洛克希德·馬丁 (LMT) 2003 Q4 法說會逐字稿

Good day, and welcome, everyone, to the Lockheed Martin 4th quarter and year-end 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 Mr. Ryan. Please go ahead sir.

Thank you Matt, and good morning.

Please review our news release and conference call charts which are available on our web page. Also, please refer to the Safe Harbor on chart number 2.

Statements in today's call that are not historical facts are forward-looking statements and are made pursuant to the Safe Harbor provisions of the federal securities law. Actual results may differ. See today's press release, our 2002 form 10K, and 2003 form 10Qs for a description of some 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 securities analysts.

Please advance to chart number three, and I will now turn the call over to Chris.

Thanks, Jim. And good morning, everyone.

As we enter 2004, Lockheed Martin is well-positioned for the future. We maintain our leadership position in defense, government IT and homeland security - all growing markets. We're proud of our highly skilled workforce and our broad portfolio of capabilities and programs. And now, they're more important than ever, as our customers need increasingly complex solutions, requiring total systems thinking and connectivity.

We're excited to have substantial new opportunities in front of us, however, we remain focused on successfully delivering on our existing commitments. To make sure our customers are satisfied and to achieve consistent financial performance and strong cash generation, we will continue to deploy our cash in a disciplined manner with the goal of increasing shareholder value.

Turning to chart 4, the fiscal year 2005 detailed defense budget will be rolled out next week, along with the future year defense plan or FYDP. While the details have not yet been released, indications are for continued growth and investment spending over the 6-year period. Of course, defense outlays lag budget authority, and our forecast assumes mid single digit growth in defense outlays over the next few years.

In the area of civil government IT outsourcing, outside experts project this market will grow by nearly 10% per year for the foreseeable future. We continue to see growth opportunities in our addressable markets.

Let's turn to chart five. Overall, government IT business, including C4ISR solutions for defense, intelligence and civil government, along with business systems and enterprise infrastructure, now represent 25% of the total sales of the Corporation. We expect continued growth in these markets and when the Titan acquisition is closed, will add additional capabilities and customer base.

I should also mention that we are monitoring the President's vision for U.S.-based space exploration and NASA's renewed spirit of discovery. We look forward to continuing our commitment to NASA just as we have for nearly half a century.

Please refer to chart 6, focusing on 2003, we are pleased with the progress we have made. We achieved strong, operational and financial performance. We won key new business opportunities, enhanced our core capabilities and customer based through acquisitions, and strengthened our balance sheet by lowering our cost to capital through debt reduction and restructuring. Simply put, all these actions combined to create value for our shareholders.

I'll continue with chart 7. Let's start with cashflow. We continue to place a great deal of emphasis on cashflow generation at Lockheed Martin and our performance in 2003 clearly demonstrates that focus.

Our cash from operations was $1.8 billion for the year, after a $450 million discretionary contribution to prefund the pension plans. This contribution was not factored into our previous forecast for cash from operations.

While some of the upside resulted from favorable collection timing, we achieved fundamental improvements, with our focus on the cash conversion cycles, performance based payments, and other fundamental blocking and tackling actions to produce cash.

I think it's important to point out that we were cash positive in all four quarters of 2003. We've embedded a cash generation culture at Lockheed Martin that will always focus on improving our cash performance. As a result, cashflow should increase as we go forward. For 2004 and 2005 combined, we expect to generate at least $4 billion of cash from operations.

After capital expenditures, debt maturities and dividends at the current rate, we will have at least $1.5 billion available for share repurchases, dividend increases, and other discretionary uses of cash to enhance shareholder value. I don't foresee any large acquisitions, however well selectively and carefully evaluate opportunities to profitably strengthen our core cape abilities.

Turning to chart 8, you will see our current business base is strong in the core areas critical to our customer strategies. We believe no other company in the world can match Lockheed Martin's ability to create total systems solutions, employing the world's most advanced technology.

In 2003, we formed a new business area, Integrated Systems and Solutions. We formed it in order to provide key support for the transformational initiatives our customers are facing. IS & S brings the best capabilities from across all our business areas to deliver advanced solutions and architectures.

For example, ISS is a key member of our team that was downselected for the final phase of the TCS, the Pentagon's Transformational Communication System, a program to significantly improve military communications. IS & S is now building a state of the art advanced concept demonstration center in Tidewater, Virginia, where customers and industry partners will collaborate on the creation of network centric systems and solutions and support of national security.

In fact, we expect the DOD budget and future year defense plan to indicate increased spending for systems providing advanced intelligence capabilities with an emphasis on horizontal integration. And we're looking at opportunities in a new way.

For example, as a prime contractor, we're working to win the competition for the U.S. 101 helicopter to carry the President of the United States as well as the Littoral combat ship for the Navy. In both cases, our teammates are building the platform, and we are leading the teams. We believe our systems integration expertise is just what the customer values and needs.

Talking about new business, please refer to chart 9. We entered 2003 fully expecting backlog to decline, since we have previously booked several large multi-year contracts. But we did better than we projected, booking more than $38 billion of new orders to increase our backlog.

In fact, all of our business areas added to backlogged during 2003, providing a strong foundation for solid, top-line growth for the years ahead. The backlog for aeronautics grew by more than $2 billion to $38 billion. We booked over $12 billion of orders in 2003 across all of aeronautic's major lines of business, including 70 international F-16s, 61 C-130Js, and 21 F/A-22s.

I expect that you will have some specific questions on the detailed status of these programs, so I'll defer further comment until the Q & A session.

In Electronic Systems we booked about $10 billion of orders in 2003, ending the year with a backlog of over $17 billion. We won several significant orders in missile defense, including continuing work on a sea-based ballistic missile defense system utilizing our Aegis weapons system. A port test base was successfully conducted last month.

Recently, our new IS & S business area was awarded a follow-on contract for the prime role of the battle management command and control program for the NVA.

We also are pleased to have won the MDA's target and countermeasures prime contract. This program will enable the U.S. to test the full range of ballistic missiles, defense systems that are underdevelopment. 2004 is off to a great start, as the MDA awarded us the miniature kill vehicle program.

Overall, Lockheed Martin is involved in 13 out of the 15 missile defense programs. Our Information and Technology Services team recently won 2 significant IT contracts, 1 for the Air Force, and the other for the Environmental Protection Agency.

Our IT outsourcing business added more than $600 million of orders in just the 4th quarter alone. With the addition of the ACS government IT business, IT has become the largest line of business in this segment, and we expect to fully integrate the ACS acquisition by the end of this quarter.

We are more focused than ever on winning new business. As can you see on chart 10, this is an opportunity rich environment, with many awards being determined in the near future. Programs that are looking for next generation transformational network centric capabilities, programs that have long development and production profiles.

We're looking forward to these new opportunities, and believe we're well positioned to provide our customers with the full depth and breadth of talent that this corporation has to offer.

Now, I'd like to spend a few minutes on our minutes on our space business, where our fundamentals have improved since a year ago. I'll refer you to chart 11.

Performance is critical in this business area, and we ended the year with 10 successful launches including 5 Atlas missions. The Atlas family has achieved 68 consecutive successful flights.

Turning to the Titan 2 program, with the successful launch last fall, it ended with a 100% mission success rate over a 15-year period.

During the year, we've won contracts for 11 new launch missions, including 3 EELVs for the U.S. Air Force, 1 for NASA, and 7 commercial contracts. To date, we now have a total of 18 EELV launch assignments, including the 3 under contract.

Also related to EELV, we are renovating a West Coast pad to prepare the launch site for Atlas 5 missions. We expect to recover the cost of the pad renovations through the pricing of future government launches.

In our government satellite business, we delivered 2 satellites and made good process on developments programs such as the advanced DHS. We also won key new business in our classified line of business. We see continued growth opportunity in the government satellite arena.

In our commercial satellite line of business, we successfully delivered 3 satellites in 2003, and received 5 orders during the year, representing about 30% of the global opportunities. We reduced costs in this area and increased our profitability. The turnaround in our commercial satellite business has been dramatic over the past two years. Overall, the business model and outlook for space systems is improving and has positive momentum behind it.

Now, I'd turn to a discussion of earnings. First I'll talk to you about non-cash settlements in our earnings picture on chart 12.

Several years ago, we highlighted the distortion of GAAP EPS caused by pension accounting. Since the cash funding of our pension plans is recoverable under government cost account standards, we focused our disclosures and discussions on the noncash impact. In 2003, the noncash impact was an expense of nearly 50 cents per share. In 2004, the noncash impact will double, closer to a dollar per share of expense.

This outlook is above our previously projected range, as a result of significant reductions in CAS expense, caused by better than planned asset returns experienced in the 4th quarter of 2003. As I mentioned in last quarter's call, we are assuming that pending pension legislation which will impact these CAS and ERISA funding calculations, passes this year.

Please turn to chart 13. For those focused on GAAP earnings, the good news is our outlook. Based on today's assumptions, including the achievement of expected returns this year, we see FAS/CAS expense declining in 2005. As a result, we're projecting 2005 GAAP EPS to grow significantly.

Let's now focus on sales and segment EBITDA on chart 14. We had double digit sales growth in three out of five of our business areas in 2003, including about 60% in aeronautics. Overall the corporation increased sales by 20%. We expect continued sales growth in 2004 and 2005 at single digit rates, as revenue stabilizes for both the F-16 and F-35 programs.

Segment EBIT continues to grow faster than sales as we consistently improve our overall margins Our increased projections for 2004 and our new projections for 2005 indicate that we expect further progress in expanding our margins.

We're looking at every line of business to either improve performance or challenge whether we should remain in that area. And we're continuing to focus on attention to detail during contract negotiations and subsequent operational performance. None of these projections include the impact of the Titan acquisition, which is expected to close by the end of the 1st quarter.

Since we plan to integrate Titan into electronic systems, IS & S, and the information and technology services business area, we've combined our projections for these business areas into one range for both 2004 and 2005 at this time.

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

Thank you, Chris.

Let me focus on changes to our guidance. We raised 2004 projections for EBIT in our space segment and also in our combined electronics systems information and technology services and IS & S business areas. Aeronautics projections were unchanged for 2004.

Let's move to chart 16 for space systems. The 2004 sales range was unchanged from prior guidance. The sales range for 2005 is $6.5 to $7 billion. The projected increase in 2005 sales is primarily due to expected higher volumes in our government satellite and launch services businesses.

For 2004, we increased the EBIT outlook for space to reflect the mitigation of risk on the Atlas program. In 2005, space segment EBIT is expected to increase over 2004 levels, mainly due to growth in our government satellite line of business. The 2004 defense budget funds the assured access to space initiative and we expect 2005 will as well.

Let's turn to chart 17. As Chris mentioned we have combined 3 business areas into one projection for 2004 and 2005 at this time. 2004 sales and EBIT projections for this group were raised from the previous estimate and reflect the completion of the transaction with ACS. 2005 sales for the group are expected to increase by $600, to $900 million versus 2004. EBIT increased to project these volume increases in all three business areas.

Let's turn to chart 18. I would now like to comment on our 2004 pension numbers. We previously have given guidance of $400 to $550 million to the 2004 FAS/CAS pension expense adjustment. Our revised estimate for 2004 is about $600 million, based on an estimate of about $900 million for FAS-87 and $300 million for CAS.

Let me briefly go through the main factors driving the revision. First, the FAS discount rate assumption was lowered from 6.75 to 6.25, which increased the 2004 FAS expense by about $150 million. Second, better than expected investment returns reduced the FAS 2004 expense by about $130 million. Third, the $450 million prefunding reduced 2004 FAS by an additional $20 million. So in essence, the FAS expense estimate did not change compared to our previous estimate of about $900 million.

The better than expected investment performance of the 4th quarter of 2003 triggered a reduction of CAS funding by nearly $100 million. One of our larger pension funds became fully funded for ERISA purposes, which, by default, made it fully funded for CAS purposes. As Chris noted, both our previous and revised projections assume that proposed legislation HR-3108, or the Pension Funding Equity Act, will be passed in 2004.

While all of this sounds quite complicated, it's important to note that FAS/CAS represents a noncash adjustment to income to conform to GAAP, and that the corporation expects to recover its actual cash funding over time through prices and products and services in our U.S. government contracts.. We provided an exhibit of GAAP EPS and adjusted earnings per share, which excludes the non-cash FAS/CAS pension impact. Adjusted EPS is expected to grow at about a double-digit rate per annum over the 2004- 2005 period, to reach a range of 350 to 385 by 2005.

Please see chart number 19 for definitions of non-GAAP measures. Lastly, as you know, we have filed a registration statement with the SEC, related to the proposed Titan transaction. As a result, we cannot provide any incremental information, including the status of the transaction, beyond what has been filed. We should also mention that the registration statement remains subject to change, pending completion of SEC review.

Before the Q & A period begins, we ask each participant to limit themselves to one single-part question, that way more people will be able to participate in the Q & A. We appreciate your cooperation.

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

Thank you, sir.

To ask a question on today's conference, please press the star key, followed by the digit one on your touchtone tone telephone. Again, it is star one for questions. If you're on a speaker phone, please be sure your mute function is switched off so your signal can reach our equipment. Star one for questions. As a reminder, in the interest of time, we are asking that you limit yourself to one single-part question. Again, star one for questions. We go first -- one moment. To Howard Rubel with Schwab Soundview Capital Markets.

Thank you very much.

Chris, you talked about really looking at each of your business lines for performance. Could you address a little bit what your -- could you be a little more specific in terms of what you're thinking in terms of other certain areas where there's some divestitures that are imminent?

Howard, thanks for the question.

We don't have anything at this time. I think my comment was that we're continuing to focus on improving the shareholder value and the earnings of this corporation, and we're looking at each and every line of business to see how to improve it and if it makes sense. I would not anticipate any significant or material divestitures, but that is an ongoing process and I think it's the prudent thing to do.

Thank you.

Thank you.

We go next to Steve Binder with Bear Stearns.

I'd like to just address the cashflow for a second, in 2003. You're obviously -- your advanced performance is far better than originally planned by about $700 million, I think you originally said a billion dollar burn, and instead you burned less than $300 million in 2003.

Can you maybe just address -- that was even better than what you said a few months ago. What caused that improvement, number one, and two, related to the same question -- that was really the outperformance in cashflow in 2003. It seems like the receivable in inventory and improvement was - instead as we've seen in the last couple of years, kind of stalled out in the second half of the year. Do you still expect to see improvement in turnover rates for inventories and receivables into '04 and '05.

Well, thank you, Steve. Let me take you through first the 2003 data, and then I'll touch on 2004-05 and try to address the key points.

I guess when I look at 2003, as you mentioned, there were really three major variations in the actual cashflow compared to what we have projected. We had talked about $600 to $800 million of burnoff in advances in '03, as you mentioned we came in around 300. So that's at least a $400 million variance, we've said all along that we don't forecast or anticipate significant advances coming in.

With our $38 billion of new orders, there were actually a couple programs that came in in the 4th quarter that did have advances with them. Relative to the inventory receivables and payables lumped together, clearly compared to what we have projected, there was a little bit of negative growth on that, it really is a timing situation, and I see that reversing early in the 4th quarter of 2004. And then the other item really focuses on the pension pre-funding, you know, contained within the $1.8 billion was $450 million, which is our '04 pension contribution being made early, obviously driven by some tax benefits, and also most importantly getting that money into that master trust so it can earn a good return.

Relative to '04 and '05, just kind of high level on the advanced payments, we had talked about maybe $600 million to $1 billion burnoff in '04, we now see that growing to maybe the $1 billion to $1.4 billion range. That is contained in the $2 billion cash from operations.

By the time we get to '05, the burnoff ought to be relatively minor, a couple hundred million, $200 to $400 million is what I'm looking at at this time, but again there's a lot of time between now and then, and then to your specific question, the receivables, inventories and payables, I see those improving favorably, again, $200 to $400 million in '04, and probably stable in '05, and for the first quarter, I would expect to be cash positive first quarter of this year. So a lot of data, hopefully that answers the question, Steve.

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

Yes, Chris, just to pursue, you took $25 million provision this quarter for the early exercise of options on a missile program. Could you detailed what the missile program is, and how many future options there might be that might result in additional charges.

OK, thanks George. Let me answer the last question first.

There are no future options that will result in a loss on this program, or as I look through the portfolio of the corporation, anything that I see at this point in time. Relative to the specific program, there is a customer sensitivity relative to me disclosing the name of the program, but to summarize the situation, I really look at this, and the management team looks at this, as being really more of an accounting convention versus a performance issue.

Back in the late 90s when we bid competitively on this program, as you would expect we submitted a bid for the EMD, which is now obviously the SDD phase systems design and development phase. As you would expect, that was a cost plus program.

We also had to give rather aggressive pricing for the LRIP, the low rate initial production phase, in the form of options, and we look at this economically over the life of the program, clearly we expect that program to be profitable, we expect the return on invested capital to be appropriate. And what we have here is the unique situation of booking each and every lot on a discrete basis, and we believe it's probable that the next couple options will be exercised, and if you believe that, you make the appropriate adjustments, which we did at this time. So, this is behind us, going forward we will be profitable, and don't see any issues on that particular program.

we go next to Cai Van Rumohr with SG Cohen.

Yes, aeronautical for 2005, you've got about 50 basis points in margin improvement, and yet, my thinking is you'll probably get full-year benefit on C-130J, plus, presumably, F-22 is doing better, and Joint Strike Fighter isn't increasing in the mix.

Is that a conservative number or are you concerned and you've padded something in there for overruns on JSF?

Well, Cai thanks for the question.

Let me take it in a couple different pieces. Obviously, we believe this is our best estimate and we try to balance the risks and opportunities for that. Relative to JSF specifically, as we talked about previously, that is a cost reimbursable program subject to semi-annual award fees. So we've forecast and continue to see that program in the mid-single digits, and you're probably right in anticipating that the sales growth '05 to '04 is relatively flat on JSF.

So again we'll have mid-single digit margin there, which will be somewhat dilutive to the higher end total. FA-22, again, we've been recognizing on these initial production lots, low to mid single digit margins. We expect some improvement there, but that program continues to be in that mid-single digit range, And on the air mobility, mainly driven by C-130J, we've talked about '04, starting to book profit on the original 119 or 120 ship set program in that 4 to 6% range, plus double-digit margins on the multi-year, so there will be a step up on air mobility, mainly driven by C-130. But again, if you try to estimate that, it's probably in the $50 million dollar range, '05 over '04.

We go next to Chris Mecray with Deutsche Bank.

Thank you, good quarter.

I'm interested in focusing in for a second on electronic systems. Your margin, while not materially below first half type rates, was a little down year-to-year, while volumes at least relative to my model were a little bit shy.

Can you just focus in on sort of the mix changes that have occurred year-to-year that might have driven the year-to-year change in margin as well as any other key program elements in the quarter that may have impacted results?

Sure, first of all, thanks, Chris.

As we're seeing, in really a fair amount of the business areas, as we continue to win the new orders and grow the backlog, and as I mentioned, we grew backlog in each of the business areas, including electronic systems, we're really seeing a transition from the more mature production-type frames, that tend to have higher returns. The Merlin helicopter for the Ministry of Defense in the U.K. to be a specific example to electronic systems, and we're seeing that be replaced by these early on development or low-rate initial programs.

Clearly, the one item that I talked to George about, the $25 million charge, does depress the margins. I think it would get a little closer to 9.8 had we not had that charge, which would have been right in the middle of the projections, But big picture as you look out over '04-'05, it really is a transition from these development -- I'm sorry, from these production programs into development programs that are making the change.

And relative to year-over-year growth, or even quarter-over-quarter, you recall that in 2002, we had a lot of activity on short notice relative to the transportation security contracts and that had a little bit of a peak, as we go forward in electronic systems, I mentioned a couple big opportunities, whether it's the U.S. 101, the Littoral combat ship, the joint common missile, possibly the MEADS program, missile defense program there.

All of these will be coming in, helping to grow the top line. They'll be competitive in nature, and initially given the early stages of program, or the development content ,might be a little lower on the margin side, but I'd rather have the business than not. And I'll ask Jim to maybe give a little more insight.

Chris, just to add one thing, in distribution technologies for the quarter, the sales were down, but that was really a phenomenon of wrapping up some contracts in the 3rd quarter of '03, before we start up new contracts or ramp up contracts in 2004. So we actually expect distribution technologies to grow around the mid single digit area, in 2004, so it's a little bit of a timing in the U.S. postal service area.

We go next to Joe Nadol with JP Morgan

Thanks, good morning.

Chris, I'd like to focus in on the FA-22 for a moment. You say you're still in the low- to mid-single digits, could you outline which production lots you're going to be producing on in 2004 and 2005 in your projections? And at what point you see the opportunity to get the margins up on that program towards 10%?

Okay. Thank you, Joe.

Let let me first make a few comments about FA-22 and the performance, I'll ask Jim to give you a little more detail on your specific question on the lots.

I will tell you that one of the disappointments for us has been the inability to secure the margins that we had hoped for on this FA-22 program, especially in these early low-rate production lots. We've talked over the last several quarters and years about the volume driven mainly by the revenue, but the margins, quite honestly, have been disappointing to us, and as you know, we are booking low- to mid-single digits on these initial development and production lots.

Early on in the program, several years back, to substantiate our commitment to the FA-22 program, we accepted firm, fixed priced contracts for the initial production, in contrast to a cost-type contract that's typically used in this phase of the program. I think the FA-22 is proven to be as challenging to program as its complexity and capability would subject. Not only is the FA-22 Raptor at the cutting edge of technology and performance for military aircraft, it is the first supersonic stealth aircraft to be produced.

This past year we did make good progress in gaining experience, and we now feel that we're in a position to manufacture efficiently the FA-22 with the precision it demands.

We're on track to demonstrate the necessary avionics stability, complete all the test preparations for the initial operation and test evaluation, known as the IO T&E phase, that the Air Force will begin this spring.

And I'll tell you that the pilots are delighted with the performance and the aircraft is exceeding expectations at this stage of the development, We work very closely and have outstanding teamwork with the Air Force and ourselves, and we really think that this fighter is going to be the predominant air dominance multi-mission combat aircraft for the next 50 years.

Let me ask Jim to try to get you a little more detail. as you request.

Chris, in 2004 we expect to complete the deliveries on Lot 1 of the FA-22, also begin Lot 2 deliveries, and be working on Lot 3. As we go into '05, we'll be continuing on with the following Lots, 2, 3 and 4. So, I think that answers the question.

We go next to David Strauss with UBS.

Good morning.

As far as the the FAS/CAS adjustment for 2005, can you give us the exact detail in terms of what your estimate is for FAS and what your estimate is for CAS, and really, what is driving the range of the total estimate?

Sure, David, good morning.

I think we've -- and I'll ask Jim to give you the actual numbers, we've talked for several years about the difficulty in estimating these pension numbers, whether it's the FAS, the CAS or the much more important ERISA calculations, and I guess there's pending legislation today that could even change that number. But Jim will give you the numbers, we understand the desire to get this, we obviously have a relatively wide range. We had a wide range for '04, and obviously we came outside of it.

We'll give you all the disclaimers, but from my perspective, I think '04 is the peek on this number, and it's clearly coming down. And I'll ask Jim to give you the underlying assumptions.

We don't want to be too detailed on the ranges for FAS and CAS, but I think the key drivers is obviously CAS. CAS will be increasing significantly in 2005, significantly greater than the 300 for 2004. The FAS number, if you took the mid point of the range, it will be probably a little higher than the 900 for 2004. And I think that -- it's really CAS driving it.

But we'd prefer not to give precise ranges because, as you know, these numbers can change based on a wide variety of different factors.

And we do not assume in these numbers any changes, and the sensitivity we've talked about over the last couple years are probably still appropriate at this time.

So if you envisioned the discount rate increasing 25 or 50 basis points, that's easily $75 or $150 million dollar benefit, or another, you know, 11 or 22 cents per share favorable to our GAAP earnings. The discount rate, as we talked about, is something you pick at a point in time, usually the last day of the year.

And looking back, just in 2003, the volatility on the index that we all monitor was somewhat surprising, over 125 basis points swing throughout the year, depending on what day you looked at it. So that's just one example of the volatility.

But, as Jim said, you know maybe a little more than 900 on FAS, and CAS is really the swing item in its ability to link in with ERISA. The other thing I've mentioned is we have in excess of 20 defined benefit plans and each one has its own unique calculation, which just adds another level of difficulty in making these estimates.

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

How much backlog came with the ACS acquisition, and how much went with the commercial IT business you sold to ACS?

Yes, the net effect on those were basically a push, I think it was in the 400-500 coming in, and 400- 500 going out.

Obviously the ACS Federal IT business just like our IT business has a lot of the IDIQ, the indefinite delivery and definite quantity type contracts. We booked those very conservatively, in fact we don't book them until a specific task order is placed or a specific contract line item is initiated. So traditionally, those businesses have about one-year backlog, so that did not affect the totals.

Thanks.

We go next to Nick Fothergill with Bank of America Securities.

Chris and Jim, hello.

Just a quick question, if I may, on the electronics IS&S and I&TS which you put on chart 17. You're showing a modest 5% growth at the top end of the range between '05 and '04. And also, you're showing margins basically flat in those collective groups of division.

Could you give us an explanation as to why you might not see -- or why that might be a bit conservative and why you might not see higher levels of growth and possibly even margin upside there.

Sure, Nick, and thanks for the question.

Let me first start with the top line sales number. Clearly, as we've talked about, the markets are growing, kind of in the mid-single digit range, overall we see that the electronics business, the IS & S and even the IT & S are generally in that range.

We have some downward pressure as I mentioned with some of these more mature programs coming down, such as the Merlin in electronics systems. When we looked at the information in technology services, you have to recall that that includes a fair amount of NASA work that we've talked about, mainly the CSOP contract that is winding down, so, in fact, you know we have negative growth on the NASA side. We have an aircraft logistics maintenance contract that -- they were a line of business in Greenville that is generally flat.

But when you put in all the different pieces, I think the parts that you would expect to grow are, in fact, growing, and I think the first six months of this year will be critical. There's a lot of competitive wins that will really allow us to see the future of all these lines of business, hopefully, you know, by July of this year.

In the homeland security area, it's continuing to evolve and grow, and I think there's some opportunities there that we need to better understand and actually convert to orders and revenue.

On the margin side, you know, I think it's generally kind of flat with maybe a few -- 10 to 20 basis point type growth. Again, that goes back to my earlier comments about the mix, and we're very excited to have a lot of these new opportunities and development programs, and, you know, I think for the long term, I'd rather have those and work on those at this point and have the opportunity to increase the margins down the road.

I'll tell that you all those numbers we combined are in fact consistent with the prior guidance, and if you were to break apart each piece, I'll just tell you top line, each of these pieces is growing, the top line meaning the sales, and each is growing the EBIT, and we'll continue to to look at how best to present this data to you.

We got next to Sam Pearlstein with Jefferies & Company.

Good morning.

Wanted to just follow-up a little bit on the pension issue, which is, I guess -- what happens if HR-3108 doesn't, in fact, get passed, in terms of the sensitivity to the rate that's being used? And also, related to the contribution you made in the 4th quarter, when do you see the tax benefit and does that have any impact in terms of the tax rate going forward in '04?

Right, thanks, Sam.

Relative to that, the pending legislation, in fact, if it does not pass, there would be a larger liability and a larger expense for ERISA, which would actually drive up our CAS expense. Jim had talked about 900 for FAS and 300 for CAS. You would expect the CAS amount maybe to go up 75 to the $100 million range, which would bring down that CAS/FAS adjustment.

So, not having the legislation pass, given our unique industry and legislation, would actually improve our earnings per share close to 10 cents per share, if you follow the logic on that.

Relative to the tax deduction on the prefund, as you would expect, a majority of that benefit was built into our '03 calculation, as the rule suggested, as long as you make the contribution prior to the filing of the tax return. So there is some incremental tax benefit by prefunding, in effect, the 4th quarter of '04, compared to what we had planned on.

It really wouldn't affect the tax rate, because it's not anything other than a temporary difference, it's really more of a cash play. So, the cash benefit is obviously factored into the '04 and '05 guidance, but the rate itself, there would be no impact.

We'll go next to Byron Callan with Merrill lynch.

Good morning. Chris, can we peel back to aeronautics a little more, particularly the contribution in 2005 for the major programs, F-35, F-16 and F-22 -- is it pretty much the same as 2004, or is there much movement between those three programs? Thanks.

Thank you, Byron.

Let me just run through, you know, as we kind of look at the three major lines of business within aeronautics, we'll try to give you more detail on each.

Combat aircraft, when I look at the sales, I see them relatively flat, '04 to '05. I see the EBIT and the margins basically all without a significant variation, so you really have no significant change in combat air.

F-16 specifically, you know, the margins will remain the same, the actual revenue and EBIT will have a slight decline, if you recall, we are recording the F-16 UAE on a percent complete basis. So when we talk about 70 to 75 deliveries, I think that's a good metric for all of us to monitor relative to the production and the operational efficiency, but it really is not a predictor of revenues. So you should think of the margins staying flat on F-16, but the actual sales and the related EBIT with a slight decline.

FA-22 is pretty level, year-over-year, we would expect a little bit of improvement in margins there, as we had talked about, and JSF is really flat, you know, on sales EBIT and margins again, mid-single digits.

Air mobility, to an earlier question, I mentioned we see a little bit of growth on the revenue, and clearly a noticeable increase on the EBIT as we go from mid-single digit margins to double-digit margins right around 10%, and then we have the workout and the skunk works where we do a lot of the research and development, classified programs, that's about a half a billion of revenue a year. Don't really see that changing significantly over the planning horizon.

So those are all the factors Byron, that support the totals that we've laid out for you.

We'll go next to Eric Hugel with Stephens, Inc..

Good morning, guys.

Can you talk about the increases in the Cap Ex budget that you're expecting for '04 and '05.

Sure, Eric, appreciate the question.

Let me ask Jim to take you through some level of detail in those two years.

Two of the main reasons. First, in the Joint Strike Fighter, we're seeing some increase in capital expenditures, that program progresses.

Also in the information and tech area, the information technology associated with some of our contracts, we'll probably see management, we see a little bit of increase in capital expenditures, these are all in our plan, have been in our plan for quite some time. We expected to get up to this around the 800 level for '04 and '05. And it's certainly not a surprise.

Also there'es one other thing I wanted to mention, we are building a global vision center, it has to do with network centric warfare and horizontal integration, and that is something we're going to demonstrate to our customers and partners, the enhanced ability of our total systems solutions, that's being built in Virginia and that adds to Cap Ex as well.

I'll just add that obviously I'm very comfortable with the process that we have to review these expenditures relative to our returns on invested capital and the efficiencies or productivities that we gain as a result of these expenditures. Obviously, we depreciate these assets and factor them into pricing and recover them, as they are allowable costs.

We go next to a follow-up from Howard Rubel with Schwab Soundview Capital Markets.

Thank you very much.

Chris, if you kind of take a higher level view and look at your businesses, you've sort of given us a guidance that sort of takes into account some risk. As the year progresses, where do you -- it would seem to us that in this combined electronics area, that's probably the best opportunity for you to retire risk as the year goes on, could you address that a little bit, please?

Sure, Howard.

We try to give the guidance, obviously,not only at a business segment level but on a consolidated balance, with a good balance of the risks and opportunities. Each one of the business areas does have a unique attribute to it. We've talked about those for years.

Clearly in aeronautics, the focus is to continue to make progress on the developmental programs. We talked about the C-130J a couple years ago, we stopped booking profit. We have an excellent team working on it, we've now returned that thing to profitability and it really is focused down in aeronautics, on the ability to produce and meet our milestones.

We talked previously about space and the difficulty we had in the commercial space market, specifically commercial satellites. And there is an example, with the right focus and leadership, we were very successful in turning around that situation and I guess, as suggested in your question, is we probably ought to take the same process and look closely at the electronics IS&S and I&TS business areas and, you know, the risk that I would see here is probably inherent in these competitive bids in the first six months of the year, and I think by July we'll have much better visibility once the U.S. 101 and the LPS, the joint common missiles -- it's just an opportunity rich environment, and that's kind of the swing item.

We've continued to grow through the acquisitions, the civil IT arena, we think that's a growing market and I think some of the budgets in outside data suggest that.

And we have some really strong capabilities, in fact with the ACS IT acquisition, it brings us some really good business processing outsourcing capabilities, and I'm aware of a couple billion dollar opportunities, of course, this would be over a 10-year period, to specifically, with the Department of Interior and one with the FAA, that is probably addressable to us now with our better competencies. And in fact, we've already won half a dozen programs or so from the heritage ACS IT business and we'll have that fully integrated by the end of March, and I think that could give us some other opportunities on the cash and the earnings side. Thanks, Howard.

We'll go next to Steve Binder from Bear Stearns.

Yeah, Chris, I know this has been asked already, but it's kind of obvious, if you look at '05 in aeronautics versus '04, basically the entire profit pickup you're projecting is coming out of C-130J, You kind of touched earlier -- you have a favorable mix in '05, as you leave Lot 1 in '04, and you move into 2, 3 and 4, you should have a favorable mix, and you figure, hopefully you're past the testing phase on the FA-22 in '05 too. So that you -- there's some risks and mitigation going on there, that possibly provides some further upside on those 2, 3 and 4 margins.

And the other thing is, with respect to the UAE program, you're shifting to full-scale production in '5 from '04. So I'm just wondering -- you're really showing in your margin assumptions no margin improvement on those two programs, why is that?

Thanks, Steve.

No, I guess I should be a little clearer -- I do see margin improvement in FA-22 program in '05 relative to '04 on the margins, which obviously will bring more EBIT. Again, the revenues ought to be relatively flat year over year, so you can envision a couple hundred basis points improvement, And that's what's factored into our guidance. Hopefully there's more, but we still have the milestones that we talked about, and some of the challenges ahead of us.

Now, on F-16. You know, we do have the UAE on a POC basis. There are, I think in '05, five different customers that we are delivering to. I'll tell that you clearly on the revenue side, the price for these aircraft varies significantly relative to what the government furnishes as equipment, or the contractor furnishes as equipment. You think specifically, you know, of the engines as an example.

So looking at the total sales on F-16, again, I see at least a 10% decline. Holding the margins flat, we're still maybe in the $40, $50 million shortfall on EBIT, just year-over-year comparison. And you should envision that's made up by the FA-22. Jim, do you have anything further to add?

Well, I think in the UAE, we are transitioning from development to production, and the first major tranche of planes will be delivered in 2005. Matt, we have time for one more question.

We'll go to George Shapiro with Smith Barney.

Chris, can you -- at this point, when do you think the next EELV bid's going to be, I mean obviously the government's delaying this so that maybe they get Boeing back to bid. But what are you hearing and how late could they delay this next bid without kind of messing up potential in the future, in terms of launches and your cost structure?

Yeah, George, that's -- that is a fair question, and I have to tell you, we don't have a very crisp answer to that. We obviously work closely with the government customer.

We had a real good year this year relative to orders and assignments, obviously we're standing ready to support our customer, in whatever means they need. And the quantity of a subsequent buy, and whether it's done as a block or an individual, is really up to our customer. And it's probably somewhat tied into the West Coast launch pad renovations, we've broken ground on that, that is going quite well. We have a pretty aggressive target. And I think the sooner that is ready to go might help answer the particular question.

But I think the pipeline is pretty full, the backlog's there, the missions and manifests have been identified, and I don't think there are any critical '04 or even '05 launches that haven't already been assigned.

So I hope that helps, George, I'll turn it back to Jim.

Okay. Before Chris' final remarks, I'd like to discuss our plans for earnings conference calls beginning with the release of 2004 earnings in April.

We have listened to your input. The consensus would like to see all conference call reduced in duration, particularly ours, since we provide so many details in our press release and web charts. So beginning next quarter, we will significantly shorten our remarks to 5 to 10 minutes and then allow ample time for answering questions. It's expected that our call will be approximately 30 minutes in length. We will continue to streamline this process as we go forward, to give you the information you need in a timely and efficient manner.

Now I'll turn it over to Chris for final comments.

Thanks Jim, and just to sum up, 2003 was an excellent year for us, and we're very well positioned for the future. Our revenues increased 20%, and our segment operating profit was up 22%.

We ended the year with another record backlog, brought about by winning several significant new programs. We increased our business base in the fastest growing government IT markets, deployed cash for the benefit of our shareholders, and positioned the corporation for solid growth in the future years.

We look forward to our next call in April, and I thank you for taking time to be with us today.

That does conclude today's teleconference, again thank you for joining us for the Lockheed Martin fourth quarter, year-end 2003 conference call. Again, that does conclude today's call, you may disconnect at this time.