洛克希德·馬丁 (LMT) 2003 Q3 法說會逐字稿

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

Today's call is being recorded.

With us today is Mr. Chris Kubasik, senior vice president and chief financial officer, and Mr. Jim Ryan, vice president of investor relations.

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

Please go ahead, sir.

Thank you, and good morning.

I want to thank all of you for your patience.

There was some confusion on the dial-in number, and we do apologize for the inconvenience we caused.

Okay.

Let's get started with the call.

Please review our news release and conference call charts, which are available on our web page.

Also, please refer to Safe Harbor on Chart two.

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 10K and our 2003 form 10Qs for description of the factors that may cause actual results to vary materially from anticipated results.

Today's presentation and web charts contain nonGAAP financial measures, as defined by SEC regulation G. While we believe that these nonGAAP 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.

I will now turn the call over to Chris.

Thanks, Jim, and good morning.

Our third quarter results were solid, indicating continued positive momentum across our lines of business.

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

Let's continue with Chart three.

The 23% increase in year over over year quarterly sales is within our estimated range.

And I should note that we achieved the highest level of quarterly sales in the history of Lockheed Martin.

Growth in segment EBIT outpays the 23% growth rate in sales.

Margins increased in three of our business segments for the quarter, a clear result of performance improvement, risk reduction and customer satisfaction across multiple lines of business.

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

Earnings per share totaled 48 cents on a GAAP basis.

Third quarter results included an 18 cent per share charge, as we proactively retired higher cost debt prior to its maturity.

We currently project that this 18 cent impact to GAAP earnings will be offset in approximately two years by increased GAAP earnings from lower interest expense.

Turning to Chart four, we provide a reconciliation between GAAP, EPS, and adjusted EPS for third quarter results.

We believe that adjusted or economic EPS is an important metric reflecting the underlying operating performance of our corporation.

In fact, our management team uses this metric in monitoring the corporation's performance.

Our calculation removes noncash pension impacts as well as unusual items, both positive and negative.

In addition, economic EPS was one of the factors we used in our decision to increase the dividend last month.

For the third quarter of 2003, adjusted EPS is up 39%.

Turning to Chart five, for the nine months sales are up 22% and year to date segment EBIT is up 24%.

The year to date adjusted earnings per share comparison is shown on Chart six.

You'll see it up almost 45% reflecting strong segment profit growth, reduced interest expense, and lower stock-based compensation expense.

Moving to Chart seven, we produced nearly $300 mill of cash from operations in the quarter.

This is the third straight year that our first three-quarters have shown positive cash flow, even after considering capital expenditures.

We're continuing to improve our debt to total capitalization ratio.

By the end of September, it was below 50%.

Additionally, we lowered the cost of our debt with actions taken in the third quarter.

We sold $1 billion of floating rate convertible bonds, which are currently at an interest rate just below 1%.

And we also retired nearly a billion dollars of bonds with interest rates ranging from 7 1/2 to 8 3/8%.

You've heard us tell you about our commitment to a strong credit standing and a focus on reducing interest expense.

When you look at Chart 8, you'll see the results of our efforts.

Since 1999, we've consistently emphasized the importance of cash management with our workforce.

This focus has allowed us to cut our debt nearly in half and restore financial flexibility.

As a result, we are now actively focusing on cash deployment to create additional value for our shareholders.

Turning to Chart nine, let's focus on cash deployment.

During the year, we've continued to execute our strategy in a balanced manner.

We've reduced debt by 1.5 billion this year and will continue to pay back maturing debt.

We've re-purchased more than 6 million shares thus far, and intend to continue to buy back shares opportunistically.

We doubled the dividend in 2003 and will continue to review our dividend payout on a regular basis.

We intend to remain competitive with our dividend.

We announced two acquisitions in the quarter, the federal IT business of ACS and the Titan corporation.

These acquisitions reflect our strategy of disciplined growth, growth in areas focused on our core customers and core competencies.

The ASC transaction includes the divestiture of our commercial IT line of business.

Each of these companies provide advanced systems and solutions to intelligence, defense, and civil government customers.

On the subject of acquisitions, our strategy is very selective and focused.

We're interested in businesses providing solutions featuring advanced systems, electronics and information technologies that compliment our core competencies.

And I should add, we have no plans to diversify into non-core businesses.

Finally, we will, of course, continue to invest in our people, training, and infrastructure to better serve our customers and improve our competitiveness.

Now, please turn to Chart 10.

We're raising our outlook for 2003 and 2004 sales and segment EBIT, consistent with our policy, this outlook excludes the impact of any proposed or pending acquisitions or divestitures.

Based on our improved outlook for 2003 and 2004, we're increasing our estimate of cash from operations by $100 million, to at least 3.6 billion over the two-year period.

Let's look at a summary of our earnings per share outlook by turning to Chart 11.

We're maintaining our overall GAAP earnings outlook for 2003 at a range of $2.25 to $2.35 per share, absorbing the 18 cent per share charge for the early retirement of debt in the third quarter.

Then we'll provide the details in his remarks, but if you remove the impact of the pensions and unusual items, adjusted EPS is expected to grow more than 30% in 2003.

Let's turn to Chart 12 to review each business area, starting with aeronautics.

Both sales and operating profit grew over 55% when compared to last year, as we continue to ramp up on major programs.

Through September, we've maintained near record backlog, and so far this year we've booked over $10 billion of orders across all of aeronautic's major lines of business.

The F 16 program delivered 25 aircraft in the quarter, the highest quarterly total since 1999.

Year to date, we've delivered 40 aircraft.

Aviation historians will note that in August we celebrated the 25th anniversary of the F 16's first production delivery to the United States Air Force.

Since that first delivery in 1978, the F 16 team has delivered over 4,100 aircraft worldwide.

Over the next three years, four additional countries will receive their first F16s, which means that the most successful fighter plane in history will now be flown in more than 24 countries.

The F 16 remains a vital program with regard to aircraft order and major upgrades.

Backlog as of the third quarter is 310 aircraft.

On the FA 22 program, Congress has funded production lot 4 as well as long lead items for production lot 5.

We're working with the U.S.

Air Force to finalize requirements necessary for full contractual authorization.

On the operational side, we continue to focus on improving operational efficiency and production flow in the early production lots.

We delivered three Raptors in the quarter, including the first FA22 ordered under production lot 1, and six so far this year, including the first operational Raptor to Tyndall Air Force Base in Florida to begin training operations.

A total of 18 FA 22s have been delivered to date, including the developmental aircraft.

In September, the Pentagon's DAB, or Defense Acquisition Board, convened to review the program's performance and assess the operational test readiness.

The DAB the progress made in 2003, including the achievement of avionics performance suitable for operational testing.

On our F35 joint strike fighter program, we're now well into the detailed design phase.

The critical design review is scheduled to begin early in the second quarter of 2004.

The JSF configuration design maturity continues to make progress.

The program continues to receive solid funding support.

In our air mobility line of business, we delivered two C130 Js in the quarter, and nine aircraft through September.

We also delivered four additional C130 Js last week.

The multi-year contract with U.S.

Air Force for sixty C130 Js has helped to stabilize the production line, and we continue to anticipate the program's return to profitability in early 2004.

In electronic systems, we booked 1.9 billion of new orders in the quarter, maintaining our backlog at $16 billion.

We received a contract to provide enhanced radar for the Navy's Advanced Hawkeye Surveillance Aircraft.

We also received the PAC missile enhancement contract from the U.S.

Army to improve its capability against new and evolving threats.

Internationally, we were selected as the preferred supplier for project Soothsayer which will include development of next-generation electronic warfare capabilities for British land forces.

Also on the development side we won several important contracts, including the C4 I upgrade for various Taiwanese military platforms and sights, a high altitude airship design for the Missile Defense Agency, and the preliminary design phase of the Littoral Combat Ship program.

On the operational front , we were pleased that the Air Force approved the Sniper Extended Range Advanced Targeting Pod for quality testing and evaluation.

And that the jazz (ph) and stealth cruise missile was certified for operational use.

In space systems, we improved both the sales and profit outlook for this year and next, and Jim will provide more details.

We had an Atlas 5 launch during the quarter, successfully placed in a Lockheed Martin built cable vision satellite, into orbit.

This was the 66th consecutive successful flight for the Atlas family.

In September, a Titan 4 Centaur (ph) successfully launched a classified payload for the Air Force and the National Reconnaissance Office.

With only three Titan launches to go the EELV (ph) program and the Atlas5 launch vehicle are prepared to take its place.

The recently past fiscal year 2004 defense budget includes $164 million for the assured Access To Space Initiative, which is intended to provide greater funding to U.S. launch providers.

Additionally, the Air Force transferred seven EELV launches to Lockheed Martin from the original buy one and we were assigned an additional three launches under buy two.

The 10 launches are scheduled to take place over the 2005 to 2009 period, and will be included in backlog as we get closer to the launch dates, and negotiations are complete with the Air Force.

We continue to make progress in signing up new orders in launch and satellite businesses.

Our orders during the quarter included one commercial satellite, one Atlas and two Proton launches.

In the third quarter, our new integrated systems and solutions business area won awards in several key strategic areas, IS& S was selected as the lead system integrator on a major classified program.

Also in the quarter, the U.S.

Army awarded a contract for the phase two of the Win T program.

Win T is a potential multi-million dollar opportunity for the next generation army battlefield communication system.

IS& S was also awarded a strategic contract on the E10 A - airborne battle management commander control program.

These significant awards continue to demonstrate our expertise in systems integration and network centric warfare.

In addition, IS& S is actively involved across all of our businesses to develop advanced solutions and architectures, to better respond to our customer's evolving transformational requirements.

In technology services, orders during the quarter included the FBI technology infusion program.

The information technology line of business has been selected by the FBI for this five-year contract to support the development of new enterprisewide security architecture for its computers and networks to mitigate risk and reduce vulnerabilites as its most critical information assets.

Overall each business area is focused on their strategy and priorities.

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

Thank you, Chris.

We raised estimates for sales and profits in three of our five business areas this quarter.

I will discuss the changes by segment.

Let me begin with aeronautics on Chart 13.

The 2003 sales range was increased by about 300 million. 2004 sales expectation has also been increased, has now projected to be in the range of 10.4 to 11.4 billion.

In 2003, the projected sales increase reflects the continued ramp up on the F35 joint strike fighter development program, and an increase in our advanced development product line, primarily classified work.

In 2004, the projected increase in sales is due primarily to F35 volume, an increase in F16 deliveries, and FA 22 production volume.

Turning to deliveries, our estimate for F16s is 60 to 65 in 2003, indicating a shift of a few deliveries, that were originally scheduled in late 2003 into 2004.

Therefore, we revise our 2004 forecast to add the planes not delivered this year, so we now expect F16 deliveries in 2004 between 70 and 75.

Projected deliveries of the C130 J Air Lifter continue to be 13 to 16 in 2003 and 11 to 14 in 2004.

Turning to EBIT and margins, we improve the EBIT assumptions for aeronautics in both 2003 and 2004.

Let's jump to Chart 15 for space systems.

The 2003 sales range was raised by about 200 million.

The sales forecast for 2004 has also been increased from the prior forecast.

The increase in both years is mainly due to volume, and the government satellite's line of business.

As regards to launches, we now expect five to six Atlas and Protons combined in 2003 versus our previous expectation of between five and eight launches, reflecting a shift of a few launches into 2004.

As a result of, we now expect an increase in 2004 to seven to ten launches.

There was no change to margin outlook in 2003 or 2004.

Let's turn to Chart 16, and integrated systems and solutions.

Sales estimates were improved in both 2003 and 2004 by about 100 million.

The increase in each year is attributable to a higher volume of intelligence, defense, and information assurance activities.

Margin estimates for 2003 and 2004 remain unchanged.

Let's now turn to Chart 18, which includes the significant impact from pension accounting between 2002 and 2003.

As we have discussed in the past, the adjustment required to conform to GAAP EPS is a non-cash item.

It is the difference between the financial accounting standard number 87, which is the basis of GAAP accounting, and the government's cost accounting standard 412, which represents the cash funding of the pension plan.

The funding of the plan is an allowable cost under government contracts.

Actual cash funding will, of course, depend on calculations required under ARISSA (ph) guidelines, although any excess of ARISSA (ph) funding over CAS funding becomes allowable in recoverable cost during the subsequent CAS period.

For 2003, we continue to estimate 305 million for the noncash FAS/CAS adjustment.

The FAS/CAS adjustment negatively impacts earnings in 2003 by about 46 cents per share, compared to a 37 cents per share benefit from pension income in 2002.

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

For the third quarter, the FAS/CAS pension adjustment changed from a benefit of 10 cents per share in 2002, to an expense in 2003 of about 12 cents per share.

Our previously-announced estimate for 2004 FAS/CAS pension expense adjustment was 400 to 550 million.

This estimate is subject to a number of variables, which will be finalized after the end of 2003.

In the meantime, our earnings release has provided sensitivity data to assist with analysis of the potential impact and changes in assumptions to our existing 2004 FAS 87 pension expense estimate.

Turning to other nonoperating items which includes equity income, the prior estimate of 29 million of expense in 2003 has been revised to incorporate a reduction in projected stock-based compensation expense.

Therefore the new estimate is arranged from 0 to $25 million of income in 2003.

There was no change to the 2004 estimate for other nonoperating items.

Unusual items reflect, of course, this quarter's $127 million pre-tax charge related to the early retirement of debt, bringing the total year to date expense to 168 million.

Turning to Chart number 19, we provide an exhibit of GAAP EPS from continuing operations and adjusted earnings per share which excludes unusual items and the noncash FAS/CAS pension impact.

Adjusted EPS is expected to grow more than 30% in 2003 and continue to grow in 2004.

Please see chart number 25 for definitions of non-GAAP measures.

Charts 22 and 23 present a summary of our estimates for both 2003 and 2004, reflecting improvements in sales, segment EBIT, interest expense, and cash flow from prior estimates.

Before we begin the Q&A period, please note that we have filed a registration statement with the SEC related to the proposed Titan transaction.

As a result, we will not provide any incremental information, including the status of the transaction beyond what has been filed.

We should also mention that the registration statement is subject to change, pending SEC review.

Now, Sheila, we are ready to take questions.

Yes, sir, thank you.

If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touchtone telephone.

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

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

Once again, please press star one on your touchtone telephone to ask a question.

And we'll take our first question from Heidi Wood of Morgan Stanley.

Please go ahead.

Good morning.

Nice quarter, and thanks for all the complete information.

Chris, I want to go into a little more detail on aeronautics.

You had an uptick in sales of 300 million while taking out, by my estimate, those five F16s about 250 to 300 million, so a net increase in 600 in sales.

I want to get some color as to where that comes from.

And then, in 2004, that uptick of 400, ah - 900 million in sales.

Again, assuming 250 to 300 of that F16, where do those remaining sales come from?

Okay.

Heidi, first of all, thanks.

We're very pleased with the quarter and the nine-month results.

Let me walk you down 2003 sales.

The old guidance was 9 1/2 to $10 billion, and as you know, we increased that to 9.8 to 10.3.

We see a majority of that growth coming from the JSF program.

And for 2004, a substantial increase in our sales outlook from 10 billion to 10 1/2 to 10.4 to 11.4.

Again, a majority of that coming from JSF.

The 2 to 300 million you referred to on F16 and a little bit on the FA22.

O3 deliveries are down, as you pointed out, just a little bit.

But the spares and the support for the F16 program continue to grow, and that really does offset the F16, if you look at that as just a single line of business.

Okay, and then, again, staying at the top, because I'm sure there will be more questions on the F16, but just going to sort (ph) of your guidance overall, for 2004, the DOD outlays are projected to be up about 8.4%, and yet only two of your five divisions are projected to be at that level or a little bit higher.

So, you know, A, is there areas that you're losing share?

And if so, where?

And B, which divisions are most likely to see pressure on the upside, versus where you are currently guiding us?

Okay, relative to the '04 guidance, let me first point out that we did increase the top line to 33 to $34 billion.

We're looking at aeronautics as continuing to grow, as I pointed out.

In 2003, you know, we do have a little bit of lumpiness, when you look at some of the surge from home-owned security or transportation security administration, it really may not be as comparable to the percentage point.

But we are seeing good growth, if you go back again to 2000, we had 24 billion of revenue.

We added about 10 billion of revenue in four years.

We're very pleased with the growth rate.

You know, your observation is appropriate if you use this as a starting point.

But 10 billion of sales in four years, we're pretty pleased with.

Jim, do you have any further detail?

Well, Chris, as you mentioned, the transportation security agency work in 2002 did add several hundred million dollars of sales in '02 that are not repeated in '03.

And we'll take our next question from George Shapiro of Smith Barney.

Please go ahead.

Good morning.

Good numbers.

Chris, the customer advances were down 364 million in the quarter to 4 billion.

What's the outlook now for where that goes in Q4 as well as next year?

Thanks, George.

Yeah, four Q4, we're looking at maybe another 1 to 200 million of burnoff.

Year to date, as you mentioned, if I look at the year to date numbers through September, we're down about 540 million for the nine month.

And, I think that's pretty close to what we have been projecting.

For the full year I've talked previously about 600 to 800 for the full year burnoff.

We see that continuing as planned.

For 2004, I guess we're looking at, you know, possibly another .6 to $1 billion.

I'll be able to get you a little more refinement as we get closer and we go throughout '04.

But right now, directionally it's coming down as we projected.

I'd say .6 to 1 billion is what's contained in our 3.6 billion dollars of operating cash for the two-year period.

Okay.

And if I look at backlog, the backlog was down sequentially in aeronautics, which is probably expected, given that you're working off some of the programs.

But it also declines some in space systems at half a billion dollars as well as electronics.

I was just wondering why, and what may happen in the fourth quarter.

Yeah, George, this is not a big concern.

It is right sequentially, it's down a little bit.

Relative to the fourth quarter, I would expect the backlog to grow in electronic systems.

There are some opportunities that we will be signing up here, both follow-on work and competitive wins.

Aeronautics will continue to burn off as we have projected.

I think in the space business, you know, we could be up, you know, possibly a billion dollars or more, relative to where we ended the third quarter.

There is a lot of activity in the classified arena that we hope to secure here.

And I think IS& S will probably also increase a little bit, and tech service is flat.

So overall, I would think we'd still be in that 74 billion dollar range on a consolidated basis.

So not a concern at all.

The increase in space in the fourth quarter is not including the signing of the launches that you got from Boeing?

That's correct.

Those are not actual contracts.

We're continuing the negotiations.

Those have been assigned to us.

And once the contracts are actually negotiated with the U.S.

Air Force, we'll include those in our backlog, probably in the '04, '05 timeframe.

And we'll take our next question from Joe Campbell of Lehman Brothers.

Please go ahead.

Good morning.

I'd like to echo Heidi's comments on thanks for all the great details.

On the guidance change on the volume and on the margin in the aggregate, we've noticed that the margins on the -- you know, the incremental margins on the incremental volume are quite low.

And, I'm wondering whether this is just you're being conservative, or whether it's indicative of the incremental volume that's coming -- is really - has this kind of low margin.

Thanks, Joe.

It's not conservatism.

I think it's a realistic outlook based on the lines of business and the products that are contributing to the growth.

When we look at it on a business area by business area basis, just using midpoint of the guidance for discussion purposes, you see arrow growing about 600 million dollars, that tends to be mid single digit margins, again, because of the joint strike fighter and then the FA22, predominantly being recognized at that level.

Space maybe about $400 million.

Again, a lot of that is coming from the government's satellite programs.

They tend to be low risk financially, as they are cost reimbursable.

And, again, those are mid single digits.

A little bit of growth in IS& S and we would expect that to continue at the 8 to 8 1/2% range.

You put that all together, the increase in sales, the 50 million of EBIT, you know, kind of reconciled.

So we're quite comfortable with that.

And, as you point out, we are growing the segment EBIT over the last several years.

I think it was 2001 we barely had a billion seven of segment EBIT.

And when we look at our 2004 guidance, you can see the upper end approaching 2.7 billion of EBIT.

And of course, that does not include any of the acquisitions.

So, a billion dollars of segment EBIT, again, in four years, we're very satisfied with that growth rate.

Then on the joint strike fighter, which the volume has been going up on that vis-a-vis the guidance.

And I'm wondering, is this just that you're executing the program faster than you had previously thought, based on your budget, or is the cost of the joint strike fighter going up faster than you thought.

And since it's a cost-type contract the revenues are going up, you know, suggesting that the joint strike fighter is seeing early signs of cost growth?

Or does this just mean we'll be finished sooner?

Well, I would say the guidance that we've been giving has been trying to fit within the funding and the timing of the funding, which brings into considerations like termination liability and such.

As that funding and the budget process is clarified, we're able to refine the guidance and the through-put.

So it's going quite well.

It's a 10 1/2 year development program.

I'm not going to project that we would finish early.

I would say that the ramp up, the ability to hire the people, and then the stabilization of the overall program and supplier base and subcontractors, will probably allow us to get a little better guidance.

It's not going to be as variable going forward.

So, I would say good solid execution and stabilization programmatically and budgetwise are contributing to that growth.

And then, on your pension guidance you've given us for 2004, 400 million to 550 million, and then you've also generously given us sort of sensitivity analysis on the various assumptions, and I'm wondering why, if we're to -- just sort of how to implement the numbers you've given us.

Why is there a range in the FAS/CAS number?

Should we take the midpoint as the point estimate, and then do the sensitivity analysis off the midpoint?

Or what have you assumed in 400 to 550?

For example, does that assume potential different discount rates?

Or is that some other factor, other than the sensitivity data you've given us?

Right, Joe.

That is the same guidance that we've had throughout the year.

We've always assumed that there would be no change in our previously-disclosed assumptions, the 6.75 for the discount rate and the 8.50 for the return on investment.

The variables do include the actual rate of return.

And that is one of the drivers between the 400 and 550.

But again, there are two separate calculations, two separate actuarial methods, and 2 sets of assumptions here working simultaneously.

One is CAS, the cost accounting standards, and that number will not be finalized until the end of the year.

There's also an indirect relationship between the CAS and the ARISSA calculation.

And of course, as you know, in late 2002, the rules changed relative to that calculation, so we're unable to finalize that until January.

And of course, the FAS, you know, is going to be driven somewhat by the actual return and the change in demographic data.

So, I know it's a wide range.

But when you look at the variabilities, I think it's appropriate.

Any discount rate change, I would apply, you know, both to the top and bottom of the range.

And we will have these numbers in late January with a fair amount of certainty.

As a reminder, we are asking all analysts to limit themselves to one question and a follow-up question.

And we'll take our next question from Steve Binder of Bear Stearns.

Please go ahead.

Hi, actually, it's Grant for Steve.

Chris, just had a question on aeronautics in the quarter.

You talked about lower deliveries on F16 for the year, but in the quarter you actually did 13 units higher sequentially, and lower C130 deliveries.

So, can you talk about any other offsets to margin and why margin wasn't up up a little bit more than it was?

Sure, grant.

Let me give you a little breakdown.

The margins were 6.8% for the quarter.

You're right on the F16 volume is up.

We also recognize revenue on a % complete basis on the F16 UAE program.

And that continues to be a significant driver, again, in that mid single digit range.

Continuing to record both the FA22 and JSF in the mid single digit range.

And let's see if Jim has a little more detail that he can share with you.

We also had a little bit less contribution from other combat air programs in the quarter.

Some of that is timing.

And, as Chris mentioned, the F35 increase in sales did impact the margin, even though the F16 was up as well.

Okay.

And secondly, what were tax payments in the quarter, and can you revisit what your expectations are for this year and next?

Yeah, the tax payments for the full year are in the 2 to 300 million dollar range.

For 2004, the tax payments are a couple hundred million higher, so 300 to 500 would be the range.

Relative, going back to '03, we've made payments of about $150 million for the nine-month period.

So, you know, you can kind of pro-rata that to get the quarterly amount.

Great.

I think it was right around 80, $90 million.

Okay.

Thanks.

And we'll take our next question from Joe Nadol, of JP Morgan.

Please go ahead.

Good morning.

I'd like to dig first into your space systems margin guidance for 2004.

You're anticipating the same as your prior guidance, although you've moved some launches into '04, number one from '03.

Secondly, you got, as you'd hoped, some of your launch support in the '04 budget.

And you have these ten launches coming over from Boeing.

At what point, if not in '04, do you think you'll get some margin bump from all those items?

Okay, Joe.

Thanks.

Let me just refresh everybody's memory on space.

We've talked about this for several years, and the continued focus on increasing our margins.

If you go back to 2001, again, we were below 5% at 4.7. 2002 we increased it to 5.3.

This year we're looking at 6 1/2 to 7.

And again, we have the 6 to 7 range for 2004.

I think the '04 assured access uncertainty we've included some of that within the range for '04.

I think we need clarification on that point, relative to actual launches.

As you know, we record that revenue upon the launch.

So the Proton and the Atlas 5 launches don't get the financial - the revenue and the profit until they are actually launched.

The 7 or 10 that we refer to, of course, are in the 2005 to 2009 time frame.

I think we've made good progress in space and we'll continue to look for opportunities to increase the performance and increase the margins.

We've talked previously about that Titan 4 program, which has been a significant contributor to our earnings, solid double digit margins.

And as I mentioned, with only three launches left, that is starting to tail off.

So, we are not getting that benefit, obviously, in '04 to the extent we did in the prior years.

So it's a combination of all those items, Joe, that are offsetting each other.

We'll continue to see how we perform in commercial satellites.

We've had a real good quarter and a good year there.

I guess there could be an indication that maybe there's some possibility there, long-term.

We feel comfortable with the 6 to 7, and we'll adjust it as facts justify.

Okay.

Thanks, Chris.

For my follow-up on your aeronautics margin guidance, you clipped the top end by 50 basis points.

Is that purely due to the higher low margin JSF volume, or have you changed incrementally in any of your other booking assumptions for '04?

No.

In fact, Joe, when we were looking through, we do get the sales guidance and we do get the segment EBIT guidance an we do get the margin guidance, when clearly we have high confidence in the sales and segment EBIT.

When we looked at it mathematically, you know, everything kind of points to, at least in this year, 6 1/2 to 7 and next year 7 1/2 to 8.

So it was just an attempt to tighten up the range.

You know, kind of housekeeping, if you will.

It wasn't appropriate to have that out there, when you did the math, based on the prior guidance.

So just trying to give you a little more clarity and tightening of the range.

That's all it was.

So, no change in F22.

No.

Okay, thank you.

And we'll take our next question from Ki Von Rumohrer.

Please go ahead, of SG Cowen.

Yes, in the past you've given us some guidance range for volume on F35.

Could you give us that guidance again for '03 and '04, and tell us how much - the '04 number of the '04 change specifically was on the F35?

Sure, Cai.

Let me give you, for 2003, for the F35, our guidance for revenue is 2.2 to 2.3 billion dollars, that's a slight increase over what I told you previously.

And for 2004, we're looking at about 2.9 to 3.3 billion dollars; again, an increase over the prior guidance.

And, how much was the increase over the prior guidance.

For 2003, it was $100 to $200 million, and for 2004, it was 1 to 300 million.

Okay.

You know, in light of that, to kind of get back to Joe's question, given that, you know, you didn't have as much increase from the joint strike fighter, was there anything in terms of the margin mix, in terms of a little less comfort with the accrual rate on the F22, or on the joint strike fighter, or is it merely a matter of conservatism? 'Cause you do have some more F16s next year.

Right.

Relative to the FA22, we talked back in the second quarter that we had deferred some of the step-ups on that program, especially in the early production lots, so that information that we gave a quarter ago continues.

There's been no additional changes since that.

We're still booking the FA22 on an all-out basis in kind of the mid single digit range.

And that continues, and we would hope that as the performance continues to improve, and we make progress there, we could step that up.

But I think you may be seeing the impact of what we talked about the prior quarter.

Thank you.

Sure.

And we'll take our next question from Chris Mecray of Deutsche Bank Securities.

Please go ahead.

Thank you.

I'd like to follow up on technical services.

A little bit of a downward trend shifting and a little bit different from prior quarters.

Is there anything a result of significant contracts that have run up or transfers of business or anything of that nature?

Thanks, Chris.

No, I think what we're seeing here is, you know, a couple of the different lines of business we've talked about, mainly the NASA technical services line of business is contained in there for the three month, and the nine-month period.

We've talked about some downward pressure there.

If you recall in 2002, we really did have quite a surge with the TSA work.

Specifically training the 50 some thousand screeners.

That was pretty much a one-time event.

That is the '02 numbers.

You know, commercial IT is soon to be disposed of, but those results are in there, and that's relatively flat.

Military aircraft is a little lumpy, mainly as a result of the conflict in Iraq and the availability of assets for the modernization.

Jim, do you have anything further to add?

I would just add as far as a trend, the government IT business is expected to grow very well in '04 versus '03 as well as military services, NASA is expected to drop as we said before.

You know, that's due mainly to the Csock(ph) contract and reconstitution of that contract.

Okay.

Great.

Can you also touch on watch programs?

We're all familiar with F22 and there's probably enough in the press to get a pretty good handle on what's going on there.

Can you update us a little bit on Super Si (ph) if indeed you view that as maybe one of your larger programs.

Yes, Chris, specifically to our government satellite line of business, we, of course, have a fair amount of classified work.

We have our advanced DHS program and Sibbers.

From a financial perspective, these programs all tend to be cost reimbursable.

Sibbers program is tracking to the revised schedule.

As you know, a fair amount of that work, we are the lead system integrator, involves our subcontractors.

I think the satellite is just coming out on thermovac last week.

We're evaluating the results.

Generally the team is doing quite well.

We're working closely with the customer.

And you know, we feel that the estimate to complete and our financial outlook is appropriate.

Other than that, you know, you're familiar with all the other major programs, as you said.

We're very comfortable with the financial controls and the processes we have in place to monitor our programs.

You know, we talked a little bit about some of the improvements we've had relative to the advanced targeting pod and jazz m (ph).

These are programs that previously gave us a little bit of concern, but as I mentioned in my comments the operational improvements we've had there.

Again, 25 F16s in the quarter was really the challenge and, I think, something that gave people a lot of concern.

But the team in aeronautics really came through.

As of today, 13 C130 Js, as we look at our independent cost evaluation process and the controls and systems we have in place, we think we have good visibility and have no concerns that are not reflected in the financials.

Thank you.

We'll take our next question from Howard Rubell of Soundview Technology Group.

Please go ahead.

Thank you very much.

First, Chris, could you talk a little bit about your bid opportunities in the integrated systems pipeline?

Sure, Howard.

Let me give you a couple upcoming potentials here in the fourth quarter, although some of these may have slipped into 2004.

The programs we're watching include target prime, which is a missile defense agency program.

We talked a lot about TCS, the transformational communications satellite program, which, of course, has a lot of IS& S involvement, especially with the ground systems and intersection.

GPS 3 we talked about MILOS, which is a satellite program, again, for the Navy.

There's a jitters (ph) cluster four bid, ACS, which is aerial common sensor, MMA, which is the maritime aircraft, which again has a lot of systems in addition to just the airframe.

Space radar, joint common missile, all those, you know, just a handful of programs that are rather substantial, probably, within the next quarter or two, or three we're actively pursuing.

And, I think the IS& S organization plays a critical role in each of those, especially with the design of the architecture and the interplay with the network.

It looks like they want some business [inaudible].

Those wins you talked about were competitive wins, as opposed to just sole source follow-on business, so there's some change in the improvement of the business base?

Yes, that would be correct.

And roughly, if you were so sum these opportunities, you're looking in excess of $20 billion worth of opportunities over the next nine months?

I would say the ultimate value of those could easily be in the $20 billion range.

As you know, Howard, the initial contract and the award, you know, would be for substantially less.

And then, either through options, or as the program progresses from development into production, we would see the actual backlog grow.

But, yes, that is the value and the opportunity that we see out there.

Thank you.

Sure.

And we'll take our next question from Sam Pearlstein of Jefferies & Company.

Please go ahead.

Good morning, Chris, just wanted to follow up in response to a question about the customer advances said that you'd still see a 1 or $200 million use in the fourth quarter.

I guess, I'm trying to just figure out, are there any other items that would be significant negatives in the fourth quarter?

Because otherwise it would seem that you would certainly come in well in excess of a billion eight that you're forecasting right now.

Right, Sam.

As I look at the different components just on the fourth quarter alone, if you look at the guidance we've given, net income, 300 to 350 million dollars, depreciation and amortization kind of in the 150 to 175 range.

When I look at the inventory receivables, payables, kind of group those together, I think that could be a 1 to $200 million, somewhat tied to the sales growth.

I gave you the advance number.

Fair amount of capital expenditures.

You know, those historically tend to be fourth quarter.

I see that happening again.

And then the interest in tax payments, of course, tend to be especially of interest in the second and fourth quarter.

So, we feel pretty comfortable with the 1.8 billion dollars.

Those are the key drivers.

Okay.

And just as a follow-up, with respect to your disciplined use of cash and the choices that are made, I'm curious, given the volatility in the stock price, why we didn't see any buyback activity in the quarter.

Obviously you were doing things with ACS and with Titan, but just, given the price was near where you bought certainly earlier in the year, if we didn't see it in September, so far in the month of October, have you been active in that program?

Yes, Sam.

That's a fair question.

As you can imagine, the opportunity and the rules that apply to the individual management team here in section 16 also apply, you know, in our -- to the corporation.

The third quarter was very, very active.

You know, when you look at the tender, the open market re-purchases of our debt, the convertible debt.

And as you mentioned, the ACS the titan discussions were very conservative, relative to having non-material public data.

In hindsight it looks like probably just about every day in the third quarter that was the situation, so we obviously chose not to.

In the fourth quarter obviously anything we do we'll disclose in January.

As you know, we're in registration, we filed an S4 at the SEC.

As you can imagine, we have to consider that in what we do.

So we've -- as I said, we intend to continue to look at it opportunistically, that includes not only the price but our ability to do so based on what information we have that is not available to the public.

Okay.

Thanks.

And we'll take our next question from Eric Hugel of Stephens.

Please go ahead.

Good afternoon, guys.

The 30 million in space systems, the 30 million dollar, I guess you had a charge from the NASA satellite program.

If you back that out, you had about 8.3% margins in the business.

Can you sort of tell us what's sort of going on there in what's going really well?

Sure, Eric.

You're absolutely right.

The 30 million did hit the quarter.

I'll ask Jim to kind of give you a little bit of color on the space activity for the quarter in the nine-month.

Okay.

The -- ah.

And we'll go next to David Gremmels, of Thomas Weisel Partners.

Please go ahead.

Do you want an opportunity to answer that previous question?

I think we got cut off there.

Something.

We hit a blip.

Let me go ahead and talk about the third quarter, back to Eric's question in the nine months in space.

When I look at commercial space third quarter '03 to third quarter '02 in the launch vehicles and commercial sats, I guess if I look at commercial space in total, we've improved.

Commercial satellites actually made money, obviously, for the quarter, and it's made money for the nine months, where in the prior year it had lost money.

Launch vehicles, commercially, tends not to offset the benefit that we're getting from the satellite business of the Titan 4program, we had a very successful launch in September of the Titan 4 centaur, and as we reduced that risk, of course, we had pretty good returns on the Titan program.

Not only in this quarter but for the nine months.

So, I'd say better margins and returns on Titan 4, commercial satellites offset the NASA satellite instance.

Hopefully that helps Eric.

Sorry for the technical glitch.

I'll jump back in, then.

Chris, on pension, can you just remind us what's your measurement date on the pension plan.

And, you know, if the rate environment were static between now and the measurement day, would you expect you'd have to revise the discount rate for the plan?

Yeah, our measurement date is December 31st, for the ARISSA calculation which , again, is required by law and, in our case, for FAS 87.

I took out a quick look at the Moody's corporate bond rate.

It's down relative to where it was a year ago or nine months ago, when we made the decision.

I guess if we had to pick it today, it could go down a quarter point.

But we'll just wait until late December and make it at that time.

Again, we give you the sensitivity, and that would be an additional 70 to 75 noncash expense.

But again, that's just one of the pieces of a relatively complicated situation.

And then on another of those pieces, the range of returns -- what's the range of returns baked into that 400 to 550 million range you've talked about in '04, and what's your year to date return?

It's kind of -- well, for '03, we talked about mid single digits.

For '04, we used the assumed rate of 8 1/2.

And year to date we're kind of low double digits.

So we'll give all the details, obviously, in January.

But it's a positive return and we'll see how the next two months play out.

And, then, just last one.

Do any of the various legislation, that have been talked about on the pension side, have any potential impact for you, like the Carr and Portman (ph) legislation.

I think this is the one you are referring to on the ARISSA calculation, relative to which discount rate ought to be utilized, whether it's the corporate bond rate, or the 30-year.

We've assumed the corporate bond rate, or a better way to say it, that the legislation that's being proposed will, in fact, go through.

It's really a renewal of a prior -- really a prior decision.

So that's baked into our ARISSA calculation.

That's really where all the legislation is aimed, which, of course, as you know, is different than the FAS and the CAS.

I don't see it having a significant impact.

It will not have a significant impact, or any impact on our earnings.

But clearly on the cash and maybe the balance sheet.

So we've assumed that legislation will go through.

Thank you.

Sure.

And we'll go next to Nick Fothergill of Banc of America Securities.

Please go ahead.

Hi, Chris and Jim.

Again, thank you very much for the detail.

Our first question is on the C-130J.

Chris, you talked a bit about return to profitability in early 2004.

I think that's a little change from what you've said previously, which I thought was kind of late 2004.

If that is the case, then what kind of margin would you book on that aircraft in early 2004?

Or would it move sequentially up throughout the year?

And how much flexibility do you have to bring in a greater level of profitability as you become more assured with the program throughout the year, let's say, in '04.

Okay.

Nick.

Thanks for the question.

My comments really were just reiterating what I said in the second quarter.

Back in July, we did talk about the progress that we had made on C130, and the ability to increase our return to profitability.

So, there is no change relative to three months ago.

To answer your question specifically, within the 120 program, you know, we would imagine those would kind of be lower to single -- low single digit as we run out the program.

We've had good performance over the last few years, so there will be additional earnings opportunity there.

Again, I would think just a couple percentage points, as we roll those out.

But more importantly, in late '04, with the multi-year, it looks like we'll probably deliver one or two in the multi-year aircraft in 2004.

And those should be right around 10% or double digit.

So when the 120 is done, you should think of the remaining aircraft there being, call it, 2 to 4% a piece, but the multi-year start now at 10% and hopefully growing beyond that as we continue to retire risk and show good performance.

So no new news, but that's kind of how we see it.

And the multi-year, Chris, is at the back end of '04.

Is that right?

Yes, it is.

Okay, and then the second question really is having retired some debt recently, obviously you continue to re-purchase shares, as you say opportunistically.

Looking back at the acquisition front and obviously after the recent proposed acquisition of Titan, you talk about advance systems and info tech.

Is there a sense of urgency there to be a consolidator in those segments?

Are we going to expect more Titans to come?

And,if so, what kind of scale would you be prepared to go up to?

Nick, I would say there's absolutely no sense of urgency.

We really do look at the five different ways to deploy our cash.

And I would look at all five on an opportunistic basis.

We did take out the debt back in the third quarter when the rates came up.

We bought back stock when it goes down.

Relative to acquisitions, you know, we have to look at the price, we have to look at the availability of the property, the willingness of the current management team and board to sell, and how it fits into our portfolio.

So, if we make another acquisition or two in the next year, it's possible.

If we didn't make any, I sure as heck would not view that as a disappointment.

So, we'll continue to deploy the cash as it makes sense relative to all those options I mentioned earlier.

Great.

Thanks very much, Chris.

Thank you, Nick.

Sheila, we have time for one more question.

Yes sir, thank you, and we'll take that question from David Kauss of UBS securities.

Please go ahead.

Thank you.

Chris, as far as the discount rate, again, how much when you go about setting that, how much is based on kind of where interest rates end the year, and how much is based on your expectation of where you expect interest rates to go on a forward-looking basis in.

David, we comply with the, you know, the financial accounting standards.

We get advice, obviously from a lot of outside experts.

But the rules would really require us to use the rate at a point in time.

And all of us appreciate the volatility of that.

But unfortunately, or fortunately, the decision has been made that we all use it at a point in time.

That's why I think when you look at all of the companies in corporate America that have a December 31st measurement date, we really are within a quarter point of each other.

So we'll look at it, you know, probably mid December, and, you know, finalize it kind of that week between Christmas and New Year's, to be honest with you.

Okay, can you give an update on the international sales environment, as it results to the sale of F16 and then as well as to the PAC 3?

Sure, David.

F16 continues to do quite well.

We've signed up about 70, in fact, 70 aircraft this year, when you considered Poland, and Oman, and Chile.

We're looking at other opportunities internationally.

Some of those are competitive.

Clearly a lot of opportunities, including some from potential long-term JSF buyers as kind of a bridge between their current platform and where they are ultimately going.

I mentioned the Taiwan win, so our electronics systems business area was successful with the po shang award.

There's opportunities in Canada for helicopters, where we can be the lead system integrator, just numerous opportunities, and continues to represent 15 to 20 % of our revenues both direct and foreign military sales.

Jim, do you have a few more?

David, just to mention, all but one of the F16 backlogs are international.

Only one is the U.S. government.

We are pursuing C-130J opportunities internationally, although we prefer not to mention the customer name.

Okay.

Thanks a lot.

Thank you, David.

Sheila, to sum it up, every way you look at it, we have positive momentum at Lockheed Martin.

We increased our sales outlook for both this year and next.

With projected '03 sales in excess of $31 billion, a new record for the corporation, further adjustments to this guidance will occur once we close the previously-announced transactions.

We raised our projections for segment profit in both years, and it's important to know that the segment EBIT is expected to grow at a faster rate than sales.

We've retired higher-cost debt and improved interest expense.

Adjusted EPS is expected to grow double digit levels for the '03, '04 time period.

And, probably most importantly, we continue to focus on generating cash as we've increased our outlook for cash from operations.

We intend to continue to deploy the discretionary cash flow to enhance shareholder value.

So thanks for joining us today.

Again, I apologize for the late start and the technical problems, and I look forward to speaking with you on the year end call.

Good-bye and have a great afternoon.

Thank you.

And that does conclude today's conference.

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