洛克希德·馬丁 (LMT) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to Lockheed Martin fourth quarter and year-end 2005 earnings results conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Jim Ryan, Vice President of Investor Relations.

Please go ahead.

Thank you, Jamie.

With me here today is Bob Stevens, our Chairman, President, and Chief Executive Officer; and Chris Kubasik, Executive Vice President and Chief Financial Officer.

As in the past, we have posted charts on our web page which supplement our comments today including our Safe Harbor statement.

You can obtain them at our website www.lockheedmartin.com/investor.

In today's call, statements 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 2004 10-K and our 2005 Form 10-Qs for a description of some of the factors that may cause actual results to vary materially from anticipated results.

The charts posted on our web page include definitions and reconciliations for the non-GAAP financial measures referenced in today's call.

Also for the first time, today's call will be made available on our web page for downloading in MP3 format as a pod cast.

Refer to our web charts for today's call as they are intended to be reviewed with the conference call audio.

With that I'd like to turn the call over to Bob.

Thank you, Jim.

Good afternoon, everyone.

Thanks for joining the call and let me wish you all a Happy New Year.

To organize the call today, Chris and I will first summarize 2005.

We'll look at our performance strategically, operationally and financially and then we'll look at 2006 and beyond.

As 2005 started, we recognized it would be a year of challenges.

Recall that we entered the year with PBD753.

We had many outstanding commitments to customers reflected in our $74 billion backlog that we knew would require excellence in execution.

We'd committed to a strategy of disciplined growth and market leadership with strong cash generation and smart cash deployment to improve value.

We also anticipated thorough and exacting reviews of our capabilities and programs throughout the QDR and budget process and along the way we had to deal with the unforeseen challenges brought about by Hurricanes Katrina and Rita.

I'm pleased to say that in 2005 we met these challenges and had a very strong year.

Working with the finest leadership team in the industry and a gifted workforce, their energy, experience and dedication prevailed.

This is no accident.

We believe that investing and developing our leaders, preparing talent and refining organizational and business models leads to excellence and we're driving hard to excel in all that we do.

That's why we've committed to comprehensive initiative to sustain continuous improvement called full spectrum leadership.

Our leaders must demonstrate rock-solid performance and they must anticipate outcomes.

That means they must get results, meet objectives and put numbers on the board while simultaneously exhibiting strong leadership behaviors, communicating clearly, advancing team work, inspiring trust, energizing others.

Many of you recently had the occasion to meet some of our leaders at our Center For Leadership Excellence where we dedicate ourselves to this end.

Our investment here is already yielding dividends by deepening our bench strength and enabling us to meet demanding challenges, raise the bar higher, and complete more than a dozen executive transitions seamlessly and effectively during 2005.

It's also how we intend to fulfill commitments to achieve, performance and improve value to customers and shareholders in the future.

Our work force represents 135,000 of the finest professionals in the world, a huge and invaluable reservoir of talent and experience with 60,000 scientists and engineers and 30,000 software and IT specialists, most with security clearances.

They are impressive.

That's why we receive 1 million resumes each year and can be very selective as we've hired about 5% of eligible U.S. engineering graduates.

The cream of the crop in technology and engineering.

With this leadership and this talent we've worked for years to horizontally integrate our Company so that we can better assess market conditions, align strategy, and allocate resources quickly and effectively.

This horizontal integration approach has been the cornerstone of our successful discipline growth strategy where we've addressed new market opportunities without significant risk or investment.

Sometimes this approach has been called "the white space" or "adjacent market" strategy, which has led to strengthening positions in prime ship contracting like LCS, helicopters like the VH71 for the President and Merlin Sustainment, outsourcing like FAA Automated Flight Service Station, information technology like the innovative work we're now doing for the National Archives, and homeland security like the new initiative to protect the New York City subway system.

This diversity, along with the four targeted acquisitions we completed quickly and efficiently in 2005, broadens our portfolio and positions us well for future growth.

We did have some disappointments that were not in keeping with expectations or our standards.

Even though the HEO payloads have been delivered and the GEO satellites are showing progress, the time required to complete these milestones on the SBIRS program has clearly been disappointing.

And while significant progress was made on the multi-intelligence sensor suite, the ACS termination for convenience was disappointing, both reminders of the difficulty associated with complex technology as well as the continuing need on our part to set high standards and to meet those standards.

Overall, though, operational performance on more than 3,000 programs in 2005 was strong and consistent, with some impressive accomplishments including the 77th consecutive successful Atlas launch, a record no one in the space launch business has ever before achieved.

Successful tests of the FAD and JASM missile systems.

The successful launch of the final Titan IV rocket.

Now, this vehicle accomplished dozens of critical national security missions over its lifetime and now we plan to continue those missions with our Atlas V vehicle through the EELV program.

Sincere congratulations to the Titan team for their outstanding work here.

The initial operational capability was achieved for the F-22 Raptor.

It's now ready for service and it'll fundamentally change how America defends itself long into the 21st century, shortening wars and saving lives.

Production's well underway for our first vessel of the Littoral Combat Ship, the first of 22 Joint Strike Fighter test aircraft has now completed assembly.

It'll leave the factory in February and it'll fly later this year.

All of our aircraft program deliveries occurred on or ahead of schedule in 2005.

We expanded our international footprint with the medium extended-range air defense system, the Patriot Advanced Capability system, and the F-16 program, and we made significant progress advancing discussions about the merits of the United Launch Alliance venture.

Across the board, we extended our exemplary performance record in 2005, and credit goes to the people of Lockheed Martin.

Quite apart from the quality they demonstrated in all the business measures we monitor, their care, dedication, and compassion for one another so clearly evidenced during the hardships imposed by the hurricanes, was extraordinary.

In Michoud, Louisiana, heroic measures were taken to protect that facility and in the storm's aftermath fellow employees not only opened their hearts and in many cases their wallets, they opened their homes, as well.

Their response was inspirational and when you've heard me and others say that it is a privilege to serve in an enterprise with people like this, their response is but one reason why.

We've always said that to keep our business model in balance, our strategic and operational success must must be accompanied by financial outcomes that'll benefit our investors.

So I'll turn to Chris now for details of our 2005 financial performance.

Thanks, Bob.

2005 was indeed one of our best years ever.

We achieved record sales, earnings, cash flow, earnings per share, and return on invested capital.

We are extremely proud of these accomplishments as they reflect the contributions and outstanding performance of all five business areas and the results of our disciplined cash deployment strategy.

For the fourth year in a row we've increased sales and earnings per share with record-setting performance in both categories for 2005.

The $10 billion of revenue recorded during the fourth quarter of 2005 also reflects a new quarterly record for the corporation.

Even with $10 billion of revenue our strong bookings allowed our backlog to grow to approximately $75 billion making 2005 the fifth consecutive year we've maintained backlog above $70 billion.

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

In fact, all five business areas increased their EBIT and margins for the year.

Since 2000 our consolidated segment margins have continually and substantially improved with each and every business area contributing to this performance.

These results confirmed that our strategy is sound and our execution is strong.

They also demonstrate our focus on consistency with no surprises.

This consistency is a result of risk mitigation processes which include open lines of communication, close monitoring of trends, independent cost evaluation, and reliance on realistic financial projections.

For the fifth time in six years free cash flow exceeded our adjusted net earnings.

On a per-share basis, free cash flow was significantly higher than our GAAP earnings per share.

Both GAAP and free cash flow per share experienced strong growth in 2005.

Cash generation continued to be an important focus of our management team.

In fact, over the past four years we have generated more than $10 billion of operating cash flow.

This last quarter was the twelfth consecutive quarter cash from operations has been positive.

Our cash deployment activities throughout 2005 are another example that we've done what we said we would do.

As I look back over the past four years, we've reduced debt by $2.5 billion and our debt rating remains strong and our underlying fundamentals continue to improve.

In fact, just today we received an upgrade to our long-term debt rating to BAA1 by Moody's investor services.

We've also repurchased 46 million shares of our stock for $2.5 billion.

We've raised our dividend multiple times to reach a level of $1.20 a share annually and we've spent approximately $1.6 billion on 10 acquisitions, largely focussed on our growing systems and information technology group.

Acquisitions are an important element of our balanced cash deployment and disciplined growth strategy.

We've developed a sound process to identify targets, conduct due diligence, negotiate with discipline, and rapidly assimilate acquired companies into our culture.

We've focussed on government IT service providers, systems integrators, and complimentary technologies.

These are companies in growing markets with strong growth potential.

Integration of each one of these companies has been fast and seamless.

Successful integrations are a best practice at Lockheed Martin.

As a result, these 10 acquisitions are performing at or above the levels assumed in our original internal business models.

The businesses have achieved strong topline growth and improving margins since being acquired.

And finally, collectively, they have won important recompetes and new business opportunities.

These transactions have provided solid cash returns and have been at attractive valuations.

In fact, on average, our acquisitions have been at high single digit forward EBITDA multiples.

We will continue to look for opportunities around these valuation parameters.

In 2004, we formalized our commitment to measuring and improving our ROIC, or return on invested capital.

ROIC at the end of 2005 was substantially higher than 2004.

This also reflects the fourth straight year of ROIC improvement and we are now an industry leader in this metric.

We've enhanced our ROIC calculation methodology to remove the benefit we've historically received as a result of minimum pension liability impacts on equity.

Both the press release and web cast slides contain complete explanations of the enhanced methodology.

For completeness, we've also included our ROIC results and projections as calculated under our prior reporting methodology.

Under either approach, we project continuous improvement.

In the future, we will report our performance based on the enhanced method which is more in line with our use of ROIC in our annual incentive compensation plans.

ROIC has been embedded within the culture of our entire corporation and will continue to be an area of focus for all of our employees.

Bob?

Thanks, Chris.

Let's take a look now at our future.

We feel confident our leadership initiatives and superb workforce position us for a continued strong performance and profitable growth, leading to sustainable value generation and a discriminating competitive advantage.

We expect to have solid top line growth in systems and IT business and project that this portion of the business will likely comprise two-thirds of our sales within a few years, and with future accusations it could be more than two-thirds.

This anticipated mix change reflects our focus on a broader range of both defense and intelligence work, as well as expanding the number of non-defense government opportunities that we pursue.

On the defense and intelligence side, the budget's expected to grow modestly for several more years in order to continue the modernization and recapitalization that began around the beginning of the decade.

In February the administration will submit the results of the quadrennial defense review, the fiscal '07 budget and the new future year defense plan with projections extending through fiscal year 2012 with preliminary indications indicating most of the defense programs are generally well supported.

DOD anticipates the costs associated with operations in Iraq and Afghanistan will continue to be met by supplemental appropriations and the congress has already provided $50 billion in 2006.

To sustain organic growth, we'll continue to expand our addressable government market opportunities by focusing on capabilities we have and customers we know.

One example that we feel will be particularly productive in the future is the sustainment and logistics business, which is mainly funded by the operations and maintenance budget.

That budget tends to total around $150 billion annually.

Although for new systems, initial funds are often provided by procurement appropriations.

This type of business already represents more than 15% of our sales today.

For us, it's a relatively low risk, high return business.

And for customers, it's absolutely essential to address.

Sustainment can represent as much as 70% of the total ownership costs for any new system.

The expected life cycle of these systems is lengthening from years to decades.

In fact, we have a number of programs that have moved through the 50-year mark.

Significant value for customers lie in our ability to design systems for ease of future adaptation, to incorporate technology upgrades include evolving net-enabled capabilities, to maintain configurations and provide maintenance and spares through supply chain management, and to develop training programs such that operational availability, which is what customers really care about, is improved.

The bottom line here is that we want to reduce total ownership costs while improving mission effectiveness.

We believe there's a significant opportunity to apply our knowledge, the experience we've gained from having such a wide variety of systems deployed for decades and our capabilities to improving quality, shortening cycle times, and through real cost reduction creating some budget headroom for customers in the future.

While it didn't exactly capture headlines, our F-117 total system performance contract won the DOD Performance Based Logistics Award in 2005, demonstrating our ability to successfully perform this type of work and attain great results.

Recent new rewards include the Merlin Capability Sustainment Programme, the Integrated Prime Vendor for multiple Air Force logistic centers, and F-22 performance based Agile Logistics Support program.

Future opportunities lie in each of our other aircraft programs, the presidential helicopter and other rotary wing programs, the Littoral Combat Ship and Navy programs, deep water for the U.S.

Coast Guard.

And our range here isn't limited to new systems.

Opportunities lie in legacy systems, as well.

At this time we estimate these accessible market opportunities to be about $50 billion.

Government IT, including outsourcing, represents another focus area.

We believe this represents an addressable market opportunity in the tens of billions.

It's growing in the high single digit rate annually.

Within Lockheed Martin we've been growing this line of business consistently and have added selected acquisitions with a disciplined approach that will enhance future value.

Nearer term, competitive opportunities represent an expanding diversity in the range of applications of customers served, including the GSA Alliant program, the FBI Sentinel program, and DOE at Hanford.

In the outsourcing arena we won the FAA's Automated Flight Service Stations program, the largest outsourcing contract to date.

Looking forward opportunities include IP outsourcing for the Army Corps of Engineers, the Internal Revenue Service, and the centers for Medicare and Medicaid.

And in homeland security, where the addressable market opportunities grew year-over-year by more than 20%, we're pursuing opportunities such as Secure Border Initiative, that was formerly known as the Americas Shield Initiative, the Eagle program, the integrated wireless network and others, with a potential order value in excess of $15 billion.

With more than 300 partners world wide and a strong track record of performance and cooperation, we'll also continue to pursue international new business over a broad spectrum, including missile defense, ship systems, military aircraft, space systems, and overall systems integration and information technology.

Turning to our space segment, we expect to grow at double digit levels in 2006 prior to the formation of the United Launch Alliance joint venture.

Longer term, growth in our space business will mainly depend on the vitality of the government's satellite business and our ability to capture market opportunities.

We think we're well positioned here and there are several significant opportunities ahead of us including TSAP, the space-based radar, and GPS3.

For NASA, we're also pursuing the crew exploration vehicle and potential space exploration missions to the moon and Mars.

We're proud of the recent success our NASA customer enjoyed on the Stardust mission.

The just returned samples of the comet Wild 2 safely to earth, and believe we're off to a great start on the New Horizons mission to explore Pluto.

That successful Atlas launch last Thursday was number 78 in a row, a new record.

In aeronautics, as we've discussed with you previously, we expect sales to decline during the next few years in accordance with our phasing plan reflecting lower F-16 sales.

Beyond that, aeronautics could grow once again with F-35 ramping up, combined with the continuing production of F-16, F-22, and C-130 aircraft.

Overall our objective is to grow sales, improve margins, generate cash and deploy it wisely, consistently grow earnings per share and generate industry-leading levels of returns on invested capital to provide attractive returns to our shareholders.

And now I'll ask Chris to provide more details on future financial outlook.

Chris?

Thanks, Bob.

We expect to improve margins in space, aeronautics and across the entire corporation.

Our goal is to reach double digit segment margins which reflect strong performance, maturing of programs started up over the past few years, and favorable program mix.

Top line growth is expected to continue but at a moderate level before any acquisitions.

We also continue to expect cash from operations to average more than $3 billion annually with free cash flow continuing to track adjusted net earnings.

We plan to deploy the cash to increase shareholder value.

As you know, we are committed to reduce our share count and review our dividend annually.

We also plan to continue to make good acquisitions at attractive prices.

Just today we closed on the acquisition of Aspen Systems, which we announced late last year.

We are patient and we are disciplined.

And we are committed to retaining our position as an industry leader in ROIC.

It was a great year in 2005 and we are looking forward to more great years in the future.

So with that, Jamie, I believe we are ready to open the lines for questions.

[OPERATOR INSTRUCTIONS].

Steve Binder, Bear Stearns.

Good afternoon.

Good quarter, good year to both of you.

Can you just touch, Chris or Bob, on info tech and especially government IT, because back in the third quarter obviously government IT sales when you back out [side] techs was flat and looks like in the fourth quarter, I think you guys were expecting a bounce-back in the fourth quarter, when your back out side techs, it doesn't look like there was a whole lot of growth again.

At the same time, though, it looks like info tech had a very strong quarter for bookings, just based on your ending backlog.

I mean, the book to bill looks like it was like 1.5 times.

Can you maybe just address what's going on there specifically in the government IT area?

Sure, Steve.

Thanks, first of all.

This is Chris.

Relative to information technologies, which is one of our three lines of business within INTS, I think it was back in October that I said we expected about 30% growth in the fourth quarter and in fact we ended up growing 33%.

So we met that objective basically just shy of $700 million of revenue for the quarter.

Relative to backlog, while it's not broken out separately, to give you the specific numbers, we ended the year with just shy of $3 billion of backlog in IT and a year ago we were at 1.8 billion.

So, you're right, we had a very strong order and booking in the quarter and we're optimistic for another strong 2006.

And, Steve, when we look out a little bit at the longer term, a little both beyond the horizon of the quarter and through '06 and even beyond, we're quite confident that there will be a demand for more applications, more efficiency, more connectivity and, frankly, more outsourcing opportunities so we rather expect that the size and proportionality of this market will continue to expand as we look forward, and we want to be well-positioned in that expansion.

Did you have any other questions, Mr. Binder?

Just one other question with respect to cash flow.

Looks like for the year, in 2005, customer advances if you go back to October of '04 you've been talking about a $500 million burn-off and you obviously did a lot better this year.

You generated about 300 million of cash out of customer advances.

That's been kind of a plug historically, Chris, and just wondering -- you had previously projected a $500 million burn-off in '06.

I guess two things -- One, what caused the improvement in '05?

And, two, do you still expect $500 million burn-off in '06?

Yes, Steve, actually on the -- you're right.

I did say 500 million about a year ago, but in October I updated it to about a 1 to $200 million range and in the fourth quarter we did burn off 105 million.

But for 2006, we continued to see about $0.5 billion of burn-off, but we are seeing -- that is also going to be offset by improvements in our other working capital accounts, specifically receivables, payables and inventory should be able to absorb about half of that burn-off.

And as we've talked about before, a lot of this is subject to the ability to negotiate with our customers, both the performance-based payments and the international business.

But we're committed to at least $3.3 billion of cash from operations in '06 and that will, again, exceed our adjusted net earnings for 2006.

Am I correct to say, though, that -- are you expecting any pension contributions in '06?

Because you obviously prefunded in '05.

It would be minimal.

In the $100 million range.

Just the final true-up once the [Arisa] calculation's finalized, so nothing significant.

So what's really going adverse?

I mean, if your cash flow that you're estimating is 3.3 billion or more in '06, and you're not going to have any pension contributions in '06 -- or a nominal amount, and you're going to be able to make up some of that headwind out of customers advances, what else is adverse in your cash flow projections in '06?

Yes, it's -- well, the advances we talked about and then the tax payments, the cash tax payments.

We'll end 2005 right around $600 million of tax and with the increased topline we're projecting the kind of the 850 to 950 million of taxes for 2006.

Right around 31% of taxable income.

So that would be the headwind.

Troy Lahr, Stifel Nicolaus.

Thanks.

You guys talked about a goal of double digit margins.

Can you talk maybe, kind of when you're looking to get there and kind of the factors that are going to make you get there sooner or maybe slow it down a little bit?

Yes, we've been -- we've been targeting double digit margins, as you probably know, for some time and I think the stated goal that we've had is continuous improvement.

And I think we're finding that we've been able to make continuous improvement.

We haven't positioned a specific calendar time.

I'm very satisfied with the quality of the earnings and really the breadth and depth to which margin improvements have been taken in the Company.

Our commitment remains double-digit margins and I think the way we'll leave it in the discussion for now is we're working on continuous improvement on our future horizon.

Okay.

And just one question on the share repurchase.

It seems like you guys have kind of stepped it up in the second half of the year.

Has your view changed on cash deployment as acquisitions have kind slowed down or larger acquisitions haven't really been there?

We've had a commitment on our cash deployment to return to investors at least 50% of our free cash flow.

That's been a longstanding commitment.

We said we'd be opportunistic with respect to the share repurchase program and I think we're, frankly, within some variability, very consistently executing that strategy.

It hasn't changed.

That's what you should expect of us looking forward and that's what we expect to do.

Okay.

Thanks.

You bet.

Cai von Rumohr, SG Cowen.

Yes.

If the -- by the way, good quarter.

Your cash generation has been terrific, and if you're not putting money into the pension plan and your generation is as good as it is, and you have a great balance sheet, and it doesn't look like there's that much left in terms of defense IT companies or public ones to buy, and the ones you've been buying have been smaller, I mean, what happens to the cash?

Do you accelerate the share repurchase or do you go off and buy businesses in other areas, or just burn the debt down?

Sort of, as you get out there what happens?

Well, that, I think -- first of all, Cai, thanks for the good comments on the quarter.

We agree with you, we're pleased with the strength we've demonstrated, actually strength throughout the year.

Our first goal was to generate the cash and then to equivalently back it up with a disciplined process for cash allocation.

We don't have any interest or intention of getting out of areas of competence for this business that include markets that we understand and customers that we can serve by adding value and we really test ourselves here.

I don't think that we've satisfied ourselves that there are not good acquisition candidates yet to be pursued that would fall within the value parameters that Chris outlined that are the cornerstones of our disciplined growth strategy for cash allocation to acquisitions.

We continually will relook at our share repurchase program.

We continually look at our dividend program.

In the past, you would recognize that we've made adjustments over time in the allocation of cash, early on, predominantly allocated to debt retirement and now more allocated to dividends and share repurchase and acquisition, and as the landscape changes, we'll make a continuing evaluation of how to best allocate that cash.

Okay.

Last one, I mean, you've got around 2.6 billion in cash today.

Is there a level at which, when the cash reaches that level, you're going to buy back shares?

Because certainly having 2 billion gives you enormous flexibility to do any kind of deal you might want to do and even if you borrowed a little bit of money you'd clearly be back into the cash pretty quickly.

To directly answer your question, we don't have a trigger mechanism on our cash balance that says when the cash balance reaches a certain level we'll buy back shares with anything over that trigger point.

That's not the way we approach it.

Okay.

Thank you.

You're welcome.

Myles Walton, CIBC World Markets.

Thanks, good afternoon, nice quarter and nice year.

Thank you.

I'm intrigued, Bob, by your comment on the two-thirds of the business in terms of the mix going towards systems and IT.

Just kind of using the pencil, it looks like if you took aerospace -- or aeronautics and space systems and you multiplied by it three you'd get to a 52, $53 billion enterprise in just a few years.

What's kind of contemplated there?

Is that math right?

Well, I'm not sure I know how you did your math and I don't know that we're contemplating or committing on this call today a $53 billion business in three years, although I like the aspirational way you set goals.

What we're thinking about here is the set of core competencies that we have within Lockheed Martin, and the way the market might progressively value those competencies.

Sometimes over time we've been called a platform house and that comment has much to do with our programs in aeronautics and space.

But I think when we look out at the marketplace, when we look at the cost systems, when we look at the life cycle of these systems and the value of the competencies that we have, we think real value can be generated in the marketplace by addressing the markets that we outlined in our comments earlier.

Markets like sustainment, markets like logistics and like the information technology areas that we covered.

So we would like to rotate the application of our resources, without diminishing our focus on core businesses that we understand well and where we have great competencies for execution, rotate the allocation of those resources into markets that are very likely to yield good value to customers, and we think when we can do that effectively and well, then we can return good value to the investors with capital.

And that's how we're looking at evolving the business.

Yes, Myles.

And if you look at the guidance we gave for 2006 and you set aside aero, you'll see that the rest of the Company is growing in a 6 to 10% range organically.

So it's that organic growth coupled with the flatness of aero that's going to close that gap over the next few years.

All right.

That's great.

And then finally a follow-up if I could.

Chris, your revised outlook for pension.

I was wondering if you could break down in relative terms, the $165 million decrease in expense in '06, just along those four items you laid out in the press release, and in particular, how much the prefunding helped you?

Yes.

I'll be happy to do that.

The four pieces, of course, the discount rate, we lowered 0.125%, and that's on the 40, $45 million benefit.

The actual return was in excess of 7% over the 5.5 that we had talked about.

That kind of brought in 15 to 20 million of extra benefit.

We lowered the compensation assumption that was kind of in the $40 million range and the rest was a result of putting in actually 980 million for the year, 530 million of the quarter of prefunding.

Those would be the rough breakdown to get the benefit for '06.

Thanks.

That's great.

George Shapiro, Citigroup.

Good afternoon.

Chris, if you can go through in the space business in a little more detail, given that you had one less launch, I deduced that the government business must -- satellite business must have grown 20% or so.

Can you go through what you expect launches and satellite deliveries to be in '06, and kind of -- well, I can figure out by deduction how much growth you're expecting in space.

Okay.

I'd be happy to, George.

Let me first start with the launches. 2005 we had seven launches on a combined basis with Atlas and Proton.

We're forecasting six to nine for the year.

We've already had one success.

And on commercial satellites, we did not deliver any commercial satellites in 2005, and we expect a pretty busy year in the five to seven range for 2006.

So that's -- that would be the main drivers.

I guess, relative to the full year, we obviously had growth in our satellite line of business, and launch vehicles were down and strategic and defense missiles were up as we highlighted the press release.

Okay.

And can you talk a little bit in terms of the commercial satellites in '06 what kind of profitability we're expecting?

I mean, it looks like that business is somewhat profitable now, anyway.

Yes, it would be -- it would be -- as a line of business you got to recall what -- with it being a commercial line of business we obviously period cost and expense the G&A on a regular basis, so for 2005 we actually had a slight loss just through the commercial accounting process, as a line of business that will be returning to profitability in 2006.

Kind of low single digits is what we would expect for that revenue.

And then just, Chris, in aeronautics you mentioned that combat was down 480 million for the year.

I mean, that implies that the F-16 probably had to be down 900 million or so with growth in the F-22 and the F-35.

What do you expect -- how much do you expect F-16 to come down in the '06 time frame?

Actually in '06 relative to '05 it could be pretty flat, in the $3 billion range is how I see it.

Okay.

All right.

Thanks.

Sure.

Nick Fothergill, Banc of America Securities.

Thank you, good evening.

Nice year.

Two questions.

The first is in your 2006 guidance you're talking about margin expansion and aeronautics and a tightening it looks like in the lower end of the margin in systems and IT.

Can you identify exactly where those are coming from and as we go through the year and you reach milestones, might they be expanded further?

Well, obviously throughout the year there are programmatic milestones, contractual events and with good execution and performance we plan to retire risk and that always gives us an opportunity to improve our margins.

Relative to systems and IT, the three major lines of business, I would expect electronics to continue to show improvement over and above the 10.5% that they earned this year.

I look at IS&S and expect improvement there, and INTS, so all three pieces of our systems and IT group should and will show improvement.

And relative to aeronautics, again, combat air, we would think would have a step up relative to '05, and I think air mobility and the work we do in the Skunkworks will -- relatively flat year-over-year on a margin perspective.

But you raised a good point with the -- with the ability to meet some of these milestones and contractual events.

I think we've seen a little bit this year and we'll continue to see in the future a fair amount of volatility or lumpiness in our margins on a quarter to quarter basis, and I would not be surprised if we don't see a few quarters where certain entities like electronic systems could approach 11% in any one quarter as we have these significant contractual events and the same phenomenon could occur, obviously, in the space business.

So over the full year we're very confident in the guidance we've given.

Quarter to quarter a little more volatility is possible.

I'm looking at the sustainment and logistics market that you identified in Bob's part of the call.

Is that an area where you can expand organically or is that somewhere where there are acquisitions that are available in scale, and if you could talk a little bit about, the characteristics of those sort of businesses that you would look at there.

Sure, Nick.

And probably the answer is finding sources of growth through both methods.

We find that in many cases the competencies that we have that went into the fundamental design of a platform or the architectures, particularly as systems are becoming increasingly more dependent on the net-enabled portion of the capability, lend themselves pretty well in the aftermarket.

Here you might think of the Merlin Sustainment program that we just won in the United Kingdom that's taking services for the 30 aircraft fleet and extending them and upgrading them overtime.

We do have pretty good core competencies across the Company to do that.

And then we have had some interest in businesses that might position us well here.

Again, we would look for companies that give us some market access, perhaps that we don't have today, or alternatively some core competencies that we may not have today.

But everyone of these companies has to meet our tests for overall valuation and returns and we'll keep you posted along the way as we continue to look across that horizon.

So we expect growth to come from both avenues, organic expansion as well as the prospect of -- the possibility of acquisitions.

Doug Harned, Sanford Bernstein.

Good afternoon.

Back on cash, in terms of CapEx, you had a fairly -- a sizeable CapEx expenditure in the fourth quarter.

I'm interested in what you're investing in.

Where is that money going now, and what are your priorities going forward, both in terms of the level of CapEx and also where you're placing it?

Sure, Doug, we expect a similar expenditure in the '06 time frame, maybe slightly over 900 million.

A majority of this capital is gaited to new program wins, both on a perspective basis and retroactive basis.

Last year, of course, we won the presidential helicopter and that required a certain amount of capital investment.

In prior years, we've won the F-35 Joint Strike Fighter and we're continuing to ramp up for production.

And in 2006, obviously, the combat search and rescue program should be awarded.

And the majority is really focussed on these programs, and we have a pretty good process to review the internal rate of returns and the net present value of these investments.

Littoral Combat Ship, of course, is another example, and we think it's appropriate to make these investments to enhance our productivity and to meet our customer commitments.

So that's kind of the outlook for the next 12 months.

And, Doug, on the philosophical side, perhaps, I mean, we feel pretty confident that we're going to generate returns on these investments in capital.

As Chris said, we use the term internally "gaited capital," and by that, we mean that we project the possible cash requirements for capital based on the probability of win, but we don't actually commit the capital on programs that he outlined until, in fact, we have prevailed in the marketplace, so that we have pretty high expectations and a greater certainty equivalent that we know we'll get the returns on the capital.

But what you're describing here is applying that capital to some very specific program situations as opposed to what I would say more broad themes.

Well, I think that when we look at the center for innovation, I think there is an application of some internal capital here that we believe is going to fuel the productive engine of the Company over the long term, and that broad theme is expanding the horizon of net-enabled capabilities.

So we're not underinvesting, and even if we look beyond capital to internal research and development, and so forth, we are not failing to invest in the productive capacity of the Company going forward, and we'll make selected investments here where we believe the market will yield good value in the returns on that investment.

But when we talk about the full measure of the capital program, when we need resources for programs, we preferred to wait until we win the program and don't go out on a speculative nature and begin to facilitize our capacity until we win.

And generally, when we look across the Company here, we are not underfacilitized in our resource base.

Okay.

Great.

And if I could, just one quick -- you had very good backlog numbers in this quarter and other companies talked about that they didn't have the backlog they had hoped and bookings they had hoped in Q4 because of the lateness in settling the budget.

Did you see some of that effect as well?

No.

Okay.

Great.

Byron Callan, Prudential Equity Group.

Yes.

Good afternoon.

Two questions.

First, Bob, there was a story today on the Aerial Common Sensor, and I just wonder if your experiences on that program prompted any broader reviews on how programs are bid or managed, or was it just set of unique circumstances with this particular program?

That's the first question.

Yes.

Thanks, Byron.

I -- this is a business that requires continuous learning, I assure you, and every day that we come to work there is always an opportunity to get just a little bit more humility.

There are always lessons learned and I think we certainly have studied the Aerial Common Sensor program.

But it's not unique -- that response on our part isn't really unique to ACS.

In every victory that we have and in every defeat that we have, part of our business practice is to, if you will, do a post-mortem.

To understand where we did achieve our results and where we did perform within the expectations the customers have, why did we do so.

And where we failed to do that, and importantly there with a very direct sense, why did we fail to meet expectations.

And we continuously try to improve this enterprise by incorporating the things that we learned there.

And I think ACS has a portfolio of some interesting activities that we can learn from.

But I'll also say that we were satisfied with the overall development of the sensor suite and believed we had very good traction there.

And when I look at our portfolio across the Company, I would say with all candor, I don't think ACS is indicative or representative of the measures of merit of how well our horizontal integration process has worked.

I think it's the exception to the rule.

Okay.

Good.

The second thing, Bob, the past couple months we all saw pretty widespread speculation about significant changes to the defense budget and the programs.

Now that we're on the cusp of seeing a new budget, a new fit up, a QDR, it really appears that not much has changed, and I just wonder from a philosophical standpoint, do you think this is going to be kind of a recurring drill that we're all just going to have to go through year in and year out, or has there been some fundamental shift in Washington that says we have national security needs, we're going to fund them, and we're not going to do this every year.

Well, I think, Byron, and hope -- I hope this is so from your perception and the perception of others, we try to be as consistent as we can in our explanation to you of how we see the environment unfolding and our expectations from that environment.

And we had plenty of discussions about what PBD753 might look like and what the consequences would be like.

I think at the foundation of our judgment is the sense that national security needs must be met, those needs tend to be driven by threats.

There are genuine threats on the landscape today.

And in view of those antecedent conditions the trend generally has been to allocate resources into national security requirements when those requirements demand it and we have not seen that demand decline.

There is always, I think, going to be interesting dialog and appropriate examination of how the money's spent.

I think I agree with you that the volatility around that dialog feels at times like it's increasing, but we rather rely on the fundamental assessment of what national security needs are and how those needs are best met.

Joe Nadol, J.P. Morgan.

Thanks.

Good afternoon.

Bob, I'm still trying to get my arms around the two-thirds/one-third sort of provocative comment you brought up earlier.

And I guess I'm just sort of doing the math.

You'd need 10% organic growth over seven years or so, plus in assistance and IT area to get -- and no growth in aeronautics and space, and I think JSF goes into production you're going to have some growth there.

And the outsourcing trend -- I guess -- my question is do you really think that it has that much more legs to it or is there something else that you think's going to come about in the budget that we don't quite see yet that's really going to get you there?

Well, I guess, Joe, directly I do think that there will be more opportunities in outsourcing, and I say that because I believe that it makes extraordinarily good sense.

If we look at the business environment, companies, some time ago, started to evaluate what their essential core competencies were and where they had operations under way inside an enterprise that were not associated with those cores competencies, they found value in outsourcing some of these requirements to companies that specialized in that.

And we have very specialized skills, and we have exceedingly well qualified professional workforce who is well-trained and has great expertise in some of these subject matters that really add value to the customers' mission area.

If I just looked at the Department of Defense , the core competency in the Department of Defense is fighting wars and protecting the nation.

And when we can participate constructively in sustainment and logistics and support that enable that core function to be undertaken with excellence, we think we can create real value-based opportunities there.

So I think under the provisions of A-76 regulations in the federal government, in work like the Automated Flight Service Station that had been an FAA government-run program for years and one in which we've made an absolutely seamless transition, and we're already adding value at lower costs and good performance and we'll continue to apply vibrant technologies to that marketplace and expand the value that the users of that system will consume.

And I think there are a lots more opportunities to fundamentally examine the way we provide for sustainment and provide for logistics and provide for communications and connectivity without encroaching on the core competencies and fundamental mission of defense and other federal governmental agencies.

Okay.

That's interesting.

I have a nit question, also.

A numbers question.

Just on the ACS, Chris, any financial implications in terms of proper release on the termination for convenience?

No.

Nothing anticipated for Q1, or --?

Nope, the impact's been reflected in our '05 results.

Okay.

Thank you.

Thank you.

David Gremmels, Thomas Weisel Partners.

Thank you.

Hoping we can look at systems and IT margins in aggregate.

Looking at your guidance for next year, it's for kind of flattish margins there, maybe up a little bit.

Generally speaking, would you say we're approaching peak margins in that group, around 10%?

I'm thinking about the mix of cost-type revenue in there and the mix of international.

So are we approaching peak margins or could something happen to drive that higher?

David, I don't think we're approaching peak margins at all.

When I look at the guidance and what we've said, we're looking at least another 100 million of EBIT and like I said earlier I would expect improved margins with electronics, ISS and INTS.

So, 20 basis points, on a $20 billion base, is pretty significant.

So electronics specifically, as we get into more international business, provides upside.

IS&S we'd like to get to 9%, and INTS, especially with the growth in the IT business and decline in the NASA business, we would expect another 20 or so basis points.

So there's still room, and we plan on growing the margins, the EBIT and the revenue.

Thank you.

Sure.

Howard Rubel, Jefferies & Co.

Thank you very much.

One sort of follow on that last one, but to sort of ask Bob to address it a little bit.

If we look at the quarter and the year, in a lot of cases, your platform programs turned in stellar results.

And we identify them, whether they're in space with Titan or even Trident or in F-22 performance pickup, and so how do you sort of reconcile that where you're really -- I should say -- just performing extraordinarily and yet when we look at the other businesses while they look like they're doing well, they seem to not be able to get to the same double digit level of profitability.

Does there need to be sort of a change in the way you go after contracting terms to get you to these double digit levels, Bob?

Well, we're always thinking about ways to improve contracting terms, Howard, but we really focus on returns on invested capital.

We want to grow business, and our commitment is to sustain growth in the model, while we expand returns on invested capital.

I agree with you and I got to tell you I give the highest compliments to the professional teams working on these platform programs who are working hard to continue to expand the margins.

Depending upon, I guess, whatever's written in the headlines, sometimes it's fashionable to be in platform programs and sometimes it's unfashionable to be in the platform programs.

But for us, it's always good because it's a core business here that we understand and know how to run and know how to deliver value to customers.

So I applaud their performance.

And if there are market opportunities to secure more of that work, be assured that we're going to be at the forefront of the competitions to secure that kind of market.

But beyond that, we think there's additional growth expansion opportunity for us with good returns on invested capital.

Leveraging our competencies from the core markets that we have into tightly adjacent markets that will generate good returns on invested capital, and we just don't want to sit back here and rest in some comfort, relying on the fact that we did have a good quarter and we did have a good year and we have improved our margins.

We want to push forward and accelerate the growth and value expansion of the business.

So that's why we've laid down the objectives that we're describing to you today.

That's very fair and I appreciate that.

And then just as a follow-up, in the third quarter, Chris, I think you bought back around 9 million shares of stock and in this quarter it was about half that.

Was there any particular reason for the change in the pattern?

Or is it just going to be a -- market opportunity driven?

Yes, there is really no reason for the change in the patterns.

As you know, it depends on when and if we're blacked out, which we were in the first quarter, as you know.

We met our commitment in the third quarter and we continued to go relatively strong to get to 72%.

And coming down the fourth quarter, we were looking at the balance deployment whether we put money in the pension, the repo, so I think it'll be hopefully a little more consistent in '06 quarter to quarter and we're always looking for volatility and opportunities to really turn up the game.

I know just going back to that first question on margins, I really want to go back to 2001 and just put some of this stuff in perspective because the hard work by the companies and the workforce has really been outstanding.

And when I look at '01 and I recall that aeronautics had 6.2% margins, and we're now at 8.5 headed north five years later and space was 4.7 and I remember all those questions about could you ever get to 5.

Well, we're at 8.3 and we're talking about 9.

And the list goes on.

INTS was at 4.2%, we're at 8.8 and the rest you can look up, but it's hundreds of basis points each and every segment.

We're quite proud of that and we'll -- confident that we can continue it for the years ahead.

Joseph Campbell, Lehman Brothers.

Good afternoon.

First, Bob, I want to thank you and Chris and the IR team for the disclosures, all the handouts that are -- kind of set the standard for giving us the data that we need.

I -- we all appreciate it.

Thanks, Joe.

You mentioned -- I have two questions, and I'll give them both and then listen to the answers.

The first is, Bob, you mentioned that you'd, I think, had 12 changes in management somewhere throughout the team and I wondered if you could kind of run through the importance of these and whether these were sort of adversity or performance-related or these were just the kind of normal you've got to find a good guy to replace the good guy that's retiring.

The second question I have is that -- well, it's an observation and a request.

You kind of never highlight -- were so busy telling the good news in the quarter, and you have had a lot to report for quite a while now, but we rarely highlight the flops or the problems until they get to be so public that you're forced to.

And I'm thinking of the F-22 software, or SBIRS, or ACS, the various satellite things.

I wondered if you would go through the programs that you have today that have important performance issues with your customers, including cost issues, and whether you could be frank with us.

Thanks very much.

Sure.

I'll do my best.

When you think about the changes in management, I think that -- I personally view our commitment to leadership development as a very sound foundational element of a good strategy, because if you look at the workforces in aerospace and defense companies like ours, I'll talk certainly about ours, you will find a population that is bimodally distributed and a lot of the experience is maturing and certainly entering into a retirement-eligible profile.

So we've internalized a leadership development and talent development set of programs that some have seen in the Center For Leadership Excellence to assure that we're growing the right kind of leadership talent that will be ready to take on additional challenges as our workforce retires.

When -- I'll leave it up to you whether you think the CEO transition at Lockheed Martin between Vance and I was handled well or not, and I rely entirely on your judgment.

I'll also tell you that Chris described to you expansion in the aeronautics margins and you'll notice that Dain Hancock, a long tenured, very talented senior executive left and Ralph Heath followed him into that job, and we did not miss one beat in the execution of the delivery of 107 airplanes last year.

We have had transitions in the most prominent of our airplane programs as we build the velocity and pace of the F-35 program.

A very talented executive named Dan Crowley has taken the reigns there.

We had new business wins of an extraordinarily interesting dimension as we diversify the Company into IT like the National Archives win and at the same time we were bidding and winning that job, my very good friend Don Antonucci retired after long and distinguished service, and that business is now run by Judy Marks.

So I think that we're looking at populating the executive ranks with the kind of talent that has the experience and judgement to drive this business forward.

And I think it's a skill that companies like ours have to have, and we're working very hard to develop that skill.

When I think about the programs that we have in our backlog that require commitments to customers, and there's no tongue in cheek here, Joe, ACS is probably a little illustration of this that we talked about.

Sometimes this business can be really, really challenging.

Everyone of our programs has commitments to customers and that's not some wobbly view of it.

I mean, every customer that we have expects that we will turn to and deliver the expertise that we have to meet their expectations.

It's why they place the award with us.

But if I look more generically, software development has always been a challenge and software development will remain a challenge.

And we have programs that require significant amounts of software.

The space based infrared system is a program of that nature.

The F-35 Joint Strike Fighter is a program of that nature.

So we know that we have areas where we have excellence and we have good process, but the inherent nature of the design and performance of the system are such that we redouble our effort and we stay focussed there.

The good news for financial exposure is that those programs tend to be cost-plus rather than fixed-price because our customers also recognize there's an element of risk in the development of these capabilities.

But I think that we're fully accountable and we're very responsible for meeting all these objectives.

We'll look at the Joint Strike Fighter software.

We've -- in a I think disciplined way to incorporate the lessons learned from other shortcomings that we've experienced already assembled a cross-corporate team to go in and look at the software development on JSF.

They will do that on a recurring basis.

It is a non-advocate review.

We invite our government customers to come in and perform these reviews with us.

So there's no one drinking bath water.

But there's unreasonable expectations, and that every projection that we make can in fact be verified and we'll continue to focus on the elements of our business that we know we have to execute on to be able to achieve these goals we described.

Thank you, Bob.

Thanks, Joe.

Heidi Wood, Morgan Stanley.

Good afternoon, gentlemen.

This is Craig [Alexopoulis].

Unfortunately, Heidi couldn't be on the call, but she does send her regards.

Bob, your conference was focussed on Lockheed becoming a global security company.

I was hoping you can provide some color on that.

How does that mean that Lockheed will evolve over time?

What milestones you would point for us to best understand from the outside how you realize this strategy?

And finally, how did a -- theoretically, how did the property like CSC work into that strategy and how do the growing defense budgets in Asia play into this?

I'm sorry.

I didn't get the last part of the question.

The last one was, theoretically how does a property like CSC work into this strategy, and how do the growing defense budgets in Asia play into this as well?

Yes.

I think that if you -- when we think about of global security strategy, you've heard us describe it as part of that disciplined growth element that says lets look at, for example, homeland security applications.

The protection of the subway system in New York City is an illustration of taking the competencies that we have and applying them to critical infrastructure nodes, and those critical infrastructure nodes don't just resides in the United States, they reside all around the globe.

And we think if we can develop expertise in domains such as that, that we'll have a much better global reach in moving forward with the capabilities that we have.

So in the short term, we have those specific targets.

In the long term I'll tell you that we'll have to apply some energy in changing the dialog to change the game.

And by that I mean if we go back to this illustration of sustainment and there had been several questions that I think were very well-framed about the two-thirds/one-third illustration I gave about systems and IT and sustainment as compared to the platform business.

We know that we have to have a compelling business case that we will need to initiate and bring forward to customer communities, both domestically and internationally, to convince them that we can do a better job and be a reliable partner as they rely on us, for example, for sustainment and support and services.

That's an initiative that we're willing to undertake because we're confident in the assertions we make and our abilities to discharge value there.

Relative to CSC, I watch that company perform with interest.

They're separate from our company.

And we don't really have any further comments there.

Okay.

Great.

Thank you.

You're very welcome.

Let me thank you all for tuning in on the call today.

I want to close the discussion with you the way we closed the discussion with our leadership team.

By reinforcing our commitments to discipline growth, productivity improvements, margin expansion, capital efficiency, ROIC leadership and growth in shareholder value.

We thank you for your interest and support of Lockheed Martin and we look forward to seeing you all in April.

Thank you.

Once again, ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.

You may disconnect at this time.