洛克希德·馬丁 (LMT) 2003 Q2 法說會逐字稿

Lockheed Martin Corporation's conference call will begin momentarily.

Please stand by.

We are about to begin.

Good day and welcome everyone to the Lockheed Martin second quarter 2003 earnings results conference call.

Today's call is being recorded.

With us today is Mr. Bob Stevens, President and Chief Operating Officer, Mr. Chris Kubasik, Senior Vice-President and Chief Financial Officer and Mr. Jim Ryan, Vice-President of Investor Relations.

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

Please go ahead, sir.

Thank you, Cynthia and good morning.

Please refer to our news release and charts which are available on our Web page.

And also please refer to the Safe Harbor first on chart 2.

Statements that are not historical facts are forward-looking statements.

Such statements are made pursuant to the staif harbor provisions of the Private Securities Litigation Reform Act of 1995.

See today's press release as well as our 2002 form 10K and our 2003 first-quarter form 10Q for a description of the factors that may cause actual results to vary materially from anticipated results.

Today's presentation and web charts contain non-GAAP financial measures as defined by SEC Regulation G. While we believe that these non-GAAP financial measures may be useful, in evaluating Lockheed Martin, this information should be considered supplemental in nature and not as a substitute for financial information prepared in accordance with GAAP.

Our website contains definitions for and a reconciliation of these measures to what we consider the most directly comparable GAAP financial measure.

Our definitions may differ from measures with a similar title presented by other companies or security analysts.

Since the previous quarter, we reclassified our financial data to reflect the formation of a new business segment.

Just go to the investor relations section of our website and click on SEC filings to obtain a copy.

I will now turn the call over to Bob Stevens, Bob.

Thank you, Jim, good morning everyone.

Before I describe the purpose and objectives of our new organizational alignment, which we announced on June the 27th, I want to personally thank the great many of you who have expressed simthys for the tragic losses we suffered in Meridian Mississippi on July the 8th.

Your kind condolences have meant a great deal to our Lockheed Martin family.

Of course our primary focus since this incident has been on supporting the families of the six victims and assisting those who were injured.

We are committed to helping all those survivors of this tragedy achieve a full and complete recovery.

Members of the Meridian team have already begun to restart operations, and I have been deeply impressed by their courage, commitment and perseverance in the face of this devastating adversity.

I'm proud to be associated with people of such spirit, and they remain in our thoughts and in our prayers.

Now to our organization realignment.

As a routine business practice, we continuously evaluate our ability to deliver value to customers and concurrently enhance shareholder value.

In these evaluations we've seen that our customers are increasingly applying the advantages of information-aged capabilities to military and national security challenges with impressive effectiveness.

We saw, for example, these applications demonstrated recently in operations enduring freedom and Iraqi freedom.

Having information, the right data at the right time and the right place, enables speed, flexibility, and precision.

Advanced knowledge-based applications, however, require extraordinary integration and a unique thought process.

This process becomes more clear when you appreciate that effective solutions must simultaneously include the use of legacy systems, current systems, and future systems, as they exploit the use of air, land, sea, undersea and space-based assets to facilitate joint action among the army, navy, air force, marine core, and coalition forces.

The entirety of all these dimensions must be fully integrated, interactive and seamless and must perform reliably in real time.

Lockheed Martin has had a long-standing critical core competencies embedded in our business areas.

Informing our Integrated Systems and Solutions business we have drawn together these capabilities.

We have aggregated specialistness architectures, systems engineering, network activity and simalation in modeling into a critical group under an experienced leader Al Smith, to focus on the following objectives: To assure that all our systems meet standards for interop rablt, to be forward looking in terms of designing arc techtures and systems that support our customers' goals as they evolve over time, and to support our customers in moving toward a more network-centric as opposed to platform-centric concept of operations.

Through this new business area we intend to provide our customers with new kaimts that fully exploit the power and potential of information that will leverage and maximize their effectiveness.

I'll turn the call over now to Chris but will remain on the line through Q and A should you have any questions, Chris.

Thanks, Bob.

We're continuing our positive momentum in both our operational and financial performance.

We raised our financial guidance for both this year and next as described in today's press release.

This continuous chart 3.

The 23% increase in year-over-year quarterly sales was above our guidance range for the second quarter.

With our year-to-date sales growth, we now expect that sales for the year will be higher than previously forecasted.

Overall for the year, we are now estimating sales growth of approximately 15% to 20% compared to last year.

The segment EBIT grew 22% in comparison to last year's second quarter.

Margins were unchanged, reflecting a greater portion of development revenues than a year ago.

Consolidated EBIT, which includes unallocated expenses, is also included on the chart.

Earnings per share from continuing operations were 54 cents on a GAAP basis.

Second-quarter results included a 6 cent per share charge as a result of our exit from the commercial mail-sorting business.

We don't anticipate any additional charges related to this decision.

Distribution technologies, which focuses on solutions for the U.S. postal service continues to be a sound business that is growing.

Moving to chart 4, cash from operations was about $850 million for the quarter, which brings us to 1.4 billion year-to-date.

We were able to generate positive cash flow, including improvements in working capital, during a period of robust top-line growth.

We continue to improve our total debt to capitalization ratio and had 2.1 billion of cash in short-term investments at the end of June.

Turning to chart 5, we had about 10 million dollar in new orders in the second quarter, increasing our backlog to a new record of over 76 billion dollars.

Items of note in the order book for the second quarter were contracts for the FA-22, F-16 and commercial satellites.

Now, please turn to chart 6.

We're raising our outlook for 2003 and 2004 sales and segment EBIT.

The profit margin on the incremental sales is estimated to be less than our overall margin, but that can be attributed to increased development revenues on several programs, including the F-35, as well as other factors, mainly in our aeronautics business.

For the full year, we've increased our projected cash from operations to at least 1.8 billion dollars.

Capital expenditures are expected to be about 700 million, unchanged from prior estimates.

Let's look at a summary of our earnings per share outlook by turning to chart 7.

We're raising our overall earnings outlook for 2003 to a range of $2.25 to $2.35 per share, driven by the increase in segment EBIT as a result of our higher sales forecast.

I should remind you that this EPS range includes a $40 million or 6 cent per share charge to exit the mail-sorting business.

This $40 million charge is now reflected in our unallocated corporate expense estimate.

Let's turn to chart 8 to review each of the business areas starting with aeronautics.

In aeronautics we booked nearly $5 billion in new orders in the quarter.

In our backlog is now above $40 billion.

We signed up a total of 70 new F-16s, for Oman and Chile.

Deliveries are slated to begin in 2006.

Earlier this year, the F-16 program was nominally impacted by the two-week work stoppage by the machinists at our Fort Worth facility.

As a result, while we remained committed to our earlier delivery assumption of 65 to 70 F-16s, our financial projections are based on the lower end of that range.

We delivered 12 F-16s in the second quarter to customers in Greece and Korea.

We also expect to initiate deliveries to Israel and sink a pore in the second half of the year.

During the second quarter, we delivered 3 F-A22s, and in early July, we delivered the fourth aircraft of the year.

That brings our current total to date to 16, including the development aircraft produced under our EMD contract.

We're on track to deliver about 11 Raptors for the year.

On the development side, we're making good progress on the software stability to the FA-22 avionic system.

Since January, we've achieved a fourfold improvement in these stability metrics.

We're working closely with the air force to begin the IOTand Ephase of rigorous testing and evaluation this fall.

In addition to this development challenge, we've experienced cost pressure on the fixed-price production phase of the FA-22.

A number of items have impacted the transition from development to production, including the systems from suppliers, shortages of spare assets, and the transition to the new production assembly line for lot 1.

We believe we've taken the necessary actions during the initial phase to stabilize production, improve efficiencies and span times, and we've experienced sustained performance improvement as we build up in preparation for high-rate production.

As a result, our guidance for this program is now projecting lower profit margins in 2003 and 2004 than previously forecasted.

Having said that, however, it's important to keep in mind that the FA-22 program remains profitable and we are making good progress with program performance.

Turning to the C130 J, we're pleased with its good performance.

We've already delivered 7 Js and could deliver up to nine more this year.

The multi-year order signed up earlier this year stabilized production flow and program costs.

Based on current costs and planning schedules, we anticipate a return to profitability in 2004.

Our F35 joint strength fighter continues to wrap up.

The program's projected revenue for 2003 is now expected to be more than two times that of calendar 2002.

The program continues to receive solid customer and budget support and our fully integrated international team continues to progress through the early stages of this development program.

Since the preliminary design review in March, the program has made substantial progress in working on routing, weapon integration, and weight reduction.

The PDR was officially closed by the customer in June.

The program has now entered the detailed design phase, which will lead to the next major program milestone critical design review, beginning next year.

In electronic systems, we booked two and a half billion dollars of new orders in the quarter, bringing our backlog to more than 16 billion.

We've received a contract for more than 265 million to provide both our aegis weapon system and support for new destroyers.

We received the go-ahead to begin production of the artillery rocket system.

On the development side, we were selected for two important programs.

First, to develop the long-range land attack projectile to the navy's DDX program and, second, to develop an extended range version of the win corrected mew initials suspenseer and the navy has joined the air force on Jasam, the missal.

It's an important strategic development for the program.

On the operational front, we were pleased that the air force approved our recommended fix for the sniper advanced targeting pods.

And finally, for electronic systems, the department of homeland and security announced new regulations for port and vessel security.

Requiring plans for commercial vessels ranging from cruise liners to cargo ships and approximately 5,000 ports in other facilities.

We expect our ports and waterway security systems solutions to be a strong competitor in this area.

Turning to Space Systems.

Our orders during the quarter included three commercial satellites, which indicate improving market share since only about six or seven satellites have been ordered worldwide so far this year.

We also had three successful commercial launches during the quarter.

At the end of June, we had 19 commercial launches and seven commercial satellites in our backlog.

In April, a tightened fourth successfully placed the last Mill Star satellite in orbit.

Mill Star is a secure communication network for all of our armed forces.

The Mill Star constellation was an important contributor to operation Iraqi Freedom, providing secure transmissions of critical target information and command and control data for our ground forces.

Also during the quarter, the advanced DHF program successfully completed all 49 caps for the preliminary design review.

It's an important milestone since it demonstrates that this next generation military satellite communication system is exactly what our customer requires.

And one more thing, while it is the third quarter, last week our spy successfully placed a Lockheed Martin-built Cable Vision satellite in orbit.

It is the 66th consecutive successful flight for the Atlas family.

Last month, as Bob discussed, we formed a new business area Integrated Systems and Solutions or ISS to maximize our ability to meet our customer's requirements and capture new business in the growing area of network center warfare.

During the quarter IFS increased back logs to 3.7 billion dollars.

In the second quarter, we completed the acquisition of Orcon, a system integrated with sales around $50 million, which was added to our ISS business area. particular focus on intelligence, surveillance and reconnaissance solutions for the defence and intelligence communities.

In Technology Services, orders during the quarter included the FBI Superdome modernization and the Icue line in business and an integration in training services contract for the transportation security administration.

We continue to see strong growth in improved margins in the information, technology line the business within this segment.

In summary, we had a strong quarter in sales, operating profit, cash flow, and orders.

Our mission success record and program performance continue to be strong.

We remain focused on our customers and shareholders.

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

Thank you, Chris.

Let me begin with aeronautics on chart 9. 2003 sales are now expected to be in the range of 9.5 to 10.0 billion, more than a billion increase over our previous estimate. 2004 sales are now expektd pecked to be in range of 10 to 10.5 billion, also more than a billion increase.

In both years, the sales increase reflects the continued ramp up on the F-35 joint strike fighter development program.

In addition for 2003, FA-22 production volume and C130 Jdelivers also contributed to the increase in our revenue forecast.

We now expect to deliver 13 to 16 C130 Js in 2003.

And 2004, our expected C130 J deliveries have been adjusted slightly to 11 to 14 reflecting the increased deliveries for 2003.

Our estimates for F-16 deliveries is unchanged at 65 to 70 in both 2003 and 2004, although 2003 deliveries may be closer to the lower end of the range as first mentioned.

Through the end of June, we delivered 15 aircraft, and we expect to deliver at least 25 aircraft in each of the third and fourth quarters.

We raise td the EBIT by about 35 million in 2003, and about 50 million in 2000 had.

Turning to aeronautics margins, the sales mix is now projected to change with the expected increase in F-35 joint strike fighter sales in both 2003 and 2004.

As you know development programs generally are in lower profit margins thand production contracts.

A mix was also impacted by the projected increase in C130 Jdelivers in 2003, since the program is currently earning no profit.

Starting with the first quarter of 2004, we now anticipate recording low single-digit profit on the remaining C130 aircraft under the original 120 shipset program.

In addition, we also have scheduled for the fourth quarter of 2004, a first two C130s under the multi-year order signed up earlier this year.

We expect to achieve double-digit profit margins in the 10% range on aircraft delivered under the multi-year contract.

Now let's turn to electronic systems on chart 10.

There is no change to the sales or margin forecasts for 2003 or 2004 reflecting consistent performance in this business area.

Turning to Space Systems on chart 11, the sales forecast for both 2003 and 2004 has been increased from prior guidance.

Mainly due to volume and the government satellite line of business.

In both years, sales are now expected to be in the range of 5.6 to 6.0 billion.

In 2003, our expected margin range has been improved to 6.5 to 7.0% reflecting tightened contract modification and performance.

In 2004, our estimated range has been widened to 6.0 to 7.0%.

As we have previously stated, we have assumed some benefit to EBIT in 2004 from the assured access initiative.

The President's 2004 budget requested a total of 160 million for assured access and congressional support has been good thus far.

Let's turn to chart 12 Integrated Systems and Solutions.

ISS is on track to make the 2003 projected sales of 3.1 to 3.4 billion.

A margin estimate for 2003 was improved from approximately 8% to a new range of 8, 8.5% reflecting contract performance improvements in the first half of 2003. 2004 sales and margin estimates remain unchanged.

Now turning to chart 13 for Technology Services.

Sales and margins are expected to grow in both 2003 and 2004 with assumptions remaining the same as our previous outlook.

Chart 14 describes a significant impact from pension accounting from 2002 and 2003.

For 2003, we continue to estimate 305 million of non-cash pension expense or the adjustment which negatively impacts earnings by about 46 cents per share compared to a 37 cents per share benefit from pension income in 2002.

Overall, this represents a swing of 83 cents per share which significantly impacts GAAP earnings per share growth.

The quarter, the pension adjustment change from a benefit of 8 cents per share in 2002 to an expense in 2003 of about 10 cents per share.

In 2004, our assumption for the non-cash pension adjustment continues to be in a range of 400 to 550 million, which would negatively impact earnings per share by 60 to 80 cents per share.

Turning to other items, there was no change to our previous estimate.

Our next chart is number 15, which presents a summary of our outlook for both 2003 and 2004.

We have increased our projections for sales, operating EBIT, segments, earnings per share and cash flow from operations.

Now Cynthia, we are ready to take questions from our audience.

Thank you, gentlemen.

Today's question-and-answer session will be conducted electronically.

If you would like to ask a question, please press the star key followed by the digit 1 on your touch tone telephone.

We will proceed in the order that you signal.

If you are using a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment.

Once again, if you would like to ask a question, please press star one.

And we will pause momentarily to give everyone an opportunity to signal.

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

We will take our first question from George Shapeero with Smith Barney.

Go ahead.

Good morning.

Chris, you raised the sales forecast so that we're now almost double where we were projected from earlier in the year.

But you really didn't raise next year much.

At what point do you sit there and recognize that next year's probably going to grow a lot faster than you've got projected?

Okay.

Thanks, George.

In fact, we believe we have raised our sales outlook for 2004.

We're now looking at 31 and a half to 33 billion dollars, you know, which is well above where we were previously.

If you're looking at the growth rate percentage on a compounded basis, clearly those percentages haven't changed a whole lot, but go back to 2001, we've grown sales on a 10% compounded annual growth rate consistently.

So from under 24 billion of revenues, four years ago, to 32 to 33 billion, I think is -- is pretty impressive and -- and we'll continue to evaluate our guidance and outlook and adjust it as we see fit.

Okay.

And the second one is -- in terms of your dividend policy -- I mean you've got a lot of cash, you don't have a lot of debt that you can pay down.

I mean, why not a significant increase in the dividend here?

That's a good question, George.

We're looking at our dividend policy and continue to -- to do so.

And, in fact, we have a process ongoing at this time to -- to evaluate that very specific question.

Clearly, our Board of Directors looks at ways to return value to our shareholders and a dividend is one of those, and I'll report on that at our October meeting as to what the outcome of that study is.

Okay.

Thanks.

Thank you, George.

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

Please go ahead.

Good morning.

The question that George asked is very similar to what I had in mind, which is -- you know, the defence companies haven't had a great track record in -- in sort of diversifying or -- and given 33 billion dollars, so you're so darn big already, it's hard to imagine significant uses.

I mean, if you look at the five-year plan, uh, for, you know, buying other defence assets and I'm wondering philosophically we know -- we know the alternatives of share buyback and dividends and buying stuff, but I'm wondering, Bob, whether you, you know, sort of philosophically think that the company ought to do a serious study to find out how to use the money to grow or whether it's really an option of trying to give the money mostly back to the shareholders?

Thanks for the question, Joe.

I think and hope that philosophically we've communicated with some consistency to you all over the past number of years that Chris included in his discussion of revenue growth that we are committed to staying focused on businesses that we understand well on businesses where we have confidence in generating good value for our customers, and in businesses where through that customer satisfaction we can yield some incremental value for shareholders.

Chris was absolutely correct in describing the increasingly high priority we are placing internally and working with our board on examining the alternatives associated with effective value generation of cash deployment.

Dividend policy is clearly among the high priority considerations we are looking at.

And I can tell you we've had fruitful and constructive discussions here.

We don't have a -- a conclusive position to report to you all today, but as Chris said, we will report to you in October the results of our valuation.

But certainly in your question, Joe, and the previous question from George, the very aspect that you are engaging in looking at our business is the exact aspect that we're following through on.

But I mean philosophically, could you consider something like a -- you know, -- I mean, your dividend used to be 350 million dollars a year and it's now, you know, in the low 200s, so you could be talking about a serious dividend increase and just get back to the dividend you paid in '99 when the company was, you know, 50 -- a third smaller.

And I'm wondering if sort of philosophically you might consider going to something that's, you know, more like utilities payout so that you would think that rather than trying to redeploy at your size into your known businesses, rather than just some marginal defence increase -- dividend increase, whether you're philosophically considering something you've never considered before?

Well, I don't want to -- and we are not prepared today to make a discreet pronouncement about the actions, and I want to be clear about that.

Philosophically I don't want to limit the range of our thinking to any particular quarter.

I want to be broad and thorough and I think the compass that we have is going to entirely be set by the ways we believe we can generate maximum value for the shareholders.

So if (compass) if that -- in our judgment is a -- an adjustment of our dividend policy, then it will be that.

And if we can maximize value in our judgment, looking at all the needs and uses of cash that we have by a larger adaptation than a smaller one, we'll take that under full consideration.

We are not self-limiting in that regard.

Chris.

To follow up on the cast deployment.

We've talked historically about four or five major uses of the cash.

And just to let you know what we've done this year and how we've deployed it, as you said, dividends on track were about $200 million of cash.

We retired $450 million of debt early through a callable opportunity in the late first and early second quarter.

We spent about $300 million buying back our shares opportunityistically.

And we have made a minor acquisition that I will emphasize is for and in fact I would say our growth is clearly in the federal market and that's where the acquisition activity is -- has been focused and it is not one of diversification.

So we have, you know, participated in each of those different avenues, in my view, somewhat opportunityistically to, again, focus on the shareholder value.

Thank you very much for your answers.

Bye.

We will take our next question from Steve Binder with Bear Stearns.

Please go ahead.

Good morning.

Can you maybe just touch, you know, your revised guidance for 2003 and 2004?

I think I know you were talk both about 22 end up previously being about a billion and eight to 2 billion in sales.

Can you maybe talk about what that new revised total is and similarly for 2004?

Sure, Steve.

Thanks.

This is -- you're right.

A majority of the -- the growth is in the aeronautic segments.

Let me just focus on that.

Starting first with sales, we talk about three -- three lines of business, combat, aircraft, of course, being the largest.

We see that growing, uh, or our guidance increasing by 7 to 800 million dollars over our previous guidance for '03 and 900 to a billion dollars for '04.

Let me do JFF first.

About $300 million increase on JSS, so that will take it to about 2 one to two two billion dollars.

And then in '04 we'll probably be 2.7 to 2.9 billion dollars for our new guidance range on JSF.

For FA-22, again about a $300 million increase, which will put it just over $2 billion for both years. $2.1 to 2.2 for '03 and maybe higher for '04 and F-16, uh, a little growth but, you know, right around $3 billion in both years probably the best way to look at that.

C130J, Jim mentioned the acceleration of some of the aircraft.

It's really just a reclass from '04 to '03, 1 to 200 million dollars.

And then we do have some other air mobility and R and D projections on going that were 1 to 2 hundred million both years.

So if you total that all up you'll have 9.5 to 10 billion of sales for this year and 10 to 10.5 billion of sales in '04.

Again, mainly driven by the combat aircraft.

And, Chris, you know, you touched on the margins in '03 and '04 will be lower than previously forecasted.

Was there any adjustment in the quarter on the program or is that just assuming you're not going to have a step-up in the second half of the year.

And while I'm on that Bob you might -- the air force made some positive comments about the -- you know, the performance of the program recently.

I'm just wondering.

Does OSD kind of share that optimism and confidence in the program?

Steve, thanks.

Let me elaborate on that.

The short answer is you're correct, there will be -- there will be no step-ups.

We've talked before as to how we monitor each of these programs and our methodology for reporting profit on these programs.

There has been absolutely no change in that process at the beginning of the program.

We identified the risks and the opportunities.

And then over time we hope to reduce those risks, hit the milestones and allow for a step-up or an increase in our booking rate.

I think the best way to look at it is really these initial low-rate production losses, which I'll define as the -- you know, up-through loss two, PRQV lot 1 and lot 2 are the significant contributors to our 2003 and 2004 revenues, and we have been and will continue to record those margins at mid-single digits.

We hoped as we were able to retire the risk and achieve the milestones, we could get to upper single digits.

We are in fact retiring the risks.

We are in fact hitting the milestones, which is the good news.

The bad news is there is a little more cost pressure to -- to hit those goals, uh, so think of these as being mid-single digits, probably for the remainder of their -- their contract term.

I do want to say, however, that as we tradition -- as we transition from these initial low-rate production lots to lot 3, lot 4 and beyond, uh, there is clearly an opportunity for the subsequent lots to be at a much higher margin and we would hope to have at least high single-digits on those programs.

That's been kind of a -- financially -- and let me ask Bob to follow up on your question.

Yes, Steve, I want to go to the second part about -- if I -- if I understood the question correctly, OSD alignment with the air force relative to the progress being made technically and operationally on the program.

Of course, the program is under expensive scrutiny, and that scrutiny, I think, is transparent from the company to the Air Force and from the Air Force to the Office of the Secretary of Defense.

We recently had a defence acquisition board review that is a very thorough evaluation of the overall performance of the program in that review, flight-test performance was evaluated carefully.

Of course, we're showing much better signs of avionic stability and burning down the test points on the flight card for the current operational -- or current test and evaluation program as we prepare to enter operational test and evaluation in October.

So the defense acquisition board meeting was okay, and I think the view of the program's performance is pretty broadly shared and well-understood.

All right.

Thank you.

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

Please go ahead.

Yes, thank you.

You mentioned that the potential for higher margins on lot 3.

First, what sort of metrics should we look at as outsiders to kind of feel better about, you know, kind of the chance of getting there and, secondly, what percent of your F22 revenues will lot 3 represent in '03 and '04, approximately?

Okay;

I guess some of the metrics that -- that -- will clearly indicate progress in addition to some of the items Bob mentioned and some of the comments from our customers including the air force and even the pilots that are flying the test program clearly could -- could be something as simple as the deliveries.

And, as I mentioned, we're making good progress on deliveries.

We had three and a quarter, four as of today, and we're on track to deliver about 11.

And, in fact, the latter part of this year we will actually begin delivering the production of lot 1 from -- from your perspective and also look at the IOT & E testing, which is scheduled to begin in October, and is a significant event that we talked about for the last couple quarters.

And it's clearly going to be visible and something -- we'll keep you up to date on relative to that.

As far as -- as far as, you know, the revenue.

When we talk about, you know, $2 billion of FA-22 revenue this year and next year, you know, a little more next year, that is comprised of the cost -- reimburseal EMD contract, PRTV, lot 1, 2, and lot 3.

But lot 3 really just being signed up, you know, again earlier this year.

It is not a significant component in '03.

And I think in '04, you know, it probably is going to be in that 20% to 30% range of our revenue.

But I'll look at that and, you know, maybe in the October call give you more -- more specifics.

Again, on lot 3, we will start out recording that consistent with our past practice.

And as we achieve the milestones, which we expect to achieve on that program, the step-ups will occur over the life of that -- life of that program.

Great.

If that helps.

The second question would be: In terms of cash redeployment, you know, the Verridian proxy statement sort of suggested that there were two other bidders -- two bidders other than General die namics that were willing to go to at least $30 a share and kind of just looking around.

You know,, you would be a logical candidate.

You've made two acquisitions, smaller ones, in this space.

What sort of priority do you put on expanding your role potentially via acquisition in this space?

And if so, what are you really looking for?

Are you looking for niche capability, you know, and how interested are you?

I'll take that question, Bob Stevens here.

The -- we're looking -- and I think again our past behavior hopefully is indicative of this sense.

We're looking for ways to round out our sets of core competencies.

Our organization realignment that I commented on earlier is an internal method of doing that.

Externally, we're very interested -- any time we can find opportunities -- to enhance the core competences that we have to focus on our core missions and businesses.

But we do that in a fashion that we think is entirely consistent with our definition of discipline growth, which means these business opportunities on the acquisition side have values, and we attempt to very clearly define financially and operationally how value will be generated.

And there is a limit to how much we would pay.

So we'll continue to explore ways to enhance shareholder value through the avenue of acquisitions as one of the cash deployment alternatives that Chris described.

Of course, it's not the only one.

But it has to meet our internal tests of evaluation.

Okay.

Thank you very much.

We will take our next question from Byron Callan with Merrill Lynch.

Please go ahead.

Good morning, gentlemen.

I just want to go back to the F22 and F35, and can you explain what triggered the increase in guidance?

Was it clearing the preliminary design review, getting that closed out on F35?

Just elaborate on what -- what caused the change in guidance?

Sure, Byron.

That clearly was one of the -- one of the key contributors.

And as specific clauses and restriction within the contract were clarified and, you know, eliminated, if you will, including things like termination, liability, and such, and the funding profile and the budget, it allowed us to continue to work on this program and move at a quicker rate.

And, again, the -- the subcontractors staffing up and contributing are all contributing to this growth.

So we feel pretty confident in the ranges we've given you, which, again, could approach 2.7 to 2.9 billion in 2004, which I think is probably about kind of the peak steady rate for a while.

I know we've increased this a couple times in the last several months -- or several calls, but I wouldn't expect a whole lot of change at this point in time.

So --

Okay.

And then back to -- on the F-22?

F-22, uh, again was a couple hundred billion dollar increase for both years.

Again, we're continuing on the development side with the software stability, which is covered by the EMD program.

So more volume and throughput as we continue to focus and prepare for the IOT & E testing, but nothing -- nothing unusual on that front.

Okay.

The follow-up question, I just wonder, Bob, can you address the -- kind of some of the specific opportunities, the new division's going to be targeting, anything that we have to watch for as a sign that the new organization is up and running and on its way?

Well, Byron, let me assure you that the new business area is up and running.

Um, specifically defined, current market initiatives would be the war fighter information network tactical system, known as WFINTS.

That program in its parameters and dimensions would be exactly the kind of program that we think would well-benefit from this architectural assay, if you will, of how to assure that the best capabilities of our company are -- are well-integrated to develop a system that will give a government a full spectrum of capability.

There are some classified programs.

But, also, the programs that we would have traditionally aligned with other business areas.

Take GPS or -- which would -- which you would appropriately align with our Space Systems business area.

Even in our current organizational structure, we want to assure that the new business area evaluates the best way for us to define val uto customers in a world that we believe (value to customers) rapidly changing and going to continue to change.

And, further, one that we believe has only barely scratched the surface in the extraordinary use of information technology.

So making sure that the architectures are right and that the individual systems or sub systems that we are working on will be compablt with the global integration grid as it matures and develops.

That will be a set of companion goals for Integrated Systems and Solutions.

Thank you.

We will take our next question from Joseph Nadol with JP Morgan.

Please go ahead.

Thanks, good morning.

I'd like to delve a bit, Chris, into EELV program accounting.

I'm sure you saw what happened over -- in billing this quarter.

And could you give us any detail on what your estimates are there?

And then, further, looking ahead, you know, there have been some press reports that you might get some additional lauchgs, what sort of things do you see for that accounting program?

Okay, thanks, Joe.

Relative to -- to EEOV, um, I'm not going to comment on other people's accounting, that's for sure.

We have I think a pretty straightforward way of accounting for -- for most of our contracts.

We either record it on a -- on a percent-complete basis or upon delivery and clearly in the launch vehicles, such as the Atlas 5, we record the sales and the profit upon the launch.

And it is discreet and unique to the contractual terms of that particular launch.

On the cost side, you know, there are costs that we expense as we go, such as the general administration of costs, the leasing of the pad and then there are the fixed assets which we amortize over their useful life and they obviously get assigned to the -- to the vehicles.

And we have the direct cost of the vehicle itself.

So I would suggest it's pretty straightforward and pretty -- pretty common with the way we account for any delivery type, whether it's an aircraft or launch vehicle.

As you know, probably over the last several quarters or several years, we have had charges related to EELV as a result of market conditions where we would either sell a launch vehicle that would be at -- you know, revenue below the fully absorbed cost, or we would change our production rate, which would of course assign more costs to shows vehicles being recorded and I think you can go back to 2000, we've talked about the difficult market, and you can see in several of those quarters we had, you know, substantial 30, 40, 50 million dollar charges within our operating results.

So I'm very comfortable with the way we account for the program, and, you know, hopefully that helps answer your question, Joe.

Well, what's the sensitivity of your profit on that program to -- in addition or subtraction of five to 10 launches over a five-year period, what --?

I'm not -- not prepared to comment on -- on anything at this point in time.

You know, if anything changes we'll be sure to update you at our next --

Sure.

As a follow-up, on the C130, the past couple of years you've been very careful not to book any profit in the first 100 20 aircraft.

Did something change in the quarter in terms of better than expected performance that led you to change your policy going into Q1?

Sure, Joe.

The -- the key event, as I see it, was late -- you know, late March when we signed up the multi-year.

It really has -- has two effects on the '04 profit.

The one item that I think is the most significant is that now that we have this multi-year contract, two of those, 60 aircraft, will actually be delivered in the latter part of 2004.

And as we've talked, outside the 1 point program and those will have, you know, the double-digit margins.

We've had the same focus on -- on the 120 shipset program.

We've got a great team down there making lots of -- lots of progress.

There's stability in the factory.

The cost performance is -- is right on track.

And, again, getting a multi-year has a little bit of stability and reliability to the original 120 and it's looking like we'll have some profit, you know, that will bring in over those 2004 deliveries.

As Jim said, kind of low single digits, but clearly -- clearly that -- that is -- there's outlook.

I also mentioned the subcontractor performance is really stepped up and we're very satisfied with the entire supplier base and the progress that we're making on that front.

So the combination of all those things, with the multi-year, really will be in probably the single-point.

Okay.

Thanks.

Sure.

We will take our next question from Howard Rubal with Soundview Technology Group.

That's the best name I've heard yet.

Gentlemen, thank you very much.

Could you review the -- could you review your decision to exit, you know, postal -- the mail-sorting contract in -- mail-sorting business?

And, also, would you touch upon -- let me just stop there first.

Okay.

Howard, it was very, very difficult to hear you, but I think the question revolved around commercial mail and the decision to exit that.

Yes, that's correct.

I'm sorry if that's not loud enough.

Sure.

Well, this is actually a -- a pretty simple decision financially.

I'll tell you a little bit about the -- the commercial.

And I want to emphasize, this is the commercial mail business.

We really were involved in two activities.

They would actually provide presorting activities for commercial mail-rooms and then they would also provide hardware to these commercial entities, banks, other -- other corporations to allow them to do their own self-sorting or -- or presorting, if you will.

The revenues of this line of business, you know, is projected kind of in the $50 million range.

The margins were unacceptable and it wasn't returning -- providing an adequate return on our investment.

So, you know, we look at all of our lines of business and sublines of business on a -- on a regular basis, and given the market changes, the economic conditions, the fact that commercial entities have cut their capital budgets, this was a line of business that was impacted.

So I would suggest it was a pretty easy decision and it was driven by those -- by those factors.

And, as I said, there won't be any 'digsal charges and I really don't see any other lines of business that will be exiting here in the -- in the near term (additional charges) I do want to emphasize we are still dedicated to the U.S. postal service and that business is growing and it's profitable.

This was a remote location and unrelated to anything in our distribution technology core business.

Thank you.

That was ...

You answered the second part of the question, which I was going to ask, which was as you look at the rest of your business units plus the various lines, are there a few areas where you might want to touch upon what you might call programs that are Yellow or -- or programs where -- for example, you've had some challenges, especially in electronic systems?

Now, I think I'll -- the answer I gave still holds but we do have a process where we look at these things and, you know, this what is clearly outside the core, not delivering the value to our shareholders.

So we -- we exited.

Thank you very much, Chris.

We will take our next question from Chris Mecray with Deutsche Banc.

Please go ahead.

Hi, there.

Congratulations on the C-130, we've been waiting for that good news for some time.

That's great.

Can you touch on the contract, the GEO had reported a few months ago that the contract was seemingly on track but didn't have a lot of cushion.

Are you comfortable with progress there, has that cushion increased at all?

I'm mindful, Chris, of the GEO report that you reference.

Of course, we're intentionally focused on the siber sigh program and certainly one of the reasons that the program is such a high priority, and probably not terribly broadly known, but components of the Sibras High program have been used, particularly the ground segment in operations, uh, Iraqi Freedom and Enduring Freedom, particularly in Iraq and have performed superbly well and have given war fighters a real competitive edge.

So the priority of the program remains at the very top of the areas that we focus on.

I honestly don't look at the Sibras program in terms of cushion, although programmatically, we know exactly what we have to do.

The team that's led by Tom Marsh and Program Manager Miles Crandall have all the resources that are necessary to execute that program.

Here, again, we have excellent interaction with our customers in the United States Air Force.

And they have put additional resources on the program to assist in its execution.

So I can report to you today that we are tracking on our schedule, and within our cost and, importantly, within the technical measures of MerRick, that this system requires and demands.

And we'll keep you updated call to call on it to be sure.

Okay.

Great.

On F-22, just on the technical side there, if by chance -- and I'm not saying it won't happen, but if you didn't meet the -- the 20-hour requirement by the review scenarios going forward, what could the impact be?

Well, we're committed to making that 20 hours.

And there is no person in our company or within the Air Force that believes that we are not making progress, that we have resources in place, that we understand the -- the performance of the system.

Importantly, and this is exceedingly significant aspect of the program.

The pilots who were flying the -- the airplane today are increasingly satisfied with its performance and are increasingly able to take the airplane into the outer regions of its test performance envelope so that we can get a better appraisal of what the weapons system will do, as compared to having those sort of nagging problems of the lack of availability of the avionic suite because of early instability problems.

So we've -- and that's a very significant operational movement forward, to be able to accommodate the test pilot's requirements to actually go out and fly the mission and test the overall performance characteristics.

Okay.

Thanks.

You're welcome.

We will take our next question from Sam Pearlstein with Jeffreys & Company.

Please go ahead.

Good morning.

You made a comment in the press release about the lower stock price helping the corporate expense.

Can you just quantify roughly how much that -- that benefitted in this quarter year to year?

Good morning, Sam.

Let me ask Jim to take you through some of the details in the corporate other and answer your question specifically.

Sam, the interest income was -- didn't really -- let me just go through the items and unallocated other just to help out here.

Interest income was actually slightly less than the quarter year ago.

Equity and earnings was slightly less, the stock plan was -- it did benefit us.

And through some other items of income and expense that -- it's a laundry list of lots of little items that kind of get you to the bottom -- bottom line, which is pretty much unchanged from a year ago.

Okay.

And then just to follow up a question on -- on the pension.

You -- you've given us really the adjustment that we're going to see going into next year.

I guess a couple things is Chris last conference call you talked about you know rough order of magnitude, what the K-A-S-M should look on a year-to-year basis.

How do you still feel about those numbers looking from '03 to '04 and then can you just talk about what the plan has been doing year to date and what the impact of discount rate changes might be?

Sure, Sam.

I have no change in, you know, what I talked about in -- in April.

In fact, in the August/September time frame, is when we have our internal process to update all the participant data and go through pretty much a firm calculation of our cast many expense.

Relative to the master retirement trust, I'll tell you it's positive to date.

The difference is still 4 to 550.

I think it was October of last year we provided a very detailed analysis on the sensitivity to changes in assumptions and changes in performance.

And I think those -- those amounts are generally still valid.

And, in fact, we're probably going to go ahead and update those when we talk again in October, I'll give you the specific points, but I think that data from last October is generally still accurate and, um, you know, we'll give you more detail at that time as the year unfolds.

Okay.

Thank you very much.

Sure.

Cynthia, we have time for one more question.

We will take our last question from Eric Hugel with Steve Fence, please go ahead.

Hi guys.

My first question is -- I know you guys want to be conservative, can you run us through, I guess, some -- I guess some upcoming programs that you would see, opportunity for upside and sort of, I guess also some -- some -- I guess risks in your plan that you think are -- of the largest?

Sure, Eric.

Probably not going to go into a program by program review at this time.

I'll tell you, we have a balanced process, I alluded to it on the FA-22 program.

We do it at a program basis, we do it as a line of business, segment and an overall corporate base.

I have the same confidence that I have over the last three years in our financial results, our outlook, I believe the balance and, uh, with -- over $30 billion of revenue.

There's an awful lot of moving parts.

Clearly the key is driven by our operational performance.

As I mentioned and Bob mentioned, the operating very well and that occurs in the mission success occurs, the financial results follow.

So, um, all that has been considered and the updated and improved guidance and that's probably -- probably as much detail I can give you at this time.

Okay.

My second question is with regards to F22.

You talked about some additional cost pressure.

Is that additional to what we've heard in the past, and if so, can you give us sort of an order of magnitude on that?

And could that affect the number of units that would ultimately be -- be able to be purchased?

Not -- not at all.

This is not new.

And, uh, this relates as I said to the transition from development to production.

It's contained within the quantity, uh -- it's our commitment and it's our responsibility as the contractor to get this resolved and this is -- this is all -- all on our nickel and as I mentioned, uh, we're still profitable and you know higher T & T testing will start in October and that's when we'll have a lot more information for you.

So it's clearly contained within the guidance that we've given.

So it's all -- it would all just affect your margin, it wouldn't affect --?

Exactly.

Okay.

Great.

Thank you.

Thank you, Eric.

I'd like to just summarize theer that we do have positive momentum at Lockheed Martin.

Sales are expected to exceed $30 billion this year, a new hire for the corporation.

If you look at chart 16, the final chart, uh, we've summarized some of the key metrics which highlight our strong performance and our positive outlook.

You can see that organic sales are expected to grow about 10% per year on average, over the four-year period.

You can see that the segment profit is expected to grow at a faster rate, about 15% over the same period indicating consistent improvement in segment margin.

We've also provided an exhibit of GAAP EPS from continuing operations through 2003, and adjusted EPS, which excludes the unusual items in the non-cash impact.

Our adjusted EPS is expected to grow at doubledigit levels during the period on the chart.

Thank you for joining us today and I look forward to our next quarterly call.

Thank you.

This does conclude the Lockheed Martin second-quarter 2003 earnings results conference call.

We do thank you for your participation and you may disconnect at this time.