洛克希德·馬丁 (LMT) 2004 Q3 法說會逐字稿

Good day everyone and welcome to this Lockheed Martin third quarter 2004 earnings results conference call.

Today's call is being recorded.

With us today are Mr. Chris Kubasik, Executive Vice President and Chief Financial Officer, and Mr. Jim Ryan, Vice President Investor Relations.

At this time for opening remarks, Mr. Jim Ryan.

Please go ahead, sir.

(Technical Difficulties - no audio for 26 seconds) -- and our 2003 Form 10-K and our 2004 Form 10-Qs for description of some of the factors that may cause actual results to vary materially from anticipated results.

And now I'll turn the call over to Chris.

Thanks, Jim, and good morning.

We had an outstanding third quarter at Lockheed Martin when you look at our performance strategically, operationally, and financially which contributed to a solid nine months and strengthened our full-year outlook.

We increased our guidance for the remainder of 2004 and we updated our previous 2005 guidance that was issued in January to reflect the improvement that we're now seeing.

I refer to you our press release and the web charts for more details.

Some of the third quarter highlights included our outstanding cash flow.

We generated over a billion dollars of cash, after considering a $400 million pension pre-fund.

We focus on consistency relative to cash here at Lockheed Martin, and for the second consecutive year we are in position to be cash positive each and every quarter.

Our backlog has grown to over $75 billion driven by key strategic wins and we continue to expand our segment margins on track for the fourth consecutive year of margin improvement.

The three areas I'd like to address before we open it up for questions are; new business, program execution, and some financial strategies.

Let me start with the new business performance.

You really have to go back about 16 months ago when the corporation decided to set up its IS&S, integrated systems and solutions area.

As a reminder, that's the business area where we have our top systems software architects, developers, and engineers.

This business area has two goals.

Number one, compete for the high end work.

Number two, to work with other business areas so that by working together we can bring all the Lockheed Martin capabilities to focus on our customer solutions.

The second goal we refer to as horizontal integration.

We've also noticed that our customer solutions are demanding more and more information technology content and want to remind you that more than 25% of our revenue is derived from contracts where the end product is an IT service, an IT solution, or an IT product.

And that is a much larger number if you consider the IT that we have embedded in our products, such as the radars, the ground stations, the satellites, and the aircraft.

I believe the combination of our horizontal integration and our world-class IT capabilities led to some significant new competitive business wins this year.

Several of these will last decades and ultimately be worth billions of dollars.

A few I'll highlight for you are the joint common missile, the aerial common sensor, the MUOS satellite system, MEADS, and ISPAN for the U.S. strategic command.

We also identified adjacent markets where our demonstrated core competencies directly apply to adding value to our customers, and we are making progress in those pursuits.

For example, in ship building we won the Littoral combat ship program and we just passed our interim CDR, or critical design review.

In the military communication line of business we were down selected on the AMS JTRS contract and we teamed to win the WIN-T program for the Army.

As many of you know we are in pursuit of the U.S. 101 presidential helicopter, which should be announced later this year.

When I look for a common theme I see all of these programs utilized our system integration skills, our systems architecture experience, our whole system thinking, and our IT capabilities.

By aligning our core competencies and strengths with our customer needs, we should have over $70 billion of backlog for the fourth consecutive year.

Let me now focus on some of the key programs and lines of business we've talked about over the last several years, and tell you about the progress the management and leadership of this corporation has made relative to risk reduction.

I'll start with the commercial satellite line of business.

In the first quarter of 2003, we made the decision to keep this line of business to streamline the operations and return it to profitability.

One of the thoughts in doing so was to position us to win the MUOS program which we did earlier this quarter.

I'll also mention that Frost and Sullivan awarded us the most reliable satellite award for excellence just last week.

Let me turn to our launch vehicle business.

The new orders and the sign-ups have been strong as we've signed up about a dozen so far this year.

We currently have 24 in backlog and we have an additional dozen launch vehicles that have been assigned to us and will be added to backlog once the contract is definitized.

Our major focus in launch vehicles continues to be mission success.

On the Atlas 2 program, we launched the last Atlas 2 in the third quarter, resulting in 63 launches and 63 successes, 100% success over the life of the Atlas 2 program.

We currently have 73 consecutive Atlas' in a row, including one just two weeks ago.

The west coast pad is on schedule and on budget, and we're prepared for our first 2005 west coast launch.

Let me now focus on the F/A-22 program.

We're excited about the progress and performance of this program.

The avionics, stability and the software is performing well.

The Air Force run IOT&E testing is tracking to plan, and the program was funded for 2005 and continues to have strong support.

We are a front running our delivery schedule relative to the production of this aircraft.

On the joint strike fighter, or the F-35 program, the weight reduction has been identified and we're tracking the plan.

Once again this program was strongly supported in the '05 budget process.

On the C-130-J program we talked about returning this program to profitability in 2004 and we've accomplished that.

Finally, relative to the disposition of our commercial telecom satellite we have announced deals for Intelsat, New Skies, and Com gen, all of which should close in the next 90 days.

Let me make a few comments on financial strategies.

The corporation has a renewed focus on ROIC, return on invested capital.

This culture is driven from the top of the corporation and led by Bob Stevens.

All of our employees understand this metric and the operating companies can easily calculate it.

It's an important factor that we utilize in our decision making process.

We've committed to a 50 to 100-basis point improvement in 2004 and 2005 and I'll refer to you our web charts for more details on that initiative.

Let me wrap up with a few comments on cash deployment.

We've previously talked about our balanced strategy and approach and we are executing upon that strategy.

First, we want to continue to make the appropriate internal investments to grow this corporation.

Our focus is on innovation, training of our employees, and improving our efficiency.

This is done through our research and development and capital expenditures.

Secondly, on the dividend front, last quarter we announced a 14% increase in our dividend to $1 a share annually.

We plan to look at our dividend each and every fourth quarter starting in 2005.

We expect to be at a premium to the S&P and comparable with our peers.

On the share repurchase front we repurchased over 3.5 million shares in the third quarter of '04, bringing our total to an excess of 9 million shares for the year, and approximately 21 million shares since we implemented this program approximately two years ago.

On the debt front yesterday, we announced the early retirement up of to $850 million of debt, we focused on near-term maturities that, in our opinion, were somewhat expensive, approaching 8%.

We believe this will improve our credit standing, credit ratios and increase our financial flexibility.

This obviously reduces our interest expense and improves our earnings for 2005 and beyond.

We pre-funded our pension plan for $400 million, which is tax deductible.

This basically satisfies most of our '05 funding commitment.

On the acquisition front we continue with our disciplined growth strategy to look for opportunities to grow our core government business.

We refer to these as bolt-on acquisitions, and we will keep you informed as we make progress.

On the acquisition front I will mention that we have an outstanding process that has worked well as we've integrated four acquisitions successfully in a quick and efficient manner, meeting or exceeding our cost savings targets and our financial objectives.

So in summary I believe the Company is in stronger position now than it was at the beginning of the year.

We've improved our outlook with a focus on cash, margins, and ROIC.

We continue to attract and retain the top talent, and have a committed work force focused on meeting our customer expectations.

With that we'd like to open to questions.

Thank you gentleman. (OPERATOR INSTRUCTIONS)

Thanks.

Good morning.

Good morning, Joe.

Chris, I was hoping could you provide a little more detail on the F/A-22 margin adjustment.

Was there anything -- I mean, can you give us your new margin on the program, and can you maybe explain the complexities with regard to the different contracts that you're currently accruing revenue on?

Sure, Joe.

Thanks.

On F/A-22 there are several underlying contracts from basically lot 1 through lot 4.

We had traditionally been booking this in the lower single digits, we're now in the mid single digits.

Mainly a result of having made our final Lot 1 delivery, finalizing that estimate to complete and making the appropriate adjustment which obviously was favorable.

So that was the key driver.

We would expect in 2005 to even have further margin improvement.

Lot 2 is progressing well.

We've made a couple deliveries on that front.

Really does look like this program is in much better shape than it has been previously.

As a follow did you know, if I get one --.

Sure.

On the ROIC focus, I guess a couple of things, why now?

Why are you emphasizing this now?

Does this have anything to do with Bob becoming CEO?

Secondly, have you changed any of your compensation metrics to focus more on ROIC than they did before?

Sure.

Well, we think that this is probably the most important metric, and it drives the right behavior.

I think with Bob taking over we wanted to renew this focus, and, yes, we have adjusted our compensation plans to realize this metric and the need to improve it.

So it has been worked in, in addition to our other metrics.

Thanks.

Thank you, Joe.

We'll move next to Heidi Wood with Morgan Stanley.

Couple of questions on aeronautics and on cash flow guidance.

Did you 8.1% margins, best performance since third quarter '01, and that's before you get the C-130J multi-year deliveries, which I guess begin in fourth quarter.

You talk about better margins in the F/A-22 as we go into '05.

So couldn't we see margins in '05 above where we are in the third quarter of '04?

Yeah, Heidi, on the -- I think that's a fair observation.

I will point out that in 2005 the F-16 program will -- which has pretty good margins, will be reducing from the revenue side, and clearly the earnings.

You know, we've given our guidance.

You see a significant improvement in margins in aeronautics '04 over '03, and we're predicting 40 to 60 more basis points from '05/'04.

I think that's a fair observation.

I wanted to understand better the revised guidance in aeronautics from your new '04 and new '05.

When you take a look at the range it looks like you took 1 to 2 C-130Js out of next year which would account for 120 million of the lower '05 sales versus prior guidance.

Anything else that would be driving why '05 might be down?

Is it those F-16s?

Why don't I ask Jim to take you through the detail.

Heidi, for the F-16 we expect deliveries to be a little bit higher in '04 than '05.

We had a range out there earlier, but we expect to be a little bit better in '04, as we're accelerating some of these deliveries.

Also, we have the mix of revenue recognition with units of delivery versus versus percentage of completion and we have more percentage of completion versus units of delivery in '05 versus '04.

The C-130Js are pretty much -- C-130Js would actually be about the same.

Heidi, I want to mention, relative to aero guidance and 2005, I think what we've done here, we've actually increased our guidance on aeronautics, both from a sales and earnings perspective.

Our previous guidance for '05 was 10.4 to 11.4 of revenue, we're now saying 10.9 to 11.4, so we've raised the lower end.

More importantly, our focus has been on margins and earnings, the range of 850 to 900 of EBIT is now 870 to 910 of EBIT.

The way I would look at it, is more volume and higher confidence in the progress we've made on all these programs.

Right.

But when I do those numbers it's half a billion dollar add from the low end, but yet you increase more substantially the new but I see the pull-forwards that could account for it.

Question on the cash flow.

In '05, again, the change from your old versus new, looks like about a 250 to 350 million increase in guidance, and I assume that's a combination of improved operational performance but does it also include a slower burn rate on customer advances?

Yeah, I think that's a good summary.

Combination of more earnings driving -- as we've talked about before, our earnings and cash clearly reconcile better negotiations on performance-based payments and a slight decrease in the customer advance burn-off.

We'll hear now from George Shapiro with Smith Barney.

Good morning, Chris.

Nice numbers.

Thank you, George.

On the customer advances it was up by 337 million dollars sequentially.

As opposed to kind of the expectation of going down.

So what did you wind up getting advances on in the quarter to make that happen?

Yeah, it was mainly driven by one large international combat aircraft consistent with our plan.

For the full year, we still are projecting about a $500 million burn-off in advances.

That's a little less than previous guidance, but we are seeing that burn-off occur, and we expect that to continue in 2005, you know, maybe in the $300 million to $500 million range.

Basically one customer payment as expected.

And if you looked at this quarter also, inventories dropped like by 259 million.

I assume that's probably due to the step-up in F-16 deliveries.

Was there anything else in there?

Yeah, I think that would have probably been the, you know, the main driver, inventory also increased, and as we move things from inventory, you know, in to receivables, you know, it just ties in with the revenue recognition.

So receivables is part of where the movement goes.

And where are we in terms of fully diluted shares outstanding at the end of the quarter?

I'm just trying to see how much head wind -- I mean, how much benefit we're actually able to make in reducing the overall shares outstanding.

Yeah, we're in the $446 million range.

I think when we implemented the share buyback we were in excess of 452 million shares just a few years ago.

So it's more than countering the dilutive effect, some of the employee options and 401(k) match, but that's how we see it.

Of course, it is on a weighted average basis so you would get more of a benefit for the full year in '05.

We'll now hear from Bear Stearns, Steve Binder.

Good morning.

Back in the 10-K you talked about the majority of the free cash flow being returned to shareholders over the two-year period, '04-'05, looks like your revised free cash flow guidance, you're averaging close to 2 billion a year for free cash flow in '04 and '05.

Based on your share buyback pace and your dividend stream this year, looks like you're kind of running at 55% of free cash flow.

You talked about a majority.

Is that the kind of run rate we should be looking at, on that order of magnitude of 55%?

Because, you know, free cash flow has bumped up here nicely.

Or should we look at a step-up in the buyback pace compared to what we've seen recently?

Thanks for the question, Steve.

We talked about that as being obviously a majority, more than 50%.

We really are looking at this on an opportunistic basis.

We've talked about a balance.

That's why we decided to work on the 850 million of near-term debt.

It's going to depend on a variety of items, including, you know, the price of the stock and other options to deploy our cash.

I think at this point we've made, as you said, pretty good progress.

We have to respect any blackout periods that are in place, and, you know, some of the other constraints when it comes back to buying your stock, but we plan to continue to make progress on this front.

In fact, later this week we'll file our 10-Q just to give you a heads up, and you'll see that during the quarter we did enter into some structured stock repurchase transactions with financial institutions as a supplement to our stock buyback program, and those have, you know, one of two outcomes.

You either get your cash back with about a 20% annual return, or you get stock, and in both transactions we were -- received our cash, so that could have been another 2 million shares, approximately, but based on the terms and conditions of the agreement, it turned out to be a 20% return on our cash, which we thought was pretty good anyway.

So we're looking at a variety of ways to try to satisfy that goal.

But I would expect at least a 55% and we'll keep you abreast as we move forward.

The C-130J profit rate looked like you ran about a 10% margin in the third quarter, compared to roughly in the 7.5% range in the first six months of the year.

Is that the mix that we saw here, or what happened there?

Yeah, I think -- I would say the C-130 just for the quarter was kind of mid to upper single digits, , so you know, we're not quite at 10%.

When we start making the multi-year deliveries here in the fourth quarter, those will be at 10%, and clearly 2005 and beyond we would expect to be double digit.

Moving on to Glenn Engel with Goldman Sachs.

Couple of questions, please.

When I'm looking at your net interest expense forecast it's basically flat '05 versus '04 yet you're repurchasing 850 million debt, you're generating free cash flow next year, so what am I missing?

Glenn, we don't update our guidance on any transactions until they're actually closed, so when the debt tender is complete, and we know the exact amount that was tendered we'll obviously adjust, but basically there were no maturities scheduled, you know, '05 compared to '04, and that practice, I think, serves us well.

If we hit the $850 million range it would be an additional, you know, 10 cents per share is my current estimate, but that is not built in.

Thank you.

Second, the F-22 you're moving to go to full-rate production, hopefully by year end.

I don't know if that's true or not but, is that built into your numbers at all, and could that have a meaningful impact?

Yeah, I think you're referring to a (dab) that's scheduled to approve the full rate production.

Relative our '04 and '05 guidance, full rate production will really be defined as the Lot 5 contract, which should be awarded and definitized in 2005.

I think the key point, and I'll Jim to give you a little more color on this, is as we evolve from Lot 4 to Lot 5 as we've previously talked, about our revenue recognition does switch from a percent complete basis to a unit of delivery basis, and you'll start to see some of that impact on the revenue until those units are actually delivered.

Jim, you want to give a little more detail on that?

Yeah, the F/A-22 as Lot 5 gets started in 2005, will not be recognized in revenues, it won't be recognized until delivery.

They'll start delivering in 2007 .

We'll continue to book sales in Lot 2 and Lot 3 in 2005.

And, of course, Lot 4.

So, you know, as we make this transition it equates to something like half a billion dollars in total sales.

Does it boost margins as it brings down revenues?

No, it actually would have no impact on our income statement.

I will mention from a cash perspective it has no impact on our cash.

We'll continue to bill and collect the cash on the F/A-22 program, consistent with our negotiations and our contractual terms and conditions, which are performance-based payments.

But the actual revenue, just like we do on any unit of delivery program, you know, will be an inventory, and when those are delivered in '07, I would expect those to have pretty good margins, but in the interim we'll just continue with percent complete for Lots 1, 2, 3, and 4 over the next couple of years.

We'll move on to SG Cowen's Cai Von Rumohr.

Thank you very much.

Pension.

You've got a range for next year of 300 to 550, presumably that encompasses potentially lower discount rate. could you give us a little color on the sensitivity, each 25 basis points, the impact of the 400 million you've prefunded and if there are any change in the ROA assumptions?

Right, Cai.

Actually that range is what we gave in January of '04, and as we put in our press release and have said all year, we don't adjust those assumptions until January of '05.

I'll ask Jim to give you the sensitivity, there's obviously a lot of moving parts in the pension area, discount rate clearly being one of those.

As I looked at the corporate bond index just this morning in anticipation of this question, the variability in that has been somewhat unusual, almost 100 basis points.

So, you know, in May of '04, I probably would have been close to a 7% discount rate.

If you asked me in September, I would be 5.75.

It's for that reason that we stay with the initial assumptions carrying through this year, and then, of course, we'll give you a very specific number in 2005, but I'll ask Jim to give you rough order of magnitude on the sensitivity.

Cai, for every 25-basis point change to the discount rate, that would equate to about 80 million of EBIT.

For every 25 basis point change in the long term expected rate of return, that would equate to around 50 million of EBIT.

To the extent that the actual return is different than the 8.5% expected return for 2004 calendar year, every 100-basis-point difference we equate to about 10 million of EBIT.

Presumably the range encompasses, so, you know, you still expect you wouldn't go over the 550 as you see it today?

The range is based on -- the rates that we have now built in.

Yeah, I think the best way to say it, Cai, there two are pieces.

Jim just talked about FASB piece, the FAS 87 expense, which directionally will go up.

And the CAS, you can't finalize that until the end of the year, as it's contingent in length with the IRS calculations, and it looks like that will increase significantly.

So if you look at the CAS/FAS difference, that's the unknown.

There are sensitivities that could be contained within the range, but upward or downward we're just going to wait for the actual numbers to play out here.

We'll move now to Joseph Campbell with Lehman Brothers.

Good morning.

I guess the question about whether the debt payback is in the guidance has been asked and answered, is that it's not.

I wonder relative to Steve's question, Chris, whether the impact of the planned return of at least 50% of the money in the form of dividends and share repurchases is in the number or not?

In other words, do we need to plan on changing these numbers by whatever the impact of the 2005 share repurchase program might be?

Right, that's a good question, Joe, and good morning.

You're correct on the debt tender that is not in, and will be trued up, and relative to our guidance on the return to our shareholders, we've put in just 50%, you know, in the base plan.

So the dividends would come out first, then the Delta, probably another 25% just to get to 50, 51%.

That is built into the model.

But, of course, we also assume option issuance and 401(k)s, so there are a lot of moving parts, but anything above and beyond that would clearly impact our earnings favorably.

So you've got several hundred million dollars of share repurchase in your guidance numbers.

Yes, we do.

Spread evenly throughout the four quarters.

So, you know, and that's practice we've generally had.

I'll also mention a lot of the divestitures like Intelsat and New Skies, we keep a consistent practice of not including the other 800 or 900 million of cash that we're going to get in our forecast, either, so I think that practice has served us well.

Joe, we also have assumptions in the 401(k), ESOP, the matching stock, we also have assumptions as Chris mentioned, on stock option exercises, so obviously there's so many variables to this, it's difficult to exactly calculate what the shares are going to be.

What number should we use for that?

I don't know if it's in there.

Is it?

I would assume flat.

I see.

Just on the options, do you know when you will adopt the standard, and will it change your option issuance activity to something like RSUs or something else, or what's the current thought process if you haven't made a final decision?

Well, my thought process has always been we'll adopt it, obviously when it's required and finalized, and I think just some of the activity in this quarter alone has shown the variability, you know, relative to the timing, and I think our decision to adopt the rules once they're issued and finalized seems to make the most sense.

Relative to our overall compensation structure, you know, it's under review, and I would put this in the category of another non-cash expense and I would expect, you know, years from now we'll be given guidance had we not expensed options, just like we are with our FAS/CAS pension.

It is a consideration and we'll see what makes the most sense.

Obviously our compensation committee and Board of directors will have a lot of insight relative to that matter.

Moving next to Troy Lehrer (ph) with Legg Mason.

Thanks.

You had modest growth at electronics system.

You cited lower volumes on air defense programs.

Can you cite what was going on there?

Something winding down?

Was this just kind of a timing issue?

It's really a timing issue on some missile defense programs in the quarter.

You're going to see a little better growth in the fourth quarter for those same programs.

It's really timing, Troy.

Okay.

Then also, at aeronautics, your work on the C-5, how long is that going to go on?

At least 10, maybe 15 years when you look at both the avionics modernization program and the reengineering program.

So 10 to 15 years.

We'll now hear from Thomas Weisel Partners' David Gremmels.

On the Intelsat situation, is there any legal obstacles that remain to be navigated there, or is that pretty much a done deal?

My understanding, it's pretty much a done deal.

On the pension sensitivity that you discussed, just want to confirm that was FAS only, and can you tell me what's that relative to?

Is that relative to the 900 million expected in '04?

Yes, that's correct.

Okay.

Thank you.

Should, thanks, Troy.

I mean, David.

We'll now hear from Miles Walton with CIBC.

In the Space outlook for 2004, you didn't really change the sales outlook too much, I guess 20 million up on the low end, but left the top end intact at 6.5 billion, yet you considerably upped the EBIT some 30 million.

I guess in '05 it's even more stark where the change in sales is down, but the guidance is up on EBIT line.

Could you talk about profitability in space?

Sure, Miles.

Our focus has been for several years in the space line of business to improve our profitability and our margins, and I think what you're seeing here year-over-year is that basically there's less commercial business both satellites and launch vehicles, maybe to the tune of $400 million to $600 million.

I think we've suggested that the commercial line of business is not very profitable.

So you're basically seeing lower volume on a less profitable line of business which really means that the core government business is more profitable, and you're seeing that fall to the bottom line.

So I think it's basically that.

Then one on the top-line growth.

I guess I was a little surprised to see the top line in '05 not edged up a bit on the high end of the range, given the number of wins you had in the quarter.

Is there something offsetting the growth from these new wins or is the impact just farther out than '05?

I think it's a combination of items.

These new wins will clearly contribute, but there's a development phase to them that ramps up over a couple of years.

We go through our long-range planning process in detail in the month of November, and obviously any changes to that we'll incorporate in January.

But when I look at the three business areas that are predictable and steady;

Electronics, ISS, and I&TS, we do see upper single-digit growth.

We've talked about the space and the aero business being a little more lumpy and contingent on the sales.

Aeronautics is clearly has not experienced a lot of top line growth, is has grown the bottom line.

I think Jim explained that, relative to the transition on the F/A-22 accounting, the F-16 deliveries, and on the Space side I mentioned the decrease in the, you know, in the commercial lines of business.

So I don't necessarily equate the sales growth with value, per se, we're comfortable with where we are and we'll make adjustments as appropriate.

Great, thanks.

Thank you.

We'll now hear from Nick Fothergill with Bank of America.

Hello.

Good morning, Chris and Jim, two questions, if I may.

The first one, if you look at the balance of your business, what is now -- what percentage is now dedicated to R&D programs, or what I would call more cost-plus programs, or even percentage of completion programs, compared to units of delivery or fixed price, today in 2004?

And how might that change as we go into 2005 and even '06?

I'm kind of thinking F-16 falls a bit next year, F-22 deliveries go up, JSS still in the early phase of cost-plus, but you might get some more satellite deliveries next year.

What's the balance look like?

Okay.

Good morning, Nick.

Let me see if I can answer all those pieces.

Relative -- I guess I'll use sales as kind of the metric to answer your question.

I think on an R&D perspective, you know, if I think of development programs, given all the new wins that we've had, I guess I could see, you know, maybe two-thirds of our business in '05 being development-type programs, where you would include things like the joint strike fighter, the aerial common sensor, MELOS, that might be a little higher that what we've experienced this year, so I could see a slight upward movement there.

Relative to the cost-plus unit of -- cost-plus fixed price, we're pretty steady in kind of that 55, 60% range being cost-plus, and that does somewhat tie, obviously to the development.

Percent complete unit of delivery, we've historically had about 70% of our revenue on a percent-complete basis, 30% on unit of delivery, and I guess that would also be moving upward, so maybe 65/35, you know, in light of the F/A-22 comments that Jim alluded to.

Great, Chris.

One follow-up, if I may.

You've won a very good number of programs in the last quarter and actually over the last year, what do you see on the radar now of any particular scale over the next six months to a year that you're looking at?

Sure.

The remainder of this year we have a couple of significant opportunities that are yet to be awarded, all competitive.

I mentioned the U.S. 101 presidential helicopter, which we hope to hear about in the fourth quarter.

Social Security Administration has an award that's scheduled for late November, early December.

We're the incumbent, and that's information technology based obviously, operating and running their data centers, and we would be hopeful on that opportunity.

And then with NASA at the Johnson space center, we have the engineering and science contract.

So those are three rather substantial programs yet to be awarded in calendar 2004.

As I look forward to 2005, there's a whole host of opportunities where once again we're well positioned and competing, whether it's GPS 3, the crew exploration vehicle, GSA has an outsourcing IT opportunity.

There's work at the Army Corps of Engineers, the Nevada test site, Patent trade office, hopefully the final down select on AMS JTRS contract, and the U.S. 101 personal rescue vehicles, would be the big main ones you'd recognize, and literally tens if not hundreds of IT-based opportunities, not only for the Department of Defense and Intelligence agencies, but several civil agencies.

So those would be the competitive ones.

Of course, we'll continue to sign up the follow-on work, such as lot 5 on F/A-22, the next traunch of fleet ballistic missile, aegis, and all the ongoing business that we have.

I think there's a lot of opportunity, we were quite successful in '04 and we hope to continue that throughout the rest of this year and '05.

We'll now hear from David Strauss with UBS.

Could you tell us what your year-to-date return has been on your pension fund?

Yeah, it's in the low single digits at this point through September.

I think 3 to 4%.

Does your guidance for '05, what does it contemplate in terms of the contingent convertible debt that you have?

Yeah, the COCO, -- as it's referred to, is not in our guidance.

Our guidance is based on the current rules, as they exist today.

If you do look through our indenture agreement you will see we can settle this in either stock or cash.

I have an understanding that the FASB is looking at this, it's on their November agenda.

I think the take-away is that we have the ability to amend this indenture, and a fair amount of flexibility so, you know, I'm not sure that this is going to have a significant impact.

It's not in the numbers, and I think we have the flexibility to assure that it won't impact our earnings if we so choose.

Last question, at Space you've been running there in terms of revenues like 1.5 billion a quarter.

Yet if you look at your guidance for the full year it seems to indicate a move up, a pretty substantial move up in Q4.

What's going on there?

Yeah, I mean, what we have here, David, is a fair amount of our revenue in Space is recognized on delivery.

I think a good example was the launch we had October 15th, which had over $200 million of revenue as a result of that launch.

That included not only our launch vehicle but our satellite.

Just to share the sensitivity, had that gone in the third quarter as originally manifested, we would have had 7% growth corporate-wide, and our space segment would have grown 10% instead of decreased 4%.

So it's really that type of situation.

A couple of launches and deliveries in Q '04.

So I would expect a billion seven, billion eight of revenue, further supporting the theory that it is somewhat lumpy based on the unit of delivery accounting method we've adopted.

Kelly, we have time for one more question.

Our last question will come from Byron Callan with Merrill Lynch.

CapEx, you talked about 800 million.

Looks like you're significantly underrunning that.

Why would you have such a large increase in CapEx in Q4?

Traditionally we keep pretty tight constraints on the CapEx throughout the year.

A lot of this is gaited to new wins, and clearly with a lot of these awards occurring in the second and third quarter, we would expect, you know, to ramp it up.

I think historically if you go back several years this is a trend that occurs, and I think it's somewhat related to our customer having a September year-end and us having a December year-end.

With the focus on return on invested capital and trying to constrain our expenditures, you know, I'm hopeful we can underrun the 800 million, but a few of these are tied to some awards that have yet to be announced, and we'll move and only spend it when necessary.

Second thing.

On the ROIC metrics, first, are you seeing any indication that your customer may be thinking along the same lines as far as the way they may compensate contractors?

To be honest with you, not quite at this point.

We obviously have interactions with our customer.

I think they've generally acknowledged the importance of cash and have taken actions over the years to support that.

You know, there are some weightings relative to cost of money, and such.

Maybe it's going to evolve to that over time, their focus obviously is on EDM and cost and schedule, and the profit guidelines do account for capital, and so I guess to some degree it is in there, but no change from historical practice.

Maybe we're just catching up with them, in hindsight.

Just on that same related question, since we talked about the 50 or 55% of cash to shareholders, what about the other half that may go to acquisitions, if that's the assumption here?

If you are going to an ROIC discipline it really seems like it's going to be very difficult to justify any acquisition in this kind of environment.

Can you elaborate on that?

I think that is a possible conclusion.

I mean, it would clearly need to be, you know, a pretty good visibility, relative to the growth of any target for the synergy, both not only from a cost, but maybe from a market perspective.

But we continue to have a process, we continue to look at acquisitions.

As I said, I put them in the bolt-on category, and, you know, we would make sure that we understood that metric.

It covered our weighted average cost of capital, and hopefully, you know, it is accretive.

The action we took last night with the debt tender was really to focus our balanced approach and keep our capital structure flexible, and we'll keep you informed of any decisions we make on that front.

But nothing significant on the horizon at this time.

Well, with that, I want to thank everybody for taking the time to call in this morning.

We look forward to talking to you in January of 2005.

Thank you.

That does conclude today's conference call.

Have a pleasant day.