洛克希德·馬丁 (LMT) 2004 Q4 法說會逐字稿

Good day everyone, and welcome to the Lockheed Martin fourth quarter 2004 earnings results conference call.

Today's call is being recorded.

With us today from the Company is Mr. Bob Stevens, the President and Chief Executive Officer;

Chris Kubasik, the Executive Vice President and Chief Financial Officer, and Mr. Jim Ryan, Vice President of Investor Relations.

At this time I would like to turn the call over to Mr. Jim Ryan.

Please go ahead sir.

Thank you and welcome to everyone on the call.

We have posted charts on our web page which supplement our comments.

Also, please refer to the Safe Harbor on chart 2.

Statements in today's call that are not historical facts are forward-looking statements and are made pursuant to the Safe Harbor provision of federal securities law.

Actual results may differ.

See today's press release and our 2003 Form 10-K and our 2004 Form 10-Q's for a description of some of the factors that may cause actual results to vary materially from anticipated results.

Now I'll turn the call over to Bob.

Thanks, Jim.

Good afternoon.

Thank you all for joining the call and happy New Year to each of you.

We had a strong fourth quarter, and 2004 was an excellent year for Lockheed Martin and I want to take this opportunity to credit our leadership team who drove performance, and compliment our employees who delivered on their commitments.

Their performance and their dedication demonstrates our commitment to our customers and to our shareholders.

In a moment Chris will talk about some details of our operational and financial performance.

So let me spend a minute reviewing a few thoughts on strategy.

We intend to stay focused on the markets where we deliver superior value in defense, intelligence, homeland security, and government information technology.

We continue to see opportunities here for companies that can provide solutions that address our customers' most complex and challenging missions, companies with superb systems integration capabilities, and we believe the breadth and depth of Lockheed Martin fits this need well.

When I look at our capabilities and our portfolio of businesses I believe we are strongly positioned to continue to adapt to a changing environment.

We have recognized for sometime in all of our discussions with you that growing deficits in the cost of the war in Iraq would cause there to be more discussion about defense budgets and the need to ensure that our government and taxpayers will get a significant value for money spent.

The discussions that have recently surfaced around Program Budget Decision number 753 are reflective of this condition.

PBD 753 describes an array of programmatic and operational initiatives intended to reduce defense spending across the 6 year defense program through 2011 and helps frame the content of the government's fiscal year 2006 defense budget.

For example, potential savings from possible reductions in the total quantities of both the F/A-22 and C-130J aircraft were included.

Beyond program reductions, PBD 753 also calls for efficiencies and cost avoidance opportunities in defense through streamlining and business process improvements, areas where the competencies we have in Lockheed Martin can directly contribute.

We recognize that PBD 753 and the submission of the President's 2006 defense budget to Congress, currently scheduled for February the 7th, is first step in a process of review and analysis about defense capabilities and needs and the best way to fill them.

This process will include full consideration of budgetary and economic impacts, as well as issues relating to strategy, force structure, future threats and uncertainties, and the vitality of the defense industrial base.

Decision-makers will include those involved in the authorization and appropriation process in the Congress, in addition to operational and planning elements at the Pentagon.

We've always regarded it as a genuine privilege to work for the customers that we have, and we know that privilege must be earned, not just in winning competitions, which we've done, but in meeting commitments and delivering sustained value over time.

In a very real sense the programs we talk about belong to our customers and to our nation's defense.

And not just for today, but as we've seen in the past, for decades into the future.

Fundamental elements of U.S. national security strategy are embodied in the programs currently being implemented.

We're constantly reminded of the magnitude of the strategic challenges our customers face and the extreme difficulty of preparing for uncertain future.

Their observations are instructive.

They tell us that architecturally we should channel our energies into ensuring that systems have superior individual performance capabilities that they are net enabled such that they can work effectively together and readily receive and transmit vital information, that their design to open system standards so they can be upgraded and expand over time using the best commercially available technologies and that they're adaptable and flexible to meet, not just the challenges of today, but the uncertainties of tomorrow.

These issues are very worthy of discussion and, as appropriate, we look forward to participating in this deliberative process.

Separately, it's also important to note that 2005 is the year in which the Quadrennial Defense Review will be conducted.

The QDR will offer a separate opportunity to assess where investments ought to appropriately be made, to address an expanding array of strategic and tactical threats ranging from the more traditional to the newer asymmetric threats of global terrorism.

Discussions will certainly address issues of protecting the homeland, securing weapons of mass destruction, the ability to deter and dissuade potential adversaries, as well as more fully understanding the dynamics of post-conflict reconstruction needs.

Our approach to meeting these challenges and exploiting these opportunities is to continually widen the aperture, to be innovative, forward thinking, to anticipate change, and to capitalize on opportunities.

We intend to continue to expand our addressable markets as we did this past year.

To do this we believe it's essential to build and maintain trusted relationships with our customers, delivering on commitments today while offering additional value from our capabilities tomorrow.

To position effectively our internal investment philosophy is guided by assuring that we can give customers a leveraged advantage in their mission areas as our investments in net enabled capabilities are proving.

Even with the current budget pressures we've challenged ourselves to grow revenues on average in the 3 percent to 5 percent range annually, which is in line with or slightly better than our assessment of overall defense budget growth.

We intend to sustain organic growth in our government markets by successfully executing the commitments in our backlog and gain market share by profitably moving into adjacent markets by providing existing capabilities to new customers and new capabilities to existing customers.

We also look to make selected acquisitions of companies that serve government markets that align well with our core competencies that are attractive strategically, operationally, and financially.

We believe these businesses will tend to be smaller, bolt-on, niche-type acquisitions that will directly contribute to adding value.

Solid alignment, ease of integration, and the enterprises return on invested capital are key element in our decision making process.

We're also committed to a balanced cash deployment strategy to contribute to shareholder value and I'll ask Chris to cover the elements of this strategy in more detail in his comments.

Beyond our revenue growth target we're focused on concurrently growing earnings at an accelerated pace with a determined emphasis on margin improvements.

We'll continue to drive hard on generating cash from operations, improving our returns on invested capital, and growing earnings per share through a program of balanced and disciplined cash deployment.

With that let me turn it over to Chris now and then both he and I will return to take your questions.

Chris.

Thanks, Bob and good afternoon.

Last year at this time we talked about several exciting opportunities that, if successful, would move us into adjacent lines of business that would be critical to our long-term strategy and ultimately our growth outlook.

Many of these opportunities were in the three business segments that we refer to as our Systems and Information Technology group, which accounts for half of our total revenue and more than half of our profits.

We succeeded in capturing many of these important strategic programs that contributed to our increased outlook for 2005.

Some of the key wins in the network centric and the military communications arena included the Win-T Program, Aerial Common Sensors, High Span, Joint Tactical Radio Systems, and Net Sense.

We also expanded into the adjacent markets including ship systems with the Littoral Combat Ship victory and expanded our Land Systems and Missiles lines of business.

We were also successful with our civil agency customer with a significant win in the postal systems area for the Universal Computing Connectivity Program.

And of course, we continue to win and expand our information technology contracts including work for HUD, the Social Security Administration, and the Environmental Protection Agency.

In space we were successful in our competition for the Navy MILO Satellite Program.

Our success in large part relates to our focus on horizontal integration.

This is what drives our businesses to work together to create the best solutions and the best value for our customers.

I think it's important to reiterate that a majority of our new business capture resides in the Systems and Information Technology group of companies.

They have had a consistent growth in sales, profitability, margins, and cash for the Corporation.

These three segments had a book-to-bill ratio of 1.1.

Let me now focus on 2004 and some of our operational highlights.

Overall I believe we had an outstanding year.

We're consistently focused on strong operational performance while reducing and managing the risks on key programs.

Let me give you a few examples starting with Space Systems.

Lockheed Martin has had 74 consecutive successful Atlas launches over the past 11 years.

We've also had 108 consecutive successful Fleet Ballistic Missile test flights over the past 15 years.

I think this is a remarkable achievement and shows our commitment to operational excellence, innovation, and mission success.

In Aeronautics we said we would return the C-130 J program to profitability and we did.

We said on the F/A- 22 program that we would complete the initial operational test and evaluation activities and we have.

We also delivered aircraft on or ahead of schedule throughout 2004.

And we received Lot 4 funding on the FA-22 program and long lead funding on Lot 5.

We will continue with our historical accounting practice for the FA-22 program which is to use POC cost to cost revenue recognition for Lot 5.

Let me make a few comments on our financial highlights.

Obviously our press release, attachments and web charts provide a lot of details, but this year we did achieve a record relative to sales and a record for cash from operations.

We said that our free cash flow would equal our adjusted net earnings and in fact free cash flow exceeded our net earnings.

On a per share basis, free cash flow was $4.80.

We said we would improve our margins and for the fourth straight year we have.

In fact, all 5 business segments increased their sales, their EBIT, and their margins for the year.

We've talked about our renewed focus on ROIC, or return on invested capital.

We achieved an 11.9 percent return in 2004, an improvement over the prior year.

This will continue to be an area of focus for the management team.

You've probably also noted that the rating agencies raised their outlook for our credit standings and we will continue to seek upgrades in our ratings in the future.

I also want to mention that we've been focused on complying with internal controls and specifically Section 404 requirements and I believe we are in good position to sign our certifications next month.

Bob asked that I comment on cash deployment and here again we've done what we said we would do.

As I look back over the past two years we've retired two and a half billion dollars of debt, we've refinanced a billion dollars of debt to reduce our interest cost, we've repurchased 25 million shares of our stock, we've raised our dividend from $0.44 a share to $1 a share, and we've spent about $750 million on selective acquisitions to bolster our systems and information technology group.

Just a quick comment on acquisitions.

As you recall last -- two years ago we made the acquisition of ACS Federal Information Technology Company that was integrated in four months and it continues our track record of rapid integration and capturing synergies.

We announced and closed 2 small bolt-on acquisitions in the fourth quarter of 2004 and we recently announced another acquisition which should close at the end of the first quarter of 2005.

Let me now transition to a few comments on our 2005 projections.

As you saw in today's press release we did increase our projections for sales and we believe we're on track for the fifth consecutive year of increased segment margins.

This will clearly contribute to our goal of double-digit EPS growth for next year.

Cash from operations is estimated to be at least $3 billion for 2005, which would be another record for this corporation.

Cash generation and balanced deployment remains a top priority for this management team.

Steve, with that we're now ready for questions.

Thank you, sir.

Operator instructions.

And we're going to go first to Joe Nadol at JP Morgan.

Good afternoon.

Hi Joe

Chris I was hoping you could run through your Space outlook.

Noticed in your slides I think you bumped up your sales expectations.

Not the margins, though.

Just wondering what the different puts and takes are as you look to '05.

Absolutely.

Joe, we did increase the sales and we did increase the absolute EBIT dollars.

Two main contributors, Government Satellites.

I mentioned the win we had on the Navy MILOs Program.

That probably accounts, with a little growth in the Classified Satellite, for half of the increase.

Then also as we look at the Launch Vehicles, you know, we're probably looking at more like 7 to 10 launches as compared to our prior guidance of 5 to 8.

So Launch Vehicles and Government Sats would be the main driver on sales front.

We did also increase the EBIT, you know, kind of in the 30 to $50 million range, and I think margins are slight uptick but, you know, approaching 8 percent.

Okay.

As a follow-up on the cash flow outlook for '05 you're looking at 3 billion plus cash from ops.

What are the -- it looks like you're looking from -- at working capital as a source of cash or at least that you're looking for cash taxes below book.

What are the, I guess, puts and takes there?

Let me give you a little more detail on '05 cash.

We have interest payments in the $350 million range, tax payments kind of in the 5 to $600 million range.

I'm looking at working capital to be pretty much a push, so that's kind of the outcome.

We did pre fund, as you know, our 2005 pension contribution, the majority of that in September of '04 and a little bit in December so that also provides a little bit of tail wind on that.

Okay.

Thank you.

Sure.

Thank you, Joe.

And we'll take our next question from David Strauss, UBS.

Thank you.

Chris, your forecast for Aeronautics in 2005, you actually show that potentially it could be higher than in 2004.

Could you discuss potentially how you get to that number?

You know, I thought with F-16, TOC deliveries increasing it was going to be tough to show higher revenues in Aeronautics in '05.

Right.

Let me give you a little bit of detail.

On Combat Air, you're right, there's just a slight decline.

Basically we're seeing an increase in JSF, F/A-22 is relatively flat.

You're correct there will be a little bit of burn-off on F-16.

Air Mobility we're looking at a slight increase as we are projecting 14 to 16 deliveries, up from 13.

So that's really what's basically holding it almost flat year to year but you're right it is an increase on the sales and, once again, just like in the Space discussion, we are increasing the EBIT along with the sales as it relates to the same programs.

So another 40 million of EBIT and again margins improving.

Could you talk about the level of cash that you're comfortable with keeping on your balance sheet going forward?

You've kind of been between 1 to $2 billion in cash on the balance sheet over the past couple years.

What do you see as a level going forward?

Yeah, we really -- we don't look at a set amount for the balance sheet.

We look at how best to deploy that cash, opportunistically for the benefit of our shareholders so we don't have a specific minimum or maximum.

We look at our return on invested capital, how best to deploy it and obviously at the end of the year, you know, we had a little over a billion dollars on the balance sheet but that was just based on that point in time and in no way should suggest a minimum or a maximum .

We'll go to our next question with Doug Harned with Sanford Bernstein.

Electronics had a very good quarter here in '04 and I'm wondering if you could give us a little bit more background on the programs that really delivered the revenues and the margins that we're seeing here.

Sure, Doug.

Thanks for the question.

The main lines of business -- and I'll ask Jim to give you the specific programs, but the Maritime Systems line of business which, of course, was successful in winning the Littoral Combat Ship this year and the Deep Water Program in prior years and Missiles and Fire Control were the two main segments driving those numbers but Jim will give you some specific programs.

Jim?

In Missiles and Fire Control the programs that were higher were Pack 3, JASM[ph], Predator, Lantern, MTAZ[ph] and Joint Common Missile.

In MS2, Maritime Systems, Deep Water, Aegis, Sea-based Missile Defense, Littoral Combat Ship DDX, and Q-70 as well as Postshang [ph].

Excuse me, there is just one last one.

PTTS, the ATOP program and the FAA business was up as well.

And on Joint Common Missile, where do things stand now?

From your standpoint has there been any change since we've heard the news from the PBD?

This is Bob Stevens speaking.

I think we all know that the PBD, insofar as I think we all look at it, is a document that was, if you will, leaked out of the Pentagon that has some planning numbers in it.

There have not been any contract actions undertaken associated with PBD 753.

And we're awaiting the submission of at the President's budget to see what the content of that budget will be, and again that will be on 7 February.

Right.

Thank you.

You're welcome, Doug.

And our next question comes from Heidi Wood, Morgan Stanley.

Thanks very much.

Chris, you talked about ROIC up 120 basis points in '04 to 11.9 which is a great number, but structurally how high can you go and what should we be expecting for ROIC in 2005?

Thanks, Heidi.

We definitely think we can go higher and in fact we're projecting about 100-basis-point improvement 2005 over 2004.

So we're going to look at this year-over-year and we're projecting continued improvement.

As I think back, you know, 4 or 5 years ago we talked about our commitment to improve margins for four years, now five years, and it may not have seemed achievable but we've proven we can do it and we have, in fact, done it and our goal is to have that continual improvement.

It's really not the absolute number although 11.9 I think is pretty good comparatively in corporate America.

It is the fact that we continually focus on that and improve it and I think it was one of the key contributors to the 2.9 billion of cash from operations this year and our commitment for 3 billion next year.

But when you look at your business you're going to get to a period of diminishing returns.

How high structurally do you think you can get?

Well the return on invested capital there's no cap on the numerator of the earnings and we're committed to go, you know, and grow the corporation and then the question is can we go ahead and do that without any significant investment.

And I look back to 2004 and the success we had on a couple of key programs that we've talked about previously, the Littoral Combat Ship, again getting into Ship Systems without the investment, without buying a shipyard, without buying a company.

I look at, you know, the VXX Presidential Helicopter which we'll all know more about tomorrow.

And again an ability to get in there by teaming and subcontracting with someone else.

Aerial Common Sensor.

Again, no investment of any substance to get into that new and adjacent market.

And clearly when I look at 25 plus percent of our business being in information technology, inherently and structurally there's a low capital intensity, so we're going to try to get 100 basis points next year and a year from now I'll give you a better view but I'd expect to continue to grow '06 over '05.

Great.

My second question is when you take a look at the backlog how much of the 2005 sales that you're projecting do you already have in hand?

Well, I think as we've looked at this historically it's probably always been in that 85 to 90% range and I think implied in your question 2004 was a very good year and we were able to secure many of those programs that are contributing to the increased outlook so as we look in past years and as we look forward usually 85 to 90% is kind of already in there for the next 12-month period.

Great.

Thanks very much.

Thanks, Heidi.

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

Good afternoon.

It looks like the fourth quarter cash flow for 2004 the pickup relative to your previous plan the reason you exceeded was looks like largely due to the fact that advances came in, the burn off in advances was less than anticipated.

I'm wondering for 2005 are you still assuming that 300 to $500 million burn-off in advances?

Yes, Steve.

I don't think it's going to be that high.

We've tried to take it up a level and talk about the fact that our free cash will basically meet or exceed our adjusted earnings.

You're right, the advances in Q4 did not burn off as much as I think some people may have anticipated.

In fact, it was basically flat, and that's the result of, you know, continuing to win new business, not just international opportunities, but better negotiations on, you know, progress payments, launch vehicles and performance-based payments all contributing to that flatness.

So we're confident in the $3 billion number that we are giving and don't see advances being much of a head wind.

The Company has done kind of just from a high level in working capital you've done a great job over the last five years in taking down receivables and inventories and payables are up over 50% in the last two years, and so I'm just wondering, you've generated a couple billion dollars of reduction in working capital since '99.

What do you see?

What's left here over the next couple of years as far as opportunity?

Yeah, I personally believe that there's continually more and more opportunities.

It really is more of a culture of continuous improvement.

We've done it in margins, we've done it in ROIC.

Specifically, you know, when we look at kind of our net days in working capital this time a year ago, it was kind of in the seven or eight days, and as we look at it now, when we look at receivables, payable, advances and inventory as you mentioned, we basically you have have one day of networking capital and I think a lot of people thought that might have been impossible.

So I'm not averse to trying to improve upon one day.

More performance based payments, continuing to focus on inventory will probably be a goal that we've set for ourselves for '05 to maybe get a little more juice and, you know, the internal processes, the shared services organization, the investment in systems and process is paying off so it's a cultural thing.

We've improved margins, we can improve working capital, we'll improve ROIC and we'll do it each and every year.

Thank you.

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

Good morning, or afternoon.

Hi, George.

Chris, there's about 200 F-16s in backlog which I guess probably gets you into '07, I mean, keeping '05 and '06 at 70 to 75 deliveries.

What's the outlook for some more orders so it can stay up at that level when you get further out?

Yeah, George, we have 205 in backlog and, you know, for 2005 we're probably looking at 70 to 75 deliveries.

We look at the rollout here it kind of gets us to the 2008 time frame, and it's probably 50 to 100 international orders that we're pursuing at this time.

So we'll continue to work on those and keep you apprised of the progress we make over the next 12 to 18 months.

Also in the Aeronautics area, the C-130, the assumption would be that you're still going to ramp up the margin this year to somewhat higher than what looks like 9 or 10 percent you recorded in '04.

Does that change based on what turns out happening to the C-130 J in the '06 budget?

Absolutely no change, no impact, we're committed to double-digit margins on C-130 for 2005, and that's what we'll record.

Okay, thanks.

Thank you, George.

We'll go next Joseph Campbell with Lehman Brothers.

Good afternoon.

I wondered, Bob talked about the outlook for the Defense business a bit briefly, but seems that you have more nondefense business than a good number of the other large defense companies.

I wondered if you just could comment briefly and kind of globally on what's cooking in the Homeland Security and the other government agencies and so on.

Joe, hi, thanks for the question.

There are some new business opportunities that are associated with the information technology content in what we regard as our Civil Government Information Technology or Homeland Security business.

I'll give you maybe a flavor for one or two or three of them.

We're working on a competitive opportunity called the Integrated Wireless Network.

The customer set for which is a combination of the Department of Homeland Security, the Department of Justice and Treasury, and the objective here is a consolidation and an upgrade of a mobile wireless voice and data communications system for collective law enforcement.

Separately and interestingly to us, there is a competition with the customer, the National Archives and Records Administration, to develop a capability to preserve any type of electronic record and data and we think that while this is an opportunity in the range of a couple of hundred million dollars, that that capability has some other market applications that we find interesting.

There's also an initiative called the American Shield Initiative for the Department of Homeland Security that is providing the country with border protection for the Customs and Border Patrol Agency.

So we do see an array of interesting possibilities driven by budgets that are not associated with defense.

Do you think these can grow as fast as the others?

As defense or faster or about the same, or what's the -- is there a number with that?

I think they can grow probably in the mid single digit range, and some of that is yet to be determined, Joe.

But if we have a conversation about the possible content and impact of PBD 753, in the same voice we're talking about ways to prepare the country for additional security challenges, and that's very much also work that we do across our Company, and we've taken good care over time to assure that we assemble the right core competencies and we've integrated those core competencies well to provide real value in this market.

Thank you, Bob.

You bet, Joe.

We'll go next to Howard Rubel with Jeffreys and Company.

Thank you.

You did -- one of the goals you set a number of years ago, Bob, was to get to double digit margins on the C-130 and you did it.

And its pretty obvious because you've been showing us the numbers.

Now if you look at the operational challenges you have today how would you sort of rank them as look across some of the business sectors?

Thanks, Howard.

Let me just say that, you know, I certainly, along with Chris and Jim and others, are a primary interface in our discussions with all of you but let's be clear, the folks who drove that double-digit margin on that Airplane Program reside in our Aeronautics business.

And I think it's useful to just point out that the Company has some really gifted and talented executives and leaders and we've got a great professional work force who are not fearful of making commitments even though they look pretty challenging, and then driving hard, even if the takes more than a year to drive hard to accomplish those goals.

It's also interesting to me that we had an executive transition in Aeronautics.

Danny Hancock, who has been a real legend, not only in our Company, but in this industry, for producing airplanes, elected to retire and Ralph Heath, a really talented executive that I hope you all get to know better over time, took his place.

And what's interesting to me is it was seamless with respect to the continuity of the commitments we make.

And I think that demonstrates real breadth and depth in the bench strength that we have here.

We have talked in a similar vein with all of you over time about the challenges in our Space Systems business area.

For a period of time it was volume on commercial satellites, and then for, you know, in subsidiary conversations we talked about extending the value premise there in generating more profitability and we are working on that.

We still have, as you all know, some well understood challenges in our Aeronautics business area.

We'd like to see margin improvements there particularly on the F/A- 22 Program and we're committed to working that hard.

When you think about the $74 billion backlog that we have, I think our focus is appropriately on operational execution and assuring mission success in customer satisfaction.

There's a lot of background discussion now about deficits.

And the impact those deficits may have on budgets.

And while our employees are concerned about that, they really can't do very much about the nation's deficit as individuals.

What we advise them that they can do is what they have been doing, and that's focusing with real concentration on the tasks that we ask them to complete in order to achieve our objectives.

And so far they've been really disciplined and effective in that regard.

And then finally we are very much committed here, as we've talked to all of you in the past, in driving returns on invested capital from this business.

And I share Chris's view entirely, that while we've had good progress to date we think there's room to run there, and we're committed to exploiting that opportunity we have in doing better there.

I'll just leave it at that.

Thank you.

Thank you, Howard.

And our next question comes from Cai Von Rumohr with SG Cowen.

Yes, thank you.

The two programs that really grabbed the headlines in PBD 753 were the F-22 and the C-130J.

How are you doing in offsetting those threats, specifically when do we expect the IOTE report on F-22, when could we get production go ahead, and what would the termination liability be on the C-130J?

Thanks, Cai.

I actually thought PBD 753 talked a lot about ship building, but relative to your question, we really haven't been corporately involved in significant discussions around PBD 753.

The -- there's been a lot of conversation about it, and what the document contains and what will get in the President's budget, and I think personally it would be wrong to make conclusions now in that I think those conclusions would be premature.

What we would like to do is to avail ourselves of the process that you know and we know is clearly going to unfold, a process that will look at fiscal pressures and budgetary constraints, but also look at them in the context of the full expression of the national security dimensions that we all have to face.

We do think the F/A-22 has performed well in the IOT&E Program and, of course, we don't release that IOT&E report, it's the Air Force's evaluation of the aircraft, but I believe it's going to be released in the not too distant future, and we await the results of that report as well.

I also note that on the F/A-22 Program we've focused on getting good operational rhythm and momentum and we delivered airplanes on schedule and in accordance with our plan this year.

You used the word "offset" in your question, and if I can just lift off that concept, I think over time we've been talking about a very genuine desire on our part to continue to focus on growing the information technology content of our business areas, to focus on logistics, and how we can take the power that we've seen demonstrated in information technology applied to the war fighting segments of our customer population, and apply that same force and effect on the logistics sustainment and operations and maintenance part, and we think we can do a pretty good job in expanding our areas of interest there.

Systems integration has been important for us and then with some key wins last year, we're very interested, for example, in the outcome of the helicopter program competition tomorrow and we would note that there will be another helicopter competition for which we think we will have a very capable offering sometime next year or in early '06.

We won the Littoral Combat Ship and have what we think a very capable system to apply here to solve some of the challenges in Navy Surface Systems.

And then we have traditional opportunities, for example, the next tranche of the EELV's, there was a prior question about follow-on F-16, assuring that the F-35 Program runs effectively and well and focusing on other information technology opportunities.

Just a follow-on, on the question relative to the termination liability, that is contained in the contract, and just for clarification, because I think the terms used a lot, and maybe not consistently, that is ultimately a cost to our customer especially when a multi-year contract is terminated prior to its completion, and at this point in time that is estimated in the $440 million range, and that adjusts over the course of time, but that's clearly how that situation would play out.

Did I mishear you?

I think earlier you were talking about POC on lot 5.

I thought lot 5 was going to be as delivered.

Is that correct?

Was that a change?

I wouldn't say it was a change.

We've historically had POC cost to cost through and including Lot 4.

We have not decided on Lot 5.

Our prior guidance had suggested a possible change but one of the key items we look at in our critical accounting policy is production stability, overall stability of the program, and basically where we are now we've decided on Lot 5 to continue with that historical revenue recognition and we'll look at each Lot subsequently and keep you abreast of how we account for it.

Thank you.

Thank you.

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

Chris, the FAS/CAS expenses is projected around 630 million in '05.

If we assume normalized equity market returns in a flat interest rate environment does that FAS/CAS expense decrease in '06?

Thank you David.

I kind of had a bet going as to whether I'd make it through this call without saying FAS/CAS and you'll be happy to know I'll be celebrating later.

I'll take half of that.

The asset return continues to be 8.5, if we have 8.5 in '06 and the rates stay at 5.75 we would expect 630 FAS/CAS -- half but, you know, it's difficult to predict, so if we do get that situation it would definitely come down maybe in that 300 to 350 million range.

Obviously if rates were to increase we've talked about a 25-basis points being $80 million so a spike-up in rates would actually be beneficial and have the 630 come down very significantly.

That's kind of how it's playing out.

David, be assured if you didn't ask him, I was going to.

And the 630 million, I looked in the hand-out, couldn't find the actual split between FAS and CAS, just for housekeeping could you give us that?

Absolutely.

I apologize for not putting it in there.

The FAS was about 1.1 billion dollars, and the CAS is kind of in the, you know, 480 to $500 million range.

Great.

Thank you.

No problem.

We'll go next to Glen Engel with Goldman Sachs.

Good Afternoon. 2 questions please.

One is if I looked at the fourth quarter you repurchased 5.3 million shares yet your share count actually went up 1.5 million shares.

Most of those repurchases were in the latter half of the quarter so on a fully diluted basis we're going to get the full benefit throughout 2005 and beyond, so it's really a timing on that.

We obviously use the treasury method for the dilution impact on options, so when you have a stock increase that also impacts the calculation.

Basically we'll have lower shares outstanding in our fully diluted calculation for 2005.

Second question is if I looked at Aeronautic margins from the third quarter to the fourth quarter even though I would have assumed you have more 130Js being profitable, the margins have actually dropped sequentially by about a half a point.

Right.

If you recall in the third quarter we did have some favorable inception to date adjustments on F/A-22 so kind of on an apples to apples basis nothing unusual increased volume on JSF offset by increased profitability op C-130J, so pretty much exactly as we had projected and expected.

Thank you.

Thank you.

Steve, we have time for one more question.

And that question is going to come from Byron Callan with Merrill Lynch.

Thank you.

Good afternoon gentlemen.

Good afternoon.

Bob, I am curious. 2 questions really.

The first, you mentioned 3 to 5 percent revenue growth and I assume that's kind of looking out over a number of years.

How do you arrive at that growth rate?

Is that your best assessment as to where your markets are going to be, or is this your kind of challenge your organization to grow at rates higher than the market you expect to see?

I think we want to be at the top end of the markets that we see, and that's the composition of our assessment of where we are today, Byron, where we think we can go, and some modest assessment about companies that we would be able to acquire that would be in that sweet spot that we've talked about with regard to core competencies and market position, ease of integration, sort of the bolt-on nature of that.

It is an integrated model that includes our view of the Department of Defense where admittedly that growth may begin to slow a little bit, but it actually is likely to also change in its form a little bit, and for us that might mean watching a little bit of a deceleration in the investment accounts, R&D and procurement, but maybe some additional opportunities in the operations and maintenance accounts.

If you think about future horizons it's really yet to be determined where the cost efficiencies and business process improvement aspects that for example, were described in PBD 753 will come from and we would very much like to mine some of those opportunities.

We also look across other civil government agency budgets.

We note that Homeland Security and the National Aeronautics and Space Administration budgets have gone up a little bit.

There's a space initiative that we'd like to participate in so it's our best judgment to place ourselves at a competitive position really at -- about the top of where we think the market might be but it's the sum of the parts in our eyes.

Okay great, and then, maybe related to that you talked about adopting in a changing environment.

What may be new in the context of that statement?

Are you thinking about different organizations within Lockheed, different investment, incentives.

Anything that might kind of spool the organization, not to really challenging some of these things, pursuing some of these things that are occurring on a day-to-day basis, we see all sorts of new needs that have come out of Iraq and Afghanistan, ground vehicles.

Go ahead.

What's changing?

Yeah, the -- and I appreciate the question because that's a very solid, in my judgment, kind of strategic background question.

When we look backwards, the Company is not taking any element or means of adaptation off the table.

Once upon a time we didn't have an Integrated Systems and Solutions business area.

We saw the power of net enabled capability and adapted the organization there so there is not one organizational model here, there is not one construct.

Our judgment really revolves around assuring the best alignment between how we're organized and how we're investing, where the customer is today, where the strategic needs will take us tomorrow, and how we best align ourselves to get there in a way in which we have really good confidence that we don't want to get extended in a position where we will be unable to perform or maybe where there will not be real permanence in the marketplace.

As I mentioned, a bit earlier on this call, we have a real interest in examining further how we can contribute to a broader market area in sustainability and logistics and streamlining an element of cost for the government that as we all know has been growing and growing and growing in a way such that we can bring the efficiency and value of information technology applied to that area.

Think of sense and respond logistics that use knowledge just like just in time inventory has worked in our factories, to use some constructs of that business process improvement methodology to provide better just in time mechanics to move things that are needed to the places where they're needed more expeditiously without as much friction in the system and lowering the total cost of that operation.

We have an enormously solid content in the Joint Strike Fighter Program, for example, where we are currently under contract to think about an autonomic logistics environment with prognostic health management information from the airplane so that we can really tighten up the span of control here requiring the government to invest less dollars to get a more operationally available airplane.

We think that if our capabilities can be applied there, there's no reason those capabilities can't apply to overall aircraft fleet management in airplanes other than the Joint Strike Fighter, or to the Littoral Combat Ship, or to fleet service and sea basing, and all the advanced concepts of operations that our customers are discussing to put themselves forward, get in the fight faster, replenish while they're forward-deployed and lower the cost of that operation.

We know that takes really significant levels of teamwork here.

We think we've horizontally integrated our Company aggressively and we have demonstrated that teamwork and you see it in our win rate, and you see it in our execution, and very frankly I think our leaders on that scale of adaptability continue to develop the behaviors, the communication skills, the listening skills, and the ability to work with one another here and reach out and work with an increasingly diverse group of customers to turn these aspirations into a reality and that's where our compass heading is.

Is there anything else, Byron?

I had my two.

I think you want to end the call, right?

Very good.

Thank you.

Thank you.

And let me just say as we wrap up everybody at this end thanks you all for your time and for your good questions.

We're focused on remaining well positioned in our core markets, adding to our broad and diverse portfolio of competencies and programs and creating real opportunities for profitable growth in adjacent domestic and international markets.

As we drive our margin expansion initiatives we've assured a tight link between cash and earnings such that the return on invested capital improvements we're making are meaningful and measurable and finally we remain committed to smart and balanced cash deployment to enhance shareholder value.

Thank you all for participating on this call, and we look forward to seeing each of you again soon.

Thank you.

Once again everyone that does conclude today's teleconference.

We do appreciate your participation, and you may disconnect at this time.