洛克希德·馬丁 (LMT) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Lockheed Martin third quarter 2005 earnings results conference call.

Just a reminder that today's conference is being recorded and at this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Jim Ryan, Vice President of Investor Relations.

Please go ahead, sir.

Thanks, Lori, and welcome to our call.

With me today, of course, is Chris Kubasik, our Executive Vice President and Chief Financial Officer.

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

Also please refer to the Safe Harbor included in you are chart deck.

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

Actual results may differ.

See today's press release and our SEC filings including our 2004 10-K and our 2005 10-Qs for a description of some of the factors that may cause actual results to vary materially from anticipated results.

I will now turn the call over to Chris.

Thanks, Jim, and welcome to our third-quarter call.

We are going to focus on four topics today.

First our financial results.

Second, I would like to talk about several strategic and programmatic areas where I think you may have some interest or questions.

Third, actions that we are taking to further grow shareholder value.

And finally, our outlook.

Jim will cover our increased guidance for 2005 and our outlook for 2006.

Let's start with our financial results.

Our sales, margins, earnings, cash, and return on invested capital are on track or better than planned.

We have achieved at least 9% margins every quarter this year, and we plan on achieving at least 9% once again in the fourth quarter.

This is an outstanding effort from all of our businesses and our goal is to do even better.

Our Systems & IT Group continues to be a growth engine for the the Corporation representing half of our sales and more than half of our profits.

When I look back at Systems & IT a couple of years I see it has grown from approximately $15 billion of revenue to approaching $20 billion next year.

While improving the margins each and every year.

Year-to-date for Systems & IT, sales are up 10%.

Segment earnings up almost 20%.

And the margins are approaching 10%.

We have a solid backlog of $69 billion and with some of the recent October announcements, we anticipate backlog to increase to at least $73 billion by year end.

This increase is driven by firm and follow-on orders.

Our corporation supports thousands of contracts.

With this diverse portfolio, we are not heavily dependent upon one contract in order to achieve and deliver strong results.

Let's now move on to the second topic.

The first area I would like to address is the U.S.

Defense budget.

As you've heard, there are ongoing budget discussions in congress.

You may see another OSD budget decision towards year end, not unlike last year's PBD753.

And, of course, in February, we will learn about the Quadrinial Defense review and the FY '07 Defense budget.

It is impossible to predict an outcome; however, there are a number of things to keep in mind.

First, we are in a good position in our marketplace.

And secondly, looking at the next few years, we continue to see modest growth in the Defense budget.

We will continue to look at operations and maintenance opportunities and other areas for expansion of our portfolio within the D.O.D.

With more than 3,000 contracts and with $73 billion of backlog at year end, I wouldn't trade where we are with anyone.

Additionally, although we are generally perceived as a pure play Defense contractor, in fact, over 40% of our sales are to non-D.O.D. customers such as civil agencies, International customers, and Commercial entities, leaving a 60% direct correlation with the U.S.

Defense budget.

Thus, we are a lot more diverse than many realize and even though we have several large programs, we have less exposure to the U.S.

Defense budget than many of our major Defense competitors.

For example, on the civil government side, we've been very successful with new orders.

In the first quarter we were awarded the largest government outsourcing contract for the FAA.

And in the third quarter, we were awarded work by the National archives, the U.S. census bureau, and the New York MTA.

In fact, civil government is a significant part of our business space today representing over 20% of our total sales.

Our broad exposure to almost all U.S.

Government departments and agencies provide significant opportunities for growth.

So in total, 60% of our business is pure Department of Defense, which should be reasonably stable over the coming years and 40% is to other civil government and International customers providing growth opportunities for the future.

The second area focuses on a few programs and lines of business.

Let me start with our Aeronautics business area.

This is a solid business with excellent positions in fighter aircraft and airlift markets.

It has strong cash flow and generates the best return on invested capital of all five business segments.

As you know, it grows in cycles, demonstrated by the fact that the sales have doubled since early in the decade to more than $11 billion this year.

The next few years' topline is solid and visible with margin expansion anticipated.

We continue to target double-digit margins over the long-term.

Let me update you on three their programs: the FA-22, the joint strike fighter, and the C130J.

The FA-22, the airplane is meeting or exceeding the performance requirements and it is in the process of wrapping up the follow-on testing evaluation process, another milestone on road for initial operational capability.

We fully understand that the customer must make a decision regarding the ultimate quantities of aircraft to be ordered.

As the quantities currently stand as reflected in the budget document, we will be delivering aircraft into the early part of next decade.

This contract remains the number one priority for the United States air force base.

We believe a thorough review will validate the value of this aircraft.

This program may still be perceived by some as a development program, but, in fact, we are well into production on this aircraft.

Through the third quarter, 83 FA-22s have been ordered, 51 have been delivered including 15 so far this year, and as I said the aircraft is performing superbly.

The other fighter aircraft program is the F-35 joint strike fighter.

There continues to be discussions about poor structure and the number of airplanes by our customers.

We have seen this happen before, and we will see it happen again; when discussions and analysis are complete, our judgment is that thousands of F-35s will be produced.

What's important to recognize is that the future order quantities do not have much impact on the program until the next decade and beyond.

The key to the program today is this the development is on track and progressing well towards the critical design review and the first flight.

The recent $6 billion contract modification is a strong affirmation of our customers' commitment.

Taking a look at the F-16 for an illustration of how successful long-term programs can evolve, grow, and be sustained over multiple decades.

The program experienced uncertainty surrounding order quantity early in the 1970s.

The F-16 has been the choice of 24 countries, more than 4,000 aircraft have been delivered worldwide with half of the deliveries to International customers.

With the F-35 being established as an International program from the start, we expect substantial deliveries to the U.S. airforce, Navy and marines as well as multiple International customers over the decades ahead.

Recall that the joint strike fighter replaces the F-16 and five other airplanes.

A quick update on the C-130J.

The airplane is performing very well and we are receiving good feedback on its performance in theatre and with humanitarian operations.

The phase 2 operational testing evaluation will be ongoing in the fourth quarter.

Now I would like to talk about a nonaeronautics program which is receiving a lot of attention.

The Aerila Common Sensor.

Let me start by saying we are disappointed in our performance.

This is the state-of-the-art technology program with unique applications that are very challenging.

And while we've made significant progress on the sensors, we have had issues with weight, power, and cooling that challenge the range and payload of the ERJ-145.

We are working with our customer and drawing upon the full resources of our Corporation to address the current issues and to determine the most achievable and affordable path forward.

As you are aware, we received a 90-day stop work order in December.

We are developing a plan with solutions and alternative strategies for the Army and the Navy that will ensure this revolutionary capability will be delivered to the war fighter at the earliest date.

It is premature to predict an outcome at this time.

I would like to spend a few minutes on our Space Systems business.

It's fundamentally a more attractive business than a few years ago with less risk and a positive outlook for growth, expanding margins, and strong operating cash flow.

Government satellites represents well over 50% of the business and is growing double digit with improving margins.

Space Systems margins have reached the 9% level for the first time in a long time, and we -- we expect to sustain those levels.

And when UOA is formed and operating, the government launch business will be fundamentally more stable and cost effective for our customer.

Overall, the risk profile of the Space Systems business is significantly better than just a few years ago.

And now let me update you on our strategies to enhance shareholder value.

Let me first start with cash deployment.

Over the last three years, we have returned more than $3 billion to shareholders, which represent more than half of our free cash flow.

In the third quarter, share repurchases were robust with more than 9 million shares being repurchased, and we continue to be committed to reducing the share count.

In September, our board authorized an additional 45 million shares to be repurchased and increased our dividend by 20% effective in the fourth quarter.

We also make internal investments to improve our efficiencies, our technologies, and our competitiveness, including $600 million annually for research and development.

Our acquisition process is working very well, and the acquisitions have been integrated quickly and efficiently.

We are patient and maintain a rigorous financial discipline relative to cash deployment.

In addition to generating value from cash deployment, we also review our portfolio and cost structure to strengthen our corporation.

Our divestiture strategy also exhibits good process and patience.

For example, a few years ago, we said we were determined to get full and fair value for telecommunications investments.

Specifically Intelsat, Inmarsat and New Skies.

We could have unloaded them in a fire sale for a lot less than we ultimately achieved.

I am pleased to report we have generated proceeds of about $1.5 billion over the past 12 months.

We were patient and opportunistic and realized good value.

It is important to note that we do not include divestiture proceeds in free cash flow.

I would also like to mention that we revised our benefit plans to make us more attractive to perspective new employees and to reduce the financial risk for Lockheed Martin.

These changes will reduce cost and make us more competitive and will also reduce the earnings volatility associated with large defined benefit plans.

We will continue to look at different ways throughout the Corporation to increase productivity and efficiency while driving down cost to improve profitability and competitiveness.

In summary, we are focused on our challenges.

Our diverse customer base and technological capabilities position us for growth in the future.

Solid operational performance allows us to expand our margins.

And our commitment to shareholders is demonstrated through our dividend actions, our share repurchase program, and our acquisition and internal investment strategies.

I will now turn it over to Jim to discuss our outlook.

Thanks, Chris.

We increased our 2005 earnings per share outlook by $0.20 to $0.25 and details are provided in the earnings release.

We raised our outlook for cash from operations by approximately 200 million.

We expect our fourth-quarter operating cash to be positive, which would mark the 12th consecutive quarter of positive cash flow.

We increased our return on invested capital outlook by about 100 basis points reflecting income and balance sheet improvements.

And then for 2006, we are forecasting a sales increase of approximately 4% to 5%.

Our operational joint ventures are reported as other income and expenses on the income statement, but, of course, are included in the income from the business areas in our segment reporting.

For 2006, we expect to have margin improvement which will be the 6th consecutive year of increased margin from our segment.

We project an earnings per share range of $4.00 to $4.25.

We project a noncash FAS/CAS pension adjustment of 450 million of expense, translating into approximately $0.65 of expense on a per share basis.

We assumed a discount rate of 5.5% and a 2005 return on plan assets also at 5.5%.

At year end 2005, we will finalize both numbers and make any necessary adjustments accordingly.

We project strong operating cash flow in 2006 of greater than 3.2 billion.

Once again, we expect cash to exceed earnings based on the calculation of free cash flow to adjusted net earnings.

Finally, we anticipate return on invested capital to exceed 15% in 2006 as we continue to focus on balance sheet metrics and improved earnings.

Overall we see 2006 as another solid year of profitable growth and value generation for Lockheed Martin.

And now, Lori, we are ready to take questions.

Thank you, gentlemen. [OPERATOR INSTRUCTIONS]

We will take our first question from George Shapiro with Citigroup.

Good morning, Chris.

Good morning, George.

The tech services business was particularly weak, especially when I figured there's probably 120 million or so of SYTEX's revenues in there.

Can you go through some detail of what you might expect in the fourth quarter?

Absolutely, George.

It is about $100 million of SYTEX's revenue.

When we look at the third quarter, again, we have three major lines of business within Systems & IT.

We experienced growth in information technology as you suggested, mainly driven by the SYTEX acquisition.

Defense services was down a little bit, and NASA was down, basically 50%.

So it is a combination of those -- those three items that resulted in the -- in the flat top lines for INTS.

Relative to the fourth quarter, we are looking at pretty substantial growth, specifically within information technology, you know, in excess of 30%, and half of that will be organic and half is from the acquisition.

Defense systems or defense services will be basically flat, and then NASA, of course, will continue with about a 50% decline pretty much as we've telegraphed here for most of the year.

So year-over-year, at the end of the day, we will have pretty -- pretty strong growth.

So we are looking for a pretty good fourth quarter.

Okay.

And just to follow-up, defense services, what's actually down in that business?

I mean, you talked in the past about the dramatic drops we are seeing in the NASA business this year but not Defense services.

Yes, to put it into perspective, we are talking about a 5% decline in the quarter, but over a year ago we had a lot of contract field service work, and we entered into a joint venture that we refer to as DF-2 relatively minor in the big scheme of things, but that -- that basically -- the contract field revenue continues to be in '04.

It is not in '05 because of the joint venture, and it was an attempt to improve the economics and the returns and better -- better address our customers' needs.

And my follow-up, in the space projection for next year, Chris, if you look at the midpoints, the revenues are up, like, 17%.

Now can you discuss what's contributing to that much better growth?

Absolutely.

The -- the three major line of business within space, of course, are launch vehicles, and we are looking for growth at the launch vehicles, and that will be driven by more launches, atlas and protons will probably in the 7 to 10 range as compared to 6 or 7 this year.

Obviously this assumes business as usual and if and when the UOA venture is formed we would adjust accordingly.

Satellites?

We would expect Satellites to grow substantially, almost 20%, and that would be a result of increased Commercial satellites as we could be delivering in the 5 to 7 range as compared to basically nothing this year, and continued growth in government satellites.

So Satellites would be the biggest.

And, you know, within the strategic missiles, Fleet ballistic missiles will continue to have some growth.

So all three lines of business are growing, and that's -- that's the 17%.

Moving on we will go next to Steve Bind with Bear Stearns.

Good morning.

Chris, could you maybe just touch on your comments, you talked about the fourth-quarter margins being at least 9% again, but then if you look at your midpoint average for sales and for profits in 2006, you are showing just a touch over 9.2%.

Negligible improvement.

I mean obviously your aim is to be conservative but can you touch on where do you see the headwinds or are you being very conservative.

I don't know if I am being conservative.

I think I am consistent with what we've done the last five years.

If you conclude I have been conservative then, I guess I am still being conservative but we give a relatively wide range of our best estimate at this time, and, Aeronautics has about a $35 million range and Space has 40, and Systems & IT, 75.

You know, you can probably conclude that margins could be as low as 9.1 or as high as 9.4 depending on how the sales and the EBIT play out.

So, as Jim said, six consecutive years of margin improvement we're committed to do it and we try to give you the best range, the best range that we could.

We will see where this year comes out, but I am pretty sure '06 will be an improvement over '05.

Chris with respect to cash flow, it looks like CapEx is coming under your original target for 2005, I mean I suspect you will be slightly over 700 million.

I guess about cash for CapEx for '05 and '06 what are your revised assumptions and maybe you can just talk about, since you are in the subject advances this year and next year.

I know you were talking burnoff 450 to 550 in the second half.

Is there any change in your assumption for '05 for advances and what are you assuming for '06 and finally cash taxes.

Okay.

We did increase our cash flow guidance for this year, and, of course, we'll sustain that for '06.

Good news cash story as you suggest.

Let me first start with capital.

We continue to push the capital as late as possible, and I continue to believe that's driven based on our focus on ROIC.

I look at capital now at a 1.7 billion over the two-year period.

So, you know, 800 this year, 900 next year, 900 this year, 800 next year depending on how it flows and how the potential contracts play out the next few --- the next few months.

So, I would think of it as a 1.7 billion over two years is probably the best way to look at capital.

Relative to advances, I think in the -- in the last call I had suggested that it would be flat.

We have had an increase in advances for quarter, and still looking for a burn off, you know, by -- by year end.

So, maybe an additional $100 to $200 million of the fourth quarter coming down from advances, and that's one of the reasons that we increased the cash from Ops from 3 billion to at least 3.2 billion, so we still will experience that in '05. '06, again, we are looking at close to $0.5 billion of -- of burnoff and advances in '06, and we are still maintaining the 3.2 cash from Ops.

I think your last question dealt with tax payments.

You know last time I said $600 to $700 million.

You know, I still see that as a pretty good range.

And next year with the increase in earnings, we are probably in the 750 to 900 range at this point but I will obviously refine that in January to the extent necessary.

Moving on we will take our next question today from Joseph Campbell with Lehman Brothers.

Good morning.

Another good quarter.

Well, thank you.

I wonder Chris if could you speculate a little bit about how the potential for withdrawing troops in Iraq or diminished operations in Iraq might affect Lockheed Martin.

I guess this kind of gets at what is buried in the recent results so far as you can tell in support of Iraq or what kind of amounts are you seeing of these large supplementals are coming and maybe if the Army were less important and urgent, are there some other programs that seem to be suffering that might pop back up or -- whatever you would -- would you see here would be of interest.

Thank you.

Sure, Joe, thanks.

Well, first of all, relative to the business that -- that's in our results and our outlook relative to Iraq, as I said before is relatively immaterial.

We don't really have a significant source of revenue or earnings as a result of those supplementals.

A majority as you know is in the OEM budgets and it would not adversely impact our line.

In fact, it could actually help it for a variety of reasons.

I think a lot of the equipment and replacements would be coming back here to the states where we have lines of business that can be involved in the refurbishments and maintenance.

I think it would take some pressure off the overall budget, which would allow other programs that are constantly being scrutinized to possibly maintain their current budget and growth pattern.

And I think those would be the -- the main drivers as I see it.

Chris, just -- can you give us some sense that you characterize the Defense budget directly as being 60.

If we look out over the period, how does that percentage change over time presumably the -- some of the nondefense stuff is growing faster but perhaps not.

I think that is a fair conclusion, but, with an estimate of 38 to 39.5 billion of revenue it takes a lot to move it.

So I think your instincts are right.

The nondefense piece will grow more.

Does it -- it's actually 58% today.

Does it get to the low 60s?

Possibly, but I see a 60-40, 65-35 or 55-45, general split over the next couple of years.

Thank you very much.

Thank you, Joe.

Moving on we go to David Hart --- I'm sorry, Doug Harned with Sanford Bernstein.

Good morning, Chris.

Good morning.

You've talked about the importance of the O & M budget as an area for growth.

Can you give a sense how large today is your business that comes from the O & M budget?

And how do you see that growing?

What areas in particular?

Sure, Doug.

It has clearly been an area of focus and actually many of our programs receive funding from -- from a variety of the budget accounts.

It is not exactly easy to trace, but we probably think it is kind of in that $4 to $5 billion range for Lockheed Martin.

And, our goal is to try to grow that substantially over the next few years as, again -- as the need for maintenance and repairs and overhauls is one aspect.

We talked publicly about focusing on logistics and logistics being more from a command and control perspective, from a systems perspective, and there are a couple of opportunities that we are in the process of bidding that will help move us in that direction.

So, we will try to get -- keep you informed in subsequent quarters but you should think -- think of that as just being over 10% of our business.

Okay.

And then when you've described -- you've described the backlog will likely increase up to around the $73 billion by the end of the year.

Are there certain areas that we should think of as being the principle areas where we will see that increase?

Absolutely.

First of all, Aeronautics, we did sign up a contract modification for the joint strike fighter in early October.

And that was just around $6 billion.

We will sign up lot 5 on FA-22 for $2 billion dollars.

So clearly in Aeronautics.

In Space, we get the follow-on Trident ballistic missile order; we'll also get some government Satellite orders so space will be coming back up.

And in Systems & IT historically, especially in the IT world, tends to be a one-year to 14-month backlog so we will probably book the equivalent of what our revenue is -- kind of on a rolling basis.

So I would say aero and space at a minimum -- minimum and systems and ITs probably be slightly flat or maybe a little bit of an uptick depending on a couple of awards coming out later this year.

Okay, great.

Thanks, Doug.

We will take our next question today from Joe Nadol with J.P. Morgan.

Thanks, good morning.

Good morning.

Chris on the share repurchase activity in the quarter.

It is very strong.

I think it is the highest you have done in the quarter forever.

Or at least as far as anyone can remember.

I was wondering if there is any reason for that specifically, where your stock was, a change in your strategy, and what can you tell us about what that means for going forward?

Okay.

I don't think there is any change in our strategy.

We talked about trying to reduce our share count.

The first quarter where we -- except for the earnings blackout in July have the entire month of August and September to actually execute the share repurchase program.

So that continues to be one of the constraints to the share repurchase.

We obviously comply with the -- with the rules relative to material nonpublic information so we had basically 60 calendar days to execute.

I believe the stock was relatively weak in that period of time and we were also trying to offset significant amount of dilution caused by a 401K match and stock option exercises in the first half of the year.

So -- my goal -- I know there's a lot of questions relative to share count.

I just look quite simply at the shares outstanding as a metric, and in '03 we had almost 456 million shares outstanding and the end of this quarter we have 436 million, and the diluted calculation in my opinion is interesting but irrelevant, because over time, the math will -- will equal out.

So they are all going the right direction as far as I am concerned.

And, with the board authorizing an additional 45 million shares I think as of today we're up to 47 million of authorization and we will continue to execute consistent with our stated policy.

Okay.

As a follow-up, on the Space Military Satellite side, you mentioned up 20% next year as part of your guidance.

I was wondering if you can parse that a little bit more in any way would you see fit.

If [FIA] is a big part of it.

If you can say anything about that and plus the other programs that are a big chunk of that.

I think all I can say this is really across -- across the board.

All the pro crams contained within our satellite business.

We have had solid performance, and we are continuing to win new business and executing on it.

Okay.

Thank you.

We will go next to Morgan Stanley and Heidi Wood.

Good morning, this is actually [Greg Alexopolis] for Heidi.

Good quarter.

Chris, how have the QDR discussions affected your guidance for '06?

And while on on it, the Air Force has been trying to increase the units on the F22.

Can you give us a little more color on how that is going?

Sure, Greg.

I would assume Heidi is still reading our press release or something, but tell her we said hello.

Will do.

Relative to the QDR, we don't have any particular insight other than it will be issued in a February '06 time frame, and as we said before the link from the QDR to the budget would be hard-pressed to impact our -- our '06 guidance.

So we -- we've assumed business as usual.

The programs are performing well.

And -- and we have pretty good visibility into the FY '05, FY '06 budget.

So there is no major change assumed as a result of the pending QDR review.

And on the FA22, again, our guidance and forecast is based on last year's PVB753 which goes out through, Lot 7 is my recollection -- or is it -- actually it is Lot 8 which is calendar year '08 which is why I said the deliveries would continue into the early part of the next decade.

If there's additional quantities, we will adjust upwards but no major changes in our business or our backlog or assumed.

Great, thank you.

Thanks, Greg.

We will go next to Byron Callan with Prudential Equity Group.

Good morning, Chris, nice quarter

Thank you.

Just following up.

I think Joe asked about Space, but more specifically there have been reports in the press about changes in the [FIA] program.

Have you changed your guidance with the change of the structure of that program?

I can't make any comments other than, we update our guidance based on our best outlook, and launch vehicles are increasing, Commercial sats, government sats, and strategic missiles.

We've given our best estimates for the remainder of this year and all of next year based on our portfolio.

Okay.

Just looking at 2006 then.

What would kind of take to you the high end of the guidance since I think that's where a lot of the cell sites have probably settled out.

To get to you up to 425, I mean, are there a couple of swing factors that you will look for, Chris in how you are thinking about 2006 or would move you from the $4.00 up to the $4.25 level?

Oh, okay.

I mean its -- as usual, the main driver, if you look back historically has been our cash deployment and what we do with our cash during the-- during the 12-month period.

We have assumed a fair amount of share repurchases in that, so we have assumptions relative to starting at the bottom with our share count.

We have a tax rate of about 32%.

I wouldn't expect significant changes there, but we do have, in my opinion, a world-class tax organization.

There could be additional upside there, and then the operation really comes down to how we performed.

And when we look at the Performance and the margin story for the last six years, I think it has been pretty -- pretty impressive.

So we have revenue on basically three -- three different types of revenue recognition.

We have the deliveries, of course, which affects our launches in our airplane, so you always have the timing effect of those.

You know, that's 20% or 30% of our annual revenue.

We have the normal cost-to-cost accounting which a big piece of that is our ability to meet our customers' needs and receive award fees and, of course, our service contract-type account is based on our ability to get the volume and the through-put and in the civil government agencies meet or exceed their performance criteria.

So, it's a wide range.

I think the last couple of years we started at $0.25 and --- as a range -- and then throughout the year we will adjust it accordingly.

Los Alamos is a big award that we hope to hear about in December and that would kick in the midpart of '06.

That could be a substantial improvement to our earnings and our margins and how we continue to execute and what contracts are awarded this fourth quarter and early '06 will also have an impact.

Thank you.

Thank you.

I guess I will also mention that that guidance -- I am still on the line here does include $0.15 of headwind from the new stock compensation noncash accounting.

So I am not sure that's been consistently applied, but there is a $0.15 headwind that will affect the comparability.

Understood.

Great, thank you.

We will go next to UBS and David Strauss.

Good morning, Chris.

Good morning.

For 2006 for aeronautics , can you give a rough order of magnitude, or precise as you can be, in terms of what you are expecting by product line: F-16, FA-22, F-35 and C130J?

Sure, why don't I give you the lines of business and I will ask Jim get into the program matics.

As you'll recall, we basically have three major lines of business within aero.

Focusing on revenue '06 to '05, IT is basically being flat.

IT Air Mobility which includes programs like the C130 and the C5 coming down and the delivery -- Jim will give you the delivery numbers on the J, and then what we call our research and development arm is basically flat and most of those are classified programs.

So Jim do you want to give a little more color.

Yes, we expect the C130J deliveries to be about 2 or 3 less' 06 versus '05, which will be in the 12 to 14 range for '06.

And the F16 about --- a few less in '06 versus '05.

Kind of the low 70s in '05 and the high 60s in '06.

Okay.

Could you -- any color on -- on JSF and F-22 in terms of revenues?

Le revenues for F-35 and F22 kind of flattish year to year.

Okay.

And one follow-up.

Chris, could you give the breakdown on CAS and FAS, what you are anticipating for '06, and even moving forward beyond that, how quickly we should see -- should see the CAS levels converge with FAS.

I will do my best to try here, David.

Just to clarify we will give the final numbers in January but for the purposes of this release we have assumed a 5.5% asset return for the full year and 5.5% discount rate which is what it would be if we had to pick it today.

The components of that FAS expense is 1.1 billion for '05, and I expect that to stay at about 1.1 billion for '06.

And then the CAS cost as you recall, is about $0.5 billion in '05, and we would project that growing to about 650 million, and it's that difference between the 650 and the 1.1 billion that got us the 450 million or $0.65 a share that we have included again as headwind relative to our $4.00 and $4.25 guidance.

That's how I see it.

Longer term, it really does continue as I have said in the past to be a function of that discount rate and the actual asset returns.

Rates coming up would start to bring down the FAS expense.

CAS I think will continue to have slight growth and the convergence here will bring that number down over time is my hope and expectation.

Thanks a lot.

Sure.

Next we will take Cai von Rumohr with SG Cowan.

Yes, as I look at 2006, it looks to me that you are assuming the share count is basically flat.

Is that correct?

And given that you bought about 6 million shares, why is that your assumption?

Yes -- we -- I don't think we gave any specific guidance on this.

My assumption that the '06 share count would be less than the '05, consistent with our stated goal to reduce the share count.

With the $0.25 range, it contains, the ability to reduce that.

So --

but the high end of the range basically assumes if you use a 32% tax rate which might be high, either the 446 share count.

So basically assumes that it doesn't go down.

Maybe another topic.

The -- what was the -- the Inmar sat cap gain?

How much did you get from that proceeds?

Sure.

I think you are referring to the October transaction.

Our net proceeds were about $85 million resulting in a $0.12 per share gain that we recorded in the month of October.

We owned 40 million shares.

We were able to sell about 15 million.

So as of today, we continue to hold 25 million shares of Inmarsat.

I think it is trading in the $5.00 or so-per-share range and we have a lock-up agreement that expires at the end of December, and obviously we will have more flexibility at that time.

And it is all cap gains?

It is pretty much all cap gains?

Is that --

Yes.

The book value on that is relatively low as a result of their privatization, the IPO, and -- it would -- it would almost all fall to the bottom line.

Thanks a lot.

Sure, thank you.

Next we will go to Troy Lahr with Legg Mason.

Thanks.

You guys trimmed about, I guess, $200 million off of your guidance for this year for the space business.

Is something getting pushed out into 2006?

Yes, let me take a quick look here.

No we -- at first, I think we just narrowed the range as I look at it.

I mean -- let me start at the consolidated -- at the consolidated basis.

You recall our old guidance was 36.5 to 38.

As I said earlier we would like to start with the 1.5 billion range early in the year given the uncertainty of new programs and awards.

And all we did on a consolidated basis was take up the low end 0.5 billion and lower the top end 0.5 billion, so that's why we're at we are at 37 to 37.5.

When I look at Space, you know, we are just talking about it, 6.5 to 7 and now 6.5 to 6.8.

I think we had one launch that may in our opinion look more like a January launch than a December launch.

So there's nothing there of concern from my perspective.

Just trying to -- trying to give you a little better guidance where it is going to come in.

And actually with a fair amount of their business like Aeronautics having cost reinversable aspects, to the extent we improve our productivity and cut costs, it does have the effect of lowering revenue which is one of the contributors to the improved margin.

As I look at the fourth quarter sequentially, we will show growth, and, we are pretty confident in the 6.5 to 6.8 range.

Good.

No hidden message there.

Okay.

On the Commercial side -- I guess that's generally --- the Commercial satellite side, generally lower margin-type work.

Is that hindering margin expansion at the business as that particular area ramps up?

I think that's fair.

We've talked about before the imbalance between the supply and demand and actually through the first three quarters as planned, and I think as previously disclosed, there are have been no deliveries so there is obviously no revenue or earnings.

And we obviously expense our G&A costs and other operating costs on a monthly basis.

So the products themselves are kind of low single digit margins upon delivery.

And we are looking forward to next year where we are forecasting 5 to 7 deliveries and we are we are looking at this to be a profitable line of business in '06 but still dilutive to the overall space margins.

Okay.

Great, thanks.

Okay.

Sure.

Our next question today is from Myles Walton with CIBC World Markets.

Thanks, good morning.

Good morning.

Contemplating the ULA joint venture.

What should we see as a net impact to earnings if the deal is done in '06?

And also if it is withdrawn, do you intend to resume the civil proceedings that had been suspended?

The second question answer would be obviously, yes.

The first question, I don't see a significant impacts on earnings.

What we will see is a 50/50 joint venture, which we will account for under the equity method of accounting so our top-line revenues would be reduced for the atlas line of business in effect, which is currently estimated to be around $850 million for 2006.

And you will recall I mentioned 7 to 10 launches.

So, that's the main driver.

And then our backlog I think as of today we probably have $1.5 billion in backlog as we currently have 14 -- 14 atlases in backlog.

I think 12 would go into the JV as Government and two are Commercial.

So there will be a backlog adjustment, sales reduction as we adjust to equity accounting.

I think it is more --

Okay.

But not much in the earnings front

I wouldn't think so.

Okay, great.

You mentioned space.

You anticipate being able to sustain at 9%.

Is that into '06 as well?

Oh, absolutely.

Okay, great.

The last one, can you just give us a little bit of clarity on the moving parts within ES -- sorry within Systems and IT, your outlook for '06?

Sure, we have the three major -- the three major areas.

I guess I'll -- I'll focus on -- focus on the sale.

We see, single digit -- low single-digit growth in electronic top line and the big growth, double-digit growth within electronics is coming from the platform business mainly driven by programs such as the presidential helicopter, missiles and fire control is basically minimal growth.

And the MS2 business which, of course is maritime.

We are looking at kind of mid single-digit growth.

Overall electronics in that 3 to 4% range.

IS&S, we are getting high upper single digits in the 8% to 9% range as where we tend to have a fair amount of our classified and intelligence work and, of course, Information and Technology Services will -- will have substantial growth, again, information technology will be double digit in that 12% to 15% range.

We see Defense systems continuing to grow and as I said NASA will be flat.

So, when you look at everything all up, I am looking at Systems and IT to be $19.5 to $20 billion of revenue next year which is kind of a 4% to 7% growth.

IT and systems being the big parts and the more traditional Defense weapon military products being a little lower.

Alright.

Thanks, nice quarter

Sure.

Thank you.

Our next question today comes from Sam Pearlstein with Wachovia.

Good morning.

Just a quick follow-up in terms of the pension assumptions with next year.

Are you assuming that the return on asset assumptions is the same?

Absolutely.

Okay.

So you are only saying performance year to date or however it will look year -- to the end of the year could be 5.5%?

Exactly.

Yes, the 8.5 will be the expected return.

I don't see any reason to -- to change that based on the long-term nature of that assumption, and the fact that we've met or beat that the last two years.

We will see how '06 wraps up, but we are assuming actual returns of 5.5 and the discount rate of 5.5 also.

Okay.

Is there any contribution that is required in '06?

Yes, for 2006, we are looking at the total CAS contribution of being around 650 million or so. 600 to 650.

And you'll recall we already prefunded 450 of that in June.

So we have another -- call it 175 or 200 of CAS funding that we reserve the right to put in later this year or is not required to go in any earlier than 2006, and then we will run through the -- the Aritha calculations as required by the IRS at the end of the year.

The last couple of years have been tens of millions required for that but that is just a timing issue.

I think it is too early to predict.

I don't expect that to be material.

So, a $200 hundred million in '06 and if we choose to do it early there will be no requirement at that time.

Thank you.

Next we will take Nick Fothergill with Banc of America Securities.

Good morning, Chris.

You mentioned the Los Alamos program and how that moved the needle for you in 2006.

Can you explain how and also have you got any other program competitions coming up over the later '05, '06 period that gets you excited and maybe beyond '06.

Absolutely, Nick.

Los Alamos is a contract to manage and operated the Department of Energy.

In a full-year basis depending on performance and award fees this program has the opportunity to generate $40 or $50 million of earnings.

So next year would have half -- half the year, call it 20 or 25 million and this would be a continuation of our growth into DOE.

We obviously already do work at [Sandia] and Capital and have a good record.

Relative to the rest of the year, I've got to go back and say I have been pretty excited looking back to the third quarter to actually be successful with those civil government opportunities and specifically, the National Archives, the New York City Mass Transit and of course the census.

There are other opportunities in Homeland Security for the usual customers there, of course, we have International opportunities in Greece and Pakistan on the F-16.

We have the next buy -- buy three of the Atlas program and we have the combat search and rescue helicopter program which would be a natural evolution to our strategy to grow into that white space and as you know we have been quite successful there.

Let me ask Jim to give you a couple of more we are looking at.

For the Air Force, the air operations center, systems integration project.

Next phase of AMF jitters, pack three international, additional FBI systems work.

The next increment of the small diameter bomb.

And then there are several large IT jobs.

The Army Corp of Engineers, Department of Energy in Hanford, the general services administration and also an IT opportunity for the FBI.

And Homeland security the two largest ones there are the integrated wireless network for three different agencies and the America shield border protection.

In space, large --- satellite --- government satellite programs that need to be decided exactly how they are going to go forward, but we certainly we are in all those, and the shuttle replacement is a possible long-term as well.

There's been some noise on the hill that Space is a little bit vulnerable particularly in the missile Defense arena for potential delays and cutbacks.

Obviously, on the terminal phase, [meiads] pack 3 and FAS you're probably less vulnerable but in service and fee and other areas you might be.

Can you outline how much of your Space or other revenues is focused in the more vulnerable areas of Defense space and particularly the missile Defense arena?

Yes, I think as we look at, as you said the terminal phase.

We are in pretty good shape with the Fad and the pack 3 and meiad , space-based assets, the one we have been focusing on and actually making good progress in deliveries is the [Sibers] program.

That is several hundred million dollars a year of revenue, and there have been two -- two planes ordered and we are making progress on that.

There has been a lot of discussion and press relative to what's referred to as [Siber's] 3 through 5, and whether that program will continue, but it is not currently in our backlog.

It is not in our outlook for '05 or '06 as it is a little longer term, and they will have to balance the budget pressures and see how best to deal with it.

So while it's a significant part of our -- our Space and maybe Missiles and Fire Control business, when I look at our components, I don't see a lot of concern in exposure.

What we are doing is in production and is needed and I think some of the more revolutionary or transformational programs which we may not be a part of are getting more focused than ours.

Thanks a lot.

Thank you, Nick.

Our next question today is from Robert Springarn with Credit Suisse First Boston.

Good morning, Chris.

Good morning.

Can you just speak to the [inaudible] the revenue volatility in the electronics area throughout this year.

Okay.

Electronics area revenue volatility -- I guess what you are referring to specifically is our electronics system business area.

We started a year a little over 2.5 billion, went up to 2.7, down to 2.5 and we'll probably get in the 2.8 to 2.9 range; a lot of it just deals with two components.

Number one, revenue recognition.

We again recognize revenue based on delivery of units and products which I think within -- within electronics is probably in the 40% to 50% range.

So it is somewhat volume dependent which, again, ties back to operations.

We have done a much better job in my opinion smoothing out from where we were previously and delivering the products on -- on a regular basis.

And then the other part deals with the budget and the funding.

And historically, you'll -- you'll see that backlog is the lowest in the third quarter.

As you know our third quarter is our customers' fourth quarter.

And then we tend to have a pickup every year that we've been in business in the fourth quarter because that's our customers' first quarter, and they have a little more money in funding to allow us to start procurement on long lead and such.

So -- I think that trend is going to pretty much continue.

You know as I look at our Systems & IT Group , we -- we do see kind of pretty -- pretty steady growth within ISS and INTS, and as I look at the fourth quarter there is a good possibility for the first time that our corporation will exceed $10 billion of revenue which we are very excited about, and that's really across the board good work from '05 business areas.

Lori, we have time for one more question.

Thank you, sir, we will take that question from David Gremmels with Thomas Weisel Partners.

Thanks, good morning.

During the quarter you won this $200 million contract with the New York MTA.

My question isn't so much on that particular contract, but just on that type of opportunity.

You know is this the beginning of a -- of a groundswell of Homeland Security-type opportunities and Transportation-type opportunities or more of a one-off?

Well, I think it is pretty consistent with our strategy in areas of focus over the last couple of years.

As we said, we are one of the few lead system integrators that can bring together the best capabilities.

We've already have some interest already from -- from similar type entities throughout the country, and we think we have the capability, the integration skills to pull this together.

So, I would hope this is the first of -- first of many as we continue to grow and evolve to Homeland Security line of business.

So Lori, I guess is there a follow-up, David?

Yes, just one quick one on Aeronautics' seasonality.

Your guidance implies that the aero margin falls off pretty significantly in Q4.

And we have seen that for the last couple of years.

Is there some normal seasonality at work in the fourth quarter?

Why would we see that dip down?

Yes, I don't think it is that -- that significant.

I think it is just timing and, again, we have done a great job compared to several years ago where everything was back-end loaded in the fourth quarter of the second half and really just running it as a stable flowing business.

I think we give wide ranges and I wouldn't -- a couple million bucks moves you 10 or 20 basis points.

There is nothing there of concern from my perspective.

Well, Lori, we appreciate everybody's questions and thank you.

And I guess I just want to say that the Defense business is doing very well.

We continue to see modest top-line growth.

It is 60% of this corporation.

We continue to focus on Systems & IT as a growth area, Space as a growth area, and the Aero backlog is very solid.

So a special comment and thanks to our 135,000 employees for a great quarter and a great nine months.

I want to acknowledge the Titan4 team who completed their last successful launch last week.

Just outstanding operational performance over the life of this program, and great financial success.

And also recognize their employees in Mishu, Louisiana who were impacted by hurricane Katrina who have now returned to work and focused on the quality and productivity to support the space shuttle.

So, again, thanks to everybody and we look forward to talking to you in January of next year.

Once again, that does conclude today's conference.

And I would like to thank everyone for joining us.

Have a good day.