General Dynamics Q4 2009 Earnings Call Transcript

Jan.27.10 | About: General Dynamics (GD)

General Dynamics Corporation (NYSE:GD)

Q4 2009 Earnings Call

January 27, 2010 11:30 am ET

Executives

Jay L. Johnson - President, Chief Executive Officer, Director

L. Hugh Redd - Chief Financial Officer, Senior Vice President

Amy Gilliland - Staff Vice President of Investor Relations

Analysts

Ronald Epstein – Bank of America Merrill Lynch

Sam Pearlstein – Wells Fargo Securities, LLC

David Strauss – UBS

Peter Arment - Broadpoint

George Shapiro - Access 342

Richard Safran - Buckingham Research Group

Cai von Rumohr – Cowen & Company

Robert Spingarn – Credit Suisse

Noah Poponak – Goldman Sachs

Douglas Harned – Sanford C. Bernstein

Howard Rubel – Jefferies & Co.

Robert Stallard – Macquarie Research Equities

Heidi Wood – Morgan Stanley

Myles Walton – Oppenheimer & Co.

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2009 General Dynamics earnings conference call. My name is Steve, and I will be your operator for today. (Operator’s Instructions).

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

Amy Gilliland

Thank you, Steve, and good morning, everyone. Welcome to the General Dynamics’s fourth 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 would like to turn the call over to our President and Chief Executive Officer, Jay Johnson.

Jay L. Johnson

Thank you, Amy, and good morning, everyone. General Dynamics finished 2009 with a very good fourth quarter marked by strong operational performance, excellent cash flow, and the achievement of several key milestones. Sales in the quarter grew $7.9 billion, up slightly from the fourth quarter of 2008, but somewhat lighter than I had anticipated, primarily because of timing on several international vehicle contractions and the delayed passage of the 2010 Defense Bill.

Net earnings from continuing operations was $618 million, or $1.58 per fully diluted share. In the quarter we achieved a 12% company-wide operating margin, our best performance in 2009. For the full year, sales were nearly $32 billion, a 9% increase over 2008, driven entirely by our defense businesses. Demand for our defense products and services generated 12.7% top line growth, more than offsetting the 6% decline at Aerospace. Nearly 10% of the growth in our defense businesses was organic.

2009 earnings from continuing operations were $2.4 billion, or $6.20 per fully diluted share. Operating earnings totaled $3.7 billion in 2009 with Combat Systems and IS&T both topping $1 billion of EBITDA.

I should highlight that Marine Systems delivered their best ever earnings performance, and Aerospace exceeded $700 million in earnings. An impressive performance in a very challenging market environment.

Free cash flow after capital expenditures totaled $1.4 billion in the fourth quarter. Each of the business groups contributed to this excellent fourth quarter result, which brought total cash for the year to $2.5 billion, or 103% of earnings from continuing operations. This included a pension contribution of nearly $250 million.

Fourth quarter orders reached $7.4 billion, the strongest quarter this year. General Dynamics finished 2009 with a total backlog of $65.5 billion, more than two times annual sales. Total potential contract value, which includes backlog, unexercised options, and indefinite delivery, indefinite quantity IDIQ contracts totaled $83 billion.

Now I would like to focus on the performance and outlook for each of our business segments starting with our three defense groups.

First, combat. Combat Systems had a very successful fourth quarter. Sales were $2.5 billion, 6.6% higher than the fourth quarter of 2008, due primarily to increased Stryker, Abrams, armor, and weapons systems volume. Double-digit earnings growth in the fourth quarter was the result of 14.8% margins. 160 basis points of improvement over last year’s fourth quarter. Margin performance resulted from increased booking rates on several of our U.S. and European vehicle programs, and a more favorable mix in our guns and weapons systems business.

For the full year, sales were up 17.7%, compared with 2008, including 12.5% organic sales growth. The group’s organic growth was driven by Stryker, Abrams, and European vehicle volume. The remainder of the growth came from axel caps (ph).

While I am pleased with this double-digit growth, I had anticipated over 20% sales growth. The difference is the result of timing on several contract awards and year-end vehicle deliveries. For the year, the group generated operating earnings in excess of $1.2 billion. Margins were 13.1%, 50 basis points lower than 2008 due to mix shift.

Year-end backlog for Combat Systems totaled $13.4, of which $11.4 billion is fully funded. Fourth quarter orders, which totaled over $3 billion, were greater than sales, causing backlog to grow $500 million from the third to the fourth quarter. Foreign military sales contracts were particularly strong in the fourth quarter, including $160 million for a Iraqi tank upgrades, $18 million for Saudi Arabia in tank work, and $2.2 billion for light armored vehicles. These international programs will begin to take hold in 2010 with growing volumes over the next several years.

The group also made significant progress towards several future opportunities in the fourth quarter. In early November, our JLTV became the first vehicle to successfully complete Critical Design Review, with our first prototypes due to be delivered to our customer this spring. Additionally, our European Land Systems group, led by General Dynamics’s UK, submitted its FRES bid to provide the British Army’s next generation of reconnaissance Armored Fighting Vehicles. European Land Systems is also bidding on a Spanish program for several hundred eight-by-eight armored vehicles.

For this year, based on the strength of our backlog and continued support for our core programs, I expect Combat systems to deliver 4% - 5% sales growth, with operating margins in the high 12% range.

Marine Systems. The Marine Systems group finished their best year with another very good quarter. Quarterly sales totaled $1.6 billion, a 12.4% increase over 2008, and operating earnings increased 18.2%, to $156 million. This quarter’s double-digit sales and earnings growth is particularly impressive, since the same quarter a year ago saw sales and earnings grow 13.3% and 30.7% respectively, when compared with 2007.

Virginia class submarine and repair volume drove revenue growth and increased booking rates on several programs, drove the earnings improvement (ph). The group’s 10.1% margins in the fourth quarter were up 50 basis points over fourth quarter 2008. For the full year, sales and operating earnings increased 14.5% and 23.2% respectively. Margins for the full year were 10.1% — a noteworthy accomplishment resulting from hard work and sustained discipline execution in all three shipyards.

Marine’s U.N. backlog totaled $22.5 billion, down from year-end 2008 but robust by any measure. We anticipate adding orders for several ships in the first half of 2010, including TAKEs 13 and 14, DDG 1001 and 1002, and advanced procurement for another DDG 51 Destroyer. For this year, I expect Marine Systems sales growth to be between 7% and 8%. Margins would degrade somewhat, maybe in the mid 9% range, as the group experiences some mix shift in its surface combatant work load.

IS&T. Fourth quarter sales in the IS&T group were $2.7 billion, a 2.8% increase over same quarter last year. Margin rates increased 80 basis points, causing earnings to grow 11.5% compared to fourth quarter 2008. Margin improvement was particularly strong at our tactical communications and ISR businesses. Sales for the full year grew 7.6%, while operating earnings grew 7.1%. Organic sales growth was 4.4%. The group’s 2009 margin rate was constant at 10.7%, a very good result. Demand for products across the group’s portfolio continued in the fourth quarter, resulting in over $2.3 billion in new orders.

IS&T’s year-end backlog totaled $10.3 billion, up slightly from fourth quarter 2008. Total potential contract value, backlog, and estimated potential contract value under IDIQ contracts grew 12.9% through 2009, to $23.1 billion at year-end, positioning IS&T for another successful year in 2010. Sales growth in 2010 should be between 8% and 9%, while margins will be in the mid 10% range.

Now, before moving to the Aerospace group, let me comment briefly on our overall defense outlook. 2009 was clearly a successful year for our defense businesses. Operation performance was very good, and we will continue to build on those successes moving forward. Execution remains paramount. The 2010 Defense Bill, passed in late December, fully supported our core programs, positioning our defense business for success in the year ahead. Most of our procurement programs were funded in the 2010 base budget, as supplemental funding targeted operations and maintenance requirements. In the coming weeks, we will get more detailed insight into defense funding priorities and requirements for the next several years.

I am confident that GD will fare well. Our products are at the center of today’s fight, and we will continue to evolve our offerings to address changing war fighting requirements in a way that is affordable to our customer.

Now, let’s move to Aerospace. The Aerospace group finished an exceedingly difficult year with a solid fourth quarter. Several of the quarter highlights include continued strength in order activity, substantially fewer customer defaults, improved service volume, and the first flights of our new G250 and G650 aircraft.

The group’s fourth quarter sales were $1.2 billion and operating earnings were $167 million. While sales and earnings were down significantly when compared to fourth quarter 2008, sales were up 5.4% and operating earnings were up 33.6%, compared with third quarter 2009. The group’s 14.1% operating margin was up 290 basis points from third quarter 2009 due to a better delivery mix and improved pricing in the services business. For the full year, sales were $5.2 billion, down 6.2% from 2008. The sales decline resulted from fewer green-aircraft deliveries and a 15% reduction in our services businesses, somewhat offset by the addition of a full year of Jet Aviation.

Operation earnings for the year were $707 million and margins were 13.7%. While earnings and margins were also down from 2008, they were outstanding given the environment. These are the earnings of the market leader. Gulf streams (ph) proactive approach to managing production and internally driven cost cutting initiatives protected profitability in an unpredictable and decidedly difficult market.

All indications point to continued market improvement in 2010. The improved trend in flying hours in the third quarter of 2009 held through year-end, and our service centers continued to work full weeks. Pre-owned inventory levels are continuing to decline, particularly for large cabin models. We have four remaining pre-owned aircraft in inventory after selling one in the fourth quarter and taking one in trade. In 2010, our aircraft deliveries include potential trade in options for nine pre-owned aircraft.

Orders outpaced deliveries again in the quarter, and customer defaults slowed significantly. New aircraft, book-to-bill, was 1.47 times on a dollar denominated basis, leading to a slight increase in backlog. Backlog now stands at $19.3 billion. Our 2009 orders were 60% international with great diversity in the customer mix. Given the continued pace of order activity in the fourth quarter and new customer interest, the backlog remains durable.

Our large cabin backlog is essentially sold in 2010, three quarters sold in 2011, and we are already making significant progress in 2012. We plan to produce 77 large green-aircraft in 2010, several more than we produced last year. Mid-sized production on the other hand will decrease to 14 aircrafts. Mid-cabin activity represented around 5% of Aerospace’s 2009 sales and less than 5% of their earnings.

Our product development efforts remain on track in the fourth quarter with successful first flights of the G250 and G650 aircraft. Both aircraft continue to undergo rigorous flight testing in preparation for 2011 FAA certification. Given the success of the testing to date, we believe that the Aerospace group is well positioned to begin delivering the G250 in 2011, and the G650 in 2012. Revenues and earnings on these programs will begin driving growth in 2011.

For 2010, I think it is reasonable to expect low to mid single digit sales growth in Aerospace, with margins around 14%. This admittedly conservative guidance reflects the market as we see it today. IF market conditions continue to improve, particularly in the mid sized market, we have the flexibility to adjust, and I will factor any upside into subsequent guidance updates.

In summary, 2009 was a good year for General Dynamics, and we anticipate continued success in 2010. The guidance I have provided this morning implies mid single digit growth in sales. Margins will be in the low to mid 11% range, causing earnings from continuing operations to grow at a mid single digit rate. I expect earnings per share from continuing operations in a range of $6.40 to $6.50. I should note that this guidance does not include or anticipate the results of capital deployment. It is purely an operating forecast.

And with that, I will now ask Hugh Redd to touch on several key financial highlights. Hugh?

L. Hugh Redd

Thank you, Jay, and good morning, everyone. I would like to cover a few items that impact the comparison of the 2009 results to 2008 and communicate to you our expectations for 2010 in perspective of those same items. First I will mention, I will quote the operating expense you can see on exhibit C and D for the quarter and for the full year, respectively. The increase year-over-year is attributable to increased stock option expense, which we report for the entire company in the corporate expense line. We expect corporate operating expense for 2010 in the range of $95 million. Next, our interest expense is up for the quarter and the year.

Focusing now on the full year. Net interest expenses up due to a reduction in interest income of about $55 million. That was driven by lower market interest rates and lower average invested cash balances during the year.

In addition we issued fixed rate notes in December of 2008 and June of 2009. That increased our interest expense during the year.

Strong cast performance in the fourth quarter reduced our net debt by $1.2 billion, preserving our strong balance sheet and the financial flexibility that comes with it.

With the reduction in net debt and the scheduled repayment of $700 million of fixed rate notes in August, we’re expecting our 2010 interest expense to be done from 2009, around $150 million.

With regard to taxes, you may recall that our 2008 tax provision includes the favorable settlement of long standing tax litigation. That reduced our provision by $35 million or $0.09 per share and resulted in an effective tax rate at 31.2%.

The effective tax rate for 2009 was 31.5% which was in line with our expectations. I’d expect the 2010 rate to be in the same range. Perhaps up by 20-30 basis points.

With respect to our sales outstanding, you can see the diluted count effectively unchanged from the fourth quarter of 2008 to 2009. We did repurchase 1.5 million shares in the fourth quarter of 2009. But that activity was late enough in the year that it had minimal effect on our weighted average share count.

This was an addition to 2.1 million shares repurchased in the first quarter of the year.

As Jay pointed out, the 2010 guidance does not assume the impact of future capital format that is including potential share repurchases.

Finally a couple of thoughts with respect to pensions. You’ll notice that the impact that changes in our funded status and several places in our financial results. First, as Jay pointed out, our strong cash generation in 2009 includes contributions of about $250 million to our pension plans. This combined with asset returns of approximately 20% from 2009, improved in our planned funded status by $500 million. This of course had a positive impact on shareholder’s equity which reflects changes in the funded status of our retirement plans.

In 2010 we’re planning approximately 207 million in contributions for our pension plans.

That completes my remarks. And Amy, I’ll turn this back over to you for a few minutes.

Amy Gilliland

Thank you, Hugh. As a quick reminded. We ask those participants to ask only one question so that everyone has a chance to participate. If you have additional questions, please get back into the queue. And Steve, if you could just remind participants how to enter the queue, please.

Question and Answer Session

Operator:

(Operator’s instructions). Your first question comes from the line of Ronald Epstein of Bank of America Merrill Lynch. Please proceed, sir.

Ronald Epstein – Bank of America Merrill Lynch

You didn’t say too much about the 650 in your prepared remarks. I was wondering if you could give us some color on how flight test is going and how a conversion from the initial deposit to the more permanent deposits has gone?

Jay L. Johnson

Be happy to, Ron. The flight test regiment is proceeding on schedule. No speed bumps that I’m aware of. We’re very pleased with the airplane. The flying qualities are sweet as we thought they would be. And so it goes. I mean, it’s proceeding on track. I would also add, even though you didn’t ask, I could say the same for the 250. Both those programs as far as the flight test programs, their regiments are going, are performing very well. Which was the basis for my remarks that we’re on track.

In terms of 650, the positive activity, Aerospace reported, we reported strong tests in the fourth quarter. And a sizeable amount of that is attributable to the 650 deposits. So we’re very pleased with that. And the backlog remains very low bust at almost at 200 in the queue. So we’re on track with the 650 and looking forward to getting it delivered.

Ronald Epstein – Bank of America Merrill Lynch

Great. Thank you.

Operator

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

Sam Pearlstein – Wells Fargo Securities, LLC

Good morning. Just because this has come up on a couple other calls today. As you think about the $4-5% earnings growth in 2010, do you expect that to be similar in each of the quarters or is it more back end loaded as the timing of various programs?

Jay L. Johnson

I think Sam, I’d stay with the later statements you just made. And you can look at us year over year. That’s usually ramp up toward the fourth quarter. So I’d stay with that.

Sam Pearlstein – Wells Fargo Securities, LLC

Thank you.

Operator

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

David Strauss – UBS

Good morning. Jay, on combat systems, you talked about timing on some international contracting lying now. And then the 2010 bill. Have you baked that in then to the 4%-5% growth done for combat? Because I thought you had been talking about before when you had a higher forecast for combat for 2009, I thought you’d also been talking about kind of low to mid single digit growth at combat in 2010?

Jay L. Johnson

Yeah. It’s actually, David, it was more on the low side. And so the answer to your question is yes, we baked it in to that 4%-5%. Whatever moved from 2009 into 2010 is part of that 4%-5%.

Operator

And your next question comes from the line of Peter Arment with Broadpoint. Please proceed, sir.

Peter Arment - Broadpoint

Actually you hit upon my question, Jay with the 650. Thank you.

Jay L. Johnson

Okay.

Operator

And your next question is from George Shapiro with Access 342. Please proceed.

George Shapiro - Access 342

Yeah. Jay, I just want to follow up on David’s question. I mean, if you were supposed to get nearly $10 billion of revenues in combat based on your guidance in Q3. So based on the 4%-5% growth you’re talking about we really have pretty minimal growth over the $10 billion you were expected. So if you could just explain a little bit more how it doesn’t seem like you factored in the slippage out there. Maybe I’m missing something.

Jay L. Johnson

I’m not sure where you’re going with that, George. But I would tell you that the core programs in combat are well supported in the 2010 budget. I mean, as I mentioned in my remarks, Striker Abrams, the international sales which are now 22%, I think, of combat’s backlog, with more to come. So some of the contracts that we had in 2009 actually delivered like between Christmas and New Years. That late in the quarter. So I think the growth as I outlined it is probably very realistic for what we see right now. Am I missing something?

George Shapiro - Access 342

Yeah. Well, I was just trying to figure between the Q3 guidance you figured that combat would grow over 21%. Which would get you between $9-$10 billion. And now if I just take 4%-5% growth on the 9645 that you reported, I get maybe somewhere 10-10.1. So on an adjusted basis it doesn’t look like you’re really getting much growth at all off of what you expected to report. So it strikes me that maybe it’s not all anticipated – or you didn’t adjust the numbers for the anticipation or that something that’s turning out to be slower in terms of growth then what you expected before.

Jay L. Johnson

Yeah. Part of that too – I maybe didn’t complete the last statement correctly. But part of that may have to do with these international orders that have a tendency, as you probably know, to build more slowly. And that plays in this for sure.

Your comment, I mean, you look at the international book itself, we’re very pleased with the contracts we’ve received. We believe there are more coming. We can see more out there. And then these will build through 2010 and really get into production in 2011 through say 2014-2015. In that context the international side we’re very bullish on right now.

George Shapiro - Access 342

And then just on the other side, you had said the margin would be 12.5-12.7 on the third quarter. And it turns out to be 13.1. So where did the positive surprise turn out to be there?

Jay L. Johnson

Performance.

George Shapiro - Access 342

Okay. Very good.

Operator

Your next question comes from the line of Richard Safran with Buckingham Research Group. Please proceed.

Richard Safran - Buckingham Research Group

Good morning. Just a quick question on M&A and cash deployment. I think you said that in Q3 you wanted to kind of be opportunistic in 2010. So kind of like a two-parter here, for M&A do you still see attractive deals? Would you consider making a deal for example, for a second or third tier defense company, if you can comment on that? Or should we maybe expect more – an acquisition to expand your commercial footprint?

Jay L. Johnson

Let me put it this way, Richard, in terms of capital deployment, the first priority for us has been and will remain sufficient operational liquidity to do what we need to do. I know you understand that. I’m stating the obvious. But that’s number one.

We’ve got pension, that you mentioned, that we’ll deal with this year in $260-$270 million range. We’ve got dividends which we’re very committed to that the board will deal with again in a couple of months. And we’ve got tactile share repurchases. So the M&A side, we remain very opportunistic and very inquisitive in our search patterns but very selective in what we do. So I would anticipate remaining within the bounds of deals in max of billions to a billion and a half. And where they will add value in our portfolio or fill a gap that exists in that portfolio. And to be honest with you, that covers a lot of territory. Both on the commercial side and within defense space. And that’s about as specific as I’ll get right now, as you might expect.

Richard Safran - Buckingham Research Group

Fair enough. Thank you.

Operator

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

Cai von Rumohr – Cowen & Company

So, your performance looked pretty good at (inaudible) jets in the fourth quarter. You have $5 million of used be (inaudible) losses. Were there any forfeiture profits where R&D and SG&A lower? How did you get that very robust profitability? And when you talk about conservatism for next year, is that conservatism just in terms of deliveries of midsized or is there performance upside also?

Jay L. Johnson

To the later, I would say, yes to both. We’re always looking for performance upside. And we’re very good at getting it within aerospace Gulf Stream, as you know. And I’m also anticipating performance upside at the Jet Aviation next year. But to the first part of your question, I think what I’d say is it’s probably a function of the mix.

Cai von Rumohr – Cowen & Company

Would you explain?

Jay L. Johnson

More heavy. More large cabin and fewer mid cabin. And the pre-owned that we have.

Cai von Rumohr – Cowen & Company

Right. Fewer pre-owned. But I mean, as you look forward for next year, we have more large planes that we did before. We have midsized. So wouldn’t say that there’s definitely more margin leverage in terms of the mix next year?

Jay L. Johnson

That would be expectation. But I’m not willing to put that card on the table just yet. It’s too early in the year.

Cai von Rumohr – Cowen & Company

Got it. Thank you very much.

Operator

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

Robert Spingarn – Credit Suisse

Good morning. Wanted to ask you about jet aviation a little bit. If we can delve into that. I think last quarter you hinted to the fact what the sales were relative to the tolls, about 25%. And we know that the margins lagged there. Would the price improvement or the pricing improvement, how should we think about current profitability at jet? And what kind of outlook do we have as volumes return?

Jay L. Johnson

As I told you before, I believe, my report on jet would be as follows. We recognize that we had operational challenges at jet. We have addressed those challenges. We have done a great deal to put efficiency and precision into the completions business. Which is a particular challenge. And now we’re starting to see in other facets of jet, MRO, FBO, services, okay, we’re starting to see increased activity, shall we say, as things improve within the market space. So, that’s a way around saying that jet’s margins, I’ve told you before, have been low, single digit margins. But we are seeing and continue to expect and demand, actually, improvement working toward double digit margins at a time, yet to be announced, yet to be realized. Nonetheless, I like what I see at jet right now. And we believe we have a skyline, as they say, of work that will keep us very active. And so jet is going to become a much more robust of our aerospace portfolio within the coming year I would say.

Robert Spingarn – Credit Suisse

I was just going to ask you if you had a time frame but that sounds like what it is.

Jay L. Johnson

I mean, I’m expecting from what I’ve asked jet to do this year, I expect them to outperform. And the trending we see right now in terms of debt play performance in the completions business and everywhere else, tells me that that’s not an unrealistic expectation. I’m looking for upside in aerospace and not all of it attributable to Gulf Stream.

Robert Spingarn – Credit Suisse

I was going to say, this can lead the Gulf Stream performance given where the base. The base is so low.

Jay L. Johnson

Indeed.

Robert Spingarn – Credit Suisse

Okay. And one last question on Gulf Stream. In the 650 order book, are you seeing any sense of cannibalization of the 550 at all so far?

Jay L. Johnson

Negative. Negative. None what so ever. We may have talked about this before. Indulge me for a second, please. We went through with a four and the five. And the price point delta is about the same, 15-20 depending on how you load it up. $20, $15-$20 million. It’s a totally different segments of the market. So there is a different customer out there for the 650.

Now, have we had some 550 people that are interested in 650? I hope so. But we’ve also got the 550 backlog is very robust and very strong. So we see no cannibalization whatsoever at this stage. Nor do I expect any, quite frankly.

Robert Spingarn – Credit Suisse

Excellent. Thank you, Jay.

Operator

Your next question comes from the line of Noah Poponak of Goldman Sachs. Please proceed.

Noah Poponak – Goldman Sachs

Question on IS&T, the book-to-bill had sort of picked up there the past few quarter. And I think this is typically a 4Q loaded segment. But it doesn’t look like you grew much organically in the quarter. And I think it was one of the weaker quarters of the year. Can you talk about what happened there? And I’d also like to get your view on what a budget freeze would mean for a defense company’s IT business?

Jay L. Johnson

Okay. The book-to-bill is still over one to one. I mean, over one we’re looking in IS&T. The reality you just described though, Noah, I think really is function of the impact of continuing resolution in the delay in the budget being approved. Which as you know impacts the IS&T contracting business probably more – as much or more than any of the rest of our business groups.

So, to your last point, the budget freeze, if there is a budget freeze, which we don’t have a whole lot of clarity on yet in terms of what might impact. I don’t see it as a lot here. But it might be in the IT services in some of the non defense related IT services piece.

Noah Poponak – Goldman Sachs

But sort of need more clarity on it at this point or something.

Jay L. Johnson

Yup. I mean, we see no obvious impact, material impact right now. We’ll see how it develops.

Noah Poponak – Goldman Sachs

Thank you.

Operator

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

Douglas Harned – Sanford C. Bernstein

Thank you. On marine, could you talk about the lower margins for 2010? You said this was due to mid ship and could you provide some detail on that?

Jay L. Johnson

Sure, Doug. I mean, it’s really if you look at that, ironworks right now, it really comes down to the mid ship attributable to the DDG 1000 in the bill (inaudible). It’s somewhere between 7%-10% complete. There’s a cost plus boat ship. And then DDG 1001 and 1002 will be fixed price. We’re still working the contract on those. But we’ll be moving down to our last DDG 51s because we don’t have the FY 1151 yet. As I mentioned in my remarks, we believe it’ll come, the contract will come this year. So it’s really that mid ship between 1000 cost plus and weaning down somewhat, for now at least, the DDG 51s. And then, frankly, there’s probably a little bit might be attributable out at NASCO as well in terms of how that work mix develops in the coming year as the PCs complete. We’re still working PC 6-9 and so there may be some impact on the TAKE in terms of overhead absorption, etcetera, etcetera. But that’s probably enough. Does that paint it for you?

Douglas Harned – Sanford C. Bernstein

Well, two things that I wondered about on this. One was the new DDG 51s, will those be in anyway different enough that could change your margin outlook from what your more traditional out production has been? And then the other part of it was if you look at Electric Boat I know you made some changes and some layoffs there and some new hires. And it seems that there may be some shift there at the margin too.

Jay L. Johnson

I don’t see much of Electric Boat. And what was the first part you asked me about?

Douglas Harned – Sanford C. Bernstein

The DDG 51s, if these would be anyway different?

Jay L. Johnson

Yeah. The answer today is no. I guess you read as I do what’s going on in terms of missile defense and what that may mean for DDG 51s down range. And I think all that being shaped right now. But for us we certainly know how to build the 51 and if changes do come to it, we’ll accommodate accordingly. But right now we believe the 2011 DDG 51 will be very much like the ones that we’re in the build with right now. And also, at EB, remember too, we’re working already the SSDN, we’re getting lead engineering development funding for that, engineering services. So there’s a lot going on there. In Virginia class as well as Ohio class replacement.

Douglas Harned – Sanford C. Bernstein

Okay. Very good. Thank you.

Operator

Your next question comes from the line of Howard Rubel with Jefferies & Co. Please proceed, sir.

Howard Rubel – Jefferies & Co.

Good morning. A couple of things. On IS&T, could you talk a little bit – I mean, it looks like in (inaudible) you’re growing share. Could you sort of address what kind of success you’re seeing in your bid rates? I know it’s not 100%, but, I mean, you had some notable items where you did some things towards the end of the year. For example, that one would not have expected in the health care area as (inaudible) and I think there’s a few others like that.

Jay L. Johnson

Yeah. I actually think the capture rate, if you will, has been pretty high in IS&T. And I think it was in our release this morning, the contract for IT for the new national capital region, Walter Reed Army, National Military Center. We’ve got IDIQ for (inaudible). We’ve got pretty good capture on most of the program – not most of the programs. But I think significant growth in cyber this year. About (inaudible) billion of IS&T sales are attributable to cyber across, forensics encryption, security info, data networks, data center integration, etcetera. So - help IT. It’s pretty well spread.

Howard Rubel – Jefferies & Co.

Okay. Two, change but still talk about the future a little bit. You highlighted the JLTV progress that you’ve made. How do you sort of envision your ability to continue the most serve the longer term needs of the army but also my sense is that the move into Afghanistan and so on is probably stressing the force? And what sort of response of actions are you taking to help the military in that region?

Jay L. Johnson

We are very committed to – as I said in my remarks, adapt to the needs of the war fighter. And that reflects exactly on what you just asked me. So we never accept a striker as being good enough. For example, we’re always looking and we have received and to be honest with you, Howard, I can’t remember, it’s either late 4Q or early in this quarter we received modernization contracts from our army customer to do exactly that. (Inaudible) striker to modernize it. So we continually adapt the platforms in the systems to the fight. That’s a great strength of ours, a great opportunity and frankly an obligation we owe to the troops.

Howard Rubel – Jefferies & Co.

And then last, also, clearly the naval industrial base every year seems to be a topic of (inaudible). How do you think about – you address, sort of the issue at Bath. I mean, there’s only going to be three DDG 1000s and so at some point Bath’s going to need some work. And then if TAKE doesn’t receive any kind of a follow on for a command ship that too will be resized. And given the long term nature of the business, what are you doing in those two instances to try to bolster them or improve them both competitively and I’ll say market wise?

Jay L. Johnson

Howard, my simple and straightforward answer to that is one word, perform. And it is our belief that if we continue to deliver platforms and systems on schedule, on or below cost, and that are of quality that makes the customer excited to receive them, then the industrial base discussion puts you at the top of the list and so we're very committed to that at all three of our shipyards. And recall, the DDG51, there may be only one that you see right now, but virtually everything you read and anybody you talk to says okay we have to recapitalize the surface combatant force. What that looks like the customer is still trying to define to a certain extent. That said, it is our belief that bath iron works will be building surface combatants for awhile to come.

The key for us right now is to perform well on the DDG1000 class and then deliver it to our customers and let them see what will shape itself out of that and the DDG51. Out at NASSCO, these — let me just back it up. Out at NASSCO I don't think there's any mystery anywhere of the quality of that shipyard. It's very highly regarded by everyone, as it should be. So I believe there will be, and we're a little premature here, but within a week or several weeks here you're going to see an '11 budget and you're going to see a QDR product or parts of one that I think will help us get some more clarity on what particular platforms may be part of NASSCO's future. But on the navy side on the military side the MLP is already being forward funded to develop. We're hopeful that more will come out of that and I think it will, but we're also on the commercial side you've got the Jones Act fleet out there that is ageing and not double hulled in every instance, et cetera, et cetera. So there is a market that is out ahead for that, it's a question of how it shapes itself and when it arrives and that's our challenge to manage as operators out there.

Howard Rubel – Jefferies & Co.

Thank you.

Operator

As a reminder please limit yourself to one question. Your next comes from the line of Robert Stallard with Macquarie Research Equities.

Robert Stallard – Macquarie Research Equities

Good afternoon. Jay, I was wondering if you could give us an update on what you think the impact could be on General Dynamics of the US pulling all its troops out of Iraq by the end of 2011? And on the flipside, what could the surge in Afghanistan do to you?

Jay L. Johnson

I think the way I'd answer that Rob is I believe we'll be gainfully employed in either instance and by that I mean if the troops come out in '11 and that's another whole discussion people can have, but to take your question as fact, a reality, if the troops come out at '11 there is still considerable work to be done on the platforms that we've deployed so hard for the last decade almost in Iraq and Afghanistan. So the reset alone, the refurbishment, the recapitalization of that field and armored vehicle fleet if you will be very, very much in our wheelhouse in terms of work to be done we believe. And then also as I said before, we've got another part of the combat portfolio and ELP and land systems that's going to give us considerable and, I believe, we believe, growing business across the domain in Europe and elsewhere.

So I don't see the pullout if you will or redeployment as being significantly impactful to us at this stage of the game because we've got lots to do with the kit that's out there and don't forget we also have JL TV in play, we have EFV in play for the 2015-ish timeframe, and an army ground combat vehicle to be shaped and defined over the next few years. So I believe that we'll be very busy.

Robert Stallard – Macquarie Research Equities

Okay. Thanks, Jay.

Operator

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

Heidi Wood – Morgan Stanley

Good morning, thank you. Jay, can you talk about your confidence in margins in IS&T in 2010? It seems when we look at the trends in IT that we ought to be bracing ourselves for a tougher tease and seize, so does your government reflect anticipation of possibly tougher contract terms, higher standards for award fees, and possibly even lower award fees going forward?

Jay L. Johnson

It does, Heidi. And what you say, I think the trending is there just as you described it. But we're very attentive to the tease and seize going in and we're very good at outperforming in execution so that was the basis really of the margins that we put forward.

Heidi Wood – Morgan Stanley

All right. And I'll press more on that offline then, but can you give us color on the discussion and demand for gulfstream coming out of Asia? Give us some sense of what the order book looks like out of Asia in 2009 and what's the outlook in 2010 to 2012? What's your sales team expecting?

Jay L. Johnson

Here's one example to your point. I always talk about the diversity of the backlog in terms of demographic and geographic. In 2009 the backlog, the Asia-Pacific backlog from I believe it's 13% to 23%. So there's definitely increased activity in Asia Pacific.

Heidi Wood – Morgan Stanley

And then what your sales force is expecting over the next couple of years?

Jay L. Johnson

I think we're expecting more activity, but as we've talked before it's not one of shall I say instant gratification or I don't want to overdrive our headlights here because we believe the Asian market will continue to grow, but the pacing of that is still somewhat to be defined just based on air space, air fields, FBOs, et cetera, et cetera. But clearly we believe that the market there will continue to grow and we look forward to being a big part of it.

Heidi Wood – Morgan Stanley

Great, thanks. I'll let someone else ask a question.

Amy Gilliland

And, Steve, I think we have time for one more question this morning.

Operator

Then your last question will come from the line of Myles Walton with Oppenheimer & Co.

Myles Walton – Oppenheimer & Co.

Great, thanks. Good afternoon, guys. The question on gulfstream, kind of a followup, but even within the largest cabin mix, the 77 versus the 75, isn't the mix in 2010 more faithful within the large cabin towards the 550 in 2010?

Jay L. Johnson

Yes is the short answer. It is. The 550 is very strong, the pricing is very strong. The 450's doing quite well, but if you had to rank them right now the 550 is definitely strongest.

Myles Walton – Oppenheimer & Co.

So I mean what is the pushback on the margin line? Is it high R&D, are we staying at the 2% or is there something else or is it that it's just come down to pure conservatism?

Jay L. Johnson

Yeah, you just said the word. We are being as we usually are at this stage of the year, very conservative and I won't apologize for that.

Myles Walton – Oppenheimer & Co.

All right, thanks.

Jay L. Johnson

Okay. Thanks, Myles.

Operator

And that concludes the Q&A portion of today's call. I'd like to turn the presentation back over to Miss Amy Gilliland.

Amy Gilliland

Thank you for joining our call today and if you have additional questions I can be reached at 703-876-3748. Thanks and have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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