洛克希德·馬丁 (LMT) 2002 Q1 法說會逐字稿

Good day, everyone and welcome to the Lockheed Martin first quarter 2002 earnings result conference call.

Today's call is being recorded. With us today is Mr. Chris Kubasik, Senior Vice President and CFO, and Mr. Jim Ryan, Vice President of Investor Relations.

At this time, I will turn the call over to Jim Ryan.

Please go ahead, sir.

Thank you, April.

Good morning and welcome to Lockheed Martin's first quarter conference call. I need to remind that you that some statements are forward-looking statements. Such forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995.

See today's press release as well as the Form 10-K and other SEC filings for a description of the factors that may cause actual results to vary materially from anticipated results.

As is our practice, we are web casting this call.

Replays are available via our web site for your convenience. We understand that some firms are now selling summaries and transcripts of our earnings calls.

Despite any representations to the contrary by those providers, Lockheed Martin does not review or edit those summaries or transcripts. We cannot attest to or are not responsible for their accuracy.

If you have not received a news release it is available at www.Lockheed martin.

investor. We have allowed Q&A following the prepared comments and request that you ask one question and one follow-up question so that more may have an opportunity

to participate on the call. I'll now turn the call over to Chris Kubasik.

Thank you, Jim, and good morning.

I will summarize the financial results for the quarter, provide an operational overview for each business area and then Jim will provide additional details, assumptions and projections for this year and next. Our first quarter was a solid start to the year with sales growth of 26%. Compared to last year's first quarter. This is at the higher end of the projected first quarter range due to timing of launches and deliveries. Our sales forecast for the year remains unchanged at 5% to 7% growth. The key point here is that we achieved solid organic growth in sales for the first time in several years, a trend we expect to continue. Taking a quick look at the second quarter, we expect slightly lower sales than the first quarter.

Again, this is due to timing. While sales were up significantly in the quarter, margins on a comparable basis were less than last year due to reduced pension income and sales mix. In systems integration and aeronautics, we have several programs ramping up in sales that have significant developmental content. During the last three quarters of the year, we anticipate that we will continue to reduce program risks and achieve important milestones which should translate into higher margins. So overall, we expect stronger margins during the last three quarters of 2002 in line with our expectation of 8 1/2 to 9% margins for the full year.

We booked 8.5 billion in new orders in the first quarter resulting in a book to bill ratio of 1.4, which drove our backlog to a record of almost 74 billion.

Looking forward over the next year and a half, there are several competitive opportunities which could provide additional growth to our backlog.

In systems integrations, there is the DDX family of advanced chip which should be awarded shortly.

Additionally, Deep Water, the modernization of our Coast Guard and the opportunity to help transportation security agency provide U.S. airports with explosive detection systems.

In addition, we recently demonstrated our biomail solutions to multiple agencies in the U.S. Government, Including the IRS, the Department of Energy, and the Offices of the Secretaries of the Army and Navy to help protect their mail systems.

We are also working with the U.S. Postal Service to compete to be their biohazard detection provider.

In space, competitive opportunities include GPS, the next generation global positioning system. Henpose], which is an advanced monitoring satellite system and the next generation space telescope, which would replace the Hubbell system built by Lockheed Martin. Order opportunities for aeronautics include F-16's for Chile and 64 C-130J's for the Air Force and Marines.

We also expect a continuous throw of opportunities in the government I.T. line of business and technology services.

Our strength is the lead system integrator will service well as we compete for these new business opportunities as well as the ongoing efforts to drive out costs and compete effectively for new business.

During the January conference call, there was a question on our backlog outlook.

And I thought I would follow up at this time. Backlog is difficult to project in the near term due to timing, magnitude and potential contract terms of new business opportunities.

Securing the significant opportunities I just covered would help to grow our backlog. On the other hand, we are working off backlogs in our large combat aircraft programs, mainly F-16's for the UAE and F-35 Joint Strike Fighter.

We are also burning off some backlog in the government launch vehicle line of business which includes Titan-4 and the external tank program for the space shuttle.

So overall, our planning assumes the declining back logs of a few billion dollars a year. But I wouldn't correlate changes in backlog to near term sales growth as the existing backlog and near term opportunities often extend beyond five years. Turning to cash flow, we generated $338 million in free cash during the quarter. As we continue to achieve key performance milestones. Our corporation is striving to become cash flow positive each and every month and the results are apparent. We continue to make progress reducing our leverage and we were pleased that our credit rating was recently upgraded by Standard and Poor's [INAUDIBLE] the upgrades previously announced by Moody's and Fitch.

Now I would like to focus on operational progress as we continue to drive performance and create shareholder value.

I will have a few comments on each of our four business areas. Let me start with our technology services business area, that booked more than 600 million in new orders in the first quarter and completed the full integration of the OAO Company on plan.

We are optimistic about the government I.T. business as many government agencies are outsourcing and increasingly amount of I.T. services as they strive to become more productive.

In fact, industry sources forecast a compound annual growth rate of about 7% for government I.T. expenditures. We expect technology services, government I.T. sales to reach $1 billion by next year, representing double digit growth. This is the most profitable business area within our technology services segment. Our next most profitable line of business and technology services is the military aircraft upgrade and modification business.

It is expected to grow from about $600 million last year to about $800 million in 2003.

Technology services also has significant opportunities in the Homeland Security area. For example, we have submitted a proposal to the Transportation Security Agency to train the airport security personnel throughout the United States. Overall, technology services is expected to grow by more than 5% organically, with steadily improving margins. Turning to systems integration, sales are forecasted to be more evenly distributed in 2002 compared to last year.

As I discussed earlier, the ramp up of developmental and low rate initial production programs is the main driver behind the first quarter growth. In one of those programs, Pac-3, we had another successful test.

The missile defense agency and the Navy conducted a successful flight test as part of the sea-based mid course defense program.

The test represented the first capability outside the atmosphere and was launched from a cruiser. Our EGIS combat system successfully detected the target, directed the launch of the missiles and provided updates until the incoming missile was destroyed.

In the air traffic management line of business, we continue to support the FAA with their modernization programs.

And although a protest has been lodged, we continue to support their missions for en route modernization.

Turning to space systems, we achieved 100% mission success so far this year, which includes our Millstar government satellite, a Proton and two Atlas launches, including the inaugural launch of the 59 Atlas 3-B's further scheduling one near the middle of this year.

We also had a successful shuttle launch and trident missile test in the first quarter.

There were no material charges and recurring operations attributable to the commercial space business.

However, higher revenues and lower margin developmental programs impacted government space [INAUDIBLE] comparisons. Second quarter sales are expected to be less than the first quarter reflecting fewer commercial launches and satellite deliveries.

In aeronautics, we had several significant new developments. The C-130J received five new orders from the airport bringing total inception to date orders to 118.

We deliver two aircraft in the quarter leaving backlog at 32. The U.S. Marines joined the air force on a multiyear buy, which is expected to add 64 additional aircraft to our backlog. We continue to market internationally for new orders, which should be helped by the strong show of support by the United States.

This multiyear buy would increase backlogs beyond our threshold and contribute to productivity stability while reinforcing our forecast of profitability on the 121st delivery, which is currently projected in late 2004. Although it does not affect our backlog regarding the F-35 JSF, the Department of Defense signed up Canada as an international partner and Turkey announced it would also join as a partner.

Other countries are currently reviewing their options.

These partnerships will strength and long-term support for the JSF program. I would like to comment on a story which circumstance [INAUDIBLE] recently on the press about potential reductions to quantities.

This study proposes fewer production after the year 2010. I want to emphasize that we have a $19 billion contract for the system development and demonstration phase that is in our backlog.

At the same time, we strongly support the current plan for production quantities as it serves to reduce costs and unit prices on the program.

I would like to spend a minute on our global telecommunications business which we announced our exit from in the fourth quarter of last year.

We continue to make good progress to divest the telecom businesses currently reported and discontinued operations. We completed the sale of Mobile Systems and announced the sale of World Systems in the first quarter.

We are an active discussions with potential buyers for the remaining two properties. Lockheed Martin Sputnik and former concept international business. In our corporate and other segment, we hold equity investments which we believe hold value for our shareholders over the longer term.

We currently own 24% of the plans for an initial public offering later this year. We also own 14% of new skies company.

Inmarsat also has plans for an IPO in 2002. We will continue to evaluate these investments with the goal of maximizing value for our shareholders. Finally, I will make a few comments on the strike at Marietta, Georgia. First, it involved about 2700 out of our 6100 employees at the facility.

Second, several C-130J's were finished and being tested for delivery. So our guidance for deliveries remains appropriate.

I will remind you we have not planned to book profit on this program until 2004. Third, the F-22 just delivered the last two of the program.

Having said that, we would like to see the strike resolved. The main issue is the demand for employment guarantees. It's only natural to be concerned about job security, but the reality is, no one has guaranteed employment.

Job security is determined by our competitiveness in the marketplace. We feel the ultimate job security is increased productivity that will serve to drive more orders and backlogs and create more jobs in the long run.

So in summary, we are pleased with our first quarter performance. Our employees remain focused on mission success, customer satisfaction, cash generation and margin improvement.

Jim will now provide some

additional financial details.

Thank you, Chris. My discussion for the conference call will focus on Lockheed Martin's guidance by segment for 2002 and 2003. Please note that there's been no change to segment sales or margins from prior guidance.

The financials as discussed focus on continuing operations excluding nonrecurring and unusual activities.

There were no nonrecurring items in the first quarter of 2002. Reported earnings per share from continuing operations were 50 cents, a loss per share from discontinued operations was 1 cent. The corporation now reflects all good will amortization prior to January 1st, 2002 in the corporate and other segment since such amortization ceased with the addition of FAS-142. As a result, EBITDA for all segments has been adjusted with the adoption of the statement thereby presenting 2001 and 2002 financials on a comparable basis. 2001 pro-forma earnings per share excluding nonrecurring and other items incorporating the impact of 142 were 40 cents. Last week, I would like to mention that our press release points out retirement plan income defined as FAS-106 retiring medical expense is allocated to the segments. Because it declines significantly between 2001 and 2003 as pension income, it's expected to become an expense during this period. It negatively impacts segment comparisons. Beginning with systems integrations, the segment sales were 2.1 billion, up 11% from a year ago, period. Sales were up due to volume growth and the missiles and fire control and naval electronics and surveillance systems lines of business.

These increases were partially offset by volume declines and platform integration and distribution technology lines with business. Systems integration sales are projected to be 9.3 to $9.6 Billion. In 2003, systems integration sales are expected to be in a rain of of 9.7 to 10.1 billion. First quarter 2002 earnings for this segment were 219 million with a margin of 10.5% compared to 216 million in 2001 with a margin of 11.5%. Segment profitability was reduced from the comparable period in 2001 due to higher volume on missiles and fire control development and low rate initial production programs such as Fad, Atacums and Pac-3.

A decline in volume on mature production programs and also due to lower pension income.

The systems integration margin is expected to be 10.5 to 11% in 2002 and 2003 margin is expected to be 10.0 to 11.0%.

Turning to space estimates. Sales are an [INAUDIBLE] of 32% for the 2001 quarter. The increase was due to a higher volume and commercial space, primarily launch activities and increased volume on government satellite and ground systems programs partially offset by decline and government launch vehicles. Sales in this segment tend to be lumpy by quarter due to timing of launches and commercial satellite deliveries.

We are projecting a combined total of 7 to 10 Atlas and Proton launches for each of the years 2002 and 2003.

Year to date 2002, we have launched two Atlas and one Proton. 2002 sales and space systems are anticipated to be in the 6.5 to 6.8 billion range, and in a range from 6.6 to 7.0 billion in 2003. First quarter 2002 earnings for the space systems segment were 122 million with a margin of 6.5% compared to 87 million in 2001 with a margin of 6.1 percent. EBITDA was up in 2001 due to the increased commercial launch activity as well as the absence of a 40 million loss provision recorded in the first quarter of 2001 on certain commercial satellite contracts. On the government side, margins decreased due to volume declines on launch vehicles as well as volume increases on development activities in the government satellite line of business. For 2002, space system margins are expected to be in a rain of of 6 to 7%.

For the remainder of the year, we expect vehicle programs to contribute to a greater degree on a proportional basis.

Additionally, excuse me, we expect positive impacts from program deliveries and performance milestones. The margin in 2003 is also expected to be in the range of 6 1/2 to 7%.

Now let's talk about aeronautics. Sales in the first quarter were 2002 were 1.3 billion compared to 900 million in 2001, a 56% increase. The sales increase was primarily due to higher production activity on the F-22 program, two C-130J deliveries in the current quarter versus zero in the year ago period.

Increased development activities on international F-16 programs and volume associated with the F-35 Joint Strike Fighter. We expect aeronautic sales in 2002 of 5.8 to 6.2 billion reflecting a full year of the joint strike fighter.

Low rate initial production of the F-22 and approximately 20 deliveries of the F-16. We delivered five F-16's in the first quarter.

In 2003, we expect F-16 deliveries to be in the mid 60s. Regarding the C-130J as we said in January, your projections assume a total of 10 to 12 deliveries for 2002. In 2003, we also assume ten to 12 deliveries for the C-130J. For the year 2003, we expect sales in airplane row nautics to be 6.7 to 7.2 billion. Aeronautics first quarter 2002 earnings were 107 million with a margin of 8.0%.

This compares to 87 million in 2001 with a margin of 10.2%. The increase in EBITDA was primarily due to improved performance on tactical combat air production programs. The margin was lower than the 2001 period due to sales growth attributable to programs and development and the aforementioned C-130J deliveries.

Air aeronautics is estimated to be 8.5% in 2002.

We expect to see continued margin improvement throughout the year as tactical combat programs progress through the development cycle.

In 2003, the margin is projected to be 8.5 to 9.0%. Now onto technology services. The sales in the first quarter were of 2002 were 670 million up 15% from the year ago period. Primarily due, as Chris mentioned, to organic growth and the segment's government information technology business and the acquisition of the OAO in that line of business. 2002 sales are projected to be [INAUDIBLE] with 2003 projected in the 3.2 to 3.6 billion range.

A strong organic growth is expected to continue. First quarter 2002 earnings were 40 billion with a margin of 6% [INAUDIBLE] with the first quarter 2001. [INAUDIBLE] due to increased sales volume and improved performance in the information technology lines of business. Margin and technology services is projected to be 5.5% to 6.0% in 2002 and 6.0 to 6.5% in 2003. The final segment is corporate and other. Sales in this segment are minimal. It was a loss in the quarter of 14 million reflecting an increase in corporate expenses primarily in stock based costs with a minimal contribution from interest income. The expenses were partially offset by increased equity earnings from investments. Stock-based compensation costs at a large impact on the quarter due to the significant increase in the price of Lockheed Martin stock during the quarter.

The company has stock ownership guidelines applicable to certain employees. In order to meet these declines, employees can defer all or part of their annual bonus to a Lockheed Martin stock-based fund.

We have over 2,000 participants in that program.

As a result, our stock-based compensation costs increase when the price of the stock goes up. We continue to expect corporate and other to generate about 50 million of EBITDA in 2002 and 60 to 80 million in 2003 manly reflecting equity income from the satellite services business plus interest income partially offset by corporate expenses, which are expected to have less of an impact on the remainder of the year. The overall sales outlook for the corporation is 25.0 to 25.8 billion for 2002 representing 5% to 7% sales growth compared to 2001. In 2003, total corporate sales are projected to be 26.4 to 27.4 billion.

Again, representing overall growth of 5% to 7%. Backlog rose to a record 73.8 billion at the end of the quarter of the 8.5 billion of new orders over 2 billion was booked in the systems integration segment. Approximately 2 billion was booked in the space systems segment.

Over 3.5 billion in aeronautics and over 600 million in orders of technology services. Turning the cash flow, please refer to the schedule in the earnings release package that reconciles the statement of cash flows with our definition of free cash flow. This definition is consistent with our past calculations of free cash. For example, we exclude divestiture proceeds and associated taxes from free cash flow. Similarly, we include proceeds from fixed asset disposals and free cash as we treat them as an offset to capital [INAUDIBLE] chores. For the quarter, we generated $338 million in free cash flow. In 2001, we generated over 1.4 billion in the quarter. However, it's disclose md our press release last year, the cash flow for the quarter in 2001 included a milestone payment related to an international F-16 program of approximately 500 million as well as proceeds from the sale of surplus real estate of 185 million. As you know, gains from the sale of real estate are not included in recurring earnings per share.

Additionally last year, we noted on the conference call that there were several [INAUDIBLE] accelerated from the second quarter. We continue to project free cash of at least 1.0 billion in 2002 for the years 2002 and 2003 combined, we continue to expect to generate at least 1.6 billion of free cash flow. Capital expenditures for the quarter were 105 million. And are expected to be more than 700 million in 2002. 2003 capital expenditures are estimated to be more than 600 million unchanged from prior guidance. Depreciation from the quarter was approximately equal to capital spending of 103 million.

Depreciation is expected to be 150 million for 2002 and 2003.

The projection is unchanged at 580 million in 2002 and 550 million in 2003. However, for average shares, we have increased our projections due to an increase in the stock price and option exercise activity.

We now project slightly under 450 million in 2002 and above 455 million in 2003.

This compares to the guidance issued in January of about 445 million in 2002 and slightly over 450 million in 2003. The tax rate is unchanged from the prior projection of 31% in 2002 and 32% in 2003. And now, April, we are ready to take the questions.

Thank you.

Today's question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch-tone phone. Again, that's star one to ask a question. In the interest of time, we are asking that you limit yourself to one question and also one follow-up. Again, star one.

We'll go first to Steve Binder with Bear Stearns.

Good morning.

Chris, can you maybe just touch up in space, you know, obviously Boeing had some difficulties in the satellite business this quarter and had some upward revision in cost estimates and you didn't take any provisions in the launch vehicle business nor in the satellite business.

You did touch on the -- some of the government satellite programs, which have been, you know, including where you've had some cost issues on granted those reimbursable contracts. But can you maybe just address your comfort level in light of the costs and revenue outlook and, too, maybe just update us on any efforts or any ability to consolidate the satellite business.

Okay, sure.

First of all, let me give you a little more detail on the results quarter to quarter comparison. As we've talked about in the past, we looked at and we disclosed our space business as both commercial space and government space.

We did have significant increase in revenues this quarter compared to the first quarter of 2001 probably in the 250 to 300 million dollar range.

That was driven by three commercial launches, two Atlas and a Proton compared to none a year ago. The satellite deliveries were one to one, but that was the main driver in the revenue. We also had probably about a 150 to 200 million dollar increase in government, mainly driven by the government satellites and as you mentioned one of those programs Sibbers comes to mind and also increases on ground systems. On the EBITDA side for 2001, you you'll recall we did have the charge on commercial satellites relative to performance.

There was no such charge this quarter. So the commercial space business is still operating at a loss when you factor in the EELV start-up, the launch vehicle and the satellites.

However, that loss was less this year than a year ago. And on the government side, again, mainly driven by the satellites, the government satellites were probably overall operating under a 10% margin this year compared to the load singled up doubled up digit margins.

So that's the back round landscape on the financial results.

The performance has been strong in the commercial satellite and the commercial launch vehicle area. There are no concerns relative to costs or schedule.

And as you know, we review those on a monthly basis. Relative to the [INAUDIBLE] or any potential [INAUDIBLE] to the government satellite business, we've often communicated our strategy and commercial satellites as first and foremost has been to improve the performance operationally, which we think we've achieved, reduced the costs which we took several actions last year, and then look at strategic options.

So that is the solutions that are being looked at.

That process is ongoing. And as you know as a matter of routine policy, we don't comment about specific

discussions we're having, but this is something that we'll continue to look at alternatives during the remainder of this year. Does that help, Steve?

Yeah that's great, Chris, thanks.

We'll take our next question from Byron Cowen from Merrill Lynch.

Good morning and nice quarter.

You mentioned some of the opportunities. Clearly, some of those are probably factored into the forecast for 2002 and 2003, but I wondered if you could delineate what the upside might be to earnings estimate if you do win TSA and DDX and get the go ahead on Deep Water?

Well, let me tell you the process we have, Byron, on the guidance that we give.

As we talked about in the past, we looked at all of the programs we assigned probabilities on a program by program basis.

When you look at any one program, it's kind of difficult to factor exactly how that would play out. I would suggest to you that we've always been very comfortable with our position on both DDX and Deep Water.

So you should assume that that is factored into some degree into our guidance.

TSA would be upside. We're waiting for that announcement, you know, for competitive reasons. I don't want to tell you what our bid was but clearly that is actually executed within 2002.

There would be some upside on that. But I'm not in a position to quantify it at this time.

I would think by the second quarter, we'll have a lot more insight on those three programs and maybe some others and we'll update you at that time.

Okay.

And a follow-up. You mentioned some of the satellite programs. There's been a lot of talk about space-based laser communications. I just wondered if that's an

area you can address as far as opportunities, when we could actually see something on this? Go right ahead.

Yeah, I would say at this time, it's probably a little premature to comment on that particular opportunity.

And I really don't forecast a whole lot here in the near

term in that arena.

But out to 2004, '05, or '06, it could be bigger than a bread box?

I think that's a fair assessment.

Great. Thanks a lot.

We'll go next to Joe Campbell with Lehman Brothers.

Good morning.

It was a nice quarter and nice presentation. I wondered if you could tell us, there's been some stories about Nunn McCurty reviews

and whether you have any major programs that may be subject to the reporting requirements of NunN McCurty and whether you think this will be of any consequence for them?

Okay.

Well thanks, Joe. The Nunn McCurty discussions, I know there were some conferences and prep on this very topic. The major program that we've talked about in the past is the Sibbers program.

That is in the process of going through recertification in the May time frame.

Relative to what is close to McCurty. As you well know, Joe this is a combination of not only our cost, but the government's cost and the total program cost.

So Sibbers is the one we're focused on. We're working with our customer. We did have a breach of that flesh hold.

Any comment on the outcome of that would be a little premature at this time, but we're working with and supporting our customers on

that.

And there aren't any that are about to have this kind of issue?

It's -- not that I'm aware of.

I mean, we look at our costs to complete, as you know, on a preg basis. As I said, it includes not only our cost but the government cost, the combination of these two.

It's calculated on all major defense programs. I think it's about 90 or 100 in the selected acquisition

reports that come out periodically and that's all I know at this point in time.

And then, could you give us any color on where the pension costs might be most market in terms of as we look at the year to year comparisons you've highlighted the pension and post retirement things are an issue.

And I guess you've given us aggregate guidance. But are the there any area where's it's more severe than the others or could it be reasonable to sort of take this stuff and, I don't know, alloy allocate can proportion gnat to sales.

Yeah.

Let me give you a total number on a quarter to quarter basis. Last year we had 200 million many pension income which we've defined as the 106 on a defined basis and [INAUDIBLE] going to zero.

For the quarter, this difference is $45 million. It's allocated basically on sales and costs in a quarter to quarter basis.

So you probably should assume $45 million. Then as you allocate it to the business areas and segments, I think using a combination of sales and employees would probably get you the right weighted average allocation.

And that trend will continue

for the following three quarters, 45 to 55 million a quarter is kind of the estimate.

Thank you very much.

All right, thanks, Joe.

We'll go next to Chris McCray with Deutsche Banc.

Hi, Chris.

Would you please touch base a little bit more on the strike? Is it fair to say that concerns on job security aren't so much the elimination of business but perhaps the elimination of a line in that particular location?

And more specifically, at what point if at all would you

start to be legitimately concerned about guidance given that you may quantify it for us maybe six weeks into it now?

Right.

The job security issue relates directly to the outsourcing of various parts and processes within the Marietta facility.

That's been the main focus. I'll point out a couple of our other companies have already agreed to the same deal that's being discussed. Talks are ongoing, and I think it's a little premature to speculate at this time.

Our focus is to get this resolved. When it's resolved, we'll look at our current plan and develop either a wark around plan or catch up plan to the extent that's necessary and we'll update accordingly.

But at this time, I think there's progress being made and discussions are ongoing even as we speak now.

But presume by, if you felt there were any impact today, you would have updated us on that today, I guess?

No doubt. That will be always our policy. The deliveries are still within our range and see no need to change that at this time.

And Chris, related to the F-22 down there, Jim Rouch made the comment that he thinks there is a 50/50 shot of moving into the next phase here to be decided very shortly.

You know, what do you see as any rest in that program given the current schedule there?

I think that specific comment was dealing with the actual timing of the test flight and the possibility of that slimming out a few months that will cause additional cost, but as you know, the purpose of this test program is to continue wally increase the demanded for the flight performance criteria.

And it's not uncommon in these tests to have some glitches to require additional testing or modification.

We have several F-22 contracts under contract and it's moving along quite well.

The defense planning guidance is due out here in the next few weeks. The Congressional budget process is always ongoing.

I've seen releases and statements that have talked about increasing F-22 to 700 and some. I've seen some go the other direction. We're just focused on

executing the program at this time, and we're making good progress.

So the cost side is under control even with the potential slippage in timing?

That's something that's evaluated and factored into our guidance and our estimate to complete, yes.

Thanks, Chris.

All right, thank you.

We'll take our next question from [INAUDIBLE] with SG Cowen.

Yes.

Could you give us a little more color on some of the detail in the quarter, specifically, what was the level of shareholder-based compensation and what do you

expect for the year? And you mentioned better improvement on tactical programs. Is that F-16, F-22 or both?

Okay.

Yeah, let me talk first about the corporate and other and the compensation. We have, you should think of maybe 2 million to 3 million shares of stock [INAUDIBLE] stock that's a couple now of our participants have deferred in accordance with our stock ownership guidelines. Has that obviously as our stock increases or liability increases and so does our expense.

That would be in the 35 to 34 million range for the quarter.

That's probably not inconsistent with what we expected for the full year. Although with the stock increase here in the quarter, so that's something we've historically had and planned on.

It just hasn't been as significant as this quarter, which is why we wanted to call it out. On the aeronautics question it is a combination of the F-16, clearly F-35 we hadn't been awarded the contract last year, so F-22, F-2, we have several of those types of programs.

So it's that whole line of business on a combined basis.

Okay. EELV start-up expense. Could you tell us, kind of, was it this quarter relative to the fourth and what kind of a pattern could we expect for

the year?

Yeah.

The total EELV start-up for 2002 is basically going to be comparable to what it was 2003 relative to the same quarter.

'01 was basically flat relative to the fourth quarter of last year as I'm looking at the numbers here.

Again it's relatively flat. So I would say you know, maybe about 15 to 20% here in the first quarter. Second and third quarters would be kind of a 20 to 25% range and then the remainder in the fourth quarter.

I may have misspoken here. 2001 and 2002 will be the peak years for EELV expenditures. I think I said 2003. Did you get that, [INAUDIBLE]?

I'm a little confused.

If you are 15 to 20 in the first and 20 to 25 in the second. You know, to get the four to equal 100 if t.'s got to be 25, which would be more in the fourth.

Yet you are telling us it was flat year over year and flat in the fourth. Is there any kind of trend as we go through here?

What you seem to be saying is it's lower early on and will be building.

It will be building as we get closer to the initial Atlas five launch here in the third quarter.

And then it would be down in the fourth, I assume?

That's correct. So the first and the fourth would be lower and the second and third would be higher.

Okay. Excellent. Thank you very much.

Sure.

We'll now go back to Steve Binder with Bear Stearns for a follow-up question.

Chris, what's the level of pension contributions planned for this year and next year?

The cash contribution?

Yeah.

Let me look at the -- I have to look that up real quickly here.

It's in the couple hundred

million dollar range. You're talking about the FAS-87 or 106?

No, the actual cash contributions. Is it a couple hundred million this year?

It will be a couple hundred million.

Does that grow next year?

Next year being 2003?

Yeah.

Yeah.

Secondly, just with respect to, you know, when you look at the campaigns that you identified up front today, when you kind of look at the kind of returns that you think you can generate the incentives, the award fee schemes and so forth, do you see the potential pricing essentially generating greater returns on that kind of business?

Some of that stuff is obviously new to you.

Generally, is there any noticeable change in the potential profitability of those programs than what you

have today in your backlog?

I wouldn't say there's anything significantly different for the cost reimbursable and the developmental type of programs.

As you know, those tend to be award-fee based and the award fees tend to be in the mid to upper single digits as we move into l-RIP and productions. We have a greater opportunity for the increased margins. I will say that the current administration's been very supportive of the contractors, including ourselves with several initiatives that have helped the health of the industry, as you know, in the last year or so, especially on the cash front with the elimination of the paid cost rule and there's recent discussions here on helping on the profit side.

So we're hoping to take advantage of that as it rolls out.

At this point in time, haven't had any noticeable or

significant items worthy of discussion.

We'll take our next question from Sam Pearlsteen, Wachovia Securities.

Good morning. Within your cash flow statement, I was wondering if you could help me out with a couple of the details just because in the press release, you mentioned real estate sales.

I'm wondering if you can quantify that and has your target really changed for the full year? And secondly, where would we see the sale to Tellenor or was that considered part of operating cash flow or [INAUDIBLE]?

Let me take those in reverse order and give you a little more detail.

The sale to Tellenor would not be operating all divestitures and acquisitions are going to be shown down in the investing and financing area.

So that is not in the operating activities. I want to clarify that. The real estate sales for the quarter were basically none. And the target remains, as Jim said, at least a billion dollars of free cash flow.

And, you know, 1.6 billion for the two years combined. We're talking about on real estate, I think last year 2001, we had about 200 million proceeds from real estate sales.

This year is minimal.

And by that, I'm thinking in the $25 million range or less.

I guess I was just referring to the comment in the press release about the $338 million in free cash and it talked of specifically about contract advances and some excess real estate sales.

I had thought there was some in the first quarter.

No, there's no significant earnings contingent on a successful launch. It's a commercial customer and we will record the sales and any associated earnings upon successful launch. But no, there are no special incentives or award fees for that launch.

Would there be penalties for a failure?

Generally not.

You would obviously have the costs associated with any failure and subsequent investigation and such.

But nothing directly associated with that customer, and we generally don't have those types of contracts.

Okay. Thank you.

Sam, I just wanted to clarify one point.

In the comments, we talked about the real estate sale in the first quarter of 2001 of

about $185 million. There were virtually no real estate sales in the first quarter of 2002.

We'll take our next question from Joe Nadell with JP Morgan.

Thanks, good morning and great quarter.

I'd like to follow up on the commercial satellite business just again. You gave us a couple of numbers. You had one delivery in the quarter versus one last year, but could you give us, I guess, your backlog in that business, how many deliveries you now expect for this year and next year?

Any color you can give us on

the market outlook? Has it changed over the past three months?

Sure.

On commercial satellites, we have eight in backlog as of today. We had a delivery in the first quarter. We would expect probably no deliveries in the second quarter and one to two in the third quarter and one to two in the fourth quarter.

A total of four for the entire year.

Mm-hmm.

And relative to 2003, I think we're looking probably in that same range, probably in the three to five range for four deliveries.

The first quarter of this year, we did not obtain any new orders.

We had several opportunities that we're looking at. And I think we've always had a relatively consistent outlook here on the commercial satellite market, and we look at worldwide opportunities and those numbers seem to have been relatively stable here over the last three months specifically, but, you know, they are probably in that 25 to 35 range worldwide depending on which analysis or study you want to believe.

And, you know, we're one of five players with, you know, 20% of the market or so. And that's kind of the map on that one.

Do you have delivery? I'm sorry, order expectations for the rest of the year?

Sure.

Sure. We have a pipeline that we're looking at, and, you know, we would expect, hopefully something in that four to six range relative to orders for this year to replenish our backlog and try to keep it in the range of 7 to 9.

We'll keep you updated.

Great.

And as a follow-up, the CDN-77, there's been some, I guess, some news that the radar

situation might be changing on that program and it might be using the CBN-76 radar instead and that you stopped working on it? Can you comment on that program?

Yeah.

I'll say that that is a good summary and assessment. I'm not sure I have anything else to add on that. We'll continue to work with our customer to meet their

needs. And, you know, adjust accordingly. But it's still early on and I think that's a good summary, Joe.