洛克希德·馬丁 (LMT) 2004 Q2 法說會逐字稿

Good day and welcome everyone to the Lockheed Martin second quarter 2004 financial 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 now turn the call over to Jim Ryan.

Please go ahead, sir.

Thanks and welcome to the call.

We have posted charts on our webpage which supplement our comments.

Please refer to the safe harbor on chart two.

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 2003 form 10-K and our 2004 form 10-Q for a description of some of the factors that may cause actual results to vary materially from anticipated results.

Today's presentations and web charts contain non-GAAP financial measures as defined by SEC regulation G. While we believe that these non-GAAP 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.

Please refer to our website for additional details.

I will now turn the call over to Chris.

Good morning and thanks for joining us today.

We've previously communicated our commitments and objectives for the corporation and I thought this morning would be a good time to recap the progress that we've made over the past few years.

I also want to reaffirm our commitment to value generation.

Value for our customers in the the forms of the products an services that we deliver, value to our employees with career development and retention, and of course value to our shareholder who deserve an appropriate return on their investments.

Let me start with our operations and focus on a couple of the key programs and businesses that we've discussed over the past several years.

First, the FA 22 program.

This program continues to receive strong support from the U.S.

Air Force.

In fact, in the second quarter, we did sign the low rates initial production Lot 4 contract for 22 aircraft.

We also obtained long lead funding for the full production Lot 5.

The avionics stability issues of the past are behind us and we've delivered 27 of the 83 aircraft that have been ordered.

The C130 J program has returned to profitability and we currently have 66 aircraft in backlog.

Turning to the F 35 joint strike fighter, we are achieving our weight design targets.

The actual weight reduction and engine thrust efficiency have combined for 2500 pounds of improvement.

While there's more work to do, we are very satisfied with the progress that we've made since our last discussion.

And in the space business, our commercial satellite line of business is returned to profitability and we are signing up a majority of the commercial launches worldwide.

We remain committed to outstanding mission success as evidenced by our 72 successful atlas launches in a row, and the most recent Cassini mission to the planet Saturn.

Let me now focus on our financial accomplishments.

Sales growth in 2003 was 20%, and we're now projecting about 9% growth for 2004.

I'd like it highlight that all five our business areas grew for the second consecutive quarter on the top line.

Maybe more important is the earnings growth.

Segment EBIT grew 22% last year and we are now forecasting more than 10% growth for 2004.

Again, all five business areas have experienced earnings growth for the second consecutive quarter.

Our margins are on track to improve for the fourth year in a row and I'd like to highlight that our electronic systems business area achieved 10% margins in the second quarter.

At Lockheed Martin, we remain committed to high quality earnings and this is evidenced by the ability to track our cash and earnings.

I'll will refer to you the web chart that Jim mentioned, for a little more detail on that topic, that metric and reconciliation.

A few comments on pensions.

We spent the last couple of years talking about the unique pension accounting and disclosures in this industry.

I just want to point out that our 2004 guidance does include a 90 cents noncash expense.

We expect that number to be reduced in subsequent years.

And the cash performance continues to be outstanding here at Lockheed Martin.

We have $1.8 billion of cash from operations through the first six months and we're well on target for our goal of at least 2.4 billion for the full year.

I'd like it spend a few moments talking about cash deployment.

We deployed cash to strengthen our core businesses.

I'd like to focus on three ways we do that.

First of all, our capital investments, secondly research and development, and finally, selected acquisitions.

With regard to capital investments, which average about 2 to 3% of our annual sales, a majority of the focus here is program centric, but we also look for other opportunities to better position the corporation for long-term growth and customer value.

One such example is the global vision integration center.

This is a state of the art facility that will allow us the opportunity to operationalize our horizontal integration architectures.

Customers can use the concepts that we develop.

It also allows for rigorous testing and real time simulation and the ability to model various concepts of operation.

I think I've mentioned previously our center for leadership excellence.

We continue to invest in the people here at Lockheed Martin to make sure that we have the talent and leadership available to assure that we achieve the objectives that we've set.

Turning to independent research and development, this average is about 2 to 3% of our annual revenue.

While a majority of the focus here is on the classified arena, we are focused on network enabled capables, developing new nodes, and improving the reliability and predictability of our systems.

Relative to selected acquisitions, we've made three over the past couple of years.

OAO, [Aurecon], and ACS federal.

All three of them fully integrated and we have met or exceeded our savings targets.

A majority of the revenue from these three acquisitions focus in the information technology arena.

And I want to remind you that 25% of our revenue is derived from contracts where the end product is an IT solution and IT product or an IT service.

We have 30,000 employees focused in this high growth area and we continue to be rated the number one federal IT contractor.

Continuing with cash deployment, we will of course return value to our shareholders through a competitive dividend.

I should remind you that less than a year ago we did double our dividend and we will continue to review that on at least an annual basis and adjust accordingly.

We were opportunistic with our cash deployment.

With share repurchases, since December 2002, we have repurchased over 17.5 million of shares, will including almost 6 million shares in the most recent quarter.

We have been opportunistic historically with debt reduction and debt restructuring and our target credit rating remains BBB+/BAA1.

We are getting close to there with the three rating agencies.

Just a few comment abouts the future and our expectations.

We expect the budget to continue to grow for defense, homeland security and government IT.

We expect the Lockheed Martin programs to continue to receive strong support in those budgets.

We're focused on maintaining our strong operational tempo and mission success.

We're committed to strong and consistent financial performance and we're focusing on cash deployment to strengthen the core business and enhance shareholder value.

So with that, Chris, we'd like to open up the lines to any questions.

Thank you, sir.

At this time ladies and gentlemen, if you would like to ask a question, please press the star key, followed by the digit one on your touch phone telephone.

In the interest of time, we are asking that you limit yourself to one single part question only.

We are not taking any follow-up questions today.

As a reminder, ladies and gentlemen, if you would like to ask a question, please press star, one.

We'll take today's first question from Byron Cowen with Merrill Lynch.

Good morning, Chris.

Nice quarter .

You mentioned dividends and you were going to review the policy.

Can you just refresh our memories.

How are you benchmarking your dividend?

Are you thinking about just a standard payout ratio or are you looking at peers, can you just shed some light on that?

Sure.

First of all, thanks.

For the dividend policy, when I talked about remaining competitive, we tend to look at the yield relative to our peers and S&P 500.

Relative to a payout ratio, we focus on our adjusted earnings per share, which of course, factors in the noncash pension.

So it's really the combination of those two and we're pretty much on a path to review that kind of in a fourth quarter time frame.

So that's are the two considerations that we try to balance.

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

Actually, Chris, given the multi mission aircraft decision, you guys are now almost all out of maritime ASW.

You've got a little bit of stuff in seminar dipping.

Is that a market that you project to be growing slower than the rest of overall defense budget or do you have a strategy to kind of strengthen that part of the business?

Heidi, we obviously have a strategy to continue in that market.

We've had a long history of work on the P3 and the S3.

We think there's -- continues to be opportunities for enhancements and upgrades relative to the older aircraft and we've had a good track record of performing there on the modifications, both with the United States and internationally and we'll continue to pursue that market. .

We'll take our next question from George Shapiro with Smith Barney.

If the contingent convert rule gets changed by FASB, you go through the impact, what you can do about it and is that part of the reason why you did raise your earnings guidance because it sure seems like you'll do better than 260 for the year.

Right, George.

There's a couple -- couple of factors, you know, relative to changing our EPS guidance.

First of all, you know, I will point out that with did indicate that we think we'll be closer to the higher end of the range and just a quick comment on that as I look back a few years ago, we used to give a specific EPS number.

We broadened the range to about a nickel and now we're giving a 10 cent range on earnings, a hundred million range on EBIT and a billion dollar range on sales.

So trying to be a little more accurate in our forecasting I think, has allowed for these wider ranges.

So I believe we did try to tend towards the higher end.

But to your specific question, that is an uncertainty out there that we are continuing to look at and understand.

The FASB clearly has not come down with definitive guidance on the contingent convertible.

I think it's about a 6 to 7 cent impact per share if adopted and we had to go back and restate to the beginning of the year.

Clearly that's one of the considerations that we want to get a little more details on that.

There is a view that if we commit or settle this, you know, 1% debt in cash, we may be able to exclude it from the calculation and we're really just awaiting further guidance on that.

Economically this has no impact on cash.

As you know, it's just an EPS calculation.

That was one of the main factors that we wanted to wait on relative to any change in EPS guidance.

There are also some competitive awards due out in the third quarter and of course cash deployment is something that we always consider.

You know, our policy is not to adjust any guidance until the cash is actually deployed, whether it's an acquisition where it's closed or if shares are repurchased that they are considered and of course if we do anything with debt, we don't reduce the interest until the deal is closed.

So you should think of the cash on the balance sheet in our guidance kind of in that 1 to 2% earnings range and if we're able to deploy it and earn more, we'll adjust accordingly.

We'll take our next question from Howard Ruble with Schwab Soundview Capital markets.

Chris, you continue to leave the three what I'll call electronics, IS, and S&I T&S businesses as a lump item.

Is this an indication that you might consider still reorganizing the business and -- to improve the cost structure further of that operation?

Yeah, Howard, that's not necessarily what we're highlighting here.

What I'd like to focus on is I think it's more meaningful for people to see the fact that we have, you know, $16.2 billion to $17.2 billion of revenue in the electronics IT and systems integration arena.

I mean, we'll continue to break it out on a historical basis.

We're focused a lot more on horizontal integration and having the different companies work together and it's not always obvious as to which entity would be the lead prior to getting more information from our customers really presenting the best solution going forward.

So it seems to be well received and, you know, it's just a decision to better communicate with you guys as to the break out of the corporation.

So we plan to continue with that.

We always look for opportunities to reduce costs and remain competitive.

That is not currently on the horizon.

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

Good morning.

Cash flow, you didn't change your guidance for the full year of about $2.4 billion of cash from operations and you've generated a little bit more than a 1.8 billion for the first half of the year.

You know, I noticed you've projected a customer advance burn of around $1 billion to $1.4 billion.

You've done half a billion already for the first six months.

My question is, is this just conservatism or are you expecting the improvement you've realized in the first half of the year from receivables and inventories to reverse course in the second half the of year?

Good morning, Steve.

You know, the guidance that we've provided is really trying to focus on tracking the cash and the earnings, which is clearly what's happening here.

The guidance that we gave previously was about a 1 billion to a 1.4 billion.

We are experiencing about half a billion as you pointed in the advances.

We expect that trend to continue in the second half and we're currently estimating half a billion to $1 billion of advanced burn for the full year.

Clearly if we don't achieve that level, we'll drop to the bottom line but it would really be a timing issue between, you know, 2004-2005.

Clearly there was a focus on cash generation in anticipation of closing the Titan transaction.

As you mentioned, just very strong performance in receivables and inventory.

We probably aren't going to be able to sustain a $900 million improvement on working capital but we'll see what we can do.

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

Good morning.

And Chris, you're welcome for the question.

No, seriously, space had the best quarter they've had I think since 1999 with 8.3% margins.

And I wondered if you could just give aus little more color on what's going on in space and whether there's any reason to think that this margin is not sustainable and whether it needs to retrace, you know, over the second half of the year and out into the future.

Thank you.

Okay.

Thanks, Joe.

Relative to space, let me focus I guess the question is really on the earnings.

The first half of the year was very strong, mainly driven by commercial space.

We've talked about commercial launch vehicles.

We had, as you recall in the first quarter, a termination of a contract that improved our earnings.

We've had six launches year to date, a little front end loaded relative to the full year, and we had two commercial satellites that were both profitable that were delivered and deployed in the first half of the year.

So the space business tends to be a little more lumpy relative to specific events as we've talked about, we recognize revenue in a lot of the space business upon actual delivery and with the front end loading and the more profitable launches in satellites, I think that's what, you know, what we're experiencing here.

We still have good confidence in the EBIT range that, you know, is still in the $430 million to $480 million range and those are the main contributors.

So the space business as I mentioned in any opening comments is really improved.

It's been a focus program for the management team an I think we're starting to see the results pay off.

We'll take our next question from Cai Von Rumohr with SG Cowen.

Good quarter.

You had good performance in all of the businesses, cash flow looked good.

And you kind of updated guidance for '04, but you didn't say anything about '05 and you have talked about '05 before.

Could you kind of, you know, give us some color on '05?

Was the reason not to have the update the [Coco] issue or you know what are you looking for for '05?

Yeah, Cai.

Thanks first of all on the comment about the quarter.

You know, 2005 probably the big variable on the EPS is going to be, you know, the pension FAS/CAS item, which as we talked about in the past really won't be known until basically late December, early January.

We've given a very wide range on EPS, you know, almost 35 cents.

And again, I think that provides a lot of variability for the various items we've mentioned.

The Coco as you mentioned, we'd like it get resolution on that.

Clearly, you know, there's a fair amount of press on the [NLSAT] and the fact that they're going through a sale process and we're a significant owner of that and that needs to be factored into the guidance.

So it really -- you know, wasn't a conscious decision to do a thorough refresh of the '05 guidance at this time.

We'll look at it, you know, later in this year and update it accordingly.

We're feeling pretty good about the budget, about the programs being supported in the budget, operations are remaining very strong and I have very high confidence in the '05 guidance we previously given.

And we'll consider adjusting that later in the year as we go through our planning process.

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

Thanks, good morning.

My questions on aeronautics.

Chris, on both the sales and EBIT sides, you are more than 50% past the top end of your range on sales you're over 6 billion, and the top end of your guidance is 11.4.

Similar situation on EBIT.

Just wondering what you expect to slow down so dramatically in the second half of the year.

Yeah, first of all, thanks, Joe and I'm going to -- I'm make just a high level comment or two and I'll ask Jim to give you a little more detail.

Your observation is right.

I do want to remind you that we do recognize revenue for the most part on a unit of delivery method and, you know, Jim will get into the specifics.

But basically the answer is going to be combat air and F-16 for the remainder of '04.

Probably a similar comment on 2005 and in my opening comments I mentioned the fact that we do -- we did sign up and did get long lead funding on the production Lot 5 for the F/A-22 and consistent with our accounting policies that we disclosed previously, we will be converting the F/A-22 to a unit of delivery method with Lot 5, which is more of an' 05 answer than an '04, but Jim, do you want to give Joe the backup?

The combat air is going to be the majority of the decrease in the second half of the year versus the half of the first year.

About half of the F-16 deliveries in the second half of the year will be on a POC basis where as the great majority the first half of the year were on units of delivery.

Other than that, there aren't too many other changes first half to second half, a little bit here and there in a few places.

I would want to point out though that the margins in the second half the of year are likely to be a little bit higher in aeronautics than the first half of the year as the profitability is very solid and improving.

We'll take our next question from Gary Lebowitz with Jefferies & Co..

Good morning.

Chris, can you comment on the Inspector General's report that just came out on the C-130J.

It was mostly critical of its meeting requirements and if if this has any effect or can have any effect on the sales and EBIT booking profile going forward.

Thanks, Gary for the question.

I don't anticipate that this will have any impact the C-130J program or the guidance that we have provided.

I think the Air Force, U.S.

Air Force has stated their disagreement with the findings in the report.

We're in full agreement with the U.S.

Air Force and their response.

The C-130J program is an element of -- does contain an element of spiral development.

We as a corporation made a significant investment into that program and we've been successful in selling that, not only to the U.S. but internationally and each customer, you know, reviews and decides how best to use the aircraft in operation and further developments and enhancements are made or spiral development, which the Air Force has been very supportive of.

I will point out that it is used in Iraq and Afghanistan, by the Royal Air Force, the Royal Australian Air Force, and the Italian Air Force and the Marines have said that it will be operationally suitable in September of this year.

The Air Force plan was to have this aircraft tested and mission ready by December of 2005 and we believe we're on track to meet that commitment, and that's probably, you know, probably all I can add based on that.

We still need to get through the report and work the process.

Obviously, we'll keep you abreast if there's any change to it.

But the program is performing well.

It's returned to profitability and we're looking for other opportunities internationally to continue to sell the plane.

We'll take our next question from David Strauss with UBS securities.

Good morning.

Your F-16 deliveries for 2005, I think the guidance is 70 to 75.

How many of those are going to be on a POC basis as compared to 2004?

All right, David, I'll have Jim go through the details again on the POC/POT.

Okay.

The -- it looks like 2005 would be approximately two-thirds of the POT delivery versus POC.

Okay.

We'll double check that number.

I think it's -- we'll get back to you on that one, David.

We'll take our next question from David Gremmels with Thomas Weisel.

Thanks.

Chris, can you give us a comment on how F22 IOT&E is going, and you mentioned improving aeronautics margins in the second half.

Is that a change -- is there a change to the profit rate on F 22 or what's driving that?

Yeah, David, the -- you know, we're limited in what we can say on the IOT&E, you know, because the Air Force is running that program and doing an outstanding job.

All indications that we get are very positive, you know, you'll read about the F/A-22 in combat with F15s and the success that it's having in the simulated battles as one example.

But all indications are that it's going very, very well.

But we really do have defer to the Air Force and their public comments on that front.

Relative to the improved, you know, the improved margins, you know, F-16s is a little bit of a contributors to that.

The C130 J as we'll start delivering some of the multi year air craft in Q4, which will have a little higher return, double digit return compared to the other C-130s and of course, you know, F/A-22 and F35 are relative stable from what we've done in the first half, so I think these those are going to be the main drivers.

We'll take our next question from Jared Murra with Prudential Equity Group.

Thank you and a very nice quarter.

I just note you note in your second quarter highlights that you were awarded one of two industry contracts on the space-based radar.

Starting to see some indications that that project, that program is maybe cut back or may not be able to do what has been promised.

I'm just wondering if you can give us a sense of what you're hearing from the customer on that.

Right.

We're -- thanks for the question and your comment about the quarter.

I mean, we're seeing the same information based on the budget.

It appears to a little bit of a stretch out relative to the initial award.

The final award, which was always planned in the 2006 time frame, so we would expect that we would continue to execute on one -- one of the two down select.

I think it's in the maybe $100 million range.

There could be a slight cut to that, but it's not obviously significant to the near term.

And we have very strong backlog in the space business.

We're working on a variety of satellite constellations and I think it's a good time to have the backlog and the programs that are fully supported.

So we'll continue to see how this develops, but we'll work with our customer, see how we can help them achieve the mission they want and get the congressional support to fund it.

We'll take our next question from Eric Hugel with Stephens Inc.

Great quarter, guys.

My question, for the rest of the year, can you give us sort of a run down as to what the major programs that you guys are going to be competing for and approximate size?

Okay.

Well, thanks, Eric.

Let me answer that and then I'll ask Jim to give a little more clarification on the earlier F-16 question.

Relative to new business that we're competing for in the third quarter, the win key program with the Army.

All these programs have the potential to be several hundreds of millions of dollars or even billion dollar type programs.

The original or the initial contract that is booked could be significantly less but it really is a long-term timing.

Win key also is known as ISPAN within our integrated system and solutions business.

The joint tactical radio system, the battle management command and control, a recompete for the Social Security Administration in our government IT arena, the UOS satellite for the Navy, obviously the aerial combat sensor, a couple of post office jobs in the space world we're bidding on the Jupiter IC moon orbiter on the space exploration front.

A couple of jobs with NASA, of course MEADS for the national missile defense and the U.S. 101 helicopter all come to mind.

So, you know, there's a dozen or so that you may have recognized.

There's also tens if not hundreds of other IT contracts that may be not be recognized by name but they're task order or smaller, you know, smaller individual awards.

A variety of these, you know, we had talked about as possibly being first or second quarter, they tend to slip here and, you know, it's one of the other reasons that we want to see the timing of these awards before we make any adjustments.

So Jim, do you want to talk about the F-16?

Just to clarify the F-16 mix in 2005, it will be about 50% units of delivery versus 50 % POC and for the full year 2004, we are expecting about two-thirds to be units of delivery and one-third POC.

Okay.

Thank you.

We probably have time for one more question.

We'll take today's final question from Troy Larr with Legg Mason.

Thank you.

Wondering if you can talk a little bit about the F 35.

You talked about the weight reductions and you were able to I guess offset around 2,500 pounds.

You still said had you work to do.

Is all the weight taken out that have to where you have that where it needs to be or do you still have more weight issues to go?

Yes, Troy, I mean, I want to remind you, we're in our third year of development in a 12-year program.

I think the numbers that have been talked about previously were in approximately 3,000 pound range.

So, you know, to give you a perspective, you know, there's 2500 pounds out.

So, you know, another 500 or a 1000 pounds to go will give you a rough order of magnitude.

But this is a significant improvement in a relatively short period of time and we're pleased with the progress that we've made.

So, Chris, with that, I think we're going to wrap up the call.

I just just like to leave everyone with a couple final thoughts, let you know that we are striving for operational excellence and focusing on a performance to satisfy our customer needs.

We are going to continue to pursue and capture the new business opportunities across all of our business areas.

And you can expect high quality earnings with a continued focus on earnings growth and we are committed to a disciplined strategy to grow the shareholder value, building on the foundation that we reported to you today.

So I want it thank you for joining us and look forward to speaking with everybody in the third quarter call in October.

Thanks again.

Once again, this does concludes today's conference.

We thank you for your participation.

You may now disconnect.