洛克希德·馬丁 (LMT) 2006 Q3 法說會逐字稿

Good day everyone and welcome to the Lockheed Martin third 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 Jerry Kircher, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Felicia, and good morning.

I would like to welcome everyone to our third quarter 2006 earnings results conference call.

Joining me today on the call are 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 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 Form 10-Qs for 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 any non-GAAP financial measures referenced in today's call.

Excel spreadsheets are available on the website and we will also be submitting our financials in XBRL format to further assist in modeling and data analysis.

Today's call will be made available on our website 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 thanks for joining the call.

I would like to start with an overview of our external environment.

The demand for our products and solutions is strong.

World events, driven by current and emerging threats, will continue to require wide ranging solutions to national defense challenges.

Providing mission-critical support to the Armed Forces of the United States and our allies remains a key imperative.

Our ongoing support and expertise in areas such as missile defense, intelligence, and command and control, highlight some of the Corporation's core competencies.

We continue to work with our customers in providing timely and innovative solutions in support of their critical missions.

Since our last conference call, the fiscal 2007 budgets have continued to evolve and solidify for the Department of Defense, Homeland Security, NASA, the State Department, and our civil government agency customers.

Starting with the DOD, the '07 top line budget of $439 billion was signed into law and reflects annual growth of approximately 7%.

The investment account, which provide a majority of our DOD program funding, grew by 6% to over $150 billion.

Looking at some specific actions within the budget, our F-22 Raptor program was fully funded and a multi-year procurement plan for 60 aircraft was approved.

In addition to saving taxpayers money, this preserves options for future production and enables a bridge between the F-22 and F-35 program.

The budget also approved procurement of two F-35s in fiscal '07, and advanced procurement of 12 aircraft in fiscal year '08.

This action confirms that production will start as planned and reaffirms the importance of this program to both the Department of Defense and our international partner.

In the missile defense area, PAC-3, TADS and MEADS were fully funded which demonstrates continued strong support of this critical area for both domestic and international use.

Our shift integration activities also received support with full funding of two littoral combat ships in fiscal year '07.

The budget continues to reflect the importance of our programs and support of the global war on terror, modernization initiatives and missile defense, while also stabilizing production quantities on many of these programs.

Let me now comment on the DOD's operations and sustainment budget which also exceeds $150 billion.

This budget contains funds for the traditional national security logistics activity, and is an area where we see future opportunities.

One such opportunity is in the area of overseas base operations and infrastructure support where we expect to leverage our recent acquisition.

The Department of Homeland Security also reflects continued growth with an approved budget of approximately $43 billion.

This budget contains fundings for initiatives such as coastal protection, port security, aviation security, and transportation worker credentialing.

These initiatives are expected to include solutions that utilize our RFID smart tag system as well as our systems in the area of biometric identification.

NASA's total proposed budget of $17 billion reflects growth driven mainly by the science, aeronautics, and exploration mission areas where budgets increased 8%.

The State Department budget increased to $34 billion with embassy security and peacekeeping activities strongly supported.

With our recent acquisition of TAE, we are well positioned to compete for this business.

Looking across all the federal budgets, we continue to see growth in IT spending.

The aggregate information technology '07 budget totals $64 billion and reflects a continued focus on movement towards outsourcing.

Our IT businesses have achieved strong growth rates in the federal IT arena and are well positioned to expand in this marketplace.

The budgets for DOD and Homeland Security Department have been signed into law.

Final approvals of the other budgets are expected to occur when Congress reconvenes after the election.

Moving from the budget environment, I would like to provide an update on our operations and recent contract awards.

We were pleased with our operational performance this quarter, as we continue to execute our new business strategy and deliver on our customer commitments.

This performance has enabled us to differentiate ourselves and to achieve record backlog levels of almost 79 -- $78 billion.

As a reminder, our backlog includes only contractually authorized work, and does not reflect any values for IDIQ work until the task orders are awarded.

In looking across our operating unit, a number of key events occurred.

Space Systems was successful in their competition and was selected by NASA to design and construct the Orion Crew Exploration Vehicle.

This contract is a multi-billion dollar program to provide the next generation of human space flight.

Space Systems also achieved 100% mission success with successful completion of key events for NASA, the Department of Defense, and satellite customers.

Turning to Aeronautics, key mission success achievements included continued progress of the F-35 Joint Strike Fighter program with a successful integrated power package run, a first installed engine run, and a full after burner test.

All these milestones continue to move us towards first flight of the F-35.

Aeronautics also delivered four F-22s, 17 F-16s, and three C-130J aircraft.

Additionally, Congress approves the sale of 36 F-16s to Pakistan.

Finally, turning to our Systems and Information Technology area, key mission success events included the initial launch and christening of the nation's first littoral combat ship, the USS FREEDOM.

This vessel represents the inaugural ship in an entirely new class of U.S.

Navy surface warships that have significant domestic and international potential.

Other mission success events included successful test flights of the PAC-3 missile and the FAD system.

The U.S.

Navy and Missile Defense Agency certified our [Aegis] ballistic missile weapon defense system for tactical deployment.

These accomplishments continue our contribution to national defense against cruise and ballistic missile threats.

New business awards in Systems and IT included a contract from the U.S.

Air Force to upgrade combat command centers around the world.

This multi-year contract will enable us to provide systems engineering and integration support on the AOC weapons system integrator program.

These are just a few of our operational and new business successes achieved this quarter.

Each of these events validates our growth strategy by providing solutions to the challenges our customers are facing.

I would now like to look at some upcoming new business opportunities.

A decision is expected soon on the combat search and rescue helicopter known as the CRX program.

This is a program for the U.S.

Air Force.

It will provide a new fleet of 144 search and rescue helicopters to replace the current aging fleet.

Our solution proposes using the U.S. 101 helicopter which is currently used by seven countries around the world.

The potential program value is estimated to be in excess of $13 billion.

Looking to next year, a decision on the integrated wireless network that will provide mobile, voice and data communications to first responders is expected in mid-2007 with a potential contract value of $10 billion.

Also, mid-2007 award is projected for the GPS-3 satellite program, with a potential value of approximately $5 billion.

In addition to these awards, we expect to see continued growth in IDIQ contracts, as IT customers increasingly pursue initiatives to improve efficiency.

We remain focused on developing a balanced portfolio of products and services that will yield attractive growth rates, by addressing opportunities in core and adjacent business areas.

We also continue to focus on the balance of risk and return for our shareholders.

Our demonstrated program management expertise and robust risk assessment process have enabled us to continue improving our operational and financial performance.

This comprehensive management approach enables us to provide timely and effective solutions for our customers while generating increased value for our shareholders.

Delivery of this strategy remains a significant discriminator in securing top and bottom line growth opportunities.

I would now like to turn the call over to Meg who will review our third quarter financial performance, cash deployment and capital market activities, and our updated guidance.

Thank you, Chris, and good morning, everyone.

We are pleased to report that our sales for the quarter and for the year to date increased solidly compared to the year earlier period.

The increases were driven primarily by sales growth in our Electronic Systems, Information Technology, and Space Systems segments.

These increases more than offset the expected and previously discussed decline in revenues for Aeronautics.

In fact, it is worth noting that during the third quarter, while our Aeronautics sales declined 7% as anticipated, the rest of our business portfolio enjoyed a 10% increase in sales.

Earnings performance also was strong, with all business areas achieving earnings above prior year levels for the quarter and the year to date, and with the Corporation as a whole achieving our goal of double digit operating margins.

The Corporation's operating margin expanded by 90 basis points for the quarter, and by 80 basis points year to date.

This margin expansion reflects outstanding performance on contracts in all of our businesses, significant risk reduction on critical programs, and transition from development to production on key platforms.

As a result of our strong earnings performance and continued focus on cash fow, the Corporation has generated year to date operating cash flow of $3.5 billion, a 10% improvement over the year-ago period.

This strong cash generation continues to provide us with the financial flexibility to make prudent and balanced decisions regarding cash deployment.

An important use of cash for the quarter was acquisitions.

We spent $609 million for our acquisition of TAE and for post-closing adjustments on other acquisitions.

We are particularly excited about TAE, our fifth acquisition of the year.

The Company has been a leading provider of outsourced support services to government agencies and international development and aid organizations for over 50 years.

The Company operates in over 30 countries, providing services such as embassy and facility operations and maintenance, base camp construction, logistics, and airfield management.

TAE does business with a diversified portfolio of customers, including the U.S.

Department of State, which accounts for over 50% of revenues.

This customer base is of great value to us since we see significant growth potential for business with customers such as the State Department.

We believe that TAE will be an important part of our corporate growth strategy.

This acquisition is yet another example of our focus on acquisitions that are good strategic and operating fits for the Corporation, enhance our capabilities and customer access, and position us to provide attractive returns for our shareholders via growth and earnings in cash flow.

In addition to deploying cash for acquisitions in the third quarter, we also continue to deliver on our stated goal to return a majority of free cash flow to our shareholders.

Year to date, we have returned $2.3 billion to shareholders in the form of share repurchases and dividends.

In doing so, we also have avoided share creep for the year.

During the first nine months of the year, we repurchased 25.3 million shares resulting in balance sheet and weighted average fully diluted share count being below year-ago levels by 12 and 14 million shares, respectively.

In September, the Board of Directors approved two resolutions which will allow us to continue meeting our share repurchase and dividend goals.

The Board approved an additional 20 million shares in stock repurchase authority to enable us to continue to make opportunistic share repurchases in the future.

The Board also approved an increase in the quarterly dividend rate to $0.35 from the prior level of $0.30 for holders of Lockheed Martin stock as of December 1, 2006.

This 17% increase in dividends supports our commitment to provide a competitive dividend to shareholders.

Before I move on to provide you with our updated guidance, I want to briefly report on our continued actions to optimize our capital structure.

During the third quarter, we took advantage of favorable market conditions to exchange approximately $1.1 billion of debt, with coupons of 8 and 3/8 and 8.5%, for cash and new 30-year debt with a coupon of 6.15%.

The total cash paid for the premium and transaction expenses was $353 million.

As a result of this transaction, we generated a substantial net present value benefit and we extended the average maturity of our debt and reduced the average cost of outstanding debt.

The combination of this debt exchange and the interest rate swap we entered into earlier in the year allowed us to reduce the average cost of our fixed rate debt by approximately 90 basis points year to date.

We will continue to look for sensible financial opportunities such as this debt exchange as we continue to execute our strategy of balanced cash deployment by making attractive acquisitions, pursuing opportunistic share repurchases, and paying competitive dividends.

I would now like to turn to our updated financial guidance.

Please note that our new guidance for both 2006 and 2007 includes the financial contributions from our recently closed TAE acquisition, as well as the impact of the disposition of the international launch services joint venture.

Consistent with our policy of only adjusting guidance for transactions which have closed, our guidance does not reflect the planned ULA joint venture.

If this joint venture closes during 2006, we would anticipate a reduction in our 2007 sales outlook of approximately $800 million, and we would expect our outlook for segment profit to remain unchanged as a result of an improvement in margins.

As outlined in our press release today, our 2006 guidance was increased for all key financial metrics.

Our solid year to date operational and financial performance enabled increased guidance for sales, margin, cash flow, earnings per share, and returns on invested capital.

These guidance increases continue to build upon the momentum that we have achieved throughout 2006.

With the majority of 2006 activities behind us, I would like to focus in more detail on our new guidance for 2007.

Our 2007 sales guidance is 41 to $42 billion, and reflects continued top line growth for the Corporation with 8% to 10% top line growth for our business portfolio, excluding Aeronautics.

Our 2007 segment operating profit range is between 4.15 billion and $4.275 billion, and is reflective of our continued operating performance, margin expansion initiatives, and commitment to provide double digit margins.

Our guidance for 2007 operating cash flow is at least $3.8 billion, and continues our record of strong cash generation through margin expansion and working capital improvement.

Our 2007 earnings per share guidance range is $5.60 to $5.80, driven primarily by higher segment operating profits, and representing an 11% to 12% improvement in recurring annual EPS.

Finally, we anticipate that we will continue to be an industry leader in ROIC, with ROIC being greater than 17.5%.

That concludes our report on the quarter and our update on guidance levels.

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

Thank you.

The question-and-answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] We will go to Heidi Wood of Morgan Stanley.

Hi, guys.

That's a pretty ripping uptick in Space backlog, up 39% sequentially and 45% year-over-year, yet your midpoint sales guidance is only 6%.

Best case is 10%.

So can you talk about how much of the backlog increase is CEV and can you discuss your assumptions and give us some sense about the environment in Space with a little more detail?

Absolutely, Heidi.

Yes, you're right on the backlog growth, something that we're very proud of to have accomplished so far this year.

Relative to '07 compared to '06, we basically see the satellite business being relatively flat, and the Crew Exploration Vehicle contributing to the growth in our space transportation line of business, kind of in the $500 million range, and the strategic and defensive missiles are basically also flat, so it's the lumpiness that we've talked about historically in Space.

But good progress on the margins, good progress on the earnings, and outstanding job winning new business so I think that hopefully addresses your question.

And then one follow-up, on ES, can you talk a little bit about the puts and takes there?

You had an 11% year-over-year increase in sales and yet the margins were down sequentially as well as year-over-year.

Can you talk about what is restraining the margins?

Yes, absolutely.

We're talking about the Electronic Systems business area.

It deals with the lumpiness of that business area.

If you recall, about half of that business is recognized upon delivery and half on a percentage of completion basis.

So if you take, for example, something like the PAC-3 missiles, which we deliver both domestically and internationally four at a time, we will have significantly more deliveries in the fourth quarter as compared to the third quarter.

And in fact, we actually have many more deliveries in the third quarter of '05 compared to '06.

So I'm highly confident that the fourth quarter margins will be greater than our year to date margins.

In Electronic, it would be well over 11% in the fourth quarter, and I just attribute it to the lumpiness of our business.

But no issues, no concerns based on our outlook.

All right.

I will get back in queue.

Thanks a lot.

Thank you.

We will go to Steve Binder of Bear Stearns.

Thanks.

Good quarter.

Thank you.

Maybe it's the 23rd consecutive quarter I'm asking this question but maybe you can just touch on, in context, these answers obviously you've made a lot of progress relative to your plan, and I know you were talking about a burn of 100 to 200, but I'm gathering there won't be a burn this year.

Maybe just touch on that as well as '07.

What is kind of factored into your '07 cash plan for advances, especially in light of the strong international activity?

And maybe you can just talk about that, and -- because my sense is -- I know there is a lot of FMS business out there but I'm sure there is a lot of direct business as well so the advances in opportunity in '07, are you still baking in a burn-off in '07?

Well thanks, Steve, and I think I will ask Jerry to try to give you some insight and see if we can address your question this time.

Steve, thanks very much.

As you know, working capital is a significant portion of our cash flow, and as Meg pointed out earlier, we generated over $3.5 billion cash from ops through the first nine months and raised our guidance again to 3.7.

The working capital through June was $700 million positive through performance and some timing events.

In the third quarter, we did in fact increase some receivables inventory, as well as, to your point on customer advances, we actually saw a little bit of favorable advances in the quarter of $100 million or so.

We continue to believe that the customer advances will show some minimal burn-off later in the year, $300 million, but we believe that our cash will continue to be strong as we go forward here.

We did say at the last call that we thought the third quarter cash flow was going to be solidly positive.

We delivered 650 million on that in the quarter.

I'm also encouraged to report that in the fourth quarter, the cash from ops should be between 200 and $300 million.

So net-net, for the year, we believe our working capital will continue to be a great contributor for our cash here, and looking forward for next year, the advances seem to be about a $300 million burn-off as we look forward for next year, Steve.

All right.

And then with respect to your pension plan, and with respect to what's been your actual returns to date, because I know -- I see what you're assuming for the year but what has it been to date?

And also with respect to that discount rate, it moved to 6%.

Is that based on what you're projecting rates will be at the end of the year or based on current assumptions?

Yes, I'll, second question.

That is based on current assumptions if we had to pick the discount rate today.

We'll obviously update at the that end of the year based on the most current data available.

I will ask Meg to answer the first part of your question.

I will just tack on relative to your question on advances, it is difficult to project, as you know, the different elements of working capital but we continue to remain committed and have actually delivered on having our cash equal to or exceed the earnings and I think that is the metric we focus on.

Meg?

Sure.

In terms of the pension returns year to date, I'm happy to report that achieving our 8.5% anticipated or expected returns is not going to be a problem at all.

Assuming that we are going to see the markets at least stay where they are for the rest of the year, we look like we are in very good shape.

All right, thank you.

Thanks, Steve.

And we will go next to David Gremmels of Thomas Weisel Partners.

Thanks, good morning.

Good morning.

On your Information and Technology Services segment, just looking at my notes from last quarter, and I kind of thought you were looking for a little bit more there in terms of revenue growth and profitability.

Is there anything that happened there that came in below expectations?

Yes, I think we're very satisfied with our Information Technology growth, double digits organic and inorganic, but Jerry, do you want to give some color on that?

Thanks, Chris.

It is an opportunity to provide some color about one of the key growth areas of the Corporation.

Appreciate the call.

The I&TS generated 16% double digit growth, David, as a business area level this quarter and even more impressively, when you look down into the line of business of the IT area, it generated 22%.

Now, to be fair for those that follow, we did in fact have some small contribution from our Aspen Systems acquisition earlier this year.

But even if you normalize that out, the organic growth for the business area was 13%, and for the IT area within that, 16%.

So by either measure, strong double digit quarter to quarter growth at the business area total, as well as the IT.

And I would also point out it is also noteworthy that you mentioned about margins.

This business was able to improve by 30 basis points from the year-ago period, bringing in the margin to 9.7% for the quarter.

So by any measure, this continues to be a very strong story for us.

David, I will just add, when you look at the press release, you see the I&TS segment which of course includes the NASA work and the defensive systems so the IT part is about 60% of that total line of business and that's where the growth is.

Defense and basically flat and NASA, as we talked about previously, is experiencing a slight decline so the underlying IT business is very healthy.

And then just a quick follow-up on -- can you just give us an update on ULA, and what are the remaining hurdles there, and do you have any sense as to timing and when it will be finalized?

Sure.

I cannot predict a closing time at this point.

We are working obviously closely with our partner, Boeing, both to get in place for the closing of the transaction.

We're also implementing the terms of the consent order.

We have not set a date as of now, but we will keep you abreast as information changes on that front.

Thank you.

We will go next to Joe Campbell of Lehman Brothers.

Good morning, Chris, Meg and Jerry.

Lockheed sure earned the right to take a deep bow for '06 performance.

Well, thank you.

Lockheed has been the best stock in the entire aerospace but you've beaten your own EBIT guidance by some 30% from a year-ago today, and presumably just because of sort of normal and appropriate conservatism and some unpredictably positive outcomes.

But there is a risk when you beat the numbers so soundly that investors start thinking that Lockheed's guidance is sort of always overly low.

And I wondered if you could sort of look out at the '07 guidance you've given for us and talk about some of the key areas of uncertainty both up or down that it's not reasonably easy to predict as we sit down here in October of '06 and I suppose what people are wondering is whether the '07 guidance might turn out to be probably not as equivalently low as '06, but significantly too low, because you have certainly earned a reputation for being conservative.

Thanks very much.

Okay.

Well thanks for the question, Joe.

Just to confirm, we're talking about EPS guidance in '07 of $5.60 to $5.80, which is about 11 to 12% increase over our recurring annual EPS rate.

Obviously, $0.41 for the year and $0.16 for the quarter is driven by some of the unusual items, all net gains that we like to highlight for analysis.

So I think it is pretty common practice to have those removed on a year to year basis.

I'm not sure we are conservative relative to having a balanced approach to looking at opportunities and risks.

The performance of the Company has been outstanding and we see that in the continued improvement of the margin.

As you know, we don't forecast a significant amount of our cash deployment other than the share repurchases to offset the share creep.

So what we like to see is some of this upside historically has been a result of solid acquisitions, capital restructuring, excessive share buyback over and above the share creep, and continued investment in the business, whether it is research and development or capital.

So we try to give our best estimate, and double digit growth on the recurring EPS line for at least four years in a row is, in my opinion, not a lay-up, and something that we are committed to try to get to.

I certainly think people think your performance is just terrific.

I wondered though if maybe -- there must be some items at the margin that would, that are sort of major swing items as you look out into '07 or some important areas where well, sort of if this turns out, then obviously things will be better and if this doesn't, we will have to work a little harder.

Any color there?

Yes, I mean -- the nice thing is we're looking at over $41 billion of revenue next year, so it is a pretty balanced and diversified Corporation.

And it is really hard to find one specific item to point to, but when we look at the portfolio with literally thousands of contracts, I guess I always go back to the delivery of them, the actual timing of the deliveries of our aircraft, such as the F-16s, the C-130Js, the high visible launch vehicle events that generate revenue, Patriot delivery, PAC-3 delivery, those types of things.

So the larger programs, as we all know, are in the Aeronautics business area.

They have had an outstanding quarter, an outstanding year.

Especially as all of the production programs there, the F-22, the F-16 and the C-130J are really hitting the stride, and we see that as possible one area of swing.

But other than that, the debt we've been able to lock in at very favorable rates with the Exchange, and the swap, the share count we can obviously control the pensions.

We will give you the final number in January but we gave you our best estimate for now, but I think we've got this pretty well managed and control the risks to the best of our ability.

Well, here's hoping '07 is as good as this one.

Thanks very much.

Well, thank you, Jeff.

We will go to George Shapiro of Citigroup.

Yes, Chris, a couple of questions.

In the Aeronautics area, the 11.1% margin, you commented, I thought that you'd increase the F-22 profit rate.

How much of that increased margin then reflected kind of the cum catch-up on the F-20, 22, and then the second part would be, given that your Aeronautics guidance next year is for about a 10% margin, what kind of upside might there be to that given that you probably have the opportunity to raise the margin again?

Sure.

Thanks, George.

On the F-22, just in the quarter, a year ago we probably had earnings kind of in the 25 to $35 million range, and for this quarter, we're kind of in the 40 to $50 million range, so a $15 million uptick on F-22, so it is nothing substantial, but again, this performance, and I think F-22 is a great example.

When we look at the line of balance, which is a term of art they use when we build aircraft, and we look at how the investments that we've made in lean initiatives over the years has really put us in a position where we have tailored this production line to really be optimal.

I mean the defects are down.

There is a significant reduction in bog.

The quality is up.

We've improved the cycle time.

The learning curve has improved significantly.

These are all metrics that we can measure and attribute to our investment in these lean initiatives and productivity.

And in fact, so far, in this program, we have delivered five zero-defect aircraft which is really unprecedented in the history of aircraft manufacturing this early in the production cycle.

And that basically means that there were absolutely no discrepancies or issues upon receipt of the aircraft at the customer's operating base.

So it is something we're quite proud of.

When you see that type of performance, you can continue to expect the results that we got.

The same applies to the C-130J program.

The same applies to the F-16 program, which we know is in the 35th year and we're still getting improvements in efficiency as a result of some of the investments and initiatives we've made.

So I see that as potential contributors in '07 and beyond.

Joint Strike Fighter program is doing well, but as you know, that is still in development.

So it doesn't have necessarily the opportunity that these other programs do, relative to being fixed price, and benefiting from the initiatives.

We talked about increased margins in Aero.

The EBIT commitment remains over $1.1 billion for next year, even with the slight decline in revenue that we've talked about for years and anticipated as a result of the F-16 and C-130J programs, reduction in volume, so it all comes down to performance.

We are making our deliveries.

F-22 is ahead of our internal plan on schedule for deliveries.

And you know, zero defect airplanes is making a big difference.

So we will be over 10% double digit margins in 2007 which is a great turn-around from where we were just a few years ago when I think I was answering questions as to when we would get to 7 or 8% so great accomplishment by the team and we're looking forward to the contribution next year.

But Chris, even the F-22 margin may be 6 or 7%, now you get the multi-year, I mean that's got to offer you significant potential upside, I would think.

Well, I'm not sure about that.

I mean the main driver of the multi-year is to add stability to the supplier base and allow some savings to the taxpayers, and allow for some certainty in the long term production of the program but we still have to be able to execute and deliver.

We've talked about being in the mid single digit range on the F-22, and with good performance, we hope to get to the higher end of that.

Okay.

I will get back in the queue.

Thanks.

We will go to Howard Rubel of Jefferies & Company.

Oh, thank you very much.

It is a pleasure to have the opportunity.

A couple things.

Chris, you went through some environmental things in terms of the size of of the budget, but in the end, your business is made up of a bunch of -- or a lot of multi-billion dollar programs and there are some puts and takes as I look at some of them.

Could you talk for a moment how some of these changes have occurred and how you have been able to overcome them?

For example, [TFAD] had some money taken out of it and it was moved around a bit.

I think the V-71 also had some money taken out of it.

And of course, the F-35 program is kind of being reset a little bit.

And -- but the positive there is you're clearly getting some certainty.

So if you wouldn't mind addressing that, it would be really helpful.

Absolutely, Howard.

Thanks for the question.

As I mentioned I think in Joe's question, one of the benefits of having a Corporation with $41 billion of revenue and $78 billion of backlog, we do really manage and look at this on a portfolio basis, so there really is no single point to failure or single opportunity to move the needle significantly.

The focus here under Bob's leadership with the entire management team is to meet our customer commitment to stay on schedule, to stay on budget and to make the delivery, and we've been doing that.

Relative to Siever, the Sievers program is stable, relative to TFAD, we are the incumbent on the predecessor program.

So there is an opportunity there for two additional satellites, while that program maybe slips out or stalls.

But again, as the incumbent, you don't see that hitting our financials in a negative sense.

On the VH-71 Presidential helicopter, that program is doing quite well.

We just completed our preliminary critical design review.

We will get the final critical design review in the first quarter of '07.

All the test vehicles have been flying down the Pax River for months.

They are ahead of schedule and in fact, November, one of our test vehicles will actually be landing on the White House lawn.

So that program again is doing well, and when you look at the wide ranges we give on our guidance and our outlook, it really is no single point of failure, and as long as we continue to perform, we think we'll be fine.

The Joint Strike Fighter, again, getting that started, production, low rate initial production, was a major accomplishment.

And I think the customer appreciates and supports our programs, when they see the benefits they're getting and the fact that we're staying focused on meeting those commitments, and that's really the best we can do to get the results we want.

And then just as a follow-up, the Integrated Systems and Solutions business, I have been a little surprised that the revenue growth hasn't been a little bit stronger there.

Is there a program start, or is it just business mix that is kind of holding it back from kind of growing in line with some of the other opportunities you have?

Why don't I have Meg give you some detail there?

Yes, I would tell you that we actually are quite pleased with the sales and profits that are up this year versus the year earlier period, and very solid margins, above 9%.

We're seeing the sales increase due to higher volume of the intelligence defense and information assurance activities.

What I think you're seeing is that the growth doesn't look quite as strong as it might have compared to 2005, because of course in 2005, we had ACS.

If you take ACS out of the equation, you would see that the growth in revenues was closer to 6%, which is of course more in line with what we're seeing across the business.

You are also going to see '07 growth that is solidly in the high single digits.

And I would also note that we continue to see margin improvement in that business, and we're seeing the backlog build.

So we're actually quite pleased with the way the business is developing.

Thank you very much.

The comparison explains a lot.

Thanks, Howard.

We will go next to Joe San Pietro of Wachovia.

Good morning, guys.

The question, it seems like you're getting a pretty substantial step-up in terms of the '07 EPS guidance, due to a reduction in the pension expense.

So I guess it kind of harkens back to Joe Campbell's question earlier, as to where the growth was.

It still seems, with regard to the last answer, Meg, that there should be a lot more growth coming in IS&T than what you folks are currently stating so -- and I understand that ACS is taken out of of the equation, but again, it just still seems low to me.

Can you just give a little bit more color?

Yes.

Let me take the first, the earnings question, and then I will ask Meg to give you a little more detail on the revenue growth for the Corporation.

I guess if I look at the GAAP earnings per share, and I think we all agree that we probably ought to eliminate the unusual items just for comparison, I look at it as basically a $0.60 per share increase, '07 over '06.

And when we look at that, only, I look at it as about 75% of that increase or $0.45 a share is a result of operational improvement, increased margins, increased volume and $0.15 coming from what would probably be characterized as non-operational items. $0.22 of that is the pension, and of course we will fine tune that in January if the rates change up or down.

But again we are absorbing an extra $0.06 of stock option expense.

The tax rate is going up, '07 over '06, which is about $0.13 the other way.

Interest is coming down, which is $0.03.

We can give you all the detail you want, but at the end of the day, I look at this as adding $0.60 per share to our '06 and $0.45 is from the operations, 15 from all the other traditional non-operational items, which I think is pretty impressive.

And I will ask Meg to give you more details.

I just want to point out, we've talked about the Aeronautics growth, and just highlight which I think we've already heard once, but again, the Corporation is growing its top line in '06 9 to 10%, excluding the Aeronautics portfolio, and is forecasting 8 to 10% top line growth in '07, excluding the Aeronautics business.

But why don't we get more color on IT,Meg?

Sure.

Why don't I step back for a minute and talk about our entire systems and IT business, because I think we actually define our IS&S business and our I&TS business somewhat differently than some other companies do.

I would point out that our 2007 guidance for our systems and IT business indicates that we will see about 10% growth in sales for the entire business.

That is very solid growth across each of the businesses contained in that group.

I would indicate to you that the biggest area of growth for us is in our IT business, which is our LMIT unit.

There, we see about close to 25% sales growth for 2007, and that of course follows on very strong growth in sales this year.

As Jerry indicated earlier, for the third quarter, we saw 22% growth in sales, both on a quarterly basis and a year to date basis, and that included very strong double digit growth on an organic basis.

We continue to be optimistic about the growth in the LMIT business and in the entire business unit for the systems and IT business, based on the backlog that we see growing, and we are very encouraged to see that our margins continue to go up there.

We're looking at margins that are very solidly double digit both for 2006 and 2007.

Great.

That's much more clear.

Thank you.

We will go next to Doug Harned of Sanford Bernstein.

Good morning.

Good morning, Doug.

On Aeronautics, and actually, Aeronautics and defense services combined, you've talked a lot about focusing on the O&M budget, and having a greater role there.

When would we see an impact there and where would we likely see it?

And I think about both sustainment on the Aeronautics side as well as your defense services activities.

Doug, what we're seeing is that historically, maybe 15 to 20% of our base has been in the traditional logistics and sustainment area, contained within the business areas.

In fact, the C-130J, one of the improvements to the profits in the quarter and year to date, is the growth in the sustainment and the profitability of the C-130J sustainment.

We're bidding numerous opportunities here in the quarter, and we have them on the screen for 2007.

Whether it is actually an outsourcing opportunity, with the U.S.

Army, relative to managing their portfolio of tires for wheeled vehicles.

There is a KC-10 propulsion opportunity that we are pursuing.

Obviously acquisitions that we've made, whether it is savvy technologies, PAD, provide us greater opportunities there, so I think it has been in our results for years, and it is an area that we're focusing on and look to see continued growth.

So we will be sure to highlight it as it comes through, but we're clearly something we've done for our existing products.

We're looking at other products, and then looking at it more as a systems, a systems solution.

Are there technology applications we can bring to save our customers some money?

So we will point them out as we bring them forward.

But so far, I think the initiative has been a positive one.

I guess the question I have, is if this is going to be a pretty significant source of growth in the future, can you give a sense of the scale it might have?

Because this potentially can be very attractive margin business, and some of the dollar sizing might be talking about in the next couple of years.

Yes, we -- I mean we talk about the budget being 150 billion, but clearly, when you peel that back and look at what is addressable, especially with consideration of existing depos and such, you're probably in the tens of billions of dollars of realistically addressable market.

We have an internal pipeline where there are literally billions of dollars of opportunities.

Those would be orders that would obviously come in to revenue over long periods of time.

These tend to be 5, 10, 15-year contracts.

But it is a several billion dollar opportunity that we hope to take advantage of.

In fact, '06 over '05, we had double digit growth within our logistics virtual line of business as we call it.

Of course, it is contained in all five business areas so it is hard to call out and see, but that was one of the key contributors to our solid growth this year.

Longer term, Meg, do you want to talk about some of the opportunities?

Sure.

As Chris said, we're already seeing that our logistics systems containment business across the Corporation is in the high single billion dollar kind of range.

We anticipate that that will continue to grow, particularly as we see the F-22s and the JSF sustainment business come online.

That should be a particularly strong business for us.

We're seeing additional growth at Kelly Air as well.

And we are quite encouraged by the government's desire to outsource some of their logistics and sustainment business to us.

We see huge growth opportunities there, and expect to go after those, both as our existing business areas and the acquisitions we're making such as TAE, where they have a very good business in outsourcing already.

Okay.

Great.

Thanks.

Thank you.

We will go next to David Strauss of UBS.

Good morning.

Thanks.

Good morning.

Morning.

Chris, could you talk about the outlook as far as cash flow in '07, what you're looking for as far as cash taxes and any pension contribution?

Absolutely.

Let me first talk that we did increase the guidance for 2006.

And relative to pension contribution, historically, we've take a hard look at opportunities in the fourth quarter, and for this year, if we do choose to pre-fund our pension, which we will evaluate over the next few months, it would not impact our already given guidance.

So we are committed to the '06 amount of $3.7 million, with or without the, any pension pre-fund.

For 2007, we're looking at taxes over $1 billion, and our current plan has pension contribution in the 150 to $200 million range.

But of course, that could change if we opt to fund early this year.

So very strong cash generation again exceeding our earnings outlook, and our goals to deploy that wisely to increase the value of the Corporation.

And could you touch on the JLTB opportunity?

I dialed in a little bit late.

But could you talk about that opportunity, what your role on the team is going to be, and timing on a decision on that?

Yes, are you talking about the Joint Light Tactical Vehicles?

Exactly.

Yes, thanks for the question.

I did not mention that in my prepared comments.

This is an opportunity we've talked about as we move into adjacent markets, and sometimes referred to as trucks.

We have a teaming arrangement with Armor Holding.

This is really the next generation of light armored vehicle.

We would be the prime, and we would be the system integrator, so we're responsible for the design, the met centric capabilities and the logistics, and our partner, Armor Holding, would clearly be focused on the vehicle assembly, and then some of of the survivability subsystems.

So we're looking forward to that opportunity.

I know people like numbers.

This could be several billion, 5 to $10 billion of opportunities over the long term.

But right now we're focused on our partnership with Armor Holding and then making sure we're successful in the competition.

And last one, you gave pension guidance all in for '07.

Any -- can you give us some color on the breakdown between FAS and CAS?

Yes, absolutely.

It is about 750 million of FAS and 625 of CAS, and that kind of nets to the 130 million that we talked about.

We will give the final number in January.

And as you know, a 25 basis point change in the discount rate swings that number into the $90 million range.

So we forecasted it, based on our best estimate today at 6% discount rate in the outlook, and if that were to continue to move up, that number could drop substantially.

Great.

Thanks, Chris.

Thank you.

We will go next to Cai von Rumohr of Cowen & Company.

Yes.

I joined the call a bit late.

Your margins were a little lighter sequentially in Electronics.

Could you comment on, kind of, was there anything abnormal and also comment on potential for foreign sales?

Sure.

Thanks for joining the call.

I'll have Meg give you some color on that.

Sure.

Cai, as Chris was discussing earlier, in our SO business, what we see is there are lot of timing events related to TOT sales, and in particular, we would point to the PAC-3 sales that we've had.

We would indicate to you that the PAC-3 deliveries this quarter were quite light.

Those compared to third quarter last year and very much compared to what we expect for fourth quarter.

We anticipate that close to 50% of the PAC-3 deliveries for the year will be made in the fourth quarter, and you should see a corresponding uptick in the EBIT as a result of that.

Okay.

And then a follow-on, the margin -- there have been a number of potential foreign sales.

Can you talk about what you see for potentials there and any guidance in terms of where international would be as a percent of sales this year and where we might see it in '07?

Yes, relative to this year, our international business, and we include both the direct and the foreign military sales, is in the 15% range, and I see that being relatively consistent here over the next couple of years on a consolidated basis.

Obviously, each of the business areas have a significant variation in that.

Specifically, Aeronautics and Electronics tend to be a higher contributor to international business.

I guess, as you look through, there has been a fair amount written on the Aeronautics opportunities.

On the F-16, clearly there is Pakistan, there is Turkey.

Longer term, there is India.

Even though there is no RFP yet, there has been an expression of interest, all for the F-16.

We continue to see opportunities on the C-130J and, of course, Joint Strike Fighter long term, toward the end of the decade or early the next decade, will have a substantial international component given our nine international partners.

Missile defense has been very popular here with the MEAD program, the PAC-3 and the EGIS, obviously, with the recent announcement with Japan.

Some of our acquisitions we've made have been in the U.K., relatively small in system state, specifically, but the TAE opportunity that we just closed on last month and Savvy Technologies have lots of solutions and opportunities abroad that even though some of the work force will be forward deployed if budgeted through the State Department, as an example, so it is a little less risky than some of the direct commercial, but it is a big part of the Corporation.

They're valued customers, and we plan to continue to grow in that area, as the Corporation grows.

Okay.

And the last one is, you've talked about moving into adjacent market areas, you've done it with the JLTV, with a partnership.

Any thoughts about increased focus on maybe doing it via acquisition to kind of turbocharge that effort?

Let me ask Meg to talk about our M&A strategy.

Sure.

We constantly take a look at how we ought to best pursue new business.

We look at whether we ought to build our capabilities internally, whether we ought to buy the capabilities or customer access, or whether we ought to create the capabilities and customer access via teaming agreement such as the agreement with Armor Holding.

I will tell that you that is a very conscious decision that we've made.

We continually revisit those decisions.

But at this point in time, we're quite comfortable with the teaming agreements we have with Armor Holding and with the types of acquisitions we've made year to date.

We will continue to review those acquisition opportunities to make sure that they are the best economic alternatives to pursue the new business we want to pursue, and that they are good strategic and operating fits with the Company.

Great.

Thank you very much.

Felicia, this is Jerry.

We're getting close to the time line.

If we could take one more question.

Thank you.

We will go to Richard Safran of Goldman Sachs.

Hi, thanks.

I have had my questions answered.

Okay, well, thank you, Richard.

And why don't we wrap it up here and I just want to just close off by thanking everybody for your questions today and obviously for joining the call.

We're continuing to improve operationally and financially as stated by our strategic initiatives and vision and we continue to enhance the Corporation's value.

Through forward thinking, innovation and creativity, we are well positioned to meet the current challenges and secure new opportunities.

It is especially gratifying that Lockheed Martin was recently ranked number 2 by Business Week magazine as the best place to begin a career.

This award continues to validate our ongoing focus on attracting the highest caliber work force and ensuring that our people will continue to be key differentiators in separating us from others in the industry.

We remain focused on delivering the operational performance expected by our customers, and the financial results expected by our shareholders.

We're committed to being responsive and accessible and are continuously working to further improve our transparency.

So I look forward to speaking with everybody again in January when Bob Stevens will be joining us on the call and we appreciate your support and interest in Lockheed Martin.

Thank you very much.

And that does conclude today's conference call.

We thank you for your participation.

You may disconnect at this time.