT will be about as we had forecast.

From an orders perspective, Combat Systems had a great quarter, adding almost $2 billion to both funded and total backlog leaving them well positioned for next year's anticipated growth with a backlog of $15.8 billion.

As for Marine Systems, really strong quarter. They had 12% growth in sales against third quarter of '07 and a 10% operating margin, 120 basis points better than a year ago. A combination of sales growth and improved margins produced a 27.3% growth in Marine Systems operating earnings.

We had booking rate increases in the quarter on the Virginia Class T-AKE and commercial product carrier programs as a result of productivity gains in electric boat and NASSCO.

Year-to-date sales have risen 10.6% and earnings have increased 21.6% over the same period in 2007. While I am celebrating the 10% operating margin, I want to warn you a little bit that it won't be repeated in the fourth quarter but margins will be well north of 9%. For the year, we will have sales growth crowding 8% and operating margins nicely above of 9%.

Marine Systems is the only operating group where the backlog is down somewhat in the quarter, but don't be misled. Look for a large backlog increase in the fourth quarter or at the latest, first quarter of next year as we contract for Virginia Class Block III. This will provide significant backlog growth and the sales volume growth we talked to you about over our planning horizon.

Moving on to Information Systems and Technology, sales increased 4.7% on mostly organic growth and earnings increased 6.3%. Margins were 10 basis points higher than the third quarter of 2007. Year-to-date sales have increased 3.5% and earnings 6.3% with margins 30 basis points higher than the same period in 2007.

The growth in sales of this quarter, although still modest, represents an acceleration in growth rate which I expect to continue through the end of the year. I should caution you that margins are likely to fall in the fourth quarter as a result of mix shift towards more services work.

Backlog importantly increased by $600 million making this quarter the fifth consecutive quarter in which Information Systems and Technology backlog increased and orders were well in excess of deliveries.

Finally, we move to Aerospace. Gulfstream also had a terrific quarter, pretty much all the way around with sales growth of 4.3% and operating earnings growth of 24.3%. Driven by an operating margin of 20.5%, 330 basis points better than the same quarter a year ago. This result was achieved really underpinned by three things; first was favorable pricing in the backlog; second, a very favorable product mix in the quarter; and third, significant manufacturing and completions cost improvement.

With respect to mix, let's see if I can ground you a little bit, compared to second quarter of this year of '08, we had one more large aircraft and it happened to be a special mission aircraft with higher margins, and we had one less medium-sized aircraft and we had no 500s or 350s, all contributing to almost a perfect mix in the quarter.

The internal improvement that I mentioned, the manufacturing completions throughout improvement effectively offset supply chain cost increases that we incurred in the quarter leaving the favorable pricing in the backlog fall to profit. Year-to-date sales have increased 10% earnings at 26.6% and margins up 250 basis points over the first three quarters of 2007. It was a good quarter from an orders perspective as well, maybe surprising in light of the markets and the length of our existing backlog.

The book-to-bill of 3.87 expressed in dollars was driven by large aircraft orders and the new 650 order intake. A soft spot in that result is a slowing of order intake in the mid-sized aircraft. But overall, the backlog increased $3.3 billion during the quarter.

Looking forward to the fourth quarter, I think you will see increased sales volume in the fourth quarter but lower margins as a result of the less advantageous mix than we experienced in this quarter.

I have given you some information about the fourth quarter in each of the groups and in some cases the year for each but perhaps not enough for you to pinpoint our expectations for the full year. I had previously given you guidance of $6 to $6.05. Let me conclude by increasing our guidance to $6.10 without a range. It's not unreasonable to add or subtract a couple of pennies to that number and create a range of $6.08 to $6.12, but I think we are looking at $6.10.

As for the future, General Dynamics backlog grew by $5.2 billion this quarter. Funded backlog now stands $50 billion, total backlog at $60, and total estimated contract value approaching $80 billion. This backlog, the productivity of our businesses, and a powerful balance sheet leaves us in great shape to enhance value for our shareholders going forward. If you like steady earnings and efficient conversion of earnings into cash, GD has got to be a good place to be.

Hugh, you have something that you would like to add?

Hugh Redd

Yes. Thank you, Nick. Good morning. Following on with Nick’s comments regarding the strong balance sheet and cash generation during the quarter, our ability to generate cash resulted in a strong balance sheet which is improving each quarter. This is manifest in the financial metrics we provided in Exhibit G to the press release, metrics like return on invested capital, debt to equity, and debt to capital. These metrics are strong in absolute numbers and have improved significantly year-over-year. The condition of our balance sheet ensures continued access to adequate and sufficient short-term and long-term debt markets.

During the quarter, net interest expense was modestly lower than either the second quarter of 2008 or the third quarter of 2007. At the end of the quarter, cash and marketable securities exceeded debt by $665 million. For your information, marketable securities were less than $200 million. They are carried at market values which are currently at or above original cost.

In September, we retired $150 million of the senior notes upon their scheduled maturity. Year-to-date, we've retired $650 million of the previously designated long-term debt. In addition to retiring debt, we repurchased 6.1 million shares during the quarter at a cost of $500 million. Year-to-date through the end of the third quarter, we have repurchased 14.4 million shares and we continue to accumulate shares in the fourth quarter.

The effective tax rate for the quarter was 31.2%, for the nine months ended 30.9%. With the extension of the R&D tax credit, we now expect the effective tax rate to be slightly above 31% for both the fourth quarter and the full year. Those expectations are lower than our prior expectations. So, again, just slightly above 31%.

Amy, that concludes my remarks and I'll turn it over to you.

Amy Gilliland

Thank you, Hugh. Before we move to the question and answer period, I want to remind to ask only one question and one follow-on question so that everyone has an opportunity to participate. If you have additional questions, please get back into the queue. Shaqwana, could you please remind participants how to enter the queue?

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Ron Epstein with Merrill Lynch. Please proceed.

Ron Epstein – Merrill Lynch

Yes. Hi. Good morning, Nick and Hugh. The results of the marine business were outstanding. I was wondering if you could give us some more color. Was there any one-time things that happened? How's also the Daewoo JV going?

Nick Chabraja

Okay, thanks Ron. This was pretty straightforward. The margin gain was propelled by the pre-booking rate changes that I have identified for you and on a prospective basis, they will continue to help marine group performance. There was one, to my memory, sort of contract close out the last of the SSG Edward that added about $6 million in both revenue and earnings. That's like they won't repeat itself. However, you never know quarter-to-quarter what other things will appear but it's what led me to say I don't believe that the ten will be repeated, but I like – we are averaging year-to-date about 93 in marine and I think the fourth quarter result will be at least that good. So we'll finish the year in my view at 93 or slightly better if we get a better fourth quarter run.

So I am greatly encouraged and it's been a remarkable turnaround. I give a lot credit to Mike Toner and the presidents of the three shipyards. They've got this thing going pretty well right now and it's only going to get better. The relationship with our partners in Korea is working very, very well and you may have noticed that I included the commercial product carrier in the booking rate increase. That ship has been launched. It will be delivered to the customer in January. It should go to sea before the end of the year for test. And I'd say it's the best first of a kind we've ever had where we didn't experience a first in class sorts of pale up and pull up as we built the ship. It pretty much went in accordance with budget and got slightly below, and we are experiencing significant learning on the second boat, so the relationship is very good. The design we got proved very adaptable to our shipyard and our manufacturing methods, and we couldn't be more pleased.

Ron Epstein – Merrill Lynch

Great. And then just one quick follow-on, if I may. In terms of the demand you are seeing for aircraft at Gulfstream, have you seen any impact yet from what's going on in the financial market?

Nick Chabraja

Sure, Ron. What we have is a lot of interest in the product, a good pipeline. But the absence of credit and the turmoil in the credit markets really kind of seized up demand and I expect that to be the case until the credit markets re-emerge and I expect that here in short order. We are beginning see some signs now of markets beginning to restructure themselves and come looking for customers again. I've had bankers talk to me about willingness to provide aircraft financing to our customers. I would say that probably prices for that financing are higher and credit quality is a very important ingredient, but I'm beginning to see signs of this market restructuring itself a little bit.

We'll have to watch this in the fourth quarter particularly with risk. It's more important for us with respect to our mid-sized aircraft. It's not as important for the large aircraft for two reasons; the length of our backlog and the fact that many of these large aircraft aren't financed. The larger customers aren't financing purchase of that size. So, sure, we've seen an impact. We're not free from impact of what has been so dramatic. It came upon us really rather suddenly.

Ron Epstein – Merrill Lynch

Great. Thank you, Nick.

Operator

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

Cai von Rumohr – Cowen and Company

Thank you Nick. Great quarter. You had a spectacular book-to-bill at Gulfstream. If we extracted the G650, would the book-to-bill had been overrun? And secondly, given that those customers presumably made their down payment required for firm orders, how come the advances were down and not up in the quarter sequentially from the second quarter?

Nick Chabraja

Let me have that second part again, Cai.

Cai von Rumohr – Cowen and Company

The second part is that clearly you got a lot of G650 orders and it looks to us like about 60 or so, maybe more. How come with the advances associated with those firm orders, your total advances were down from the second quarter?

Nick Chabraja

I don't know. I don't know with respect to the second and I'm not even accepting your statement because I don't think you would have the information that led you to calculate that.

Cai von Rumohr – Cowen and Company

I'm just talking corporate wise.

Nick Chabraja

I have no idea. We were working off advance payments all over the corporation. I have no idea. Cai, with respect to your first question, I don't know how much granularity I intend to provide because we don't provide units of sale until the end of the year and then we do it in groups. What I think I'm going to do for you at the end of the year is separate out the G650 so we'll report jumbo, large, and medium to give you all some insight.

The one thing I will tell you is we were clearly below 1 to 1 book-to-bill on the midsize. But I think while I haven't done the calculation, I think that the big guys were pretty close. We were particularly strong on the 550 and I think it was over 1 to 1 book-to-bill but I don't know for sure because I'm not trying to do that calculation. It's not an information I intend to furnish. We're not going to parse this thing, but it's quite an awful lot of airplanes.

Cai von Rumohr – Cowen and Company

And the follow on, given the slowdown in the biz jet market, when do you expect to close the Jet Aviation acquisition and how are your – I guess you would have expected it to be accretive, do you still think it can be accretive in 2009 after you close given what we see in the market today?

Nick Chabraja

Yes, why not? Got a staggering backlog. As I've said to you before, their problem with revenue isn't going to find the business, it's creating the efficiency to run it through the mill. We fully expect it to be accretive.

Do I expect the services revenue to be as high as we might otherwise have thought from the maintenance repair facility? Probably not. The same might be true for FBO gas station sales but the big bellwether in this business almost 50% of it is completions work, and if we can turn up the wick on that, it might be 55% or 60%. But to give you a little insight into MRO, our service business is up in the quarter.

I was down there visiting. They were running at 120% capacity, but they expect to drop down to100%. It seemed like a low but it's not like this thing has gone cold. We're experiencing very nice revenue from services. And I would expect flight hours to go back up as the price of jet fuel comes down. I think it particularly impacted medium and light sizes to be more sensitive to operating cost. I think you will see some of that.

So there is no gloom and doom here on that size. When we will close it was one of your question? When the justice department gets done with their Hart-Scott-Rodino review and gives us clearance, that's when we'll do it. We're hopeful that that happens before the end of this year.

Cai von Rumohr – Cowen and Company

Excellent. Thanks and great quarter again.

Nick Chabraja

Thanks, Cai.

Operator

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

Joe Nadol – JP Morgan

Thanks, good morning.

Nick Chabraja

Good morning, Joe.

Joe Nadol – JP Morgan

Nick, just to – you mentioned in combat that you think that sales growth is going to be a little bit lighter than you thought three months ago but that margins would be higher. I'm just wondering if you could give us more color on the changes in the outlook.

Nick Chabraja

Yes. I'd be happy to, Joe. I think the answer to that is the same if you would have asked me why lower this quarter than the third quarter '07. I'd give you the same answer. Here is what I think we've experienced. This might surprise you. We have a modest increase over the third quarter of '07 in armored combat vehicles, almost up across the board. Land systems is up. We are down at ATP where we had lower than expected Chameleon deliveries and we were down slightly at OTS on significantly less aircraft tactical munitions business.

In addition to that, for the year, we don't believe we are going to get the check revenue booked for the year and the cash collected. It's possible but we think that's slipping into the first quarter. The relationship there is markedly improved. The vehicles are undergoing tests at the Army.

They have passed tests that what would be our OSD level and we are working on the re-negotiation of a contract for a full complement of vehicles. But those are the things that really drive the shortfall in revenue and the improvement in productivity has made up for it at the earnings line. I think that's probably the best answer to your question.

Joe Nadol – JP Morgan

Okay. It sounds like mix might have improved given what the strong and what is weaker. Is that – ?

Nick Chabraja

You are getting – and that's why I made the point that the armored vehicle line has continued to do well. It might surprise you if you think back, Joe, in the third quarter of '07 we had a major pick up of MRAP vehicles. MRAP volume is flat. So we did very well with MRAP in the third quarter. So the down draft didn't occur there in the combat vehicle side. It occurred really in one segment of munitions and maybe a little bit of second one. There is a little less Hydra-70 volume if you really want to get down in the (inaudible). But it's Chameleon deliveries weren't what we had in plan.

Joe Nadol – JP Morgan

Okay, and then secondly Nick, I know it's early days here on the 250, but any color on market feedback or early interest, that sort of thing?

Nick Chabraja

Yes, I think the plane is being well received. We have a considerable number of LOIs, the last time I checked and I'm confident that some of those will be very soon converted into orders. We go through a process where we execute letters of intent first and then hammer up the contract details, but the plane has been well received by the community and we are seeing a lot of interest from our 550 and 450 customers who are coming to us to fill out their fleets with a couple of 250s. So I think we've hit that right where the market needed that plane. I think we've got it right and I'm pleased with it.

Joe Nadol – JP Morgan

Okay. Thanks Nick.

Operator

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

Heidi Wood – Morgan Stanley

Good morning Nick. Question on Gulfstream. We're trying to understand how firm is firm for the 2009 Gulfstream deliveries and we've seen this trend of upwards about 60% of new orders coming from international. Can you flesh out for us, what gives you confidence that these customers are going to stay entrenched especially in view of the dollar weakness and rising inventories and likely next couple of quarters decline in prices because then they can get – they do need the planes, they can get them sooner and maybe pay less?

Nick Chabraja

I don't know about that. I can't support any of that hypothesis you have just advanced, particularly towards the end. Heidi, we have taken a good look at the 2009 backlog. We've scrubbed it. We think of pretty solid credits across the board. We are not getting much in the way of discussion from our customer base. I feel particularly strongly about the 450 and the 550 backlog.

The international component of the 2009 delivery is not as strong as the international component of the 2008 orders I also have a very large backlog and it is very easy to pull people forward if we have to, but we are not anticipating that. We have heard you and others on this subject your worries and we are all over it. And we do not see anything out there other than what is typical. I mean, now and then you get somebody who has got an issue and you work it out as best you can.

The other thing that gives us comfort is the contract terms and conditions we put in place after the last cyclical downturn and the amount of cash that we have – that we are holding as these claims go through our system. So it is not very irrational to default. Occasionally people have to default for very irrational reasons, but right now, we are feeling very comfortable about it all.

If you want to worry a little bit about Gulfstream, let me get you into the right pen here, I think where we have some softness is in the midsize aircraft and particularly in the 150 models where we do not have as large a backlog.

And if that continues during the course of the fourth quarter, we will cut production on those aircraft. They represent a little bit over 10% of our operating earnings at Gulfstream and we have plans in place to mitigate that. Those plans include bringing forward production of additional large aircraft and we have been spending the last half of the year working production planning issues in our supply base to enable us to do that, if we must.

So my feeling about Gulfstream is I will be shocked if next year they drop below $1 billion of EBIT. The issue for me is how much can we grow them in this market condition, but I do not expect a problem. I do not expect it on the pre-owned side either where we experienced so much trouble in the last downturn. I hope that covers your question.

Heidi Wood – Morgan Stanley

Thanks, that does flush it out. Would you be willing to give us color on the percentage of international in ’09 and –

Nick Chabraja

I do not know. I would be willing but I do not know the answer. I would have to go and tally that up in the backlog. We gather that data for you all. It is not something that is as important to us as it is to you, and we do have our order basis but we do not track it through the backlog but we can do it.

Heidi Wood – Morgan Stanley

Well we see that the brick trade is over, so many of us are wondering what the implications are then for your backlog.

Nick Chabraja

Yes, but I do not see it being over. I mean, I do not have Russians running up to cancel. You have made up your mind that everybody in that group is broke and I do not think it is true. I think, they are pulling back their horns but I think they are honoring their commitments, at least to us. We deliver planes to those folks and they write checks and they make their payments like everybody else does. I am much more concerned about the financial sector in the United States than I do about some of my international customers, but –

Heidi Wood – Morgan Stanley

Alright then –

Nick Chabraja

I cannot speculate about conditions in the world or even in the domestic economy, it is going to be what it is – but I have an enormous confidence in our ability to manage through our 2009 backlog in 2010 for that matter.

Heidi Wood – Morgan Stanley

My follow-up question Nick then would be, can you bring us up to speed on your views of cash deployment versus stock repurchase? We have seen a drop down in a lot of properties out there. Are we going to see a higher appetite for M&A potentially in’09 as a result?

Nick Chabraja

I think, Heidi, I have a balanced view of that. General Dynamics’ stock is increasingly attractive to us and as you pointed out, we had bought 14.4 million shares in the first three quarters and we have kept it up and I think when we stopped for our blackout period, we had a running tally of 16.1 million shares in the year. And it is handsomely accretive for us.

Will we look at deals? Sure, we will. But they are going to have to do a good job for us and then there is the issue that we do not have to confront right at the moment, for deals of any size, that is, what will the debt markets be when they reestablish themselves. Right now, we can take care of our requirements for jet aviation and anything else we would like to buy including our own stocks out of cash and access to the commercial paper market, which we have full and unfettered access to.

But if you’re talking about doing a significant acquisition, I don’t know what the markets are like out there, in fact I’m not seeing any transactions that are significantly financed but that will all take shape, I think, in the fourth quarter one way or another. We don’t know how to price that, we don’t know right now long-term debts. Appetites will have change, I think, during the course of the quarter depending on the facts on the ground.

Heidi Wood – Morgan Stanley

Great, thanks very much, Nick.

Operator

(Operator instructions) Your next question comes from the line of Myles Walton with Oppenheimer & Co. Please proceed.

Myles Walton – Oppenheimer & Co.

Thanks, good morning and a really good quarter, Nick.

Nick Chabraja

Thanks, Myles.

Myles Walton – Oppenheimer & Co.

A question for you again on Gulfstream, sorry to beat this one up, but with respect to pre-owned inventory as well as trade-in commitments, which were two areas you were burned by in the last down cycle, can you tell us what is the current pre-owned inventory and also has the trade-in commitments risen from $70 million at the end of the year?

Nick Chabraja

We have one aircraft in inventory that we took in, a G4 SP, in September and we have two kinds of commitments, Myles. Most of our trade clauses are fair market value that is established 120 days I believe in advance of the trade date. We have a very elaborate process by which we establish that. We have a commitment on two aircraft that is of the old kind that we no longer make that is a guaranteed value trade and there aren’t anymore. And as a matter of fact, with respect to new orders, we have quit taking trade commitments of any kind but we hope to relax that soon as we view what is going on out in the world. But we are in dramatically better shape than we were the last time we went into a cyclical downturn because of both the absence of inventory and absence of commitments of an inappropriate kind. So, so far so good on the pre-owned front, not been a bother yet.

Myles Walton – Oppenheimer & Co.

Given the ground inventories are rising and the transactions are going down, do you anticipate more – getting more put pre-owned as opposed to – when it was obviously a good market with transactions, no one really wanted to put it you because they could get their price.

Nick Chabraja

Oh, I think that depends on the price we establish. People are going to have to play the same game. We will take into consideration as we establish a fair market value, the direction of the market.

Myles Walton – Oppenheimer & Co.

Okay, great. Thanks.

Nick Chabraja

We will discount accordingly. We won't –the price won't be the last comparable trade, right, it will be the last comparable trade discounted if the market is moving in a negative direction. So I think people will place their bets just like they do now, predicate it on the direction they think the market is moving.

Myles Walton – Oppenheimer & Co.

Okay, thanks, Nick.

Operator

Your next question comes from the line of Richard Safran with Goldman Sachs. Please proceed.

Richard Safran – Goldman Sachs

Good morning.

Nick Chabraja

Good morning, Richard.

Richard Safran – Goldman Sachs

Switching topics, I saw your JLTV on at the AUSA show and I want to know if it is possible to get your view on how you see that program panning out. There seem to be a potential for an interim solution with MRAP Light and possibly the AM General ECV II, so just want to know if I get your thoughts there.

Nick Chabraja

I think JLTV is a program fully supported by the Armed Forces. It is an objective vehicle, which means it is a development program. I think the Army has announced that they intend to make three awards to our competitors in this quarter or systems design development contract and after that, to have a down select and a further development, so it will be a while before they are fielding JLTV and they have interim requirements which you are seeing on news about.

But as best I know, MRAP Light or other interim solutions with different names are neither funded nor programs record, so I do not know how to speculate those for you although I remain terribly interested into all of that. But I think you will see JLTV go forward probably in the quarter, at least that's what the Army is predicting, but if it slips it'll be into the first quarter of next year.

I think they've got their funding for this phase of the program and it will be the objective vehicle and it will create a very sizeable buy over time in a market that's ancillary to and adjacent to what we occupy with the big combat vehicles. But we love to move into adjacencies and we like our partner very, very much who participates regularly in this market segment and has terrific reputation. So I'm very interested in that program. Okay?

Richard Safran – Goldman Sachs

Thanks very much.

Operator

Your next question comes from the line of Rob Spingarn with Credit Suisse. Please proceed.

Rob Spingarn – Credit Suisse

Good afternoon, Nick.

Nick Chabraja

Afternoon, Rob. How are you?

Rob Spingarn – Credit Suisse

Good, thanks. To what extent can you give us some sense of what next year looks like across the businesses?

Nick Chabraja

Well, I don't want to go any further than I already did in my remarks. We've got a ton of backlog. We are going to do okay. We're going to grow the business. We're going go – as we do every year, we're going to go through our planning cycle right now. Our businesses are hard at it right now and they will be in the first week in November and then I will be at Gulfstream the second week in November, and we'll have a plan then that's solid and something I can talk about. And I will talk to you about it given my first opportunity which usually isn't until the fourth quarter conference call in the middle of January. But sometimes, some years, there has been an investors' conference or some other vehicle that enables me to get out and give specific guidance. But look, I think we've got plenty of business, plenty of backlog. I think we're going to see very strong combat systems growth. I've been talking about 10% publicly. I don't see any reason that that won't be true.

I think we are going to see some IS&T growth. We've been building for it. Our marine group will continue to grow. Gulfstream, we never planned a lot of growth in our out year plans for '09 and '10. We talked to you about a spurt Gulfstream growth in 2011. That will in fact occur as we begin making deliveries of the 250 and the 650 Green deliveries.

Rob Spingarn – Credit Suisse

Well, that's actually pretty helpful, Nick. But qualitatively, I might ask, is there an area that you find more vulnerable? I'm not talking about Gulfstream but the three military-oriented businesses. As we go into a new administration, are there particular areas that you think hold up better than others?

Nick Chabraja

Rob, I don't think so. I think, look, I think ship building is on a course that's not to be changed. Though you're going to have a Democratic Congress no matter which party occupies Pennsylvania Avenue, and that Congress is dead set on improving the numbers of ships in the fleet and I think our submarine program is pretty much locked and loaded. It's just a question of time. Performance on that program has been absolutely superlative and I'm proud of Electric Boat. For that matter, I'm proud of our partners at Northrop-Grumman, Newport News; done a good job.

We are doing great at NASSCO. There is demand for auxiliary ships; they are being built now, very successful T-AKE program and there'll be follow-ons for that kind of ships. The vagueness in ship building is on the surface combatant side where we have some exposure, but I expect they'll build something. It's either going to be DDG-51s or DDG-1000s. We'll have some grist for the mill there.

I think there is a pent up demand for information systems and technology boat products, network products, and services as evidenced by our growing backlog over five quarters now. And George Shapiro, who unfortunately isn't with us here, has made a career out of chiding me about absence of organic growth in IS&T. So you're well aware of the history of that but we've suffered a flat spot for a couple of years there that is now obviously providing us organic growth and it's accelerating.

So I feel pretty good across the board here and I think it's not going to matter to me too much which party is in the White House. I think our programs are strong and that backlog is durable and we are in good shape I think. What we tell our people internally is perform, perform, perform.

Every administration likes programs that are on cost and on schedule. The ones that are vulnerable are the ones that are (inaudible). But we try real, real hard to back up our customer here and make the services look good by having programs that are coming in on budget. When we don't, we get real unhappy about it. But good margins for us usually indicate good performance for the benefit of the customer.

Rob Spingarn – Credit Suisse

Well, you definitely showed that this quarter. Thanks very much, Nick.

Nick Chabraja

Thanks, Rob.

Amy Gilliland

Shaqwana, I think we have time for one more question.

Operator

Your next question comes from the line of Harry Nourse with Banc of America. Please proceed.

Harry Nourse – Banc of America

Good afternoon.

Nick Chabraja

Harry, how are you?

Harry Nourse – Banc of America

Not bad, thank you. I was wondering, Nick, whether you could just talk about the international component of combat and how are bookings from a broad side in the quarter?

Nick Chabraja

I don't know specifically bookings, Harry, but they had nice performance in the quarter. Their margins improved slightly and the volume improved very slightly. They have a considerable backlog and there are a number of additional opportunities. Some of them sole source and some of them competition. And I know that offline Amy can give you a lot of help in understanding that. That is a nicely growing business for us. We've been a little bit preoccupied with getting the check issue resolved. We probably spend an awful lot of time on FRES which is still, I think, up in the air as to the nature and shape of that program and how we fit into it. But the opportunity set for European land systems is very good, both their backlog and their future.

Harry Nourse – Banc of America

And how is the Saudi contract advancing?

Nick Chabraja

Moving right along, I think we'll have a contract in place this year for – or early 2009, I'm not sure which either this quarter or next for 724 vehicles for the Saudi Arabian National Guards. And we are also working on an unrelated contract but also for labs [ph] with the army for their land forces and that probably will be later in 2009. We also expect a tank contract. The award for the engineering effort for the M1A2S, that’s the Saudi version, will be less [ph] this year probably in the fourth quarter. Certainly in the fourth quarter if it’s going to be this year. But I think that should get done before the end of the year. And then we’ll follow on with the production contract itself. So all those things are moving slowly but surely into the right place.

Harry Nourse – Banc of America

Thanks very much.

Amy Gilliland

I want to thank you for joining the call today. If you have additional questions, I can be reached at 703-876-3748. Have a great day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: General Dynamics Corporation Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts