洛克希德·馬丁 (LMT) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the Lockheed Martin second-quarter 2006 earnings results conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Jerry Kircher, Vice President of Investor Relations.

Please go ahead, sir.

Good morning.

I'd like to welcome everyone to our second-quarter 2006 earnings results conference call.

Joining me today on the call is Chris Kubasik, Executive Vice President and Chief Financial Officer, and Meg VanDeWeghe, Senior Vice President of Finance.

Consistent with our past practices, we have posted charts that may be obtained on our website, www.LockheedMartin.com/investor, which supplement our comments today including our Safe Harbor statement.

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

Actual results may differ.

Please see today's press release and our 2005 Form 10-K and 2006 first-quarter Form 10-Q for a description of some of the factors that may cause actual results to vary materially from anticipated results.

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

Excel spreadsheets are also available on the website to facilitate analysis and modeling.

Today's call will be made available on your webpage for downloading in MP3 format as a podcast.

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

With that, I would like to turn the call over to Chris.

Well good morning, and thank you for joining the call.

As we begin our discussion today, it remains clear that current and emerging threats in the world will continue to require wide-ranging solutions.

Providing mission critical support around the world remains a core competency for Lockheed Martin.

Ongoing watch areas in the world require our support in intelligence and missile defense to help defeat threats as they emerge.

It's the current and future threats that require continued investing in security.

Since our last discussion, the '07 budgets have continued to evolve for the Department of Defense and the Department of Homeland Security.

The House and Senate Committees are reconciling their DoD budget positions and appear to be centering on an '07 core budget that reflects annual growth in the mid-single-digit range.

The final budget version is expected to reflect support for our programs.

The Homeland Security budget appears to be approximately $31 billion and contains funding for new initiatives recently outlined by President Bush in the area of border security.

Additionally, budgets for the federal and civil information technology area are projected to expand to $64 billion with an increased focus on outsourcing.

World and economic pressures in the areas of rising oil prices and interest rate increases continue to be areas that could impact most corporations.

At Lockheed Martin, we've been successful in anticipating some of these upward pressures and implementing risk mitigation actions.

It's against this backdrop that I want to begin this morning by providing an update on our operations and recent contract awards.

I also want to update you on some of the actions we're taking as we continue to balance our portfolio and expand into adjacent markets.

After my comments, Meg will provide an overview of the second-quarter financial performance, cash deployment efforts and our updated guidance for the year.

Then Jerry, Meg and I will take your questions.

We were pleased with our operational performance this quarter as we continued to execute our mission success and new business win strategies.

In looking across our businesses, space systems successfully achieved mission success events as evidenced by the 79th consecutive successful Atlas launch and the delivery of two commercial satellites.

Space was also successful in new business wins with their selection by NASA to launch the Future Mars Science Laboratory Mission and an award for additional work on government satellite programs for the US Air Force.

Looking out in space, we submitted a proposal for the Crew Exploration Vehicle, a multibillion dollar NASA program for future replacement of the current manned shuttle fleet.

Contract award is scheduled for later this year.

Turning to aeronautics, second-quarter mission success achievements included the inaugural rollout of the F-35 Joint Strike Fighter, recently named the Lightning II, also the first flight of the modernized C-5 aircraft and the delivery of the 4,300th F-16.

For the remainder of the year, aeronautics' new business pursuits continue to focus on securing congressional approval for F-16 sales to Pakistan as well as securing additional air mobility solutions for multiple customers.

Turning to our broad portfolio within systems and information technology, let me focus on our missile defense and missile program highlights.

We successfully intercepted a unitary ballistic missile target with our THAAD weapon system.

We had the seventh successful target intercept by the Aegis ballistic missile defense weapon system.

And the first test flight of the Extended Range Joint Air-to-Surface Standoff Missile was a success.

Our second-quarter new business awards included approval by the US Navy to further expand our presence in the adjacent shipbuilding area with an award to construct a second Littoral Combat Ship.

Also, extension of the deepwater systems contract by the US Coast Guard through 2011 and additional awards for the Patriot, or PAC-3 system.

In the information technology area, we successfully won three key new programs.

The first award was from the US Army Corps of Engineers to provide IT enterprise automation, communication and system support.

This contract was awarded to the government's most efficient organization, or MEO, and is a partnership between the current US Army Corps of Engineers and our information technology unit.

The second award was from the Department of Homeland Security for their EAGLE contracting vehicle.

EAGLE is an IDIQ contract under which we will provide IT infrastructure for engineering design, operations and maintenance and software development.

Work on this contract will be performed by three separate Lockheed Martin operating units and is a direct reflection on the horizontal integration activities and cross business solutions that we are offering our customers.

The third award was from the US Army to compete for future task orders under the information technology enterprise solutions IDIQ contract vehicle.

Let's now look forward.

Within systems and information technology, this quarter, we submitted a proposal on the combat search and rescue helicopter, known as CSAR-X, for the US Air Force.

This program would provide a new fleet of 140 search and rescue helicopters.

Our proposed solution centers on using the US101 rotary wing platform currently used by seven countries around the world.

Potential program value is estimated to be in excess of $12 billion with an award scheduled in late 2006.

For the Homeland Security department, we submitted a proposal for the Secure Border Initiative, or the SBInet program, to provide an innovative solution to leverage our expertise in intelligence, surveillance and data fusion.

This proposal is in response to the President's call for increased border security actions.

This program has a potential value of $2 billion with awards scheduled in the fourth quarter of this year.

These are a few of the many operational successes and new business opportunities and are a direct reflection of the dedication and focus of our 135,000 employees as they continually seek to provide mission success solutions to our customers.

Each of these awards provides continued validation of our goal for balanced, profitable growth.

Across all business areas, we're focused and committed to developing a portfolio of products and services that provide adjacent opportunities with attractive growth rates.

At the corporate level, we continue evaluating opportunities to target selected non-traditional markets, utilizing a prudent and calculated risk return model.

Achieving this strategy will provide significant discriminators in creating additional shareholder value.

In addition to the organic growth, we are also pursuing growth through acquisitions.

During the second quarter, we successfully closed on two acquisitions, bringing the total for the year to four.

In June, we completed our acquisition of Savi Technology, a proven leader in active radio frequency identification, or RFID.

Savi products provide innovative logistics solutions that track in transit shipments in a secure, accurate and timely manner.

Its full line of integrated hardware and software products have been implemented by the US Department of Defense, international defense agencies, civil agencies and shipping enterprises.

Also in June, we closed on our acquisition of the ISX Corporation.

This acquisition further strengthens our IT expertise in distributed collaborative military operations, autonomous systems and knowledge management.

ISX will expand our development activities within our advanced technology labs and will assist our customers in the design of next-generation IT solutions.

Both of these acquisitions enhance our capabilities and position us for future growth in our core adjacent and non-traditional markets.

I would like to turn the call over to Meg.

Thank you.

Good morning, everyone.

In looking at our second-quarter financial performance, I'm pleased to report that our sales are up 7% compared to the year earlier period and 8% compared to the first quarter.

Sales improvements for both periods were driven by growth in government and commercial satellite sales in our space systems business and by increased volume in platform training and transportation solutions sales in our systems and information technology businesses.

Earnings performance also was strong with all business areas achieving earnings above prior-year levels.

These increased earnings resulted in operating margins of 9.8% for the second quarter, which represents a 50-basis point improvement above prior-year levels.

As a result of our strong sales and earnings as well as our continued focus on cash flow, the corporation was able to generate 1.6 billion of operating cash flow in the quarter, bringing our year-to-date operating cash flow to 2.8 billion, which is a 25% improvement over the year-ago period.

This strong cash generation provides Lockheed Martin with the financial flexibility to make prudent and balanced decisions regarding cash deployment.

During the second quarter, we used 321 million of cash for acquisition activity.

We also returned a significant amount of cash to our shareholders during the second quarter.

We paid dividends of $129 million.

Additionally, we used $718 million of cash to repurchase 9.8 million shares of our stock.

Compared to share counts for the year-ago period, we have reduced outstanding shares on the balance sheet by approximately 20 million shares and have reduced weighted average fully diluted shares by approximately 18 million shares.

Before I move on to provide you with our revised guidance, I want to provide you with an update on our exposures to the markets, which Chris mentioned.

I'm pleased to report that we have minimal exposure to increasing interest rates or oil and gas prices.

Early in June, prior to the most recent hike in Fed funds rates, we entered into an interest rate swap, which effectively fixed the interest rate on our outstanding $1 billion floating rate convertible debt from June 2006 until the debt is callable in August 2008.

As a result of this transaction, our borrowings are now 100% fixed and provide protection from future interest rate increases.

We also have evaluated our energy price exposure and have protected against increases in energy prices.

Given the nature of our operations and contracts, we have minimal exposure to rising oil, gas and electricity prices.

Our energy costs typically represent less than 1% of our cost of goods sold.

Even though energy costs are small, we seek to protect against increases in energy costs by entering into one and two-year fixed-price contracts to manage a significant portion of our expected electricity and natural gas usage.

We will continue to look for sensible financial opportunities, such as the interest rate swap and the long-term electricity and natural gas price contracts.

We also will continue to execute our strategy for balanced cash deployment by making attractive acquisitions, paying competitive dividends and making share repurchases consistent with our commitment to avoid share creep.

Now, I will turn to our revised guidance.

Based on our solid year-to-date operational and financial performance, I'm pleased to report that we are increasing our financial outlook for 2006.

We are raising our 2006 sales guidance to a range of $38.5 billion to $39.5 billion.

This increase was driven primarily by continued strength in our systems and information technology businesses.

We also are raising our 2006 segment operating profit guidance to a range of 3.825 billion to 3.925 billion.

This increase was driven by continued focus on program execution, risk retirement and an achievement of contractual milestones across numerous programs.

Our guidance for 2000's operating cash flow also is going up to at least $3.6 billion.

This increase is driven by improvements in earnings and working capital management.

Our earnings per share guidance has increased to a range of $5.10 to $5.30.

This increase was driven by improved operational performance across all segments in addition to a projected reduction in our full-year share count.

Additionally, as a result of improved operational performance and the benefit of share count reduction on invested capital, we are increasing our 2006 return on invested capital outlook to greater than 16.5%, an increase of 170 basis points from prior guidance.

Finally, I should indicate that while we will continue to pursue growth organically and via acquisition, our commitment to return the majority of free cash flow to shareholders remains in place.

In fact, based on our unchanged 2006 capital expenditure guidance for the corporation at approximately $900 million and our new guidance for cash from operations of at least $3.6 billion, our year-to-date payments of $261 million for dividends and $1.6 billion in share repurchases have already resulted in returning over 50% of our expected full year of free cash flow to shareholders.

Now, Chris, Jerry and I will be happy to answer your questions.

Jamie, please open the lines.

(Operator Instructions).

Troy Lahr, Stifel Nicolaus.

One question on aeronautics.

It seems like you guys said in the text that volumes were -- or revenues were down, but it seems like deliveries were up quite a bit.

Can you just explain what's going on there?

Let me just start by saying the decline in revenue at aero for the second quarter and for all of 2006 has been something we've talked about for about a year and it's coming in exactly as planned.

I will ask Meg to give you the specifics on your question.

Sure.

We saw a slight decline in the F-22 and the F-16 volumes.

F-22 was down and F-16 we actually only delivered 12 instead of 16 for the prior-year quarter.

We saw an increase in F-35s and the C-130Js were approximately flat.

So that may give you a little bit of color on that one.

Yes, but I guess you had nine F-22 deliveries versus four last year.

Yes, what we have here is the revenue recognition.

We use our percent of completion or the delivery.

So the C-130Js and the majority of the F-16 programs, we recognize the revenue on earnings upon delivery.

The F-22 program and the Joint Strike Fighter, we use the percentage of completion cost-to-cost method.

So we disclose and tell you about the deliveries to give you an indication of the progress that we're having in our different facilities, proving that we're meeting the commitments or in most cases exceeding the delivery commitments.

But, reconciling that to the revenue because of the different revenue recognition models that we disclose in our 10-K is not exact correlation.

Does that help?

Yes, that's it.

Thanks.

Myles Walton, CIBC World Markets.

Good quarter.

A question for you as it has to do with international sales.

I think both you and Bob have recently talked about trying to get to a target percent of sales around 20% international.

I think last year was only 14, this year maybe 15.

I'm just trying to contextualize that with likely a headwind on the international sales from F-16s and how you've -- kind of where the strategy is ahead both organically and maybe through acquisitions that could get you to that 20% number.

It seems to be pretty healthy, and I guess the majority of that would be through electronic systems.

Let me clarify.

You're absolutely right; we have -- about 15% of our revenue is international.

I've also sometimes said 25% of aeronautics.

So just to clarify, the 25% is the aeronautics number; the 15% is the consolidated number.

We've talked longer-term looking out with the Joint Strike Fighter and the eight international partners and that opportunity towards the end of the decade that will clearly increase us probably closer to the 20% range.

We also look at a couple of acquisitions that we've made in the UK.

Although initially relatively small, we think there's good growth opportunities there.

There's clearly international missile defense;

Patriot 3 is such an example of that.

So all those things generally would drive us towards that goal.

I guess the comments we've made is directionally, we see towards the end of the decade more international rather than less as a percentage of our portfolio.

Then if I can squeeze in a follow-up, if you can give us some indication directionally on pushing a little bit on the guidance for '07 maybe top line as well as segment margin.

I know that your strategic planning process is sometime in October but just a little bit of a glimpse if you would.

Actually, our strategic planning process is probably a daily event around here, but you are absolutely right.

In October, we will give you pretty detailed and specific numbers.

But let me have Meg give you some directions, so you can feel comfortable on what we're looking at here.

Sure.

Directionally with the metrics that the analysts and investors would be tracking, we should see an increase in 2007 sales, earnings and EPS compared to 2006.

We expect our cash flow to continue to track earnings.

And we expect to continue to be an industry leader in ROIC.

And I think I should add in terms of our earnings that we do expect to continue to drive towards the double-digit return on sales.

Heidi Wood, Morgan Stanley.

I want to drill a little bit into the space numbers.

These are pretty amazing space numbers.

I think the last time we saw a surge this high was back in '98.

I just want to take apart the quarter a little bit, so I can understand the year guidance.

You talk about launch being flat year over year and you had two satellites in the quarter so that would be about 160 million.

So that 475 million year-over-year differential, is about 100 million of that defense and strategic missiles and the balance government satellites?

Absolutely got it right.

That was going to be my answer, but every number you calculated is exactly pretty close to what I'm looking at.

I'd say commercial sats is closer to 200 million, and the plug would go to government sats.

But you are exactly right in your analysis.

So then, here's the question.

You did 6.8 billion in '05.

The upper end of your guidance for the year would be 8; that's a 1.2 billion increase.

If we assume that launch is flat and you've got five more satellites to go, seven for the year -- let's say that's $550 to $600 million -- so that balance of the 600 million guidance is government satellites and then defensive and strategic missiles.

I guess I'm curious why that couldn't be quite a bit better, given that again we saw government satellites and defensive and strategic missiles added 300 million to this quarter alone.

What am I missing?

Yes, I would just say on commercial satellites, you'll recall we had no deliveries in 2005 and we're talking about five to six in 2006.

So that in and of itself is maybe a $500 million to $600 million swing just on the commercial satellites alone.

You are right; launch vehicles is flat and a couple $100 million on government sats. 300 to 500 is not a bad assumption, and I think that's pretty consistent with what we've tried to lay out.

So I don't disagree with your analysis.

I don't think there's going to be upside beyond the guidance that we've given however.

Then can you talk about the profitability components for space for a moment?

Did you make any money this quarter on commercial satellites?

Yes, why don't I have Jerry walk you through the different lines within space?

Sure Chris glad to.

If you talk about the satellites, as you know, it's military and commercial -- are the two primary items in there.

And encouragingly, the commercial satellites that you mentioned two deliveries in the quarter were nominally profitable.

They were not a robust profit center for us, but encouragingly they were positive.

And of the $40 million or so that we're up this year, roughly half of that, maybe slightly less than that is from the commercial satellites.

We are also seeing in the launch services about the other half in terms of risk reduction on the Atlas program improved performance essentially driving the rest of the performance that you asked about.

Can I get a question in to Meg?

Absolutely.

Meg, can you -- now that you've been there for a couple of months now, I'm wondering if you can provide us some color on how you see approaching the challenge of M&A at Lockheed differently from the competitors, who are likewise flush with cash and seeking acquisitions for growth?

It's a good question.

It certainly is a competitive acquisition market.

I have to say that we've got a great team working on this.

As you know, we approach acquisition activity making sure that we analyze any potential acquisition from a strategic and operating perspective as well as from a financial perspective.

We tend to see at any given point in time 40 or 50 deals that we are analyzing.

I would tell you that the most attractive deals that we're seeing are deals where the targets will come to us and they have an interest in being part of Lockheed Martin.

There are a number of companies, where we either are seeing owners who are nearing retirement or owners who want to grow their business to the next stage.

And they really are interested in being part of the Lockheed Martin team so that we can help them to grow their businesses and so that we can take care of their people.

In terms of differences, I think that number one, Bob sets a great tone in setting the strategy.

We've got a very strong finance team, and the EVPs and their operating teams have been tremendous in helping us to identify opportunities and to evaluate opportunities.

We have a very strict analytical process in place.

I think we're seeing some good deals, but we're going to be very, very careful about what we do and make sure that they fit with our strategic operating and financial guidelines.

Rob Spingarn, Credit Suisse.

If I could just go back to space and maybe frame the question a little bit differently -- but it looks like you were a bit front ended in the first half this year in terms of sales and profits.

So are we understanding this right that it declines in the second half?

Yes, absolutely.

Let me try to be more specific.

I talked about the different revenue recognition methods we have in aeronautics and the same applies to our space business.

And in launches, Atlas, Proton, and the commercial satellites, we recognize the revenue upon delivery.

Everything else is generally on the percentage of completion method.

So if you look at our guidance, call it 85% of the revenue in space is booked on a cost-to-cost method and we have just about $1 billion that we record upon delivery in orbit or upon launch.

And about 70% of those events have already occurred in the first half of the year.

So there will be a substantial $300 to $500 million reduction on those events in the second half because again we had the two satellites at the beginning here in the second quarter.

Year-to-date, we've had six of those events -- two Atlases, a Proton and three commercial satellites.

And there's only a couple in the second half of the year.

Then of course, you have to factor in the prices of the different satellites, launch vehicles and the configurations.

But to sum it up, more than 70% of our delivery events have already occurred and the revenue has already been recognized.

So it's as we've called it before kind of a lumpy business.

The third-quarter revenue will definitely be less than the second quarter sequentially.

The fourth-quarter revenue will be less than the second-quarter revenue in space, both in the 1.8 billion, 1.9 billion range would be my best estimate.

That clarity is helpful.

Just as a follow-up to that -- back in May, the Journal talked a little bit about the potential for some interim satellite orders to make up for some delays in certain classified programs, the switch from Boeing to you on fee, etc.

Is there an opportunity there?

And if so, is that incremental to the fieldwork?

We don't comment on classified satellite programs, so I can't help you on that one.

Thought I would try.

Thanks.

Steve Binder, Bear Stearns.

Good quarter.

Just a couple of things, one on cash flow.

You obviously upped your guidance.

You had a very strong quarter in cash, and customer advances were a big source of cash for the quarter in the first half.

So if you look at your assumptions going back to the last quarter, I think you were planning to burn off 450 million to 500 million of advances and make up that deficit by reducing working capital accounts.

Can you maybe review what are your new assumptions and your revised cash flow plan?

I'd be happy to.

I think I have tried to answer this question for 22 consecutive quarters without any success.

So I'm going to ask Jerry to see if he can do a better job here in either predicting advance burn-offs or satisfying you.

So Jerry, can you--?

Thanks for raising the bar, Chris.

Cash flow -- I'm glad you asked because it truly is one of our great success stories as anybody who has followed us.

As you pointed out, cash from operations in the second quarter actually was a record level for us at $1.6 billion.

That in addition to the 1.2 billion we did in the first quarter brought us year-to-date to the 2.8 billion that's referenced in the press release.

As you might remember when you referenced back to the prior call in April, we said at the time we expected to improve our working capital in the second quarter, which we did materially by about $900 million.

That was tracking per our expectations on a year-to-date basis, so nothing really new there.

As you look a little forward, the third quarter we believe is solidly positive but the fourth quarter appears to be about flat as we look at the profiles right this minute.

Some of that is due to some key fourth-quarter events that could impact it favorably or possibly slip over to next year.

But we still continue to feel very comfortable with the guidance.

Let me just mention because you mentioned about the burn-off of advances where we did say last quarter we expected 450 to 500 of potential runoffs offset we said at the time by about 50% of that by working capital increases and receivables and inventories.

I would tell you now that it appears that the advances are probably going to be in the $100 million to $200 million burn-off as we look forward to the year here.

And if I gave you just a macro perspective on the full-year cash going from the 3.4 prior guidance to the 3.6, about 100 of that is net income increase and about 100 is working capital improvement.

So we continue to believe cash is looking very good around our 3.6 guidance, and we'll keep you advised as we go forward.

I'm not sure that helped, Chris, but I hope so.

I think that was a better answer than I've ever given.

Then one other one -- Meg, you touched on the robust share repurchase program in the first half the objective to offset share creep, which you've already done already, and you've actually brought the share count down.

I'm just wondering if you looked since you embarked on your share repurchase program and your goal to return more than half of your free cash flow to shareholders, your collar has been somewhere in the 55% to roughly 75% range.

And if you use gross share repurchase in the first half, you've already broken through to a new record.

What does that suggest about the second-half share repurchase program?

I think if you look at our guidance what we're doing is suggesting that in the second half of the year, we will pursue a share repurchase program which at least will cover any option exercises.

We're not assuming anymore than that.

We'll take an opportunistic approach to this and take a look at stock price and levels which make sense to repurchase shares.

We're constantly balancing the share repurchase program against other uses of cash, and we are committed to keeping our share creep down.

But to the extent we see other uses of cash which we think will provide higher returns to shareholders, we will indeed pursue those opportunities.

Cai von Rumohr, Cowen & Company.

Good quarter.

Aeronautical, you had fewer F-16 deliveries, which presumably would've been a mixed negative, and yet the margins went up.

Were there any positives -- positive adjustments or changes in the accrual rates in the quarter?

Could you comment on the mix impact of less F-16 deliveries?

Yes, we have a process where we review all of our programs on a quarterly basis to make the appropriate adjustments to our estimates at complete.

I don't see anything really out of the ordinary as I'm just looking at the data here.

We are continuing with the F-35 in the mid-single-digit range.

F-22 is also mid single digits.

We're doing very well on that program.

We're actually ahead of schedule on deliveries, and the airplane is performing relatively I think better than most people expected.

So I think we had some minor adjustments there.

F-16 again, we completed a couple countries' deliveries and that was just contract closeout.

Just overall good performance in the factories.

C-130J is staying as planned.

So you know I think we're talking about 260 million of EBIT versus 245 million.

There just isn't much there other than normal business, looking as previously recorded or slight improvements on the programs I mentioned.

As a follow-up, I guess I missed it.

Are you talking about a burn-off in advances of 100 million to 200 million for the year or from where we are here?

Could you give us some color on what the assumptions are?

Presumably, we have the burn-off on the UAE.

Could you talk to us about additional order potential, specifically F-16, Pakistan, Taiwan, and any international missile sales?

This is Jerry.

As far as the burn-off, that's -- when I said 100 to 200 burn-off, that's from year-end '05 to year-end '06 just as a reference point.

And if you talk about additional international F-16 business, clearly, you've read the same reports we have regarding the congressional notification on Pakistan.

As you know, India continues to evaluate a fighter for their requirements, and there are other international countries that are also evaluating the need.

So to the extent those can bring some additional advances when they are secured hopefully, that would help the advance runoff that we're seeing here later in the year.

But I'm still a little confused in the sense that the customer advances are now about 4.8.

You ended the year at 4.3.

So if we're going to get a burn-off, you're really talking burning over 500 million in the second half but that assumes you get no orders.

Is that correct?

It's just a function of how the programs liquidate the advances and you said it just right.

It's about $500 million in the back half of the year burn-off.

And that assumes no new orders?

That is correct.

We do not build international order advances into our cash guidance.

As you recall, some of these programs take 5, 6, 7 years to secure.

And we've been consistent for at least five years in saying that.

Because there is in fact an international order and it has an advance, it would be upside.

But we have not factored any of those F-16 advances coming in in 2006.

David Strauss, UBS.

Chris, overall, you raised the EPS guidance by about 10% and you've given us some detail in terms of the movement in the individual segments.

But could you just give us a little bit of color maybe on a program level what dramatically improved relative to what your expectations were three months ago?

Yes, let me just put it big picture, and then I will ask Meg to talk about specific programs.

The $0.45 or so increase, about two-thirds of that is operational across all three of our major segments that we talk about and Meg will give you some specific programs.

About $0.08 of that was due to the share count reduction, and then $0.03 was just a onetime land sale that we factored in.

So, Meg, you want to go through the major ones?

Sure.

If you look at our systems and IT business, what we see is an increase in ESBA with our missiles and fire control business -- improvements in performance on programs there.

That will be a major driver in the improvement in EBIT.

We also see improvements in our platform, training and our transportation solutions business.

The main driver there will be sales change and improvement in EBIT as a result of that.

We see moderate increases in our IS&S business and our I&TS business as well.

But I think really ESBA is going to be the driver there in improvement in guidance.

When you look at space, we see improved performance in our government sats business and that's the primary driver there.

If you look at aero, we see an increase in F-16 step-ups in performance.

We see an improvement in air mobility sustainment and some F-35 volume.

Then Chris, could you just give us an update on pension, given the move we see in interest rates this year?

Also kind of what your year-to-date performance is and as well what impact the proposed legislation in Congress might have on the funding that might be required?

Sure.

First of all, the performance for the six-month period is mid single digits out of our Lockheed Martin Investment Management Company.

And as you know, our long-term rate of return is 8.5%, so we're probably tracking to that.

Although, I don't like to look at that on a quarterly or annual basis, we are positive.

Relative to the discount rate if I had to pick it today, it would probably be about 50 basis points higher than what we used at the end of December '05.

But picking that on the last day of the year seems to be the appropriate methodology.

So we will monitor that and I think we've been pretty clear over the years that an increase in the discount rate obviously drives down the FAS 87 expense.

And then the congressional legislation, we're continuing to monitor.

I think that will be enacted in the August timeframe.

But that will be a focus on cash, not in earnings amount.

So we may have to put in additional cash, which we've done voluntarily a couple of the last two or three years.

In any case, my reading of that is it would not impact us or I think any of the corporations in 2007.

So, we will hopefully be able to give you more insight on that in the October call, but I think it's an '08 and/or beyond cash issue for the corporation.

Joseph Campbell, Lehman Brothers.

Wow, the stock is up 21%.

It's the best stock I follow.

I'm glad to hear that.

I'm sure you are.

I wondered if you could go over for us, Chris and Meg, kind of the big program competitions that you've outlined for us in the previous quarters, sort of which ones you went for and won and which ones you are going for and are yet to be announced that will kind of make a difference in the growth path going forward.

Thanks very much.

In the second quarter, you know some of the big wins were -- one was known as IWN, which is the Integrated Wireless Network.

It was a down-select from four to two.

I mentioned three of the major information technology wins in my prepared comments.

You know the EAGLE program for Homeland Security, Army Corps of Engineers and then what's known as the [SDV2].

I'll mention none of those are in backlog because they are either being protested or they are IDIQ contracts, and we've taken a very conservative approach.

So you won't see that growth in the backlog.

So those would be the big ones in the second quarter.

The ones on the horizon for the third quarter -- and then I will ask Jerry to maybe give you some more details -- Crew Exploration Vehicle for NASA major opportunity, the CSAR-X combat search and rescue for the US Air Force and the secure border initiative for Homeland Security and of course all the F-16s that we've already talked about would be third/fourth-quarter awards.

Whether they are actually definitized and signed and in our backlog, we obviously will work towards that.

But a couple of those could slip into first quarter '07.

Jerry, do you have some more we can talk about?

Sure, Chris.

Looking ahead I guess in the third quarter here, we have one in our S&IT we'll call Air and Space Operation Center Weapon Systems Integrator.

I know that's a long acronym, but it's AOC WSI.

It's for the Air Force, has $1 billion potential.

That's up in our integrated systems and solutions area.

Looking ahead to the fourth quarter, we've already touched on aeronautics, which is the F-16 Pakistan, has an opportunity to happen before the end of the year for 36 aircraft.

As you mentioned earlier, international takes a little bit of time.

That could possibly be early next year, maybe.

The other one in the fourth quarter is the F-16 Greece, the definitization of 30 airplanes with the Greece government.

Really as you mentioned, IWN, after the down selection when we and the remaining competitor get down-selected to the one winner, that's probably early '07.

That is a $5 billion opportunity for the Integrated Wireless Network, which is for the Department of Homeland Security, Department of Justice and Treasury in a LAN mobile wireless voice and data system.

So there are a number of large ones as you point out on the upcoming radar screen.

Who is left in IWN and who got eliminated?

It's GD and us are left.

General Dynamics and ourselves.

Howard Rubel, Jefferies & Company.

The three of you are doing a nice job of playing -- how should I say -- playing -- running the backfield very well.

But one of the questions you didn't answer before when you was asked was sort of an outlook for '07.

If you could sort of give us maybe a better answer in terms of the context of what you talk about in terms of growth, Meg, or in terms of some of the other pluses that you might experience?

Sure.

Obviously, as Chris said, we don't go into our long-range planning program until September, so we won't give specific numbers until October.

Having said that, I can tell you that we see modest top-line growth for our systems in IT business.

We see our aero business top line going down somewhat, and we see space being flat to modest growth depending on what happens with ULA.

As I said earlier, we do anticipate that our margins for the corporation will continue to drive towards double digits and you should see improvements across our business areas.

Doug Harned, Sanford Bernstein.

On I&TS, we've talked about growth in the IT portion of that business.

Could you give us a sense of what you're looking at now in terms of long-term growth rates for the IT portion?

Yes.

We're looking at double-digit growth.

And that's organic?

Absolutely.

Then as we see the business mix change, shouldn't we be expecting to see some margin improvement overall in I&TS as IT becomes a bigger part of that?

Absolutely and I think we have had that to date.

I will just point out in I&TS, I guess I'm spending more time talking about revenue recognition.

But there is what's known as service contract accounting, and it does provide some volatility or lumpiness relative to our IT contracts, especially when there is outsourcing.

Think of it as almost being on a cash basis if you will, so you get a little more volatility.

As we've won a lot of these contracts, the upfront startup costs if you will gets expensed and then you look for higher back-end profitability.

But absolutely, double-digit growth and improved margins.

When I look at the rest of the year for I&TS, I would expect that the third and fourth quarter would be in the 9% range at a minimum.

So you're not seeing -- more and more people are targeting this from the commercial side.

You are not seeing any additional margin pressure as more people go after these competitions?

We haven't seen a whole lot in that world.

We take an approach of getting the best teammates that provide value for our customers.

So, we actually have a lot of the commercial entities and some of the second-tier subs approaching us to try to get on our team.

So we view that as a positive to get them interested in this market and have them add value as a teammate as compared to a competitor.

I think the strategy has been quite successful to date.

Joe Nadol, JPMorgan.

I want to go back to I&TS for a second.

It looks like you generated some organic growth there this quarter, and I'm just wondering where we are in NASA.

Is that completely gone?

And then either, Chris or Meg, if you could just talk a little bit about how all these acquisitions are fitting in here.

I think you did Aspen Systems in Q1, and that was the largest one you've done year-to-date.

And of course, you did SYTEX last year.

Is there integration going on?

What are you doing with these different businesses?

Absolutely.

Let me ask Jerry to give you some of the actual numbers you're looking for, and Meg can talk about the acquisitions.

We just did an internal review for our Board to actually tell them the progress we've made.

So we have some current data on that.

Sure, Chris.

Joe, as you pointed out, I&TS reported 7% sales growth at the segment level this quarter.

But if you bore down a little bit to your question about NASA and others, the IT component of that actually reported 14% growth.

Now to be fair, of that 14%, there was some component for the Aspen Systems acquisition.

If you normalize that out, the organic growth within the IT itself line falls to about 7% and SYTEX was no longer a comparison in the second quarter because it was already acquired last year.

So the only adjustment we had to do was Aspen this quarter to get to organic.

The defense systems is another line of business within here.

It's pretty flat as it's been recently slightly positive.

The NASA headwind you're talking about is getting pretty much off the table now.

There was a little bit slight negative comparison on NASA -- $10 million just this quarter.

We had to cover that headwind in the 7% that I&TS was able to generate.

So when NASA gets dead flat quarter-to-quarter comparison, I think you are going to see even a higher growth than the 7%.

Chris mentioned the recent wins are going to help the future growth.

The Army Corps of Engineers, the EAGLE IDIQ award and the [SYTEX 2S].

So we continue to see positive growth within this segment.

Let me talk a little bit about our mergers and acquisitions.

As I'm sure you are aware, since 2001, we've done 14 acquisitions valued at approximately $2 billion.

And as Chris mentioned, our Board recently asked us to take a look at those.

What we did was put a team together of experts within finance experts across the business areas, and we had independent reviewers take a look at each acquisition.

So for instance, if we were reviewing an acquisition which was done in our systems and IT business, we had someone from aero take a look at it and vice versa.

As that team went through, they rated the acquisitions against our expectations for the acquisitions and looked at how they were helping improve overall sales and earnings.

I'm happy to report that the review found that the acquisitions have been extremely successful.

We saw that they had indeed helped to drive our strategy, helped to drive our financial performance.

And across-the-board, we were pleased with the performance of those acquisitions.

I should note that we take different approaches to integrating acquisitions.

Savi and ISX are perhaps good examples of the difference in integration that we use.

If you look at ISX, we will completely integrate that business into our advanced technology laboratories in Cherry Hill, and we are already seeing that that business is going to be able to help not only our electronic systems business but other business areas across the corporation.

Savi, we're actually going to keep as a separate entity, reporting into our IS&S business.

There again, we're seeing extraordinary opportunities for synergies across the businesses.

We think that that's a business that we will enjoy watching grow to $1 billion a year business.

For my follow-up, I just want to get back to the F-22.

I mean you noted again in your text that the operating profit was down year over year.

I'm just wondering if you could give some qualitative flavor for how performance is tracking there and award fees.

And I guess where you are in the different contracts you are transitioning from lot to lot, if there's any reason to be optimistic that might get better next year.

Yes, the F-22 is really just doing an outstanding job in the performance.

When you look at the deliveries, we are ahead of schedule on our deliveries.

There were no reductions or hits relative to any of the booking rates.

As you know, we account for each lot on a separate contracting method, so we have work in process on lots 1 through 5.

The plan for the year was 15.

We've had risk reductions and the program is really doing well.

What happens if you go back to our second-quarter '05 press release, you will recall that we had an inception to-date adjustment in the second quarter of 2005 given the progress we made then.

And of course, under POC accounting, there was a large EBIT pick.

So comparably, it's down but there are absolutely no issues.

We couldn't be happier with the performance of the plane and the aeronautics team and the progress that they are making.

So we hope to now focus on negotiating lot 6 and have that as a target by the end of the year.

I mean the 9 -- I just want to clarify the nine deliveries were in the second quarter this year, 15 year-to-date.

So 15 F-22s in six months -- obviously an all-time record and it's indicative of the performance of the program.

Byron Callan, Prudential Equity Group.

Chris, just to kind of -- a lot of questions have been answered.

But missile defense, you talked about the success in THAAD and some of the other programs in your opening remarks.

And just to kind of refresh my memory, what are the total revenues either as a percentage company revenues or just absolute number that you derive from missile defense programs in 2006?

2006, you know like anything it's how you count it.

I guess last time I looked, I thought it was right around a couple billion dollars.

And if you take a broad definition and you include programs in space, for example, like the [Silver Satellite] program;

I view that as part of missile defense obviously, given the mission -- THAAD, PAC-3, the Aegis program, Airborne Laser, the MKV -- Miniature Kill Vehicle program -- the [targets prime] program.

So if you take a broad approach, you could get to a couple billion dollars of revenue.

If you narrow it down to kind of a PAC-3 and THAAD obviously, we're talking high hundreds of millions of dollars.

But it's a big part of the business.

And these successes I think and some of the issues we're seeing around the world I think are further validation that this is a good strategic move to focus on these programs and the performance has just been outstanding.

This may be a little too nuanced of a definition, but I know you guys have begun taking up your margin guidance.

And I'm curious how much of that is really cost take-out of the business, and how much of it is just your own confidence?

You I think talked at one point about risk reduction as one of the factors.

Is there any way to kind of slice and dice that if you look at what is approximately a 50 basis points increase in your EBIT guidance for the year in terms of margins?

That's a good question.

I mean the process we go through are these quarterly reviews.

And as you know, the booking rate is a factor of our estimated complete.

And it's probably in the 60% to 70% -- is just better program execution, meeting the customer milestones, completing the jobs on time and having the mission success.

By doing that, I like to think of that as cost control.

If you have a satisfied customer and you are able to make the deliveries on time, you avoid additional costs going beyond that timeframe.

The other 30% or 40%, I look at all the business areas -- the companies, our shared services initiatives, our IT initiatives and what we're doing here at corporate is actual cost reduction and cost control.

But I look at them overall as risk mitigation.

We look at our leadership and say that their job is obviously to identify the risk and mitigate it in a timely manner and that comes in a variety of flavors.

But mission success and meeting those milestones and commitment seems to be the best way to drive the performance of this Company financially and that's what we're focused on.

Chris, is that kind of the balance we should expect in the future, that kind of mix, or does it switch over when you think about 2007/2008 generically?

We've always been in the 50%, 55% cost plus with the balance being the fixed-price business.

So as long as our portfolio is in that range, I think that's a decent answer.

If we were to have a shift to be more fixed-price as we get into production, maybe there is a little more of the cost control that falls directly to the bottom line.

But I'm comfortable with that answer probably for the foreseeable future.

Jamie, this is Jerry.

We're coming up on the time.

Maybe one more call and then we will go to Chris's final comments.

Robert Stallard, Banc of America Securities.

Chris, I thought I would ask you a quick question on the C-130J.

You noticed that year-to-date the performance has improved.

How far do you think you are along the curve there in terms of improving the margin and at what point do you see yourself reaching full operating margin on that program?

We think we are operating at a pretty efficient position there when you look both at the rate -- I think long-term, the improvement comes from additional orders and throughput.

So as we continue to look for international customers and we had a lot of interest at the recent Farnborough Air Show, additional multiyear opportunities here in the US and even maybe the joint cargo craft -- all those will contribute.

It's really more of a long-term volume throughput in Marietta, Georgia.

And we are committed to try to get double-digit margins and don't see any reason why that cannot continue.

Just finally, I was wondering if you could give us an update on the United Launch Alliance, when we might get a resolution on that?

Excellent last question.

We can acknowledge and we have that we have and our partner received a consent order and we're working with the government on that.

They clearly control the timing, and I can't honestly predict when this will go forward.

But ourselves and I know our partner continue to believe that this is in the best interest of the employees for Lockheed Martin and our partner and is exactly what the US Air Force and the country needs.

So, we are continuing to monitor that and be responsive and work through it.

I want to thank everybody for joining the call and for their questions today.

I want to remind you that the management team is focused on continued improvements in the strategy, operations and financial performance with a goal towards balanced profitable growth.

Our creative and innovative employees enable us to secure exciting opportunities and position us to meet our future challenges.

It is especially gratifying that Lockheed Martin was recently ranked number one by undergraduate engineering students as their most ideal employer.

Their future contributions will continue to infuse new creativity and ideas for our corporation.

Our philosophy is simple -- deliver on our commitments today while offering additional value by further expanding our capabilities of tomorrow.

So we look forward to speaking to you again in October, and thank you for joining the call.

Thank you.

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

Thank you for your participation.

You may disconnect at this time.