洛克希德·馬丁 (LMT) 2002 Q4 法說會逐字稿

Good day, everyone, welcome to the Lockheed Martin fourth quarter 2002 earnings results conference call. Today's call is being recorded. With us today is Mr. Chris Kubasik, senior vice president and chief financial officer, and Mr. Jim Ryan (ph), vice president of investor relations.

At this time, I will turn the call over to Mr. Jim Ryan. Please go ahead, sir.

Thank you, Andy. Good morning and welcome.

If you have not received the news release, it is available on our web page at lockheedmartin.com. We also posted charts on our website to accompany our remarks this morning. Please refer to our Safe Harbor statement on chart two. I need to remind you that statements that are not historical facts are forward-looking statements. Such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. See today's press release as well as our 2001 Form10-K and our 2002 form 10-Qs for a description of the factors that may cause actual results to vary materially from anticipated results.

I will now turn the call over to Chris.

Thanks, Jim, and good morning, everyone.

We're pleased with fourth quarter results as our sales segment operating earnings and cash were in line or better than our projections. I'll continue with chart three. The 6% increase in year-over-year quarterly sales was above our target for the fourth quarter. It was driven by growth across all businesses with aeronautics providing the greatest amount both in terms of dollars and percentage. For the full year, our sales increased 11%.

Turning to 2002 earnings, we hope you find that our new format for segment results as filed in an AK last week provides greater transparency into our operations. Jim will take you through the numbers, but the bottom line is that our operating earnings were even from our four segments excluding the pension impact grew18% in 2002 over the prior year.

Now, turn to chart four. With the significant increase in our 2002 baseline and the expected incremental growth in our aeronautic segment, we're raising our growth outlook for 2003 sales to 8 to 12%. For 2004, our sales are expected to grow an additional 5%. Segment operating profit is expected to grow about 15% in 2003 and 5 to 10% in 2004. That translates to profitable growth with improving margins.

Let's turn to chart five. As we have discussed during the last year, FAS 87 pension income will transition to pension expense in 2003. While the difference between FAS and CAS is mostly a non-cash element of the income statement, it does impact our GAAP earnings per-share significantly. All three key factors that drive the FAS 87 calculation for 2003 changed in a way that is detrimental to GAAP earnings. Specifically, we experienced a negative return on plant assets in 2002. We lowered the long-term expected rate of return on plant assets from nine-and-a-half to eight and a half percent and we lowered the assumption for the discount rate from seven and a quarter to six and three quarter percent.

From a balance sheet perspective, these changes led to a $1.6 billion minimum pension liability charge to equity. I should remind everybody that this charge was non-cash and did not impact earnings per-share. With the FAS 87 expense of about $500 million expected in 2003, our GAAP earnings per-share are projected to decline despite the strong increase in segment operating profits. Since we won't be in a position to accurately project FAS 87 pension expense and CAS funding for 2004 until the 2003 asset returns are known, and the assumptions determined, we will not provide a forecast of GAAP earnings per-share for 2004 at this time.

We'll consider some sensitivity analysis as the year progresses. In the meantime, we are providing projections of sales, segment operating profit, interest expense, tax rate and average shares for 2004. Jim will provide more detail in his remarks.

Moving on to chart six. As expected, tax payments, interest payments and the burn off of advances resulted in the usage of more than $650 million of cash in the fourth quarter bringing our total, free-cash flow for the year to a positive $1.7 billion. Looking forward, we're raising our 2003 free-cash flow outlook to at least $800 million, and the two year free cash flow outlook to at least $1.8 billion. Our leverage is now 57% on a debt to capital basis and 45% on a net debt basis. We continue to be committed to debt reduction to increase our financial strength and flexibility.

In the fourth quarter of 2002, we announced a new share repurchase authority. As of year's end, we purchased 1 million shares. We'll continue to pursue additional open-market purchases when financially appropriate. We just announced a 9% increase in the dividends raising the quarterly dividend to 12 cents per-share. Going forward, we'll continue to assess our dividend policy as warranted.

Turning to chart seven, we recorded several unusual charges in the fourth quarter. First, approximately $500 million related to the impairment of our telecommunications investments reflecting the ongoing challenges in that market. We wrote down our investment and Inelsat (ph), Imarsat (ph) and New Skies (ph). Second, a $100 million dollar charge for Space Imaging as we are the guarantor of their bank debt and will most likely have to satisfy that obligation in early 2003. And third, a charge of $110 million related to prepaid proton launch vehicle advances. We restructured our agreement with the Russian manufacturer to reflect the extended outlook for commercial launches and the ultimate realization of the prepaid launches. This adjustment reflects the economic value of the prepaid advances on our balance sheet.

Now, let's go to chart eight. I'd like to turn to a discussion of our 2002 focus area and how we scored. This time last year, we outlined seven focus areas. First, we said we would focus on the successful execution of our $70 billion backlog by maintaining the positive operational momentum achieved in 2001. One of the ways our customers evaluates our performance is through award fee ratings and in 2002, we captured around 95% of the available award fees equaling our record setting performance in 2001. We acknowledge, however, that there are certain programs that continue to require additional management attention where we can and must perform better, such as the F/A-22 and Sibbers (ph). And we're committed to meeting our customer expectations.

Second, we said we must work toward a better value alignment in our space system's business. Last year I told you about our ongoing dialogue with the Air Force on the launchside of the business and our commitment to streamline and strengthen the competitive posture of commercial satellites. Overall, we made progress in a tough market, but there is more work to do.

Third, we said that we would focus on divesting and monetizing our global tele-communications discontinued operations. As of the end of 2002, we have closed three of the divestitures and have a signed contract for the fourth transaction. Regarding monetization of other telecommunication assets, we will continue to evaluate alternatives for each, with the goal of maximizing shareholder value over the long-term.

Fourth, we said we wanted to improve our cash flow. Our free-cash flow was $1.7 billion in 2002. In total, we have generated five and-a-half billion dollars of free cash flow over the last three years. Fifth, we said we would continue our initiative for profit margin expansion. As a result of these efforts, we improved the segment operating margins, that is the margins excluding the pension impact from 7.1% in 2001 to 7.6% in 2002.

Sixth, we said we wanted to further strengthen our credit standing. We were pleased to receive a credit upgrade in 2002 from Standard & Poor's. And lastly, we said we wanted to fuel additional discipline growth, both by redeploying organic capabilities to meet emerging market needs and through the evaluation of selected value creating acquisitions. During 2002, we had strong organic growth of 11%. Our growth came from our defense business, our entry into the homeland security area, as well as continued strong growth in the government I-key (ph) market. We also reviewed several acquisition candidates and (inaudible) our criteria, we will continue to review future opportunities.

Let's now review each business area starting with systems integration. We received a contract for over $300 million from the U.S. Army to produce 88 PAC-3 missiles and associated hardware. PAC-3, the next generation Patriot, has been deemed by the Army and test community as threat representative and operationally realistic. At the Army's request we are accelerating the PAC-3 program in support of their requirements. For the Transportation Security Administration, our team successfully reconfigured airport security checkpoints at the nation's commercial airports. We received contracts totaling $400 million for work on the Aegis weapon system for two UF Navy destroyers, a new Congo class destroyer for Japan, and three destroyers for South Korea. Separately, Aegis and spy one radars (ph) demonstrated for a third time their ability to guide a Navy standard missile to intercept a ballistic missile target.

Let me update you on the JASM (ph) program. As you know, it was decertified in November from further operational testing pending an investigation of two, free flight anomalies. After an independent review team evaluates the data the program expects to receive formal recertification, which will allow for the final development flight test next month. Turning to space, our results included nine launches in 2002 -- five Atlases and four Protons. In the fourth quarter, an Atlas successfully boosted a NASA satellite into orbit - the 63rd consecutive Atlas success. On a less positive note, it was an anomaly on the upperstage of a Proton Block DM (ph) launch, but it returned to flight a month later with a successful launch for the Russian government. We have only one more launch with that configuration in our backlog. Subsequent launches will use the Brezent (ph) configuration. In 2002, we secured a total of six new Atlas and Proton launch contracts.

Our discussions with the U.S. government continue on how best to achieve assured access to space. We need to insure that we have a business model that meets U.S. government objectives using two launch systems and providing a healthy contracting environment for the suppliers. We'll keep you updated as this progresses. Regarding commercial satellites, we recently announced that we will retain and realign this line of business with around $400 million in annual sales. We believe the best value proposition for the corporation, our customers and our shareholders at this time is to strengthen our competitive position through operating efficiencies.

Additionally, the commercial satellite team will be a key part of the Navy's next generation satellite communication system known as Mulos (ph), which should also further improve our competitive position and leverage operating efficiencies. The long-term potential value for the winning team is in the billions of dollars. On the military side, the important Sibbers program is progressing well under the new baseline. In aeronautics, we were pleased that the F-16 was selected by Poland as the winner of their competition to supply the Polish Air Force with 48 aircraft. We expect to finalize the contract in 2003 with production deliveries to begin in 2006. Our firm backlog of 280 aircraft does not include the 48 for Poland and 22 others currently being definitized.

Simultaneously, the F/A-22 program is in development and low rate initial production. We delivered the last three of nine EMD or development aircraft in 2002 and continued our progress in demonstrating the operational capabilities of this aircraft. As you know, F/A-22 has experienced cost growth under the development contract. We expect the increased cost to be funded out of existing F/A-22 program funds. The impact of this revised estimate has been incorporated into our financial projections, including the diluted impact on margins. On the production phase of the F/A-22, we delivered the first three production aircraft last year. However, consisting with our practice, we are booking low profit margins early in the program and as we meet milestones and retire risks, we expect margins to increase. As expected, we also received funding during the fourth quarter for the production of Lot 3, an advanced procurement to Lot 4.

There have been a number of articles related to total production quantities for the program. It's important to understand that the Air Force continues to operate under a buy-to-budget strategy, therefore, buying the maximum number of aircraft within the production cap. F/A-22 funds in total remain the same. Our goal is to continue to work with the Air Force and our suppliers to maximize the number of F/A-22s that can be purchased.

Turning to the C-130J program, during the quarter we delivered two aircraft, bringing the total for 2002 to eight aircraft versus our guidance of ten to 12 for the year. The planned delivery of two U.S. Marine Corps tankers was not achieved as expected in the fourth quarter. While the aircraft have been built, they're awaiting customer testing and verification of the refuel pod operation. The other aircraft plan for the fourth quarter for an international customer has completed ground test and is awaiting final customer acceptance flight testing. Negotiations with the Air Force and Marines concerning the C-130J multi-year buy are progressing. We are targeting a contract for early this year. It now looks like the contract will be for 60 aircraft,40 for the Air Force and 20 for the Marines.

TheF-35 Joint Strike Fighter had a successful first year. Seven additional international partners joined the program making it an unprecedented nine country partnership. Staffing continues to ramp up on plan with the next major milestone being the preliminary design review in March.

Now turning to technology services. The Department of Energy announced the renewal of our management contract for Sandea (ph) labs for another five years. Under our other contract with the TSA to train passenger screeners, we exceeded the congressional mandate to train 30,000 screeners by November 19. By year's end, we have trained over 54,000. Lastly, the government IT business continued to show strong growth with organic revenues up 22% over the 2001period. Overall, with our acquisition, government IT grew 68%.

I will now turn it over to Jim to provide additional details.

Thank you, Chris.

First, I would like to update our sales and margin guidance by segment for 2003and 2004. I will then discuss results and assumptions for various income statement and cash flow elements. Beginning with systems integration on chart nine, sales in 2003 are projected to be between $9.8 and $10.2 billion, slightly higher than our previous guidance. In 2004, systems integration sales are expected to increase to a range of $10.3 to $10.7 billion. Sales growth is driving operating profit increases in both years. We expect sales growth in each line of business. Systems integration (inaudible) is expected to grow its distribution technologies business, the new postal automation contract awarded in the third quarter of 2002, as well as various domestic helicopter programs. Altogether these increases should more than offset the wind up of the U.K. Merlin program. The C4-I line of business expects to grow its information superiority business with programs such as Integrated Space Command and Control, or ISC squared, and programs providing command and control, battle management and enhanced communications.

Missiles and fire control expects to grow in the air and missile defense and tactical missile areas, specifically PAC-3, MLRS, or Multiple Launch Rocket System, and ATACMS (ph). The naval systems line of business is expected to grow modestly with a ramp up of the Deep Water program with the rest of the portfolio remaining relatively stable. Systems integrations margins, margins expected to be 9.5 to 10.0% in both 2003 and 2004. Over the last couple of years we have experienced a gradual transition from mature production programs such as Merlin, Lanter (ph) and Matads (ph) (inaudible) targeting night-vision system to development programs including Fad (ph), Sniper (ph), JASM, PAC-3, ISC squared, and new Aegis development contracts. Naturally, development programs will book lower profit margins on the average than production contracts.

Turning to space systems on chart 10, we expect sales to range between $7.3 to $7.7 billion in both 2003 and 2004. In 2003, sales increase from our prior guidance is primarily due to additional volume and ground systems. We expect to launch a combined total of five to eight Atlases and Protons annually. For both 2003 and 2004, space system's margins are expected to be in a range of 7.0 to 7.5%. A margin improvement in 2003 can be attributable to ground systems. The margins in both years benefit from reduced EELV start-up expenses.

Now let's talk about aeronautics on chart 11. We expect aeronautic sales of $8.4 and $8.9 billion in2003, a substantial increase from our previous guidance. The increased growth assumption is driven by higher forecasted deliveries of C-130J and F-16 aircraft, higher F/A-22 volume mainly for the development phase, and higher volume on the F 35 Joint Strike Fighter.

For the year 2004, we expect sales in aeronautics to achieve solid growth and reach the $8.9 to $9.4 billion range. For both 2003 and 2004, we expect 65 to 70 F-16 deliveries and 12 to 14 C-130Jdeliveries. Both represent increases from our prior guidance. Aeronautics margin in 2003 is estimated to be in a range of 7.0 to 7.5% and reflects the higher C-130J volume at zero margin, and higher development activities which generally book at lower margins than production contracts. However, on the production of the F/A-22, we are also booking lower margins as we are in the early stages of low rate initial production.

In 2004, we expect to achieve solid margin improvement reaching the 8 to 8.5%range. The 100 basis point improvement is driven by expected margin expansion in the combat aircraft line of business, primarily F-16, F/A-22,and F-35. Overall, aeronautics expects to achieve about 30% average annual growth in operating profit between 2002 and 2004 during a period when sales are growing by an average of approximately 20%.

Now on to chart 12 in technology services. 2003 sales are projected to be in the $3.1 to $3.4 billion range, with 2004 sales projected in the $3.4 to $3.8 billion range. Our government IT and military aircraft businesses are expected to grow at double-digit rates organically while NASA sales will decline more than 5% in 2003 and more than 25% in 2004 due to the reconfiguration of the C-SOC (ph) contract. Margins in technology services are projected to be about 6.5 to 7.0% in 2003 and 7.0 to 7.5% in 2004.

2004 margins are expected to improve in all lines of business in this segment. Now, I'll use chart 13 to discuss unallocated corporate income or expense which includes the impacts of pension accounting and non-operating income or expense. For comparative purposes we have excluded unusual items. Pension accounting for government contractors has been a fairly confusing topic for years with little consistency in how it's presented and disclosed. As evidenced in our previous disclosure including our recently filed AK, we have tried to take the lead in this area and I will provide a brief overview.

First, pension funding is determined by the U.S. government's cost accounting standards, or CAS. Those costs are allowable and are forecasted in our forward pricing rates and the majority gets recovered. In our segment results, cost of goods sold reflects pension funding under CAS as an expense. And due to cost base pricing practices in our industry, it is also factored into our segment sales. So, therefore, at this stage, we are assuming that sales and cost of goods sold for pensions are basically the same, which effectively negates its impact on segment profit. So, in order for us to comply with the requirement to report pension expense in accordance with GAAP utilizing FAS 87, we subtract the CAS expense from the FAS 87 income or expense -- the resulting FAS/CAS adjustment is the true-up entry to get us back up to GAAP EPS. Prior to our recent AK filing, we would allocate this CAS/FAS adjustment back to the segments. Now in accordance with the new AK presentation, the adjustment is included in the unallocated income line. Therefore, the impact of pensions is essentially neutral to the segments and allows you to see how our operating results are consistent with the way we measure each of our business areas.

Chart 13 should clearly describe the significant impact from pension accounting between 2002 and 2003. The FAS/CAS adjustment changes from a $243 million benefit to GAAP earnings in 2002 to about a $330 million expense in 2003. As we disclosed in our third quarter release, potential changes to be expected rates of return in the discount rate as well as the actual 2002 return on plan assets could have a significant impact on our prior guidance for the FAS/CAS adjustment, which had assumed a net benefit of $110 million for the year 2003.

Now that we have revised the assumptions and recorded the 2002actual return, FAS 87 will become a non-cash expense of about $490 million in 2003 compared to our prior guidance, which was an expense of at least $50 million. The total per-share negative impact on earnings compared to prior guidance is, therefore, about 65 cents per-share. The estimate for other corporate income items in the unallocated category, which includes equity income from joint ventures, interest income, stock plan impacts and other income and deductions has been reduced. The outlook for these items is now an expense of about $20 million in 2003 compared to our prior projection on an equivalent basis of about $45 million of income for 2003. This change in other corporate items is expected to negatively impact 2003 earnings by about 10 cents per-share. Therefore, the total of these changes is expected to have a negative impact on prior 2003 earnings guidance of about 75 cents per-share as noted in the press release.

Turning to cash flow on chart14, we generated $1.7 billion in free cash flow in2002. Capital expenditures were $660 million, depreciation was $433 million, and amortization of intangibles was $125 million. For 2003, we increased our free cash flow guidance to at least $800 million versus our prior guidance of at least $700 million. For the two years 2003 and 2004 combined, we expect to generate at least $1.8 billion of free cash flow. From a working capital standpoint, we expect to continue to generate cash from receivables, inventories and payables over the two year period, with forecasts that the burn off of advances will use cash during that period.

Capital expenditures are expected to be at least $700 million in both 2003 and 2004. And 2003 and 2004 proceeds from fixed asset disposals are expected to be minimal. Our final chart is number15. Depreciation is expected to be about $475 million in 2003 and about $525 million in 2004. Amortization of intangibles expected to be about $125 million in both years. Regarding our outlook for interest expense we expect about $535 million in 2003 and about $520 million in 2004, and the tax rate is expected to be in a range of 31 to 32% in both years. Our guidance assume average shares of about $460 million in 2003 and about $470 million in 2004.

So, in summary, our revised forecast increases the sales and operating profit from our four business areas compared to our prior guidance and increases our free cash flow outlook. Before we take your questions, I'll turn it back to Chris for some additional remarks.

Jim just provided a guidance and now I would like to discuss our top focus items for 2003.

We'll continue to focus on driving operational excellence, financial performance and shareholder value. First, we'll continue to focus on the successful execution of program management to ensure customer expectations are met. Senior executive management will pay particular attention to the F/A-22 and Sibbers programs. Second, we must provide winning solutions for customer needs. We're focused on winning key programs to fuel top-line growth, achieving 100% customer satisfaction and realizing cost-efficiencies to increase competitiveness. Third, we will continue to work toward a better business model for our launch vehicle business. This involves further discussions with our customers as well as additional cost cutting. Fourth, we're focused on improving our returns. We will continue to strive for operating margin expansion within our existing programs.

Overall, we are targeting 8% operating profit in 2003, up from 7.6% in 2002 and 7. 1% in2001. We continue to see higher returns on investment on a program by program basis. Fifth, we will carefully evaluate the various alternatives for cash deployment and implement those that provide the greatest returns for our shareholders. And last, we're focused on hiring and retaining a talented workforce. This morning we efficiently opened our new center for leadership excellence here in Bethesda to enhance our development efforts and to support our quest for superior performance both for customers and shareholders.

And now, Andy, we're ready to take questions.

Thank you.

At this time if you would like to ask a question, please press the star key followed by the digit one on your touch-tone phone. Once again, that is star one if you would like to ask a question at this time and we'll pause for just a moment to assemble our question roster.

And we'll take our first question today from George Shapiro (ph) with Salomon Smith Barney.

Good morning, good numbers.

Chris, on '04, it would seem to me that the sales growth you're projecting is too low. I mean, you've got big increases in the procurement in R&D and the '03 budget. Space, which you don't have any growth, but an area that you have been consistently growing faster and raising projections almost every quarter. So I just wondering if you would provide some color on why the sales growth in '04 is not higher than 5%?

Okay, thanks, George.

As you pointed out, space has traditionally been flat the last few years and we're projecting that trend to continue, mainly from the commercial side. We look at this from 2001, where we had $24 billion of sales growing to over $30 billion by 2004 is a pretty significant improvement. Eight to 12% in '03 is really the baseline that -- to some degree is holding down the '04 incremental growth. So we'll continue to monitor it, the '04 budget will be out here in a few weeks, and we feel confident in the guidance with the numbers that we have provided.

Jim?

George, I just wanted to add that in aeronautics we had a very -- we're expecting a very significant ramp up in 2003 and we don't seethe same Delta in 2004 as programs like JointStrike Fighter don't have the same increase between the two years.

And as a reminder, in the interest of time, we are asking you limit yourself to one question and one follow-up.

We'll go next to Steve Binder (ph) with Bear Stearns.

Yes, I was just wondering -- good performance. With respect to aeronautical, the $900 million increase in sales, it looks like you have not really changed your margin of guidance for '03 versus '02, because you're basically talking about flat to slightly higher in '03 versus '02 before the restatement of the CAS FAS adjustment. And you're talking about $900 million increase in sales now versus previous plans. Seems like the C-130J, F-22, you know, and JSF, low margin stuff. Can you maybe just touch on, you know, where did you boost your F-22 sales numbers up? I think you were a billion six before for '03, what is that gone up to? What has JFS gone up to? Given the growth in sales I would have thought there would be a little margin delusion. Maybe you can just touch on that.

Okay, Steve, first of all, thanks. When we look at aero just absolute numbers here on the sales side, from 2002 to 2004 as you mentioned we're growing about 19% over that two year period on a compounded annual growth rate. And our operating earnings before the FAS/CAS adjustment is growing close to 30%. When you look at the key drivers to the increase in '03 over the prior guidance, as I mentioned, we had a couple C-130J aircraft that were scheduled for '02 will now be delivered in '03. A couple hundred million there, obviously no margins on that.

The F/A-22 is going to have additional revenues as a result of the EMD cost growth on the cost-plus program, specifically, you know, we're looking at $200 to $300 million incremental over the prior guidance, so we're probably now looking at a billion eight to a billion nine for the F/A-22 program. The F-35 or Joint Strike Fighter is another $100 million or so over our prior guidance and now we're looking at maybe in the billion eight to $2 billion range if that program is ramped up and, you know, $100 million of other various development type programs.

Does that help?

We'll go next to Byron Calen (ph) with Merrill Lynch.

Yes, nice quarter and thanks for providing in detail the breakout with CAS and FAS.

Chris, just kind of following on aeronautics, if you could also give us a little bit more color on the 2004 margin increase. Are you assuming that the C-130J is profitable in there? What else happens in some of these underlying programs and what are some of the drivers in that increase?

Sure, thanks, Byron.

There is a little bit of profit that we're assuming on T 130 in '04. It's really not significant or a driver to that. We're looking at, you know, the overall business area evolving and then progressing on its various development programs, low rate initial production programs. Again as we retire the risk and achieve the milestones, we believe there is an opportunity for us to earn additional fees and that is what we're projecting -- specifically the F/A-22 program as we continue to make good progress there both on the development and the production side, we think there could bean opportunity to go from the -- kind of the mid single digit margins on a blended basis to the upper single digit margins. We think there could be a little bit of upward potential on the JointStrike Fighter and the F-35, and clearly, the entire F-16 line of business when you look at the 280 that we have in backlog, not counting the additional 70 that we're in the process of negotiating with historically double-digit margins coming in to delivery here full step in '04. A contribution of all those things will account for that step-up.

Thanks.

We'll go next to Heidi Wood (ph) with Morgan Stanley.

Yes, morning, nice quarter.

You threw off such strong cash in 2002, Chris. Can you walk us through the headwinds you're facing in '03 that would result in less cash flow versus what you did this year, and does that include the cash positive that you might get for contract signing on the PolishF-16's?

Okay, thanks, Heidi. The main drivers between the billion seven free cash flow for '02 and the 800 for '03 is going to be the burn off or the runoff of the advances. If you recall last quarter, we talked about the fourth quarter having several hundred million dollars burn off. I think at that time we had advances at about $5.1 billion. I think I projected about $4.6 billion and we came in at 4.5, so the $600 million in advances did occur as projected. We do have pretty good visibility into that amount. For 2003, we're looking at $700 to $800 million of advances running off on the various programs.

Taxes, you'll see when we file our 10 K in early March that our tax payments for 2002 are going to be in the $50 million range. We are projecting several hundred million, 300 to 400 in '03. That is also another driver. And we do not have any advances forecasted in '03 for the F-16 Polish program. That is an FMS program, foreign military sale. It is not a direct foreign sale. So those, as you know, do not contain those substantial advances. Does that help?

That is great. And as a follow-up, you mentioned that you were reviewing future opportunities with respect to deploying your cash in the future. Can you talk a little bit about what areas you might be interested in? I mean, are there niche areas that you particularly feel that you need to expand in?

Oh, Heidi, I think one of our top priorities is clearly to invest that money in selective acquisitions dealing with our core competencies and in adjacent markets. As I mentioned, we have looked at several opportunities throughout 2002 and for a variety of reasons, either from a regulatory, an operational, strategic or a financial perspective, we did not pursue those. We'll continue the process, it's ongoing. We have talked about our systems integration and our technology services lines of business or segments having the greatest potential to expand in their existing markets. I think in aeronautics with $35 billion of backlog, the focus there obviously is on the execution of that backlog and selling existing products.

And again, in space, we're focused on the launch vehicle matter. So I would say in systems integration and tech services would be our top priorities and we'll be opportunistic in the other business areas if warranted. Internal investments, as we have talked about in the past, is a very important part of our growth. We did have 11% organic growth. I mentioned the -- something, you know, like our training center where we'll be having 25 to 30% of the leadership in this corporation come through on an annual basis, and this is just across the street. So Vance Coffman, Bob Stevens and others in the management team can meet and talk with the employees and leadership of this corporation. And as always, we'll continually review our dividend policy, look for opportunistic share repurchases, and we do have, I think, close to $900 million of debt that is maturing as scheduled in the first couple of months of '03. So all those items are being looked at.

Okay, great. Thanks very much.

We'll go next to Pierre Channel (ph) with CS First Boston.

Good morning, gentlemen.

Can you shed a little bit more light in terms of on the space side and the satellite business? You obviously indicated that Sibbers has been rebaselined, but I'm kind of interested in knowing from an operational and managerial standpoint and financial, I guess, controls and reporting, any new initiatives, efforts and what has been changing there to kind of keep these programs on track?

Sure. First of all, thanks, Pierre.

When we're talking specifically on government satellites, the Sibbers program we talked about earlier in 2002, it's a cost plus reimbursable job. We have several controls and processes that we have in place on all programs and specifically been enhanced in this particular one. There are periodic meetings I think currently on a weekly basis with our president and chief operating officer on this particular program along with theF/A-22. The entire management team, Vance Coffman, myself and others review major programs with the executive vice presidents on a quarterly basis and then we have the ongoing processes, the independent cost evaluation group that goes out and assesses the programs.

We have had some management changes in that line of business, specifically a new CFO of the space business earlier this year is one example, and other organizational changes within the operation of Sunnyvale (ph). So that what is we have done internally. Just as importantly - more importantly, we're closely linked with our customer. There are high level meetings with the customer on a regular basis. It's clearly a team approach and a team effort, and they're aware of the progress, the risks and the opportunities that the team faces. So we feel pretty comfortable that the controls and the processes are working, not only on that program but all of ours.

Okay. And then in general, any other programs or areas that you would put sort of on the watchlist that you haven't discussed?

No, there aren't.

Thanks.

We'll go next to Kai Von Rumur (ph) with SG Cowen.

Yes, thanks.

Your new pension assumptions, eight and a half percent return and 6.57 on the discount rate, those were kind of bigger clips than I expected. I was looking for 9 and 7. Were those increments, you know, basically 50 and 25 basis points, it looks like they might have been close to 20 cents of the incremental pension impact and, secondly, while you can't exactly forecast CAS for 2004, can you give us any help directionally, you know, where that might be going?

Sure, Kai.

First of all, the discount rate of 6.75 was a 50 basis point reduction. The indexes that we monitor and follow, really, the Moody's 10-year bond rate came down almost an exact amount. So I think you'll find that that's going to be a pretty common assumption. Each quarter point as we talked about was $40 to $50 million of EBIT so that probably gets you part of the 20 cents. And as we talked about in the third quarter, on the long-term rate of return, eight and a half percent -- each quarter point there was around $60 million. So that would be another 120. So clearly, we wanted to be conservative. We don't want to have to keep changing these assumptions, especially the long-term rate of return. We look at this on a long-term basis. It matches the benefits that we are providing to our employees, which we also look at on a long-term basis. So we believe the eight and-a-half is the appropriate assumption and I do believe it may be a little more conservative than other companies, but we felt it was prudent.

Relative to '04 directionally, I think, you know, there is a possibility that it will increase. But again, you know the variability in that. Also, the FAS directionally could increase. And ass we have laid this out, the real important number from an earnings perspective is the difference between the two. So they both, I think, in '04 and beyond for the next few years probably will be moving in the same direction, so the real focus that we need to look at as the year progresses and communicate to you is the Delta of that growth. But I would say directionally both are going forward a little higher.

Okay.

One quick one -- I guess I'm confused on the advances. If the advances are down $700 to $800 million in '03, my assumption is that the burn off on the F-60 UAE is much, much more moderate on '04. How come you only get a $200 million step-up in the cash flow? Couldn't it be more?

Well, we're looking at '04 again close to 600 to 800 of additional burn-off on those advances from '03 to '04. So we're going to have a comparable amount at this point of burn off '04 to '03 that we have '03 to '02. Taxes are currently being projected to be maybe a couple hundred million higher in'04 and we do see some declines both in the receivables, and we think there could be some additional help from the inventory accounts. So, that is kind of our preliminary look, but we're looking at the advances to come down here over the next two years.

Excellent, thanks.

We'll go next to Joseph Campbell (ph) with Lehman Brothers.

Good morning. First, let me say thanks again for all the clarity around the pension and just the general attitude of being clear about what is going on.

I wondered if you could remind us of what's left in all these various space assets that were acquired over time and you have been liquidating, I notice, you know, in the out years. There is not much left in equity income and then, too, you talked about margins and how you had done better in the margins in the space segment and I wondered, I'm not trying to bore into precisely what the R&D spending was, but just sort of operationally, what is going on here? Presumably the military business is getting better and better, and the commercial business is drifting and the R&D is going down. Just sort of some components of whether the margin expansion there is really better performance or is it just R&D going down?

Okay, Joe, first of all, I appreciate your comments.

As you know, we have been focused on trying to provide as much transparency and clarity as possible, and giving you and others the information they need. Specifically, let me start with your space assets and I think by that you're referring to the old Lockheed global market telecommunications segment. We started the year with four operational businesses and as I mentioned three are gone. One is under contract and that is Lockheed Martin enter Sputnik, and we hope to have that closed here in mid 2003. Once that is closed, we will have three large holdings and equity investments -- specifically, Intelsat (ph), which we own 24% of, Inmarsat (ph) and New Skies(ph) -- these are collectively now on the books after the write down in the $800 to $900 million range, and our plan there is really to wait for the most opportunistic time to monetize those. Intelsat (ph) is contributing some equity earnings that we've indicated and they are a component of the corporate and other items.

Relative to space, let me just look at it first of all for the full year and where we're headed both from a commercial and government perspective on earnings. This year we actually made good progress in reducing our commercial space losses. The government business was relatively flat from an earnings perspective, a little bit down but not significant. Again, the Titan program is winding down near the end of its life and that's traditionally been double digit margins. We are seeing real good growth in government satellites, with the Sibbers program and the advanced DHF, and the whole ground systems line of business is growing, also.

Relative to the R&D, specifically the EELV investment, we have been writing off. We have talked about '01 and'02 being the most significant of those years and that will be coming down clearly in '03 and '04. As you know, we had our successful launch in 2002. So from a start-up expense, R&D on that specific program, I think you're seeing some of the benefits there. Additionally, government satellites we're looking at improvements over the year. Again, these programs move along in their life cycle.

Relative to overall research and development, independent research and development, corporate-wide and within space, there has been no reduction in those endeavors. We've continually invested a couple of percentage points of our sales in the bid and proposal on the research and development. In fact, we're committed to continue with that investment as that fuels the pipeline.

Jim, do you have a little more detail?

I just wanted to add that the margin in ground systems also is going to be a little bit higher than the prior guidance for '03.

Perfect, thanks very much.

We'll go next to Stan Perlstein with Wachovia Securities.

Good morning.

Just looking at your guidance in the 8-12% growth in '03, four percentage points is a pretty wide range and it's about a billion dollars in sales. Can you just talk about what are the pieces in terms of the swing factors as to whether you're at the low end or the upper end of that?

Sure, Stan. We looked at the way we've given guidance in the past and specifically in the sales area and we think it is prudent to give you a realistic range which by definition will, in fact, be wider at the beginning of the year and hopefully narrow in over time. Some of the things causing the growth and some of the variability are items like the F-16 program, where we delivered 21 aircraft in 2002 and we're now projecting 65 to70 in 2003, a rather significant ramp-up and, you know, those deliveries do have some variability with them as far as recognizing the revenue upon the delivery.

Similarly, C-130, we give a range of deliveries there. There is always a couple $100 million swing item, depending on that. TheF-35 JSF continues to ramp up. I think we have a pretty good estimate we gave you on that. But again, there could be a little variability. Then the homeland security opportunities, we think we have an assumption in there that's reasonable but there could be some upside. We would at this point feel very confident that our '03 sales will be within that range and probably toward the midpoint to be honest with you.

Okay. And just to follow-up on the corporate items when you talked about the unallocated corporate and went through with pension, I guess two questions: Why in your prior projections did you have $45 million of, I guess, income going to$20 million of expense, you know, that $65 million swing, what is driving that? And then also with respect to pension -- what is your net pension outflow in '03 and '04 if we -- I guess the outflows that you don't get reimbursed?

Okay.

Let me try to address the $65 million. I think you're referring to the non-pension pieces would really be a reduction in our joint venture equity earnings from the various telecom assets that we own. That accounts for probably two-thirds of the decline. The other $20 million or so is really a reduction of interest income. Mainly, it is a combination or mainly driven by the lower interest rates and the opportunity to invest that cash. Those two, about $65 million is a ten-cent decline that we referred to in our press release.

Let's see, relative to the net outflow, again, in 2003, our CAS expense is about $160 million. Just to give you a baseline in 2002, it was $87 million and in 2001 and 2000 it was less than $10 million. We're about 50 to 60% cost reimbursable and about 40 to 50% fixed price. We put these costs into our forward pricing rights. We probably would suspect we would collect 70 to 80%. So maybe, you know, 20% of the 160, you know, $30 some million. But that's clearly contained and included in the guidance that we have given you both for '03 and '04 and again, '04 we need to wait to see directionally, but again we think there will be some increase there. And again, that has been factored in. Further out, the increased costs are the -- actually, the greater percentage of recovery as we're able to price that into our opportunities. Does that help, Stan?

Yes, it does. Thank you very much.

We'll go next to Joe Nadell (ph) with JP Morgan.

Hi. Good morning.

I guess just on that $45 million, Chris, or $40 to $45 million of reduced equity income in your investments, is it fair to say that just about all of that is Intelsat?

Well, Joe, that is one of our larger investments. They're in registration, as you know, and we really are limited as to what we can disclose relative to their performance, but you know the portfolio of assets we have and that is our largest. So --

Okay, fair enough. And then just a couple of quick ones on programs. First, is it fair to say that you don't have an EELV -- bail out is the wrong word -- but I guess a new agreement with the government factored into your space margins for '03? And secondly, in the F/A-22, can you break out between the EMD and the fixed price production contracts what the impact was on your lower profit guidance for '03?

Okay. Relative to your first question and EELV for 2003, that is correct; we do not have any assumption in there relative to the government's support that you've read about and we've talked about in the past. So that is relative to EELV in 2003. On F/A-22 -- let me kind of break that into the two pieces so everybody understands. We have an EMD, which is an engineering manufacturing and development program, which is a cost reimbursable award fee type contract. This is the contract that experienced the 700 to$1 billion of cost growth that was a result of a joint U.S. government and Lockheed Martin comprehensive test (inaudible) complete. This program is approximately 90% complete and you should assume that the additional cost growth does not bring with it any additional fees. So that is several hundred million dollars a year, say, in the $300-$600 million, which you should assume is kind of low single digits.

On the production side, as you know, we have -- it's fixed price. The production piece of F/A-22, we currently have 31 aircraft under contract. There were eight that were part of the PRTV, as it is referred to, the production ready test vehicles. We delivered the first three last year, we'll deliver the next five this year. Lot one has ten aircraft and lot two has 13 aircraft. As you would expect, in these fixed price low rate initial production programs, the margins increase as we retire the risk and meet the milestones. So those would be more in the mid single digit range for 2003 and hopefully increasing in 2004.

So on a blended basis, I would say F/A-22 mid single digits for '03 and upper single digits in '04. Does that help?

Yes, it does. Just to be clear, on the fixed price portion, did you lower your booking rate for 2003?

No, we did not.

Okay. Thanks a lot.

Due to time constraints we'll take our final question today from David Strauss (ph) with UBS Warburg.

Good morning and thank you.

If you can talk on space systems -- if I go back and look at the guidance you gave at the end of the third quarter and adjusted for the different reporting methodology you're using going forward, it appears there is a very significant bump-up in your expectations for margin for next year in space systems. Could you give a little bit more detail what changed between the end of Q3 and now to justify that increase?

Andy, I just wanted to add something. We would like to continue on about five more minutes to allow others to ask questions, okay?

Yes, please go ahead.

All right. Okay, David, thanks for the question.

Relative to space and the increase in the guidance and the margins, it's really driven by the ground systems known as our M&DS line of business. We talked about the Atlas V and the EELV investment declining, also contributing to that is the great progress that we have made on the government satellite programs. We see some margin improvement opportunities, which we have committed to and included in our guidance relative to the advanced DHF program and the restructured Sibbers program. Those are offsetting the Titan IV build out, as we talked about before. And increased award fees, as I mentioned, for the second year in a row, the corporation has earned 95% of the award fees. The space team has been leading. Our corporation in that endeavor for several years is a significant part of their earnings and we would expect that those award fees, record award fees will continue and that is also driving the increased margins.

Okay, great. Thanks.

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

Hi, thanks.

The Quadrilant (ph) contract I guess has just been cleared, and does that ramp up for a full year of revenue recognition this year?

Chris, on that one, you know, we do not actually record the sales. That is a 50/50 joint venture. We will be using equity accounting on that, so the margin or the operating earnings will be contained in our end of technology services line of business. Our share of that is in the $1-$5 million range, our share of the earnings that you'll see in the operating EBIT. But the sales growth in technology services is not driven and does not include anything on that. This is an act of JV, very similar to the USA joint venture that we have in space and some of our other joint ventures.

So the growth in technology services isn't necessarily driven off of that contract. Can you then maybe review what you see as some key opportunities in that area and to what extent the government IT business can continue to grow at strong double-digit rates, and does the homeland security opportunity represent a big upbelt in that area?

Sure. The growth is really being driven by the government IT line of business. In fact, you know, we would think for 2003 we could be at a billion dollars or more relative to sales for government IT. Military aircraft is actually growing, and those two are more than offsetting the decline in the commercial IT business and our NASA line of business.

Relative to some specific opportunities, clearly the technology services organization did an outstanding job on the TSA homeland security opportunity. I mentioned the 54,000 screeners that have been trained. We think there is several hundred million other opportunities. We haven't specifically identified them, but given where we think things are headed, we should be able to take advantage of that. The Army has a rapid response Heidi IQ (ph), which is indefinite delivery and indefinite quantity vehicle that we have been able to take advantage of for several years. We expect that to continue. There are some (inaudible) management opportunities, Social Security, national security agencies, lots of opportunities. There is one at the Pentagon that we're actively working this week actually. So several two or three to $400 million-dollar opportunities in the government IT and we have got a pretty good win rate there and we expect it to continue.

Thank you.

We'll go next to Nick Fathergil (ph) with Banc of America.

Good morning, Chris and Jim.

First of all, thank you very much for giving us the segmental guidance on paper. It does reduce our smoking pen syndrome back here. The first question is on the -- as you identified, Chris, the focus areas for the future, F-22 and Sibbers, if you could give us a little bit of insight into what you see are the real tensions here in the program and what are the financial risks. It has something to do with really - the program is being a little bit delayed and therefore margin recognition going forward.

Okay, Nick, thanks.

I'm glad the charts are helpful. Relative to F/A-22 and Sibbers, these are just large programs that tend to get a lot of publicity and a lot of attention and we think it's appropriate to have the senior executive leadership team be an integral part of that. Again, in both cases, we're working very closely with our customer in the Air Force. Financial risks at this time, I think our guidance is appropriate based on our ability to continue to perform and our assessment of risk, and I would expect any financial risk relative to what we have told you. So again, programs are performing well. Good interaction with our suppliers, our subcontractors and our customer. These are developmental. Both our cost reimbursable software is always a challenge and that is what we have been focused on in making good progress with. So -

Yes. I was going to ask you about the software processing side, because obviously that is quite antiquated on a program like F-22 that has been around in R&D for a long time. Are you getting through that successfully?

Yes, we are. We are making good progress on that and we're continuing to make improvements and update the various versions of the software working closely with a couple of our fine suppliers and subcontractors, and when you look at the capabilities of this corporation and 50,000systems engineers, we're redeploying resources across all lines of business and business areas and putting them on the top priority programs, and so far so good.

Great, Chris.

And one really quick supplemental on cash flow. Exciting cash flow projections for '04 of greater than a billion. Can you tell us where the additional upside could be coming from and what actually drove you to actually record that number?

For 2004?

Yes, that's right.

Yes. It's -- I think the main drivers are we're getting some -- we're going to be getting some help from inventory. As I mentioned, advances will be a significant amount, but a little less than 2003. And then just continued focus on the working capital and our internal processes and systems. We've pretty much got about 80 to 90% of the corporation on our shared services organization. It allows us to process our transactions whether they're the billing, the collection of our receivables, or the payables, in a much more efficient manner, and we're seeing the benefits of that continue year after year as we try to go forward. You know, our days sales are outstanding. Just this year alone are down about ten days from where we were last year, which was a main driver of the $1.7 billion and we're striving to improve that number year-over-year.

Great, Chris, thank you very much.

We'll go next to Bob Decker (ph) with Harris Investment Management.

Yes. I just have one question to follow-up on the F/A-22. I guess I want some clarification on your comment about the numbers of aircraft that we see (inaudible) around in the press. I seem to conclude that from your comments that maybe the final number of aircrafts will just be a total plant program cost divided by your unit cost? Is that a fair assessment or what is the insight into that?

Yes. I think that is actually a pretty good summary, Bob. I mean, the first program that's almost complete is that engineering manufacturing and development phase. The additional cost needed to work a variety of the developmental issues and solutions that you have read about does come out of the production funds. So there is, as I mentioned, the Air Force does have a build-to-buy philosophy. There is a cost cap on production, and we're working closely to try to get as many aircraft as possible. As of today we have 31production contracts -- 31 aircraft under contract, lot three and lot four are in the process of negotiation. We would expect to have lot three finalized in the mid part of this year. We're trying to get lot four for F/A-22 negotiated, hopefully by the end of this year or early '04. Once we have those, for example, we'll be up to 70 aircraft under contract. I'll mention this program does go out 11 production lots is our estimate. Deliveries will occur beyond the 2010 time frame. But I think your summary, Bob, was right on point, it is a build to by philosophy and the quantity will vary depending on the cost performance.

Andy, we have time for one more question.

Thank you. We'll take our final question today from Robert Friedman (ph) with Standard & Poor's.

Oh, yes. Were there any big gains from asset sales?

Robert, no, there weren't. There was nothing like that in 2002.

Okay. Were there -- just doing some housekeeping questions -- any reserve reversals into income by any chance?

Nothing significant. As you know, we have 3,000 programs and we have a process where we'll review our estimates to complete on a quarterly basis and we adjust booking rates based on our projection of ultimate cost and that's just normal course of business. But nothing that I think your question is aimed at.

Okay. And just to kind of quasi comment question, you had mentioned earlier that you thought your eight and a half percent expected rate of returns for the pension plan were on the conservative side. But assuming that you have a 60/40split, which is between bonds and stocks, is that, first of all, pretty close?

Well, it does vary. I would say 40 to 60% is a wide range, but that is probably the equity range over time, depending on market conditions and our investment philosophy, but 40 to 60, yes.

Well, if you assume a bond yield of, let's say, 5%, that would suggest that your equity portion is -- evidencing that your long-term equity gains would be 14%. Do you think that is conservative?

Yes, I think my comment was that I feel the eight and-a-half is conservative relative to what you're going to see from other companies. It is along-term rate of return. You know, the manager performance is a differential. We have an active management and the alpha on top of some of the economic factors that you see, we think is appropriate and, like I said, it's an attempt to match the long-term obligation with the long-term investment philosophy and we'll see how this plays out over time.

Andy, I would like to wrap up the call. I would like to say it was another good year for Lockheed Martin and our outlook is promising. As I mentioned earlier in the call, our sales in 2001 were $24 billion and we're now projecting over $30 billion by 2004. Our operating EBITA is growing from $1.7 billion to over two-and-a-half billion during the same period all while continuing to generate strong cash flow. I'll let you know that the management team led by Vance Coffman and Bob Stevens is focused and committed to achieving these goals and we look forward to talking to you again in April. Thank you.