洛克希德·馬丁 (LMT) 2006 Q4 法說會逐字稿

Good day, everyone and welcome to the Lockheed Martin fourth quarter and year end 2006 earnings results conference call. [OPERATOR INSTRUCTIONS] 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.

Thank you, Jamie.

And good afternoon.

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

Joining me today on the call are Bob Stevens, Chris Kubasik, and Meg VanDeWeghe.

We have posted charts on our Web site which supplement our comments today.

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

Actual results may differ.

Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.

Today's call will be made available on our web page for downloading in MP3 format as a pod cast.

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

Thanks, Jerry.

Good afternoon, everyone.

I hope you all were able to enjoy your recent holidays.

And found that 2006 was rewarding for you and your families.

And I trust you're looking forward to a prosperous 2007, as we are.

As I start the call today, I would like to begin by thanking our 140,000 employees and their leadership team, who have enabled Lockheed Martin to make advances in effectively providing mission critical products and services to our customers while achieving improved financial performance.

During 2006, overall, our program execution was solid.

We won important new business.

And we continued to shape balanced business portfolio designed to both meet customer needs today and tomorrow, while enhancing shareholder value.

Let me summarize briefly our accomplishments in each of these areas before providing you with an outlook for our future.

Our program performance continues to be a top priority for all of us.

We're focused on execution and on meeting our commitments to customers by completing key milestones on time and on budget and providing continuously improving quality.

Significant operational achievements included the first flight of the F-35 Lightning II, a fifth generation tactical combat aircraft that will serve this country and our allies for decades, delivery to the United States Air Force of 27 of our fifth generation F-22 Raptors,he world's most advanced and most flexible fighter.

Successful tests of critical missile defense programs like THAAD, PAC3, and Aegis.

And thousands of other successful operations across all our business areas.

These 2006 operational results are important in their own right.

But I also think they've been important as drivers for our ability to win new business.

Solid operational performance, delivering on all commitments, builds confidence in our capabilities, and that confidence contributed to the highest annual level of new order bookings in the history of our company, and a year-end backlog of almost $76 billion.

We believe that business success is a result of superior program execution, effectively listening to our customers, our continued drive for innovation and responsiveness, and our ability to leverage our experience and our skill to horizontally integrated or align our abilities across the entire corporation.

Notable 2006 contract awards included the Orion crew exploration vehicle, NASA's next generation human space flight transportation system, the air operation center weapons system integration contract, and the TMOS advanced global communications network contract for the United States Air Force, the joint air to surface standoff missile for the Australian Ministry of Defense, the first international sale of this missile, international F-16 awards that will extend production through 2010, the third advanced DHF satellite, a variety of domestic and international awards for air and missile defense programs, and civil information technology outsourcing programming such as the Army Corps of Engineers, DHS Eagle, [IFEZ 2] and the FBI Sentinel contracts.

In addition to performing on contracts and winning key competitions in 2006, we also focus on significant steps to reshape our business portfolio.

We successfully completed the creation of the United Launch Alliance Joint Venture, to better align our Atlas launch vehicle business with customer needs, and ensure that our nation has continued high quality assured access to space.

We also invested our Russian proton launch business to focus on higher growth, higher return opportunities.

Beyond using joint ventures and divestitures to reshape and trim our portfolio, we have made additions through acquisitions.

We completed five during 2006, while announcing a sixth as we closed the year.

We are confident these transactions will provide the same sort of value to shareholders that previous acquisitions provided.

Our acquisition of Management Systems Designers, which we announced in December, should close in a few days, and should provide enhanced system and information technology capabilities for our ongoing health care initiatives, as well as access to customers such as the National Institutes of Health.

These actions bring our total completed acquisition since 2001 to 16.

And have greatly expanded our capabilities and customer access.

All have been fully integrated and all are meeting objectives.

Again, these achievements and many, many others are the result of the dedication and professionalism of our 140,000 employees.

And I compliment them for delivering a very solid 2006.

Looking ahead, by now, you've already had a chance to review our 2007 guidance.

So you know that for the year, we anticipate double digit growth in our recurring earnings per share, strong cash from operations and continued growth in revenue and margins.

Let me describe for you our general sense of the overall market, and our vision for the future as we look at 2007 and beyond.

Looking long term, we expect to see continuing uncertainty and complexity in the global security environment, which will drive future demands, to include not only highly capable military power, and strength in homeland security and law enforcement, but further initiatives aimed at international outreach, diplomacy and support for emerging democracies.

We see a compelling desire in civil government agencies to have more efficient and effective services provided to citizens and we see a growing international interest in our capabilities.

All our customers will face the need for increasing situational awareness, through advanced sensing devices that will be linked to communication systems that enable them to share information and to be always connected.

With data everywhere, networks will continue to grow in importance and power, and in vulnerability.

As corrupting information will be viewed as a weapon of mass destruction in the 21st century.

We have the experience, skills, and breadth in our portfolio to contribute significantly to this future.

Looking at funding, the current fiscal year 2007 defense budget was enacted at $435 billion, with investment accounts funded at $157 billion.

Additionally, supplemental appropriations of $70 billion have been approved, with the prospect of another $100 billion or more under discussion and review.

The 2008 president's defense budget will be delivered to the Congress on February 5, probably in the range of $460 to $480 billion, with the investment accounts at about $170 to $180 billion.

Based on all that we see, we expect continued growth in both our core and adjacent markets, domestically and internationally.

As we grow, we anticipate an increasingly diversified portfolio that will be progressively less dependent on U.S.

DoD sales and which reflects increased levels of international sales.

We continue to expand our addressable government market in several ways, by focusing on customers we know and capabilities we now possess, by extending value to customers and offering new capabilities such as those acquired with Savi and HMT, and by developing new customer relationships, such as those associated with our Aspen, PA&E, and MSD acquisitions.

Looking specifically at our business areas, our systems and information technology group, we will work to grow domestic and international sales in areas such as missile defense, with PAC3, Aegis, THAAD and the MIAD system.

Homeland security with solutions for port security and cargo tracking.

And government information technology, related to traditional focus areas such as defense, and new focus areas such as health care.

Systems and I.T. both will also come from continued creative approaches to adjacent markets, similar to the approaches we've taken about the littoral combat ship, the presidential helicopter and the joint light tactical vehicle programs.

Now I recognize that we have a stop work order on one of our systems in I.T. contracts.

The stop work order on the second littoral combat ship, which is based on cost concerns, is a matter that we take very seriously, because affordability was a goal the Navy emphasized, along with schedule, and sound technical performance.

But I want to be clear with you.

I have complete confidence in our overall adjacent market strategy and our ability to bring value to commerce and we will continue to pursue opportunities in this fashion.

We understand what the cost pressures have been on the first LCS ship.

We have made modifications that have added to the durability and survivability of the vessel and have made a better and more valuable ship, but we are accountable.

Working with the Navy, we have also moved from concept to first ship in the water in four years, a notable success.

And we believe quality of the vessel will be outstanding.

We will continue to support the Navy in every way that we can, as they evaluate the program, and decide upon a path forward.

But our adjacent market strategy is sound.

In our space business, we expect sales growth to continue to be driven by the government satellite market, and opportunities like GPS3, additional advanced DHF spacecraft and space based radar.

Our ramp up on the Orion crew exploration vehicle, and potential space exploration missions for NASA will also fuel growth.

Looking at aeronautics, as we have previously indicated we expect sales to decline over the next couple of years, with the low point in 2008 at about $10 billion, or about a billion dollars less than 2007, reflecting the long-plan ramp-down of F-16 sales.

However, the anticipated growth from F-35 ramp-ups, continued C-130J and F-22 production, and increasing levels of sustainment and logistics activities will drive future sales expansion beginning in 2009.

Acquisitions will also remain an important component of our strategy to build value in our portfolio.

We will continue to pursue a balanced cash deployment strategy, returning at least half of our free cash flow to shareholders, while using the remaining cash flow to pursue capital projects and acquisitions that will add to productivity and expand our capabilities.

As we continue to grow our sales organically, and through acquisition, we will also continue to expand our margins.

We're pleased to have achieved our long standing goal of double digit operating margins and generating in excess of $4 billion in 2006.

We continue to see opportunities for additional margin expansion across all of our business areas.

By successfully transitioning developed programs to production, improving program performance and adding higher margin international business.

Our new goal is to continuously increase EBIT to exceed $5 billion while adding 100 basis points to operating margins, a position we hope to achieve by the end of the decade.

And we remain focused on strong cash generation and on industry-leading returns on invested capital as we are committed to sustaining ROIC performance in the 15% to 20% range.

We believe that the keys to our future success will be our continued development of critical competencies, attracting and retaining top employee talent, ensuring alignment of management and shareholder interests, listening to our customers, driving innovation, leveraging horizontal integration, and deploying cash wisely.

Jamie, that concludes our summary of 2006 and the outlook for 2007.

And I think it would be good if we could open up the lines to our participants and address their questions directly.

Thank you. [OPERATOR INSTRUCTIONS] We will go first to Steve Binder of Bear, Stearns.

Good afternoon.

Good year.

Bob, maybe you could just start out by talking about the 100 basis points of margin opportunity.

Did I hear you correctly by the end of the decade?

Yes, Steve, thanks.

And thanks for your comments about the year.

A lot of folks worked real hard to put good numbers on the board.

I think it is very consistent about our philosophy about setting general overall direction to the leadership team and our professional work force that we look to the future.

When we think about that future and margins, we are really pleased to be in the double digit range, but we think we should set a general vector of continuous improvement on margin expansion and the goal will be to add a billion dollars to EBIT and drive 100 basis points improvement before the end of the decade.

And can I just follow up, you know, you mentioned LCS.

When you look -- since we have you once a year --when you look at the portfolio today, of $40 billion, and look at all your major programs.

Where do you think you got customer issues today?

Because we read a lot, there is a lot of noise in the press and so forth, as far as, you know, around the portfolio, where would you think are the customer -- where are customers generally unhappy today?

Which programs.

Well, I tell you, I work hard to stay aligned with customer interests.

Customers have an incredible number of demands that are placed upon them, and frankly they want industry to perform flawlessly.

And I understand that.

I also understand the nature of the technical complexities in delivering the sophistication that we have in some of the systems that are required.

We set our standard here in performing flawlessly for customers.

Any time we don't, I'm dissatisfied.

So I am not pleased that we have a stop work order on the littoral combat ship because the Navy has better things to do than to work that stop work order with us.

I was disappointed that we didn't prevail in the combat search and rescue helicopter program.

Because our goal there was to provide significantly compelling value, and to execute against our program portfolio responsibility.

So whenever we're not meeting a test of near perfection and execution, we're not satisfied with ourselves, Steve.

Okay. [inaudible] Thank you.

We will go now to Troy Lahr with Stifel Nicolaus & Company.

Could you briefly explain kind of the lessons learned on littoral combat ship and I guess kind of why you have confidence that this adjacent market strategy is still sound?

Well, relative to the littoral combat ship, Troy, I think all of our energy and all of our focus ought to go into working with the Navy, to assure that they have a complete understanding of where the program is, where the costs and value in the program lie, and they can determine an appropriate course of action to move forward.

It is just critically important that our United States Navy have a capability in the 21st century to address threats in the littorals.

And the littoral combat ship is an excellent vehicle in which to do that.

We would be honored to sustain a position in this program, but all of our effort on LCS will be dedicated in communicating with them and I think we ought to reserve some period of time to allow the Navy to work through this issue and to understand fully where we are on the program, and what their options are and pursue those options accordingly.

Do you still feel that is the same with the presidential helicopter contract, you're aligned properly with the customer, as that's kind of another adjacent market that you have been tapping into?

Yes, I absolutely do.

Lockheed Martin has had a long and good track record at being a systems integrator.

Long before there was a presidential helicopter, there was a Merlin helicopter, and our Owego, New York facility had run a very good systems integration program, integrating complex electronics capabilities into green aircraft produced for the Merlin mission.

So this is not our first experience in complex systems integration.

When we look at the presidential helicopter, I think it is important that we all remember the demands of the mission and the schedule that were undertaken.

The goal was to move into service a more capable vehicle to protect the Commander In Chief, and the head of our government in a post-9/11 threat environment.

Everyone knew there would be a demanding schedule.

Everyone knew that the quality levels on this program would have to be extraordinary and exceptional, and we all signed up for that.

And I think we're making very, very good progress in advancing the capabilities on a tight schedule to deliver the performance that is expected on this program.

Great.

Thanks.

Yes.

Thank you for your questions, Roy.

We will go next to David Strauss with UBS.

Thank you.

Bob, can you talk about the mood on Capitol Hill, and what might come of the talk that we're hearing as far as increased Congressional oversight?

Well, I think that we have always been familiar, David, with a fairly high degree of oversight on programs, and I think, you know, that's the role that Congress plays, and we're not unaccustomed to that role and we will support it in every way that we can.

I think the mood is generally one that recognizes that there are really significant security challenges in the 21st century, and that we're probably going to need to continue to make investments in systems and capability and force structure, that will be able to address those challenges in the 21st century.

That's frankly why we always come back, David, to a common denominator here, that focuses on our execution.

Because that is something we can do better and we should do better, and it is something that our customers rely on us to do that they can't get anywhere else.

So whenever we hear about challenges or demands or potential shortcomings or opportunities, part of the solution for us is always improving our overall performance.

When we look at investments in security, if we use the defense budget, including this $70 billion portion of the supplemental that's been approved, we've been running at about 3.8% of GDP, so there is some prospect that there may be some additional investment funds coming.

I also think that there will be increased focus over time on homeland security missions, and on law enforcement missions.

As this security environment becomes more complex.

And what we want to do is be in a position with an array of high valued offerings, and the kind of execution that is reliable upon which customers can depend, and position our company well to serve our customers' interests.

Thanks for the answer.

Thank you, David.

Chris, could you touch on aeronautics?

Obviously, the margins came in better than expected there again in the fourth quarter.

Where was the upside relative to plan?

And also the adjustment that you made, the upward guidance that you gave for '07 as well?

Thanks, David.

It is actually pretty close to the plan that we had internally but to answer your question, the F-22 continues to perform very well, not only in the quarter but throughout the year, and our deliveries were obviously ahead of schedule and ahead of plan, so we made the appropriate updates relative to the earnings on the F-22 program.

Probably followed some of the press and heard about the zero defect aircraft.

I think it is seven now, and that contributed to the earnings.

Thanks.

Sure.

We will go next to David Gremmels with Thomas Weisel Partners.

Yes, thank you.

Bob, on I.T., some of your competitors are saying that there are a couple of issues in the market, you know, one on the DoD side, some repriorization at the expense of I.T., and two, on the civil I.T. side, some disruption related to the continuing resolution.

Can you just comment on what you're seeing in the I.T. market?

Sure, David.

Thanks for the question.

Well, there is a continuing resolution.

I mean we know that.

So we know that there will be some restrictions on overall funding there.

And I think in DoD, there are often reprioritizations among a variety of lines of business.

I think our judgment, if I take a step back, is that we work in market segments that are growing, we work in market segments that are flat and we work in market segments that are declining.

And believe that we've got to have strategies and approaches to perform well in each of those conditions.

And in a flat and declining market, we think we've got to be sufficiently competitive to take share.

And that typically comes from listening very carefully to the challenges customers are trying to meet, to tailor our offerings such that customers see compelling value that would be worth a prioritization of funds to support the program, and then as I said, executing on those programs in a fashion that really delivers the value that customers expected to see.

We also find we get some value out of having fuller spectrum solutions.

We have a broad portfolio of offerings from very high level architectures down to desk top applications.

And find that with the breadth of that portfolio, and the experience that we've had, in solving customer problems, we can position ourselves well in either of those environments.

There surely seems to be a pretty consistent demand now in the -- if you think of the civil part of the government to include intelligence communities, a desire to get intelligence systems right, and to make appropriate investments in those systems, and so we found that we have been able to demonstrate growth in these market segments, and in 2007, even if they were to get more challenging, we're anticipating the ability to sustain a level of growth here.

David, this is Chris.

I will just add in that already in 2007, you may have heard that we've been successful in winning a Department of Justice I.T. outsourcing contract, and recently the Center For Disease Control awarded us a contract for strategic national stockpiling.

So we're off to a good start early in the year and we're looking for double digit organic growth in our LM IT business for '07.

Thanks for that.

And for my follow-up, for Chris, on cash flow, you know, the last few years, your cash generation has been, you know, quite front-end loaded and obviously if you hadn't made the $600 million pension contribution, you would have been pushing like a billion dollars in operating cash flow in the fourth quarter.

Did any of that come out of Q1 '07, you know, pulled forward from Q1 '07 so that the '07 cash profile might be more even than we've seen in the past?

David, we generally don't try to pull forward cash.

My experience is that usually comes at a price when you're negotiating with your customers.

So for several years in a row, we've had significant cash from operations in the first quarter, and I would expect in the first quarter of '07, that our cash from operations would be in the $750 to $1 billion range, and obviously, we will know that in April, but absolutely not.

We have a great system.

A great process.

And we didn't make any unusual acts or adjustments in that process at the end of the year.

Good.

Thank you very much.

Thank you.

We will take our next question from Heidi Wood with Morgan Stanley.

Bob, nice to have you on the call.

Good to see you, Heidi.

Two big picture questions for you, Bob, if you don't mind.

Can you talk about the business model for open architecture for the Navy?

I mean the incumbency for proprietary architecture has been huge.

You are in this race along with Raytheon for this move to open architecture but opening up the business use of course invites others into the software business.

So doesn't this lead to commoditization and then how does that lead to better returns?

Right.

The open architecture model frankly is going to find its way into the customer community whether we're involved with it or not, Heidi.

It is the natural flow of trying to tap the enormous reservoir of innovation that occurs in the commercial marketplace.

So in our view, the decision for us is we either lead the way, by creating the kind of architectures that adapt to highly proprietary, highly classified applications, but also allow access for competitive open market commercially available participation, or we don't.

And our choice was to lead that market.

So you're right.

We had a position that was, you know, I would tell you, compellingly proprietary, and by taking a leadership role, we have opened that up.

And I think where we sustain value in this market segment is by demonstrating to the customer that they get enormously good value by being able to select among applications in the commercial segment, getting the price cost benefit from having full and open competition at that level, without impairing the ongoing operational cadence that it is absolutely mandatory that they maintain.

I think that the Aegis open architecture system is an excellent example of the ability to open up the architecture, add value to customers, and concurrently add value to Lockheed Martin.

And I think you will find that the joint strike fighter system is built on the same philosophy of open architecture, bring your best ideas, and we will maintain a high performance architecture but also protect the data that flows across the networks and the architecture that we put forward to customers.

So we're very committed to this approach.

I think the Navy views it as an enormously valuable addition to their maritime domain awareness capability, and we will continue to do that.

So you think, just to confirm, you think that they're going to give you similar kinds of margins as what you see in the past as your proprietary work?

I do.

I think if we can convert the discussion to where do you get value, and why, and there is -- if there is real underlying value in open architectures, then the answer to your question should be yes.

Okay.

And then for my follow-up, the Democrats are arguing for supplementals to be build into spending for the budget.

That has led to some thinking that there might be cuts in missile defense and space, and now with this Chinese satellite shootdown, that possibly boosts space funding.

So can you talk to us about how you see the puts and takes, both in the outlook for space funding, as well as where within the defense budget you might expect cuts to balance things?

Yes, but Heidi, I don't know that I can do better in an answer than you've done in the question.

Don't we live in an interesting world?

That now you've raised the issue and I know what you're referring to, the widely reported press accounts that the Chinese, I guess, I'm not sure even today if they're now confirming or acknowledging, or the ballistic missile launch of an anti-satellite kinetic energy intercept kill vehicle that would have taken out a low earth orbit exhaustive communication satellite.

Those are the demands we speak of when we talk about the complexity in the world that our customers face, and that members in Congress face.

And there isn't any one among us who can predict with any perfection what that future will look like.

So I would rather suspect that there are good and strong voices who say put all of the supplementals into the budget and there is also a recognition, just as the one you've made, that there will be externalities, there will be events that occur, some of which will require supplemental funding.

I will say the Congress never seems to have failed in their responsibility to put the money into the funding line, either in the budget, or in the supplemental appropriation after good and healthy debate to make sure that sufficient resources are flowing in to providing for the security of the United States.

Again, if we look at defense, that's been at about 3.8% of GDP.

In our judgment, with a $14.4 trillion economy, the nation has a lot to protect, and we might see even more funds flow into the accounts.

It is not entirely clear to us whether the funds flow will be incorporated into the baseline budget bill, or whether the funds flow will come in the form of supplementals, but we, like you, think there will be additional funding.

Do I dare ask one more?

Sure.

All right.

Thinking about areas of adjacency growth for you Bob, GE we just saw upped its commitment to aerospace with an acquisition recently.

You are obviously number one in air, and you have commercial space heritage, do you imagine that is an area of expansion as the fed I.T. market expansion runs its course?

I'm not sure -- could you talk a little bit more about that area of interest?

Would you be interested in getting into aerospace?

If I think of where your businesses sit, and where there are adjacent areas.

We have seen some people again, like GE, get back into it more forcibly and wondering where your interest lies there.

Well, not in the avenue that you described.

I mean we are not looking for emerging opportunities in commercial air.

All right.

Great.

Thanks very much, Bob.

Thanks, Heidi.

We will go next to Robert Spingarn with Credit Suisse.

Good afternoon.

Bob, you know, looking at the aeronautics business and the C-130 program in particular, we saw Ralph, I think back in December, and he talked about that program, you had 39 aircraft in backlog back then, and he talked about a number of big opportunities out there.

We've seen talk in the press on more aircraft in the supplemental, the '08 palm, Canadian opportunity.

How should we think about this program, perhaps the F-16 going forward, in terms of trend, rate, and just general opportunity and margin upside?

Robert, thanks.

And good afternoon.

Thanks for the question.

Well, let's start with the F-16, because as I have conveyed to you in the -- our general sense of the landscape, we're watching a reduction in the backlog as we ramp down on F-16 deliveries over time.

And in fact, I think Chris and Meg and Jerry have reported to you previously when we look at the integrated growth for the company, you're seeing growth in some segments of the business, but a decline in revenue in the aeronautics company associated with the F-16.

There continues to be international interest in the F-16.

You might think of the multi-role combat aircraft for the Indian government, where they're contemplating buying 126 airplanes for which we think the F-16 would be a contender.

There are other countries that may look selectively at follow-on buys, extending their position in the F-16s, Turkey is a country that comes to mind when we think of that.

So there may be, in our future, selectively, F-16 line extension opportunities, and we will pursue those as we have pursued F-16 line extension opportunities in the past.

Recently that included a Pakistan order with 18 firm with an option for 18, as an example.

I think on the C-130 airplane, we're seeing first of all the performance of the aircraft live up to everything our customers expected of the airplane.

And I know that you and everyone on the call and others beyond the call always get subjected to lots of reporting and accounts about some of the difficulties that we and others have on programs, and I know that's hard to sort out, but we've always had confidence in the C-130J that it would be a superior aircraft in its mission areas and it is proving to demonstrate those capabilities.

So I think we are going to see expanded U.S. interest in the aircraft.

And I do think we're going to see expanded international interest in the aircraft.

In Canada, there may be an opportunity for 17 airplanes.

In India, an opportunity for 6, with perhaps the prospect for more beyond an initial interest in 6.

And we think there might be an opportunity in Israel for 6 airplanes.

And in the Department of Defense, we think that with regard to conversations that have unfolded over time with the special operations command, the United StateS Marine Corps, the United States Air Force, there may be fairly significant double digits interest over time.

So again, I think it all starts, though, on, you know, on assuring we can execute on our contracts, and assuring that the systems and capabilities that we offer to customers meet the performances advertised, and when that happens, I think there will be continuing demand, so we expect to see continuing demand on the C-130.

So Bob, thank you very much for that, that really could extend the tail on these programs, it suggests that I ask Chris, though if you could refresh us on the '07 production rates for both C-130 and F-16 and just as a final question, is there any chance at this point for ACS to come back?

Thanks very much.

Relative to 2007, we're looking at 38 to 41 F-16s.

We're looking at 22 to 24 of the F-22s.

And 11 to 12 C-130Js.

So 2006, we had a record delivery of 106 aircraft, and the numbers I just gave you will probably get you somewhere in that 75 aircraft range.

Bob teed up the '08 revenue decline, and that is supported by the fact we will have about 60-some or so aircraft delivered in that time frame.

Let me get back to Bob on ACS.

Yes, there -- whether or not there will be an ACS in the future follows a set of conditions that applies to all programs and that's whether there is a mission need.

And in fact, there is a mission need for a capability like an aerial common sensor.

So we rather suspect that there will be a growing interest in finding the right configuration to meet the demands of the mission, and we will look upon, with considerable interest, how those demands may unfold, and test our ability to provide value here.

Thanks very much.

You're very welcome.

Thank you.

We will take our next question from Cai von Rumohr with Cowen and Company.

Yes, thank you very much.

Performance continues to improve in aeronautics.

Could you comment a little on some of the specific drivers in the fourth quarter, and if we look at your aeronautics margins, they basically improved sequentially in every quarter since the fourth quarter in '04.

Is there any reason, you know, that wouldn't continue, presumably at a decelerating rate, into 2007?

Well, I will tell you, Cai thanks for the comment, our aero team is only looking at improving their performance.

They have spent an enormous amount of time, and we have invested a considerable amount of money, in trying to first train the best aeronautics work force and team that we possibly can.

Leadership, program management, professional skills.

I think part of the improvement that you described stems from that.

We've looked at lean and Six Sigma events on a recurring basis to try to wring out of the cost structure every possible element of waste or unproductive efforts so that we can focus on accelerating throughput, accelerating streamlining.

I can also tell you they are a very motivated team and they work very, very hard at this.

They want to be regarded as the finest high speed combat tactical aircraft team in the world, and I think they're willing to work as hard as it takes to earn that reputation.

So -- and those comments apply to the F-22 program, and to give you some sense of performance here, they delivered more F-22s in 2006 than was in our original baseline plan.

Many of those jets were zero defect or extremely high quality aircraft.

And it gives them an enormous level of satisfaction to turn those jets over to the finest pilots in the world, in the United States Air Force, and watch what those pilots are able to do with that aircraft.

And if you're reading current reports, and I know that you are, you are reading commentary now that says gee, it isn't really a cold war relic after all, that it is a highly capable combat aircraft, and it is the epitome of net centric warfare, that even when this airplane is out of ammunition, combat controllers keep it in the battle space because of its intelligence surveillance reconnaissance mission and it can act as a battle manager, and the excellent pilots that I'm describing to you are only getting started.

It is also evidence that if you can get stability in a program, get some confidence in execution, stabilize production rates and funding into a program, then teams like our aeronautics company can work on, in that stable environment, reducing costs, improving quality, and delivering value to customers.

So that is exactly what they're trying to do on the F-16 program, on the joint strike fighter program, on the F-22 program and on the C-130J program, and I frankly expect to see continued strong performance out of the aeronautics company.

And Cai, specifically as you know, I think it has been six consecutive years now that the margins have improved in aero, going back to a low point in the 2001 time frame.

But if you recall in 2005, we ended the year at about an 8.5% return on sales.

This year it is 10.3%.

We're giving guidance, if you go to the midpoint of the range it would easily suggest 10.6%.

So to your question, we are looking at year-over-year improvement, quarter to quarter, you know, it gets a little more complicated with the deliveries, different prices and such.

But no doubt we are committed to year-over-year margin improve in aeronautics, and committed to year-over-year margin improve in aeronautics, and we've seen it and we're forecasting it to continue over the next several years.

Thank you.

Quick one.

Adjacent markets, could you give us maybe the one or two best opportunities and maybe some comment on the vehicle market and the logistics?

Well, sure, Cai.

And the vehicle market is one of those adjacent opportunities.

It will be the joint light tactical vehicle, or the Humvee replacement.

I think as you followed us, you've noted that we have had an advanced technology demonstration contract that we win to bring forward a new vehicle, and we've tried to take the very, very best of Lockheed Martin systems integration capabilities, and apply it to vehicle, as we have other adjacent market interests.

Now this is what I mean by that.

You might think a truck is a truck.

But we know that these land vehicles are vulnerable to IEDs.

So we've tried to use our systems integration and systems engineering skills from across the corporation to look at the dissipation of hyper sonic shock waves to protect the people in the vehicle, and configure the truck to have a shock wave dissipating configuration.

And to reinvent through material science applications the kind of ballistic absorbing armor that would enable modular, easy to facilitate, up armoring and down armoring of the vehicle, such that the armor could absorb some of the blast, and really protect the troops inside.

Because that is the nature of the threat in the 21st century.

We have that kind of skill, experience, and capability.

For decades and decades in some parts of our company that we can bring to bear on these very selective individual adjacent market opportunities.

We see a contract like for the transportation security administration, the TWIC contract, as an interesting adjacent oriented move into better homeland security applications, through secure identification and verification of identities.

We look at our Savi group of companies, and believe that they will make significant strides as we look forward in providing for heightened intelligent levels of port security that will far better secure the citizens of the nation.

So I think we have some very interesting opportunities.

We've assembled the kind of portfolio that will bring these opportunities for life -- to life.

I think we've got very competitive offerings.

And we will keep you posted throughout the year on how well we're doing.

Terrific.

Thank you.

Thanks very much, Cai.

We will take our next question from Howard Rubel with Jefferies and Company.

Thank you.

One financial, one strategic.

First, Bob, to talk about strategic for a moment, you for some time had the I.T. and systems group put together for us.

Could you talk for a moment and address how you're going to continue to have them work together and leverage the growth of the business?

Sure, Howard.

They are clearly incentivized.

I mean there is a couple of lessons I guess we've learned that you all have known, and maybe folks like us have to learn and relearn over time, but one of those lessons is be very clear in what you ask for.

Try to create the conditions inside the company where that request can be honored.

Measure the results.

Incentivize the performance you want.

And provide feedback to the leadership team.

If you have the right quality people, and we certainly believe we do, they're very dedicated and they're very hard working, and you apply that process, we think that you can do great things in a company like ours.

So if you look at this company immediately after all of the acquisitions that were made, which is a very tough way to assemble core competencies, and you look at the company today, you do not see the same organization.

And I give great credit to the 140,000 men and women who work in Lockheed Martin, because they have worked tirelessly to put this company together to serve the interests of the customers first.

They have seamless leadership.

There are incentives in place.

The requests that we make of them are clear.

They understand the strategy.

They understand the tactics.

You've had the opportunity to meet many of them so you've gotten to know them personally and you can make your own judgments as to whether you think they understand and are of the quality that we think they are.

They're committed to an approach that pushes a growth engine, and I will tell you, we are working tirelessly to assure that in our full spectrum leadership program, we have a real breadth and depth of talent on the bench.

And I think you can measure us in that regard by looking at the number of executive transitions that we've had.

You and others have mentioned, and I think appropriately, and I concur, with the excellent performance in aeronautics.

But aeronautics is one of those business areas that went through a senior executive transition when Dane Hancock left our business, and Ralph Heath took over the responsibilities of Executive Vice President, and I would submit to you not one beat was lost.

And we've made an executive transition in our space systems business, with Joanne McGuire, taking over for Tom Marsh, and not one beat has been lost, and just recently, we've announced Linda Gooden taking over our information technology and global services business from Mike Camardo and I assure you when I spoke with Linda, not one beat will be lost.

So those are the areas of excellence we pursue in the company to make sure that our performance will be consistent, that the investors in our company won't be disappointed, and that we continue to provide value to customers.

Well, I mean I guess maybe the way I should have pushed it a little bit is, you're now at a size and scope where, I mean -- and I don't want to beat on the littoral combat ship because it is small relative, because I should say it snuck up on you and you had such a good record of late, how do you balance this scope going after the most complex problems with avoiding, you know, some of these smaller things so that you don't get, and your customer doesn't get surprised?

You have to run every job every day, Howard.

There is no distraction here because of size.

We have the right organizational structure.

We have the right leadership team.

You know that we changed the organizational structure where ever we think an adaptation is important.

And there are exceedingly clear lines of accountability, responsibility, and authority here.

And we expect, I expect of myself, and each member of this executive team expects of themselves a level of accountability here to assure that we execute on our responsibilities.

So we don't leave any gaps, and we don't leave any holes, and in that fashion, because we are accountable, because we measure results, I expect that we will continue to perform, and I expect this company to continue to grow as we've demonstrated in our guidance for 2007, and continue to execute.

And I appreciate that.

And then with respect to cash flow, Chris, this is the first time in a while I've seen relatively flat year on year cash, and if we were to back out the pension contributions, year over year, you would actually be a little bit on the down side, I think you would be down.

I'm sure there is something in there that I'm missing, maybe it is a tax payment or something like that, that is causing relatively flat results.

So Howard, you are dissatisfied with $3.9 billion of cash from operations?

I didn't say that, did I?

I mean you're parsing the question.

I asked whether or not --

Absolutely, no.

I will give you the answer.

We have -- well, first our overarching strategy has been to make sure our free cash flow is equal to or exceeds our adjusted earnings and that once again has in fact occurred.

We have tax, you know, significant tax payments I think in the $1.2 to $1.4 billion range for 2007.

And when I look at our prior guidance, the way I analyze this, generally -- we generally gave two-year numbers back in October and I looked at that as $7.5 billion over a two-year period.

I'm now looking at $7.7 billion over a two-year period, with the $600 million pre-fund.

You know, I kind of look at that as $8.3 billion.

So to an earlier question, we have been cash from operations positive.

I think, you know, 26 out of 28 quarters has got a great process, a great system, and due reach forward and steal money from a future quarter to make a prior year, we don't defer money from a prior year into a future quarter.

It kind of comes in on a daily basis.

We draw a line in the sand on 12/31 and that's what we have.

So I couldn't be happier with our performance on the cash generation side.

We continue, even this year, to many people's surprise, to generate cash from working capital and another 200-plus million dollars, seven consecutive years, of generating cash from working capital, and we're projecting a slight cash generation again in '07 from our working capital management.

Oh, I think that you know, a little bit of your enemy of your own success, and that was the point I was making.

Well, thank you.

It wasn't that I was trying to pick on you.

You misinterpreted it.

Okay.

Don't let him rough you up, Howard.

No problem.

Okay.

Thanks, Howard.

We will go next to Robert Stallard with Banc of America.

Good afternoon.

Good afternoon.

Chris, just to follow-up on the cash issue, which is pretty good, I must admit.

Thank you.

This year, you said you wished to return at least 50% of your free cash to shareholders.

You're tracking ahead of that.

As you move into 2007, do you think you are going to find it complicated to get 50% of free cash flow deployed on acquisitions, and can we expect maybe closer to the 2006 deployment on share buybacks and dividends?

Thanks for the question.

You're right, we did deliver over 90% in '06.

We're very proud of that accomplishment.

Why don't I have Meg give you a little more detail on what we did and what our outlook is.

Sure.

Thanks, Chris.

Rob, I think that we say that returning over 50% of our free cash flow to shareholders is a very important commitment.

A commitment we've made once again for 2007.

We also had made a commitment to avoid share creep, and this year, as you know, we worked quite hard to make sure that we made good on both commitments.

As you know, we bought 27.6 million shares, which amounted to about 6.4% of our outstanding shares at the beginning of the year, and I would point out that we continued to buy throughout the year, even as our share price went up 45%.

We were able to reduce the share count by 10 million shares for the year.

And we certainly intend to continue a share repurchase program this coming year.

We will have that be part of our balanced cash deployment and we do intend to make good on 50% of free cash flow to shareholders but not necessarily on the 90% that you saw this past year.

Thank you.

Are you finding it difficult to find the right targets then for the right price?

Or is there some regulatory issues I'm not aware of?

In terms of mergers and acquisitions?

Yes.

Well, I tell that you we looked at literally hundreds of mergers and acquisitions as candidates this year.

As you know, we did close on five deals.

And announced a sixth deal.

We are constantly looking at transactions at any given point in time.

There are 30 or so that are actively being looked at throughout the corporation.

We see lots of interesting targets, some of which we decide to monitor simply because the prices are not right at the moment.

Regulatory concerns are not normally the kinds of things that are getting in the way on transactions for us.

But we are committed.

We've got a very disciplined process here within the corporation to being strategic, to being proactive, and to making sure that we do the right deals at the right time and at the right prices.

And our entire management team at the corporate level and the business areas is involved in doing that.

I think you will continue to see some very interesting and -- transactions that are going to continue to add value to the corporation from a strategic operating and financial perspective this coming year.

That's great.

Thanks, Meg.

We will go next to Douglas Harned with Sanford Bernstein.

Good afternoon.

Good afternoon, Doug.

On I.T. and GS, can you talk a little bit about specific architects and engineers, and now that it is being moved in as services, how does -- how is progress going in terms of integrating it?

Are you looking for cost synergies in addition to some of the revenue synergies you've talked about before?

Yes, thanks, Doug.

Actually, when we're adapting our business model here, modestly, to accommodate what we think the individual value opportunities are for some of the acquisitions that we make, and so that PA&E is being lightly integrated, there will be some cost synergies, and of course, we will have to provide a level of financial controls and discipline over the company, and we're very able to do that.

But we're really looking for two things to occur.

We think there will be a market expansion for PA &E based on our judgment that as we look forward in the 21st century, we think that other forms of national power will need to be exercised increasingly.

Beyond military power.

And PA&E has a business model of going into countries early, establishing democratization programs, supporting our embassies and generally participating in an expansion and outreach program supported by the State Department and the United States government.

And we simply think global circumstances will require the leadership in our nation to do that more rather than less.

And then further, we believe that as PA&E is situated in these market segments, that there will be a demand for information technology applications, and in that case, for example, there would be some cross-selling opportunities that will be a revenue generation initative for the company.

But also through the aperture of PA&E, the ability for that organization to deliver low risk proven technologies through apertures and customer contacts that we didn't have before, so that in essence we will be widening the aperture in that market segment through cross-selling opportunities.

So I guess it is a less a cost synergy, cost reduction focus than it is a market-making market expansion focus.

If that answers -- did I answer your question, Doug?

Yes, that is where I was going.

And just on one other thing.

Could you give us an update on the international front, in terms of what some of the opportunities are, and if there is any change now in your perspective on the percent of either bookings or revenues that you see ahead on the international side?

Generally, we sense an increasing interest from the international community, really across all our lines of business.

And a previous call participant raised the notion of recent activities undertaken by China.

And of course, we have been working hard on missile defense programs like Patriot Defense Capability and THAAD and the Aegis system so that there -- I think there very understandably -- is such an increasing interest in how those systems may be brought into a portfolio of security capability for countries, who are friends and allies of our country.

Think of the circumstances unfolding in North Korea, and other parts of the globe.

So there is considerable interest, let me say in the missile defense portfolio.

There continues to be interest in the aeronautics segment.

In the F-16 program that we talked about briefly, certainly in the C-130J program, I think you will see sustained and continued interest in the joint strike fighter program.

Recall, we have eight partner countries in addition to the United States involved now, but we haven't even begun to consider selective foreign military sales opportunities, or direct foreign sales opportunities that will likely unfold as this program ramps up.

So I think in aeronautics, there will be a sustained and continuing interest there.

I know that we have a stop work on the littoral combat ship but here again, here is a system that meets the threats in the 21st century, and by that I mean the demands that will occur in the littorals, and it is why we participated in that adjacent market to begin with.

It is why we have confidence in the capability and we're looking forward to a resolution on the littoral combat ship.

We have the U.K. military flying training systems and I think we look forward to more interest in our simulation and training capabilities as we would support customers' interests around the globe.

We will look for outsourcing opportunities, we will look for fleet sustainment opportunities, in ways that both expand our markets, and drive better value for customers.

There seems to be a good deal of interest.

It is why when I said there is an uncertain security market that we think that interest will be sustained as we look forward.

Okay.

Great.

Thank you.

Jamie, this is Jerry.

I know we are right at the hour now.

Why don't we do one more call.

We will take the final question from Myles Walton from CIBC World Markets.

Hi, guys.

Good afternoon.

Good afternoon.

Just a quick one then, on the F-22, Chris, is the multi-year yet baked into your internal financial planning?

We anticipate the F-22 multi-year, you know, we've only given guidance through 2007, so, you know, I think the revenue and earnings and cash from that would fall outside the guidance period that we have given.

You know, the original plan was 60 aircraft over three buy, the multiyear is 60 aircraft with one three-year buys, so it is in there, I would say.

But you won't see anything in '07 relative to earnings or cash.

Okay.

And then the last follow-up, then if I could.

For the last couple of years have you been able to pull out some gains from prior investments you've made in the deep and distant past.

I think most of that has run its course.

Do you have anything left in the portfolio that are these kind of investments that you're slowly divest out of, that is still remaining in the balance sheet?

We have got a pretty good -- in fact, I think our team has done a great job liquidating and monetizing those developments.

There is nothing material out there that I see continue, you know, to review the portfolio strategically and see if there is anything there, we still have some land that we periodically liquidate and we are constantly looking to consolidate and reduce our costs, but nothing material, and we will obviously let you know if and when that comes to fruition.

All right.

Thanks.

Great quarter.

Great.

Thanks.

Well, why don't we wrap up here.

I guess I just want to make a quick comment before turning this over to Bob to wrap up, we have received several questions and I wanted to wait to answer this on the webcast and it dealt with our 2007 EPS quarterly profiling and just want to say that I would recommend using a similar profile for '07 that the corporation achieved in 2006.

But you need to be careful and make sure you exclude those unusual items.

So use our recurring '06 EPS if you're interested in trying to model the '07 earnings.

Bob?

Thanks, Chris.

Well, let me say we know you're all very busy and I want to thank you for your interest in Lockheed Martin and your participation on the call here today.

All of us here at Lockheed Martin are focused on delivering first rate operational results for our customers, and industry leading financial results for our shareholders.

We are committed to maximizing shareholder value by building a balanced portfolio of businesses which will allow us to continue to expand margins as we grow revenues organically and through acquisitions.

We thank you very much for your support.

We look forward to talking to each of you throughout the year.

Thanks for your participation today.

Jamie, thank you.

Thank you.

Ladies and gentlemen, again that concludes today's call.

Thank you for your participation.

You may disconnect at this time.