洛克希德·馬丁 (LMT) 2003 Q1 法說會逐字稿

Everyone please stand by.

We're about to begin.

Good day and welcome to the Lockheed Martin first quarter 2003 earnings result conference call.

Today's call is being recorded.

With us today is Mr. Chris Kubasik, Senior Vice President and Chief Financial Officer, and Mr. James Ryan, vice president of Investor Relations.

At this time I'll turn the call over to Mr. Ryan.

Please go ahead, sir.

Thank you, Steve.

Good morning and welcome to Lockheed Martin's first quarter conference call.

If you have not received the news release, it is available on our web page at www.lockheedmartin.com.

We also have posted charts on our website to accompany our remarks this morning.

Please refer to our Safe Harbor statement on chart 2.

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 2002 Form 10-K for a description of the factors that may cause actual results to vary materially from anticipated results.

With that I'll turn the call over to Chris.

Thanks, Jim.

And good morning, everyone.

I would like to start by expressing our appreciation for the dangerous and difficult work our Armed Forces have done and continue to do in Iraq.

It is heartfelt when I tell you the women and men of Lockheed Martin are proud to support them.

250 of our own employees are now on active duty and hundreds of others are supporting our customers in theater.

Our thoughts and prayers are with them and the brave men and women defending our freedom around the globe.

Now on to our discussion.

We're pleased with the first quarter results.

Our sales, segment operating earnings and cash were in line or better than our projections.

Let's continue with chart 3.

The 18% increase in year-over-year quarterly sales was within the guidance range for the first quarter.

While this growth was, in part, driven by timing, it raises our confidence in the full year outlook.

We had growth in each of our four businesses with aeronautics providing the greatest amount both in terms of dollars and percentage.

Our operating earnings or EBIT from our four segments grew 23% in comparison to last year's first quarter.

Margins continue to improve, up 30 basis points for the same period reflecting strong performance in our core businesses.

Earnings per share from continuing operations were also up 10 percent.

In addition to increases in sales and earnings, our first quarter results included a 4-cent per share benefit due to lower than expected stock compensation expense as a result of our stock price fluctuations.

This activity is captured in unallocated corporate income and expense.

Our plan assumes that stock compensation expense will be a net expense for the full year thereby negating the benefit experienced thus far.

I should mention that we recorded two unusual items of 3 cents each, which offset in the quarter.

The details are described in our earnings release.

Cash from operations was more than 540 million for the quarter, and we were pleased to achieve this performance during a period that also demonstrated substantial top-line growth.

Turning to chart 4, we booked more than 11 billion dollars in new orders, increasing our backlog to a new record of nearly $75 billion.

Included in the order book for the first quarter was the 60 aircraft C-130J multi-year contract valued at about $4 billion.

As you know, the Congress recently passed a $79 billion supplemental defense budget.

However, no funds were earmarked for any specific systems, programs or platforms, and accordingly, none have been reflected in our orders.

We are working closely with the DOD to identify and respond to their needs, but it will be at least several weeks before we have a comprehensive picture of the department's priorities for specific equipment and system procurement.

Now please turn to chart 5.

While we had a strong start to the year, we're keeping our growth outlook for 2003 sales segment profit and segment margins at the same level we disclosed in January.

As I mentioned, some of the first quarter upswing was timing.

Second, we have many program milestones to achieve and several risk reduction actions to complete across many of our programs.

For 2004 our sales and operating segment profit guidance remains unchanged.

In both years we continue to anticipate top line growth coupled with improving margins.

Let's turn to chart 6.

We said last year that we would deploy our cash to create additional shareholder value, and we have.

As of today we have reduced debt by more than $1.3 billion this year.

The benefit of lower interest expense associated with the retirement of $450 million of callable debt is incremental to our prior guidance.

We also used our cash to repurchase our shares.

In the first quarter we repurchased 6.3 million shares of common stock, spending about 280 million in cash.

This action is also incremental to our prior guidance.

The net benefit of these cash deployments is reflected in our increased earnings per share outlook for 2003, which I will discuss momentarily.

Now turn to chart 7.

Looking at pensions, we finalized our recoverable pension expense and funding estimates shown as cost accounting standards or CAS expense for the year.

We increased recoverable funding for pensions from 160 million to about 185 million, thereby reducing the pension adjustment for 2003 by $25 million on a pre-tax basis.

This incremental benefit to earnings per share is also reflected in our revised guidance for 2003.

Let's look at a summary of our earnings per share outlook by turning to chart 8.

We are raising our overall earnings outlook for 2003 to a range of $2.20 to $2.30 per share.

This increase in earnings guidance is mainly driven by cash deployment actions that reduced interest expense and shares outstanding.

Let's turn to chart 9.

As we've been forecasting for some time, financial accounting standards or FAS 87 pension income has transitioned 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.

Since we won't be in a position to precisely project FAS 87 pension expense for 2004 until the 2003 asset returns are known and the various assumptions are reviewed and since the CAS for 2004 is not yet finalized, we cannot provide a forecast of GAAP earnings per share for 2004 at this time.

However, we can provide a rough order of magnitude for the FAS/CAS or the pension adjustment for 2004.

Based on a range of outcomes, we expect the pension adjustment for 2004 to be an expense in the range of $400 million to $550 million.

Let's move to chart 10.

We generated positive cash from operations and improved our leverage in the first quarter.

Our long-term debt rating was recently raised by FITCH to triple B plus, a rating we strife to earn from all the rating agencies.

For the full year we continue to project cash from operations of at least $1.5 billion and capital expenditures are expected to be about $700 million.

Let's now review each business area starting with systems integration.

Some of our accomplishments for the quarter include receiving a $100 million additional funding from the U.S.

Army to accelerate production of the Patriot's advanced capability which included 12 additional missiles, bringing the total to 100 missiles for the fiscal 2003 buy.

Extending our hit to kill technology, Lockheed Martin and a teammate received one of two $10 million contracts from the missile defense agency related to its kinetic energy interceptor or KEI program.

In March the Air Force and Lockheed Martin successfully launched a joint JASM from a B52 bomber.

JASM navigated precisely through its final development test at White Sands missile range and will now proceed into the Air Forces operational flight test program.

The Air Force awarded us a contract valued at over $100 million to pave the way for laser-guided bomb kits.

This is an important new strategic market for our company.

Our Naval electronics and surveillance systems team began installation of three vessel traffic service systems as we continue to expand in the homeland security arena.

The systems are engineered to meet maritime safety and surveillance requirements in major U.S. ports, including New York.

The ports and waterway safety systems will be in place during 2004 with a put combined value of approximately $25 million.

Our javelin joint venture was selected by the U.K. ministry of defense light forces anti--tank guided weapon program.

Our portion of this contract is about $100 million.

In aeronautics, we continue to ramp up on major programs and at the same time maintain near record backlog of $38 billion.

We had several new business awards during the quarter, including the C-130J program.

The multi-year volume pricing provides savings to the U.S. government and stability to our production effort.

It solidifies our return to profitability for this program.

In addition to the multi-year award we received an order for one aircraft.

That brings the total ordered to date to 179 aircraft.

Additionally we delivered three C-130Js during the quarter.

The F-35 team, now more than 4,000 people strong in nine partnering countries continues progress towards first flight in the fall of 2005.

The governments of Singapore and Israel have officially stated their intention to join the F-35 program as security cooperation participants, a special category.

In March the F-35 team conducted a major program milestone, preliminary design review on schedule.

DDR confirmed that our preliminary design meets the key performance parameters and our balanced design approach achieves present and future F-35 requirements and solutions.

We have successfully resolved the majority of the open PDR matters and are working with the customer to close the remaining open items.

While we're focused on the technical challenges that are ahead of us, we're pleased with this integrated international team's ability to ramp up to meet the program's aggressive schedule requirements.

Turning to the FA-22 program, the defense acquisition board, or DAB, recently gave the go ahead to proceed with production lot 3 for 20 aircraft.

With that approval, the contract was fully definitized early April.

Overall the DAB decision was a show of support for the F/A-22.

However, resolving the avionics stability issue and meeting the challenges of transitioning the program from development to production continues to be an area of focus.

In the quarter the F/A-22 raptor surpassed 2 milestones, 1400 sorties and 3,000 flight test hours.

On the F-16 program we're making great progress with Poland on their 48th aircraft program and expect to sign a contract in the second quarter.

At the same time for other international customers we're transitioning into full production ramp up with deliveries projected to triple as compared to last year's results.

During the quarter we delivered three F-16s and our current backlog is 277 aircraft.

Let me make a few comments regarding our strike.

We are working the issue on a day-to-day basis.

The international machinists union at aeronautics Fort Worth, Texas facility went on strike at midnight on Sunday, April 13th.

It involves about 4,000 out of the 15,600 people at the facility.

The Marietta and Palmdale sites are not included in this bargaining unit.

We made an attractive contract offer to the IAM that includes substantial improvements in many areas of compensation and benefits.

We're using salaried personnel in selected areas as needed to minimize customer impact.

Fort Worth also produces the mid fuselage section of the F/A-22.

We don't expect any near term impacts to the F/A-22 program and have sufficient assets already delivered to support final assembly requirements in Marietta, Georgia.

We'll work closely with all of our customers to insure that everything possible is done to avoid a long-term adverse impact.

Turning to space, from an operations standpoint performance was very strong in our government space business.

We received good feedback from our customers with excellent award fees in our government satellite and government launch vehicle lines of business.

In the first quarter a Titan 2 successfully launched satellites for the Air Force and the Navy.

The mission will provide important ocean and solar wind measurements, improving forecasting around the globe.

Also, two commercial satellites were delivered in orbit and became operational in the first quarter.

We were awarded three Proton launch contracts, all with the new Brezem upper stage.

Both Utilsat and Telesat were among the customers who selected the Proton vehicle.

Utisat plans to launch their satellite in late 2003 while Telesat plans to launch in 2005.

Regarding the space shuttle investigation, we continue to work daily with NASA to provide any support or resource that they need to assist with their investigation.

At this time there is no impact to our financial guidance.

Now turning to technology services, United Kingdom announced a $1.6 billion, 15-year extension of our joint venture with two British firms to manage the U.K.'s atomic weapons establishment.

Since it is a joint venture, we will not record any sales on this contract, only our equity earnings.

Other new business highlights include winning a follow-on contract for the army's rapid response program and indefinite quantity vehicle known as IDIQ with a ceiling of close to $3 billion.

We also secured $140 million of IDIQ task quarters under other contract vehicles.

So, in summary, we had a strong quarter in sales, operating profit and cash flow and we signed up $11 billion of new orders.

Our mission success record, award fees and program performance continue to be very good.

We continue to perform for our customers and shareholders.

I'll now turn it over to Jim to provide additional details.

Thanks, Chris.

First I'll review our sales and margin guidance by segment for 2003 and 2004.

I'll then discuss estimates for unallocated corporate income or expense elements and close with an overall summary of our outlook.

None of our segment sales, EBIT or margin guidance changed from the fourth quarter conference call in January.

So, rather than reading you the numbers, which are available on charts 12 through 15, instead I'll make a few comments instead.

Beginning with systems integration on chart 12, we anticipate that margins will stay relatively flat at 9.5 to 10% for both 2003 and 2004.

This reflects a gradual transition over the last few years from mature production programs such as Merlin, Lantern and the TAS Pinvis targeting night vision system to development programs including FAD, Sniper, JASM, ISC squared and new Aegis development contracts.

Development programs book lower profit margins on the average than production contracts, so this transition limits margin expansion.

Now let's talk about aeronautics on chart 3.

Sales in 2003 are ramping up significantly, mainly due to growth on development programs.

To the extent that such growth would cause sales in aeronautics to be at the high end of the estimated range for the year 2003, margins would be closer to the lower end of the range.

In 2004 when sales growth is expected to moderate as planned, we expect to achieve margin improvement reaching the 8 to 8.5% range.

Margin expansion is expected in both development and production activities in the combat aircraft line of business, primarily the F-16, the F/A-22 and the F-35.

Turning to space systems on chart 14, despite first quarter sales growth of 11%, we expect full year sales growth in the single digits due to timing.

However, margins, which were well above last year's first quarter level, are expected to achieve similar comparisons for each of the remaining quarters in 2003 reflecting solid contributions from our government space business.

Let's now turn to chart 15 and technology services.

We expect strong growth from our information technology and military aircraft businesses in both 2003 and 2004 while NASA sales are expected to decline in both years, primarily due to the reconfiguration of the Sesock contract.

Margins in technology services are projected to improve in all lines of business in this segment.

Information technology margin was higher in the first quarter, reflecting the favorable impact of restructuring our commercial IT programs and the achievement of savings from the successful integration of the OAO acquisition into our government IT business.

Chart 16 describes a negative impact from pension accounting between 2002 and 2003.

The FASZ/CAS adjustment changed from a 50 million benefit in the first quarter of 2002 to a 72 million expense in 2003.

Despite the significant increase in this largely non-cash item, earnings per share from continuing operations were still up 10%.

For the full year a 243 million benefit in 2002 is projected to become a 305 million expense in 2003, a swing of 548 million, thereby causing GAAP earnings per share growth to be well below an estimated double digit increase in segment operating profit.

In 2004 we provided a range for the FAS/CAS adjustment as Chris mentioned.

FAS/CAS is a major portion of unallocated category.

We also provided for the first time a 2004 range for the other items also included in the unallocated corporate category.

We expect other unallocated to range from 25 million positive EBIT to 25 million negative EBIT in 2004.

Our final chart is number 17, which presents a summary of our outlook for both 2003 and 2004.

Those items that changed from our previous outlook are highlighted, as are the new additions to the outlook.

So, in summary our current forecast for 2003 and 2004 maintains the sales and operating profit from our four business areas compared to our prior guidance.

The estimate for cash from operations and capital expenditures were also kept the same.

The estimate for 2003 earnings per share was increased, reflecting improvements in interest expense, average shares and FAS/CAS pension adjustment slightly offset by reduced levels of interest income as we have used a portion of our cash to reduce debt and repurchase shares.

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

Thank you, sir.

If you'd like to ask a question on the phone lines today, you may signal by pressing the Starkey followed by the digit 1 on your touch-tone telephone.

If you are on a speakerphone, please make sure your mute function is disengaged to allow your signal to reach our equipment.

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

Once again, that will be star 1 if you'd like to ask a question.

We'll go first to George Shapiro with Smith Barney.

Good morning.

Very nice numbers.

Chris, in this space area, given how much growth you had this quarter and given that the launches weren't particularly strong, I mean, what's gonna happen in subsequent quarters to get the revenue growth to slow significantly?

Okay.

Well, thank you, George.

On space specifically we had about 2.1 billion of sales here in the first quarter.

Included in that were two commercial satellites that were delivered in orbit at approximately $300 million of sales.

We have one more delivery in the third quarter of a commercial satellite.

So, if you took out that 300 million, you know, and kind of looked at a normal run rate of about 1.8 billion, I think you'll see that we tend to be more in the middle of the guidance which we've given, being, you know, 7.3 to 7.7 billion dollars for the full year.

So, its's really that one increase as a result of those two commercial satellites.

For the second quarter I would expect the space sales to be below the first quarter that we just reported.

Okay.

And in the satellite part of that, the commercial satellite part of the business, can you just go through what kind of losses there might have been in the quarter?

Sure, George.

Actually, I'll give you a little background on commercial sats.

We currently have four in backlog at this point in time, and as I mentioned we'll deliver one in the third quarter of this year.

For the quarter commercial satellites was actually slightly positive on a stand-alone basis.

So, the strategy that we laid out and the decision that we made to keep this line of business is working well.

There have been significant cost reductions.

We believe we remain very competitive.

In fact, we currently have five bids that are outstanding at this time, new opportunities.

As of today we've been down selected on two of those satellites.

The other three we're still awaiting a decision on.

And I have very, very high confidence that we should be able to secure at least one commercial satellite contract in the second quarter of this year.

So, things are working well.

No losses.

In fact, a slight profit for the quarter.

Okay.

I'll abide by the rules and let somebody else go.

Thank you, George.

And we'll take our next question from Steve Binder with Bear Sterns.

Yeah, good quarter.

Maybe I just want to touch on the CAS/farz issue and what you've outlined for 2004.

What is's the CAS component of that projection you gave for 2004?

Raytheon has obviously given guidance for '05 for FAS.

I guess one of the key drivers of FAS is the amortization of deferred loss.

Do you think the FAS number for '05 will be up equally with what you see for '04?

Okay.

Thanks, Steve.

On the CAS/FAS guidance that we gave for 2004, it was a relatively wide range.

We've taken really two assumptions.

One is a double digit positive return and the other, of course, being a double digit negative return during 2003.

At this time, you know, I think since both of these kind of move in the same direction but at different rates, I prefer not to give too many different numbers at this time.

I would say that you should think of FAS expense, you know, approaching not quite doubling as a possibility, and the CAS expense probably doubling, if not a little more.

It's kind of that type of trend in relationship relative to 2004.

And it's just too early to project or look into 2005 at this time.

Obviously we'd need not only the '03 results, but the '04 results and all the assumptions that go into that.

So, does that help a little bit, Steve?

We'll take our next question from Joe Campbell with Lehman Brothers.

Good morning.

On the aircraft business, one of the things that maybe you could help us out with is I notice the guidance for the year is approximately four times the first quarter sales number.

But we've got all the aircraft deliveries essentially ahead of us.

Could you remind us of what is going on here so that we get all the aircraft deliveries but we don't actually have -- apparently we don't have any incremental revenue?

Is there something else going down out there?

Thanks, Joe.

We've got a couple things, and I'll ask Jim to give you a little more color kind of on the line of business, the majority of the revenue of this corporation and even within the aeronautics business area is accounted for in a percentage of completion cost-to-cost method.

So, the F/A-22s, the Joint Strike Fighters, some of the C-5 air mobility program, some of the Palmdale research and development are all on a percent of completion basis.

So, you do get a fair amount of stability and predictability on a quarter-to-quarter basis.

The C-130J specifically we delivered three in the quarter.

That's pretty much in line, you know, if you were to annualize that with what we've talked about for the full year, being in the 12 to 14 range.

So, that really doesn't drive a big difference.

And the F-16 is really, I'm sure, the thrust of your question where we delivered three.

We have 15 to 20 forecasted somewhere in that range for the second quarter.

So, we just think it's a little early in the year.

We want to make sure we achieve those milestones, reduce risks and, as I mentioned, you know, we still have a labor action that we need to get resolved.

But I'll ask Jim to maybe give you a little more detail.

Joe, the F-16 program is not just deliveries when we look at revenues.

It's also support and spares.

And those tend not to be level.

And we did have a pretty healthy chunk of those in the first quarter of '03.

Also, there's support and spares for the C-130 and it kind of is the same pattern.

In other words, it's not completely levelized.

And we also had a chunk of that in the first quarter.

So, I think that skews the sales out look a little bit if you just look at those items.

We'll take our next question from Heidi Wood with Morgan Stanley.

Good morning.

Nice quarter, guys.

Chris, going over space again, can you break out for us what were the award fees in the government space area in the quarter and give us a little color on the commercial launch losses versus how much the commercial satellite profits offset this?

If we can get a net loss number in the quarter on commercial?

Okay.

Well, first of all, thank you, Heidi.

Let me start with the commercial question first.

We talked about commercial space really having two aspects, the launch vehicles and the satellites.

And as I mentioned earlier, we were slightly positive in the commercial satellite line of business, which of course means that we were down on the commercial launch vehicle business pretty much as expected and consistent with our plan.

I think if you look at the press release, what you'll hear a reference to is that there was a decrease relative to the first quarter of 2002.

The driver of that, if you recall in the first quarter of 2002, is that we had three commercial launches.

And those were all profitable, you know, probably in the 25 to 50 million-dollar range in aggregate.

So, we did not have any launches in the first quarter.

So, there was no earnings from that.

We go to the next level, there's really two other elements of cost that we capture in commercial launch vehicles and commercial space.

That's our start-up cost.

And as we've talked about, as the Atlas 5 program is continued and as expected that number has been reduced to about 50% of the prior year amount.

However, we do, now being in operations in the Atlas business, have other costs that are hitting the books, specifically the lease of the launch pad that we disclosed, you know, in our 10-K and foot notes.

That's an annual or in fact a monthly operating expense.

We're beginning the amortization of what we refer to as the VIF, the vehicle integration facility.

So, when you look at really the start-up expense, the operating expense and then no profit from launches, you would get, you know, something in the 25 to 50 million-dollar loss on launch vehicles.

That was offset by profit, as I mentioned, of zero to 5 million on satellites in the first quarter.

Does that -- before I answer the second question, does that help on commercial space?

Okay.

Well, I'm gonna assume it does and let me answer your second question on the government space.

Most of our award fees probably 50 to 75% of the award fees do come out of our space systems business.

We did earn in excess of 95% of the available award fees in the quarter.

So, just again outstanding performance by that line of business.

You should think of the government launch vehicle business such as the Titan 4 program earning award fees and then a fair amount of our classified government satellites and ground systems also generating most of their earnings from the award fees.

And we'll take our next question from Cai VonRumohr with S. G. Callan.

Yes.

Could you tell me how much of the supplemental for Iraq you feel you have a chance of getting and how much, if anything, is in your plan?

Sure, Cai.

As we talked about, the $79 billion in the supplemental, and let me first say that we're pleased to see that the administration is funding these incremental requirements and we really don't have any visibility at this time as to how, if at all, this could play into this corporation's backlog and future guidance.

I do think the supplemental does reduce the risk on our existing programs from a funding and budget perspective.

I would think in the second quarter we should have a lot more visibility into that.

As you know, when we forecast our orders and our guidance, Cai, we try to have a balanced approach relative to orders, of course, we have -- or relative to sales specifically in earnings we have our existing backlog, we have the follow-on work and then we have new business.

I would think any additional opportunities from the supplemental budget could help fill in either the follow-on or the new budget or new business categories.

So, not a whole lot baked into our guidance, but realizing we do have these targets in new business that we need to capture, it could give us good progress towards achieving that goal.

Okay.

And for the follow-on, Fort Worth, could you tell us what is the status of negotiations with the union?

How long would the strike have to go to impact your results?

And lastly, does this jeopardize achieving the first flight milestone on the Joint Strike Fighter in 2004?

Yeah, Cai, the -- well, first let me say relative to strikes, you know, we have as a corporation had strikes before and in fact last year we had one down in Marietta.

The number one goal obviously is to have the union and management resolve this matter.

And our policy has been and continues to be to treat all of our employees fairly.

And as I mentioned in my prepared comments, we think we've made a fair offer.

We have contingency plans in place, and once this is settled, we will lay out a recovery plan if in fact we need one.

Now, historically, you know, these things are settled within a 90-day period.

I don't expect this to have a material impact on the corporation.

We're talking to our customers and keeping them apprised of the status.

And I think it's best just to report to you in July the status and the recovery plan and the outcome at that time.

Relative to the First Flight, early in the fourth quarter of 2004 and clearly -- I'm sorry -- 2003, we'll monitor that milestone closely and keep you abreast as information becomes available.

And our next question comes from Byron Callan with Merrill Lynch.

Yes, good morning, gentlemen.

Nice quarter.

I wondered, Chris, if you could come comment on the bookings outlook for the balance.

You mentioned you're at a record backlog.

You still have the Polish fighter contract to nail down.

I guess which there is uncertainty surrounding what may come out of the supplemental.

But what else could fall into the bookings picture?

Could we see backlog continue to grow over the balance of the year?

Sure, Byron.

First of all, thanks.

As you know, we ended the first quarter just over $74.5 billion.

Our goal and expectation would be to try to close 2003 for the third consecutive year over $70 billion of backlog.

A couple of the items that we're monitoring over the next couple quarters in systems integration we'll have follow-on relative to that.

PAC-3, some additional opportunities on E-RAM.

Internationally, the aegis system, specifically Korea.

There's some new opportunities.

The LCS, Lateral combat system, you'll hear more about that.

It's in the very early stages.

Small diameter bomb is also an opportunity out there.

Aeronautics, I think you pretty well hit.

We did sign up lot 3 on F/A-22 here in April.

So, of course, that will be an additional billion and a half or so to record.

Poland, we would expect here again in the second quarter, that could be in the one and a half to two billion dollar range.

We've talked previously about Oman and Chile for F-16.

We're continuing to monitor those.

They could clearly be 2003 orders.

A lot of opportunities in space.

Fleet ballistic missile of course we'll have a follow on.

I think I mentioned the commercial satellites were in competition for five.

And like I said, I feel confident in one of those for the second quarter.

We have launch vehicles, a lot of classified work.

And clearly, as you indicated, Byron, the possibilities from the supplemental and any opportunities in homeland security.

So, hopefully that gives you a little bit of insight.

I think timingwise, though, at the end of the second quarter, to your specific question, there is a possibility where we could again grow backlog over the $75 billion range when you look at F-22 and Poland specifically.

Great.

Thanks.

And we'll take our next question from Joe Rudall with J. P. Morgan.

Good morning.

Congratulations.

A nice quarter.

My question is on the F-22.

Chris, could you provide a little more color on how things are going there, particularly with the avionics, I guess any metrics you can give us, a schedule on closing out that issue, award fees, maybe your margin booking rate, anything else you can give us?

Okay.

Thanks.

Let me just first clarify on Cai's question.

I think I answered, and I don't recall if you were asking about the F-16 UAE first flight or the JSF first flight.

But just to set the record straight, the UAE F-16 first flight is the fourth quarter 2003, and the first flight for JSF is planned for the fourth quarter of 2005.

So, my comments apply to both aircraft relative to monitoring their milestone and any potential impact.

So, I apologize if I caused any confusion on that.

Relative to F/A-22, Joe, let me start with just kind of an overview of the program.

There are so many different aspects to it.

First of all, we do have an EMD contract, which is the engineering, manufacturing and development phase.

That is a cost-plus contract that was for nine aircraft, and those nine aircraft have in fact been delivered.

We then have 51 production aircraft under contract today, a combination from the PRTV production ready test vehicles, to lot 1, lot 2 and lot 3.

Three of those production vehicles have in fact been delivered.

None were delivered in the first quarter of 2003.

We do expect to deliver two here probably in the next four to five weeks.

And our goal is to try to get close to 10 delivered in total here in 2003.

Relative to the -- your specific question on avionics -- well, let me just talk on a blended basis from a margin perspective.

We're generally booking these things kind of mid single digit to low single digit area as we talked about in the fourth quarter of 2002.

Avionics stability is clearly the number one area of focus and priority.

You also hear that referred to as a software issue.

But they're really one and the same.

The first thing the management team has done here is actually redeploy some of our top resources from other business areas, space systems specifically and our systems integration business.

I'll tell you we understand the problem.

We think it will take time to continue to work this problem.

And I'll tell you that we're making pretty good progress.

As far as milestones to look for, Joe, clearly the DIOT &E, the dedicated initial operational test and evaluation will begin in the early fourth quarter of this year.

That process will allow the Air Force to assess the operational effectiveness of the F/A-22.

And I think that is probably something that you should keep an eye on.

The Air Force and the DOSD did develop a red team of software experts, and that team did conclude that the architecture is sound and stable, and they believe it can be -- again, this avionics stability can be resolved by working through the development issues.

We've got a task force in place, including the experts I mentioned, including some of our suppliers and subcontractors, working together to implement those recommendations.

So, I would say we understand the problem.

We're making good progress and I can assure you the executive office of this corporation and myself personally get weekly, if not more current, reports monitoring the progress we're making.

Okay.

Thanks, Chris.

Just for a quick follow-up, you may not be able to answer this question, but is there any chance that you can migrate or will migrate work from Fort Worth to Marietta given what's going on, on the F-22 specifically.

I think I just won't comment any further on the labor situation at this time.

We're working on it on a day-to-day basis, and we'll let you know the resolution here as soon as it occurs.

Operator: We'll take our next question from Chris Mcx-ray with Deutsche Bank.

Thank you.

Could I just follow up on Joe's question?

Could you touch on also what you regard as the level of seriousness on the other F-22 engineering issues, the lamination and the heat exhaust issue?

Are those workable in the very near term or medium term or how do you see it?

Sure, Chris.

I think those are clearly workable.

The one item, you know that, I think has gotten the most press and something that I've talked about and we're focused on is this avionics stability or software.

There are no other issues of any significance that cannot be worked on a timely manner.

And you know, again, getting through the DAB and signing up lot 3 for 20 aircraft I think is further indication of the support for this program by Congress and the Air Force.

Do you think you need to actually get a 20-hour run rate as has been suggested in a couple of places as the requirement, or can you kind of slip by if you can get that stability for eight or 10 hours?

Is there any room for wiggle there?

Yeah, it's kind of a give and take process, and I'm not really, Chris, able to say at this point the exact number of hours, you know, that we're targeting.

I think the key focus here is to get those two aircraft delivered in the next four or five weeks and then begin the DIOT&E testing again in early October time frame.

I'll look at that, and if I have more information, I'll be prepared to talk about that in July.

And we'll go next to Sam Pearlstein with Wachovia Securities.

Good morning.

Let me just ask two questions, since it seems you get cut off for the follow-up.

Both related to cash flow.

One is you've know bought back stock both in the fourth quarter and again this quarter.

Can you just talk about strategically has your use of stock buyback changed?

I always thought it was really minor, and just to offset some of the ESOP creep in terms of the shares but now it seems you're using it more tactically.

And secondly, there wasn't a big use of cash for advances in the quarter.

Are you still on track for the 7 or 800 million dollar use this year, or did you get some international awards that offset that this quarter?

Okay.

Thanks, Sam.

Let me talk about cash from operations first of all you're right.

There wasn't a whole lot of burnoff in the first quarter.

And in fact, in the second quarter we're really not projecting a whole lot.

The numbers I've used before are 500 million to about a billion on the advances.

That is still on track.

It is clearly third and fourth quarter timing relative to that.

So, we do expect it, and we do expect it in the latter part of the year.

Relative to cash deployment, I would say the five uses of cash we've talked about historically continue in place and we look at the best use of those.

Again, the retirement of debt, as I mentioned today, we've already taken out $1.3 billion, and we'll continue to evaluate that.

The callable debt was just very attractive economically, and we had to take advantage of that situation.

We increased the dividend, as you know, back in January.

And we talked about selective and opportunistic stock repurchases, and I think that's what you saw us do in the first quarter.

So, we'll continue to evaluate those options.

But clearly the top priority when it makes sense operationally and strategically and financially is to redeploy this cash either in internal investments or selected acquisitions.

And we'll balance those five priorities.

But as you know, the stock in the first quarter did present some opportunities to buy back and we took advantage of that.

And we'll go next to Nick Vadagill with Bank of America Securities.

Thanks for the FAS/CAS adjustment guidance for 2004.

I've got two questions, the first is: Post-Iraq, is there any potential upside that you haven't already placed in the plan for back to factory maintenance for aircraft and systems used during the war, and if so, what scale might that be financially?

And the second question is you gave a comprehensive list of potential additions to the backlog to Byron earlier.

Are there any cash advances available here, especially from international contracts that you can't yet put in the plan?

Okay.

Thanks, Nick.

And I'm glad the FAS/CAS number was well-received.

Relative to post-Iraq, we actually, as Jim mentioned, in aeronautics we had a lot of activity on spares and support with F-16 and C-130 in our tech services line of business or business area.

They have the aircraft logistics in Greenville, South Carolina.

We didn't get into a whole lot of details, but the volume there in the first quarter was just a tad below what we had planned on given the fact that a fair amount of these assets were deployed.

So, we would expect that to kind of come back in here over the next several quarters, probably offsetting, you know, again the dip that we experienced in the first quarter in that line of business.

So, for the full year I would think we will be in pretty good shape.

You know, relative to advances, I will mention, you know, Poland is clearly on the front burner.

That is an FMS, foreign military sale-type contract through the U.S. government.

So, that of course does not bring any significant advances.

To the extent we can have direct sales with these international governments, you know, there could be an opportunity.

There's nothing really large on the horizon that I see.

Obviously if and when that occurs, I'll let you know.

But nothing at this point for 2003 that we're tracking closely.

We'll go next to Howard Rubel with SoundView Technology group.

Good afternoon, almost, gentlemen.

Just two quick questions.

One is could you talk about your progress in disposing of some of the telecommunications assets?

And then second is that I'm struggling a little bit with this timing issue with respect to the quarter.

So, what we've really done here is pull forward some earnings that will occur later in the year.

That sort of explains a large part of the difference between what you might have thought the results were gonna be and how they turned out.

Okay.

Thank you, Howard.

On the first question relative to the former Telecom -- global Telecom line of business, you know, last year, 2002, our focus was on divesting four operational lines of business.

Three of those did occur as planned.

We did have a deal on Lockheed Martin Inter-Sputnik.

We are going to be remarketing that property.

The contract we had in place is not going to close.

This will not have any significant financial impact, positive or negative.

That is the one item that carried over into 2003 from the operational side.

We do continue to hold passive investments in Intelsat and Marsat and New Skies.

We look for the best time to monetize those assets.

Two of those companies Intelsat and Marsat have stated publicly that they're considering an IPO.

Obviously as a shareholder we can't comment specifically on their plans.

I do know they both have Investor Relations organizations that can give you a little bit more insight.

But we'll continue to monitor those again opportunisticly, and when it makes the most sense we'll monetize them.

There's nothing in our plan or guidance that assumes those divestitures.

Relative to the second part of your question on sales, or I guess the earnings point, clearly the two go hand in hand.

And with the increased volume, again it was within the range but probably at the higher end of the range than most people had expected.

It did bring with us, as we would expect, earnings at similar margins that we've experienced throughout the year.

I will mention, as I said in my opening comments, we did also have a slight benefit from that stock-based compensation to the tune of about 4 cents per share.

So, we're very comfortable and confident in the guidance that we've given for all three relative to both sales and operating EBIT.

We expect them to move in unison.

Jim, do you want to --

I just want to add onto that question.

In three out of four business areas we will -- we do expect to see higher EBIT in subsequent quarters.

But in space the sales we expect will be the highest in the first quarter and then less in subsequent quarters and at about the same margin you would have less EBIT in subsequent quarters, as well.

We'll go next to David Gremmels with Thomas Weisel Partners.

I wonder if I can hit you with another F-22 question.

Is there a point at which problems on the F-22 development contract would start to impact the production contract?

You mentioned 10 deliveries planned for this year.

Is there a point where that could have an impact on the aeronautics revenue plan?

And as a follow-up, just wondering if given all the noise we're hearing from the Gulf War and lessons learned from the Gulf War, the impact that might have on longer term demand for tactical air power?

Just wondering if you might share your views on that with us, as well.

Thanks.

Okay.

Thanks, David.

Relative to F/A-22, the development program and the impacts on the sales plan, I really don't see a significant impact there.

What we may see is more in the earnings or the margin arena 'cuz clearly not only on F/A-22 or Aero, but all of our lines of business, as we've talked about previously, the development programs tend to have lower returns and margins than the production programs.

So, I would think of any additional effort or money on EMD, which is clearly covering the software issues or the avionics stability issue, would be more of a margin play than a revenue play.

Relative to the Gulf War, I think that's probably further evidence of the need for air power superiority.

And clearly that is one of the key missions of the F/A-22.

So, I think that that bodes well for this type of program and there's gonna be many lessons learned from our products and others and I'm probably gonna defer to our customer until the war is completed for them to analyze that.

Jim, do you have any data on that?

Internationally budgets are not that strong.

But still the F-16 is the preferred fighter.

And there are some opportunities, but not a lot of opportunities in the near term.

But there are some opportunities for additional sales.

We have time for one more question, Steve.

Thank you.

We'll take that last question from Eric Hugell with Steven Inc.

Good afternoon, guys.

And good numbers.

I guess my first question, going back to the F-22 and looking at the whole cost issue, is that the DIOT&E being pushed back now into August, is that what's in the government budgets, when they tell whoever it was what the costs are going to be for the program, or are we looking at potential further cost growth because of a delay?

Yeah, Eric, this -- well, first of all, thanks.

This is not additional delay.

The DIOT&E testing is slated for early fourth quarter, call it October.

And that's clearly a plan.

I don't see any additional cost growth expected relative to that item.

But that number has -- that date has slipped several times, correct?

Yeah.

But relative to the new and improved recovery plan as of today we're a couple weeks behind relative to that agree upon plan, but we fully expect and have plans in place to make up that time frame and get back on track by early October.

So, that's where we stand on that one, Eric.

Great.

And my second question is I want to delve a little more into the technology services, the tech services business.

You had very good margin performance in the quarter.

Just wanted to get a better sense as to sort of what exactly was driving that and is that sort of maintainable going forward?

Sure.

Well, first of all, I hope it's maintainable going forward.

We have five sublines of business within technology services business area, two that are declining in sales that we've talked about before, one being the NASA lines of business.

NASA has traditionally had lower returns and margins in the low single digits, and then the commercial IT line of business, while the sales are kind of flat we've actually been able to turn a profit on that the last year.

And of course, government IT tends to be higher margins.

So, I think when you look at those three items, the growth of government IT with the higher margins, commercial IT shifting from a loss to profit, and then the NASA business declining, you know, with the lower margins, coupled with the OAO acquisition that we made in late 2001 being fully integrated within 90 days and starting to significantly contribute to the operations, the combination of those items account for those margins, and we would expect to keep it in that range for the remainder of the year.

Great.

Okay.

Well, thanks, Eric.

Steve, before I close, I wanted to recognize both James Ryan and Randa Middleton, both of whom recently were selected as the best officers for large cap investors by investor magazines.

I'm going to wrap up the call.

It was a strong quarter for Lockheed Martin and our outlook is positive.

The management team is focused and committed to achieving our goals.

We're supporting our customers in every way we can, and we never forget who we're working for.

We look forward to talking to you again in July.

Thanks, Steve.

Thank you.

Once again, that does conclude today's teleconference.

We appreciate your participation.

You may disconnect at this time