洛克希德·馬丁 (LMT) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Lockheed Martin first quarter 2007 earnings results conference call.

Today's call is being recorded.

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

Please go ahead.

Thank you, Jamie, good morning, everyone.

I'd like to welcome everyone to our first quarter 2007 earnings conference call.

Joining me today on the call are Chris Kubacik and Meg VanDeWeghe.

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

Actual results may differ.

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.

We have posted charts on our website which supplement our comments today.

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

Thanks, Jerry.

And good morning, and welcome to the call.

Consistent with our expectations, we had a strong first quarter and are off to have a good start for the year.

Our results reflect the solid performance of our operations across the corporation and our ongoing drive to improve execution, diversify our portfolio and deliver value to our customers and shareholders.

This morning we'll describe in some of our accomplishments for are the quarter, but before we do that, I'd like to cover two topics of recent interest.

First, our performance on adjacent market programs and then the recent reorganization of our corporation.

- Let me start with the Littoral Combat Ship.

Some have questioned whether the termination of our contract for LCS ship number 3 is a sign that we are having problems managing complex development programs and adjacent markets or even that our adjacent market strategy is somehow failing.

I believe our history of success on numerous challenging development programs across our corporation reflects our capability to manage the most technologically challenging programs for our customers while assuring long-term contribution to shareholder value.

On LCS, the Navy's termination decision was based on affordability concerns regarding projected cost growth estimates beyond the initial baseline value for ship number one.

On this first in class ship, cost growth from the baseline level occurred in two key areas.

First, growth resulted from Navy design changes, engineering change proposals, and the application of Naval vessel rules, all of which occurred after the contract award.

The other driver of cost increase was caused by the industry change, including the significant delay caused by a General Electric fabrication problem with the critical propulsion gear and material supply delays caused by an inability to procure steel.

All these factors resulted in production delays and inefficiencies for which we as the prime contractors are accountable.

We fully understand the sources of these cost pressures and communicated our financial, technical and schedule status to our customer.

In addition to informal communications, we delivered monthly cost performance reports as required per the contract.

We're disappointed by the cost growth experience on LCS number 1, and by our inability to reach a satisfactory conclusion with our Navy customer on a path forward for ship number three.

We believe that our proposal for the third ship was responsive to customer requirements and fairly shared the risk while providing financial discipline consistent with shareholder objectives.

We look forward to completing our current ship, and commencing sea trial evaluations later this year.

We're pleased that we met the objective of putting a first in class ship in the water in approximately two years, half of the time normally required for production of a lead ship.

We believe that our delivery of LCS ship number one will validate the world-class innovative design solution to the Navy for the Littoral mission.

We believe that our LCS approach offers a new competitive paradigm by combining the proven capabilities of the nation's midtier ship builders with our corporation's program management and systems integration expertise, we're providing the benefit of a third ship builder to broaden choices and enhance the competitive landscape for the Navy.

The LCS program has also reinvigorated the discussion about the value of using fixed price contracts on development programs.

We do not think that fixed price contracts are appropriate for development activities because they do not encourage the type of direct, responsive, collaborative behavior necessary for success.

The development of complex systems is a demanding task, the technology is sophisticated, and the customers require high-performance capabilities that perform reliably under rigorous mission conditions.

Unless there is substantial empirical knowledge about a system and the requirements are stabilized, fixed-price contracting could result in a suboptimal design and unacceptable contractor risk.

I remain convinced that our strategy for successful pursuit of and performance on development projects in adjacent mark opportunities make sense for all of our stakeholders.

I know that the disciplined tools and processes we have put in place as well as our continuous management oversight and training programs will allow us to continue to develop valuable solutions for our customers.

We are pursuing and will continue to pursue new lines of business, new customers and new capabilities in productive and profitable ways across the corporation.

The second point I wanted to discuss is the reorganization of our corporation, which reflects our ongoing evolution as we respond to changing customer requirements and priorities, developments in technology, and geopolitical events.

Our strategic review process continually assesses the environment in which we operate to determine appropriate adjustments to our business model.

Our intent is to organize our portfolio with business in the most efficient way possible to enhance growth and deliver value.

During the first quarter we established a new business area, we moved our aircraft and logistic centers to aeronautics, and we made several other changes which are described in our press release.

These changes were made in recognition of trends in customer requirements and the way in which we already are integrating delivery of products and services.

Let me start with aircraft and logistics centers.

We believe there will be significant benefits through the combination with aeronautics, as the military aircraft become increasingly sophisticated, it will be critical for us to be able to provide full life cycle sustainment.

We'll provide sustainment and support services for our next generation F-22 and F-35 along with other aircraft, which will help drive long-term growth for our aeronautics business.

At the same time, we also created a new business area, information systems and global services, led by Linda Gooden.

This action consolidated the entire spectrum of our information technology expertise from across the corporation into a single cohesive operating unit.

The new IS and GS segment will allow us to focus on our core mission solutions area, continue our growth with information systems and accelerate our expansion into global services.

We also feel that the newly formed segment will increase our speed and agility by providing an organizational construct that provides an agile information framework.

This framework will enhance our capabilities to offer cost effective, seamless full spectrum solutions to our customers.

The full aggregation of IT architecture, system engineering, design and development, business process, security, and outsourcing capabilities along with over 52,000 employees, many with clearances, will provide tangible benefits.

IS and GS will leverage our research in innovative customer solutions in a way that will allow us to provide interesting opportunities for employees, optimal solutions for our customers and attractive returns for our shareholders.

During the quarter, IS and GS exhibited strong performance with a variety of successful achievements such as the delivery of the ATOP air traffic management system, which became fully operational.

This system will significantly improve air traffic management for the FAA.

Also, IS and GS were selected by TSA to manage the transportation worker identification credential program for the deployment of biometric identification cards.

This was a good example of the way in which IS and GS continues to diversify its capabilities.

Another notable example of diversification was the expansion of our information technology business with the award of a Department of Justice contract to operate and maintain data centers and improve IT solutions.

I don't believe any of our competitors have aggregated the capabilities, optimized the capacity and empower the customers as we have.

This reorganization will be critical to our success and in achieving our goal of double digit organic growth for IS and GS.

We are committed to reevaluating our strategy and operations on a continuing basis and assure we deliver superior value to customers, employees, and shareholders.

Now, Meg will tell you about some of our other accomplishments during the quarter.

Thanks, Chris.

There were significant achievements across all of our business areas during the first quarter.

In our aeronautics business, the Joint Strike Fighter program achieved two key milestones.

The production sustainment and follow on development MOUs were signed with the remaining four partners.

Denmark, Italy, Norway, and Turkey.

We now have solidified the long-term relationship with all eight of our international partners.

Additionally, we completed the air worthiness testing on the Cooperative Avionics Test Bed.

This moved us a step closer to production of the F-35, for which LRIC 1 and LRIC 2 funding was recently approved.

The F-22 Raptor program also had two notable achievements.

The program was warded the 2006 Collier trophy in recognition of the visionary design, innovative manufacturing and unparalleled superiority of the F-22 Raptor.

The program also continued to demonstrate the industry-leading manufacturing expertise.

During the quarter, we delivered our eighth zero defect F-22.

In electronics systems, we had a wide variety of achievements during the quarter.

We won a $1 billion contract from the U.S.

Navy to evolve the capabilities of the Aegis system in the increasingly critical missile defense arena.

We also continued to grow our international business.

Our sniper advance targeting pod, was selected by the United Kingdom, Canada, and Belgium to improve target detection, identification, and engagement.

In addition to pursuing growth opportunities internationally, we successfully pursued adjacent market growth opportunities.

We delivered four lightweight prime mover vehicles to the U.S.

Marine Corps.

These deliveries were critical examples of the military vehicle capability and expertise we will use in providing innovative solutions for future programs such as the joint light tactical vehicle program.

In another adjacent business, we successfully assisted the U.S.

Coast Guard in the critical restoration and recapitalization of their assets.

We continued to deliver fixed and rotary wing airborne assets to the deepwater program, on time and within budget.

We also delivered a new shipboard systems operation training facility to the coast guard as part of the deepwater program.

As a reminder, Lockheed Martin's area of responsibility on deepwater are modification of airborne assets and C4 ISR integration.

Our joint venture partner is responsible for ship fabrication activities.

Unlike traditional joint ventures, the integrated Coast Guard systems JV structure provides for separate contracts and separate economics for each of the two prime contractors.

Our electronics business also worked with our space systems business during the first quarter to accomplish the successful THAAD intercept of an ballistic missile target.

Subsequent to the first quarter, an additional successful THAAD intercept was achieved at a more challenging altitude than any other previous THAAD test.

Both of these intercepts illustrate our terminal missile defense capabilities which complement our boost in midcourse capabilities in providing a full range of missile defense for the United States and our allies.

Other achievements in space include the delivery of the final two satellites in a modernized GPS block 2rm program for the U.S.

Air Force.

We also successfully completed critical program milestones for our [Sybaris and our Milos] satellite contracts.

Finally, we were awarded contracts for the production and sustainment of the Navy's trident fleet ballistic missiles, which will extend our support for the fleet through 2042.

As a result of the operating achievements across the corporation, we had strong first quarter financial results.

With EPS growing by 19% on a reported basis and 24% on a recurring basis.

By now, you've had a chance to review our press release.

So you know that as anticipated, the corporation had modest sales growth, about 1% on a reported basis and approximately 4% when adjusted for the ULA and ILS divestitures.

We had solid margin expansion with margin increases in every business area, helping to drive our double digit earnings growth.

This margin expansion is a result of strong performance on key programs, successful risk initiatives, risk reduction initiatives and continued diversification of our business in the U.S.

and internationally.

These same factors drove strong cash flow, which we deployed for acquisitions, capital expenditures, share repurchases, and dividends.

During the first quarter, we successfully completed our acquisition of Management Systems Designers.

This acquisition provides enhanced systems and IT capabilities for our ongoing healthcare initiatives.

It also provides expanded access to critical new customers such as the National Institutes of Health.

After the first quarter, we also closed on our acquisition of the assets of RLN systems in Australia.

RLN systems developed software and operates classified geospatial systems for the Australian government.

We think that this transaction will position us well to do classified business with ,.

as well as the U.S.

National Geospatial Agency.

These two acquisitions were our 16th and 17th since 2001.

They continue our track record of disciplined acquisitions focused on profitable and strategic diversification of our portfolio.

In addition to using cash for acquisitions, we deployed cash to repurchase shares.

As you saw in our press release, we repurchased almost 2% of the shares which had been outstanding at the beginning of the quarter.

We believe that our share repurchase program has created value for our shareholders and we intend to continue to make opportunistic share repurchases.

As of the end of the first quarter, we still had authorization to repurchase another 27 million shares, which at current market values would be worth approximately $2.6 billion.

Following the close of the first quarter, we also paid a $148 million dividend.

As a result of this dividend and our share repurchases completed year-to-date, we are well on our way to keeping our commitment to return at least half of our annual free cash flow to shareholders.

We also are on track to deliver strong annual financial results.

Based on our performance during the quarter, and reflecting our acquisitions, we have increased our guidance for 2007 sales, operating profit, operating cash flow, return on investigated capital and earnings per share.

The detail regarding our new guidance is outlined in our press release.

In summary, we will continue to pursue balanced growth, innovative solutions for our customers, operational excellence, financial discipline, and our practice of returning at least 50% of free cash flow to shareholders.

We believe that these practices are consistent with our strategy to differentiate ourselves from competitors, diversify our portfolio, and deliver results to customers and shareholders.

Now we would like to open up the lines for your questions.

Jamie, can you open up the lines,

Thank you.

(OPERATOR INSTRUCTIONS) Ladies and gentlemen, due to time constraints, we would ask that everyone limit themselves to one question and a brief follow-up question.

We'll go first to David Strauss with UBS.

Thanks, good morning.

Good morning.

Chris, could you talk a little bit about IS and GS?

It looks like if you exclude PAE and some of the other acquisitions, it looks like organic growth was relatively flat in the quarter.

And I think you talked about the LMIT business growing organically double digit this year.

So if you could just touch on that.

You're correct.

The organic growth was relatively flat in the first quarter.

What I talked about was the entire segment, IS and GS growing 10% double digits for the full year.

And based on the guidance and the pipeline and the backlog, we have high confidence in that ability.

This is the new business area that I referenced that we set up and we're really looking at and will be talking about it in three major lines of business.

Information systems, which is clearly the growth engine of the group, the mission solutions, which is our more traditional core business, historical ISS and TSS business and then, of course, global services where PA&E and the Savi acquisition will tie in.

But 9% growth for the quarter, you're right, a lot of that resulted from acquisitions.

But we have high confidence as the double digit organic growth for the full year and 15% to 17% all up just for that one business area.

Okay.

Thanks.

And as my follow-up, could you just touch on your guidance for cash flow?

I think you came in at least $500 million better than you expected -- raised your guidance by $100 million.

If you could just touch on that and what you're now looking for, as far as advances, the burn off there this year?

Thanks.

I'll have Jerry give you the advances, but the $100 million increase in our cash guidance to $4 billion, greater than or equal than 4 ties in to the earnings increase of the $100 million.

And, of course, we had favorable timing here in the quarter, specifically dealing with the inventory and the payables.

But let me give Jerry a chance to give you more detail on the advances.

Sure, Chris.

David, as you saw, the working capital did improve about $70 million in the quarter and we expect like last year that working capital will continue to have a favorable contribution for the full year, probably a couple hundred million dollars, pretty consistent with where we were full year last year.

As Chris pointed out, there was a little bit of timing benefits in the quarter, some advances turned out to be a little stronger than we had anticipated in internal planning.

We do see some runoff later in the year on that.

But as Chris pointed out, we have in the aggregate seen it raise us to the $4 billion number.

We'll go now to Troy Lahr with Stifel Nicolaus

Thanks.

Given the changes to deepwater and LCS, did you guys pull any work out of backlog?

I don't know how deepwater is structured with the joint venture, but did anything like that occur?

No, nothing like that occurred, Troy, on either of those programs.

Relative to the joint venture, as Meg mentioned in her comments, they're very specific domains in that program from C4 ISR, aviation, logistics and systems integration and engineering, which we are accountable for and then the surface ships are with our partner, Deepwater is an IDIQ contract so the backlog is not substantial.

Okay.

And as a follow-up, space systems, sales are done a little bit, I understand the reason for most of that but is CEV ramping, and can you tell us maybe how much?

Yes, absolutely.

Just to clarify for others on the call, the decline in space revenue is as expected and as we said, it's a result of the Proton and atlas launches and programs being included in the '06 revenue and not the '07.

CEV is definitely ramping up, we're off to a good start.

We had talked about 400 to $500 million of revenue for the entire year.

I think in the quarter, we were probably in the 100 to 150 range is my recollection.

But no problem getting the team started.

And making good progress so far.

Okay.

Thanks.

Thank you.

We'll go now to Cai Von Rumohr with Cowen & Company.

Yes, thank you.

Aeronautics, your guidance sort of implies that the margin is going to be flat as we go through the year, whereas it went up last year.

As I look at the mix, it looks like you were a little bit light on C130s and F-16s which I assume are higher-margin programs.

So is there in conservatism in there?

What am I missing?

Yes, well thanks for the question.

This has been a long effort in aeronautics, and with their outstanding performance on programs like F-22, we're now happy to have double digit margins early in the year.

A lot of that was a result of step-ups in the quarter, specifically on the F-22 program.

But nothing unusual going on that deliveries are are on plan.

They're a little more back-end loaded in the year than the front of the year.

But there is no anticipated decline in performance or adjustments downward.

The programs are doing well.

My question is, given that the mix will be shifting toward higher margin programs, why aren't the margins going up as we go through the year?

I mean, just looking at the mix, one would think that's what would happen.

Yes.

Well, it's quite honestly the F-22 performance here in the quarter, you have the book, the step-up in the quarter, which effectively means that the F-22 program was significantly above double digits just through POC inception to date accounting.

The lumpiness is a result of the percentage of completion accounting and the inception to date adjustments.

It's that simple.

That explains it.

Thank you.

Okay.

Thank you.

We'll go now to Ron Epstein of Merrill lynch.

Good morning, guys.

Good morning.

Just a quick question for you.

When you look at some of the space programs, I know that with PSAT and GPS-3 were changed, but there was an independent third company acting as a program office.

Given your experience on LCS and on deepwater, do you see that as a trend going forward, that you can have a third kind of independent party acting as a system integrator or as a proxy for a program office?

Yes, well thanks, Ron.

PSAT and GPS 3 are still in competition, GPS 3, we hope to get the RFP here shortly.

I think in fact there will be two.

There's the actual procurement of the satellite system and then there's the related ground station.

In your question, you kind of have to go back 15, 20 years and just look at the whole concept of the system integrator and as you know in the mid to late '90s, Congress mandated a significant reduction in the acquisition work force which ultimately resulted in industry picking up more of the responsibility.

I think it's on a program by program basis.

There's been a lot written on this and a lot discussed about it.

And some of the government experts that have studied this would suggest that it's at least a 10-year process to transfer the capabilities which currently reside with industry and I'm talking about the system engineering and system integration capabilities back to the government.

So, while it could be a slight movement on a program by program basis, I do not anticipate again, based on where the capabilities for these very unique skills reside, a significant change.

If and when that does occur, I think industry and in particular our corporation, has shown an ability to be agile and adjust and continue to be successful.

So, we'll work with the customers as appropriate.

But those are two good examples and again, I think we'll be late this year before GPS is even awarded and I think the latest I've read or seen on PSAT probably an '08 time frame.

So we'll see how those evolve.

Just one real quick follow-up for you, Chris, on the cash flow, there was about $539 million of other.

Is that adjusted customer advances?

No, we break out the customer advances separately, really.

The other is, my favorite topic here is tax payments.

We make two tax payments in the second quarter, April 15th and June 15th.

So again, there's no tax payments in the quarter, but of course we book the expense, same phenomenon with interest, we book the expense rate -- payments tend to be second and fourth quarter and then, of course, pension was kind of the third piece.

So nothing unusual there.

It will kind of correct itself through the the year.

That's great.

Thank you.

No, thank you.

We'll go next to Robert Spingarn with Credit Suisse.

Good morning.

Good morning.

Chris, based on some of the puts and takes in the reorgs.

it possible to refresh on the segment guidance for sales and margins for the year?

Yes, we did, you mean within the IS and GS segment?

Yes, and overall.

Is there any change?

I think Meg was pretty clear on deepwater about the separation of responsibilities.

But is there any change, for example, on the number there affecting --

Sure.

Well, let me hand it over to Meg.

We did post web charts that tried to lay it out by each of the four business areas.

But I'll ask her to kind of walk through to make sure we're all on the same page here.

Sure.

Let's start with aero where we've already mentioned the fact where we expect our margins to be about 10.5% for the year.

We would see similar margins, perhaps a tiny bit lower, in our space systems business.

In our ESBA business for the year, we'll see margins coming down a little bit from first quarter, but not significantly.

We still expect them to be in the mid-12% range.

And you can see that in the EBIT and sales guidance we've provided.

In the IS and GS business, you can see that we still have one business below 10% but working its way towards 10%, we expect them to come in in the mid to low 9 range.

And we should note that we do see differences in our margins for each of those businesses, as well as differences in growth rates for those businesses.

It may be a little bit confusing to understand what's gone into each of the business areas we now break out.

Our info systems -- is probably the business that the analysts are paying most attention to since that is where our traditional IT business now resides or at least most of it.

And in that business, we are looking at, as Chris mentioned earlier, significant organic and total growth for the year.

We expect that for the year, we'll see growth that will be at least double digit and we expect to see the margins there come out at quite healthy margins.

We're looking for those margins to be vary strongly in the mid 9% range, similarly in our missions solutions range, same sort of range.

In global services, we have a couple of businesses that are growing.

That's where PAE resides, that's also where our Savi networks reside and it's important to note that as we build up our Savi networks business, those margins will rise as we get beyond certain fixed amount of cost that we have to cover.

So I think you'll see the margins for the overall IS and GS business going up over time.

Your question specifically we did not lower guidance in any of our business areas for any of our programs.

If you look at our web charts, you'll see we attempted to lay out the guidance as of January under our old structure and we give a roadmap on the new one.

And as Meg said, it's, across the board increases for the reasons we just discussed.

So there's no program adjustments and then separately on your I guess page 8 of your release, your unallocated corporate figures there, the, it's a small number but the other was a bit higher than we expected.

What's the full year type number there, that $36 million we saw there in the first quarter?

I'll tell you the other relates to interest income on our cash balance.

We're probably looking at something in the 60 to 80 million range.

For the full year.

Okay.

Thank you, that's helpful.

Thank you.

We'll go next to David Gremmels with Thomas Weisel.

Thanks.

Chris, on the IS and GS, 10% margin goal, when do you hope to achieve that goal, and what do you assume in your plan to get there?

Is it more international on the mix or just operating more efficiently with what you have today?

Yes, there's two goals here.

I just want to make sure we're clear.

First goal that I referenced was 10% top line growth organically for 2007.

So, that is clearly the immediate goal.

Our margins are in the low 9% range.

And consistent with our overall corporate goal of adding 100 basis points to our margins, we've targeted towards the end of the decade.

And I think it's a combination of cost reduction and performance on those IT-type contracts.

And the international business historically has a little higher margin but most of that we tend to see in the electronics systems business area.

The synergies from the reorganization I think will be a big contributor towards that goal.

So we're making good progress, you'll see us through the the year report on that.

And clearly, I view this segment as more of a top-line story with solid upper single digit lower double digit margins over the long term.

And then, one of the adjacent markets that you've begun to pursue is trucks, just wondering if you could update us on the partnership with Armor Holdings and the pursuit of JLPV, and do you still expect an RFP release in the second quarter?

And then with respect to the nearer term opportunities, the MRAP, do you see any room for Lockheed to participate on that contract maybe through logistic support or integration type activities?

Okay.

Why don't I ask Meg to give you the update on the vehicles?

Sure.

We're very pleased with our joint venture with Armor Holdings.

We think that that we and Armor Holdings together have come up with a solution which should be an extraordinarily good solution for our customer and we are looking forward to competing in the JLTV competition.

We would anticipate that the RFP for that would probably come out towards the end of this year.

And we're looking for that to be, as you know, about a $10 billion contract over the long term.

So that's one that we're keeping a very careful eye on.

We are not, for the moment, participating in the MRAP program.

We certainly could, but it would take some adjustments to our current offerings, at the moment, our offerings are more lightweight than what they're looking for in the MRAP program.

Thanks very much.

We'll go know to Steve Binder of Bear Stearns.

Good morning.

Hi, Steve.

Chris, a big picture question, when you think about Lockheed over the last several months, there's been a lot of obviously -- you pointed out earlier about headline issues, what is LCS, deepwater, Orion, C-5, whether there's really cost issues or not, there's been headlines, but you read your release here today and you see nothing but performance improvement, with it's F-22, or in the space area, electronics systems, it's obviously you're getting a number of programs where you're getting some favorable cum adjustments or favorable contract closeout adjustments, which is obvious part of the story.

But you see an absence of headwinds, there's really no negative performance issues that is touched on by the company.

And I guess, and I don't mean to make this a softball question, but on a go-forward basis, is management confident that these performance improvements we're seeing today will continue in the next couple of years, and you're comfortable to say that you don't see at this juncture really any performance headwinds?

Yes, I think that's a fair summary.

And somewhat of a softball question so I do appreciate that.

I mean, we have thousands of programs, as you know, and I believe we have the right tools and processes in place, not only at the corporate level, with our independent cost evaluations, our independent -- the use of earned value measurement tools and systems, but the same process is down at the business areas.

So the headlines, it's fair, have not been favorable, but I think when you look over the years, there tends to be more negative press than positive press.

But what we're really seeing here when you step back is developmental programs in my opinion, and I think there have been numerous studies have shown it takes a combination of stable requirements from our customers, funding stability from Congress and execution by industry and our partners and our subcontractors.

And if and when any one of those or any two of those fall out of alignment, it puts pressure on the programs, usually in the form of cost and schedule and thereby the press that you alluded to.

Orion, the program is performing well.

Again, there's an example where there's been an extension.

I don't see any performance issues there.

There's been a change, again, driven by the customer on the requirements.

C-5, I think a majority of those, the discussions there, dealt with the Barry amendment and the use of precious metals in the engines for the reengining program and that has been recently resolved.

Deepwater, as we've suggested, I believe is performing very well.

It's a unique structure but again, when you look at the C4 ISR, you look at the aviation, you look at the fact that we've delivered on our part the maritime patrol aircraft.

We've reengined, almost completely, all 77 helicopters, we've put command and control systems and the 12 high endurance cutters, the 27 medium endurance cutters, deepwater, again we're satisfied with the progress we're making and I tried to cover LCS.

So I'm confident in the management team, the process we have.

And completely expect to continue to perform the way we have historically.

Thank you.

And this is for Meg, I guess, just on share repurchase.

This is the second year in a row in the first quarter we saw heavy share repurchase.

Looks like some of it's offset share creep.

How do we look at the, from a share repurchase standpoint, obviously is it tied to seasonality because cash flow is strongest in Q1, is it tied to share creep or is it really truly opportunistic?

Maybe you can touch on that.

Because obviously it's likely to be less in the second half of the year.

Sure.

Thanks for the question.

I think you hit on some of the key issues that we consider as e we look at our share repurchase program.

We run two types of share repurchase programs.

One is our open market repurchase program, which does tend to be an opportunistic program looking at the share price.

It also does very much focus on the options that are exercised and we try to make good on our promise of avoiding share creep.

So as we see heavier option exercises during the first quarter, we do indeed increase our share repurchases.

We also have a 10B51 program that we put in place during the quiet periods and that tends to be almost entirely opportunistic.

We don't disclose the formulas there, but I can tell that you the formulas are based on declines in share price.

I think we were very pleased this quarter to pick up 7.6 million shares.

We wish we hadn't had the opportunity at the low prices we did, but we took advantage of that opportunity.

And as I said earlier, we're happy to go ahead and acquire 2% of the outstanding shares.

I noted in some is of the analysts' report this morning that people thought we hadn't reduced share count and I should note that we have indeed reduced share count.

The balance sheet and the fully diluted shares are down 4 million shares since December.

And if you look back a year, we've reduced our share count by about 12 million shares on a balance sheet basis and about 9 million shares on a fully diluted basis.

We're quite pleased with that.

And we will continue to pursue a share repurchase program that certainly reduces and hopefully avoids any share creep.

And may indeed reduce our share count in the manner as we have done as we see opportunities to do that.

All right.

Thank you very much.

We'll go now to Joe Nadol with JPMorgan.

Thanks.

Good morning.

Good morning, Joe.

Chris, I'd like to get back to the IS and GS segment just a little bit and the 10% organic growth.

I got actually a slightly negative number for Q1.

And I think with the supplemental, getting delayed here in Q2, that I'm guessing your service business might be impacted, at least a part of it that's not critical, much like the rest of the industry.

So can you talk a little bit about I guess the profile of the organic growth the rest of the year?

Do you see midteens, the back half of the year?

Let me first address the first quarter.

We reported growth of 9% on an organic basis.

It was basically flat or just under 1%.

So when you back out, clearly the MSD, the Aspen, the PAE and the Savi acquisition, it's kind of in that 150 to $160 million range in aggregate.

Okay.

But so it was slightly positive, but nonetheless, it is back-end loaded.

And when we look at sequentially, quarter over quarter on ISGS, I'd be disappointed if we didn't have at least 10 to 15% growth second quarter over first quarter.

I continue to see growth third quarter and fourth quarter.

So sequentially, we will have growth in each and every quarter for isgs and a majority of that will obviously be organic as the acquisitions start to cycle through on the second, through the second full year.

So it will become organic.

We've had recent wins here.

The Army Corps of Engineers was something that I think for almost a year, was under protest and dispute and we'll finally got that signed up and that will be a significant contributor to our organic growth.

And I know there's been a lot of questions here early this morning relative to our growth.

And when I look at each and every business area, this could be one of the few years where I see sequential growth for the corporation on the bottom line and I mean, on the consolidated basis, but I see it for each and every business area, I see aero, ISGS, ESBA and even space sequentially growing quarter over quarter.

We've highlighted some of the key, percentage of, or delivery events.

You look at the F-16s, the C130s and the commercial sats, where we booked at revenue upon delivery.

Again, the profile is more back-end loaded.

We have high confidence and visibility into those programs.

And for the quarter, we were right on plan.

And the headlines of 1% has caused a little bit of confusion.

But I think I've been incredibly clear for at least three years that the aeronautic sales were going to decline in '07 and '08.

In fact, they were flat this quarter but they will decline on a comparative basis and the divestitures as Meg mentioned, basically with ULA and ILS, provided over $300 million of headwind just in this quarter alone.

So I have high confidence in our sales and our profile and as I said before, the quarter to quarter analysis will make you, sometimes wring your hands and worry.

But when you look at the full year, high confidence is what we've given and I think we have a track record of delivering.

What, if any, issue do you think there might be with regard to sales in the second quarter if the supplemental is delayed?

I know your exposure to supplemental is relatively lower.

But the Army is starting to talk about deferring some of their regular way-- their O&M spending and particularly the IT spending to pay for the war.

Yes.

I got to tell you, I really don't see anything, as you mentioned.

We're not that dependent on a day by day, quarter by quarter basis on the supplemental.

We're looking at 3% to 4% growth over the second quarter of 2006.

And then sequentially, I'd be disappointed if we didn't have over $10 billion of revenue in the second quarter.

And we have the visibility to see that.

We look at our burn rates on a weekly basis, you look at the programs and the funding and I'd be surprised if we talk again in July, there's an issue here.

Okay.

Thank you.

Thank you.

We'll go now to Heidi Wood of of Morgan Stanley.

Good morning.

I have two questions.

A big picture question for you, Chris, and then sort of a smaller one.

Okay.

So there's two concepts that look like they're under question with Congress and the DoD at the moment, fixed price and the future of LSIs.

So in your comments, you were pretty clear about your views about fixed price, but I'd like to get a little more in depth on your thoughts of the future of lsis.

And related to that, would you refresh us with the outlook for the major growth drivers for the enterprise, assuming lsis go away?

What are the major leavers to achieve top-line growth beyond the core?

Okay.

Are those both your questions?

Yes.

Okay.

So you're right, the fixed price, I'm not going to repeat what I've said.

And I think we've demonstrated through recent actions our philosophy on those.

As they relate to developmental programs.

I will add that when you look at some of the success that we've had here the last couple of years of this quarter, it's on programs like F-22 that are clearly fixed price production programs.

So there's clearly a time and a place and in fact almost half of our backlog and revenue is a result of fixed price contracts.

So we're not averse to them.

It's just at the right time in the life cycle.

Relative to LSIs, second question first, I don't see, again, a major threat or challenge to revenue or outlook based on that concept, being challenged.

There was a question earlier relative to GPS 3.

I mean, we will respond and bid, and hope to be successful on not only the satellite, but the ground station.

So relative to us bidding as LSI or us bidding separately, , it's hard to see a significant change in the revenue or the profit in all honesty, especially as I see that program.

You look at the future drivers of our growth, the F-35 and Joint Strike Fighter, classified space, Orion and the crew exploration vehicle.

I mean, I think in all those, as I mentioned earlier, it's a program by program decision.

And the capability and the talent resides within our industry and the transition to government is going to be an issue.

So, the key in all situations in my opinion, is getting the requirements correct.

And once those requirements are set, whether by the LSI, the customer or someone acting as a proxy for the customer, I'm confident that this corporation and industry will be able to continue to be

Okay.

I get it.

And then my little question is, I'm wondering as we think about the future of the campaign for LCS, who owns the IP on the LCS ship design that you have?

You or the Navy?

Well, as of now, right now, it's the Navy.

Okay.

I mean, it is the Navy.

Okay.

Great.

Thanks very much.

I think that's pretty common in these cost-plus contracting vehicles and traditional terms and conditions.

So they have it.

But that means as they move towards competition, even though you guys did the design, then somebody else could technically build this if they chose to order from someone else?

They always reserve that right, absolutely.

This is not unique but yes, that's fair.

Okay.

And then actually since this one last one, if we normalize for the aircraft logistics did you do 10.8% margins in aeronautical this quarter?

Yes.

Okay.

Good.

Thanks very much.

No, thank you.

We'll go now to Howard Rubel with Jefferies & Company.

Hi, thank you very much.

I won't ask four questions, I'll just try to focus on electronics.

One of the things that's notable in here is despite all the headlines from LCS, you can't even see it in the rounds or the results.

I mean, is that sort of, and in fact, when you talk about the absence of LCS 3, you didn't reduce your guidance.

So in fact there's some other underlying business strengths in electronics that's causing you to see improved results there?

Yes, I think that's a fair summary.

I mean, it is a large corporation with a broad portfolio.

And again, LCS, we're continuing to work on ship one, not ship three.

And you're right, we did not lower our guidance and there there there were improvements and we continue to see growth,when I look at the full year or maritime systems business, our missiles and fire control business and even our platform business.

So whether it's the missile defense programs, the Aegis program with the big order here in the first quarter, the international sniper sales, it's a broad portfolio.

And we were able to absorb that termination and continue to grow the corporation.

And then, as a follow-up, though, in two cases, missiles and fire are control profitability I think was down.

Was there a problem in an area because that's just so unusual, given the environment.

There was absolutely no problem.

Missiles and fire control, at 14% margins or whatever, I take a whole bunch more of those.

So there's absolutely no issue.

And, throughout the the year, they'll get back to where they are.

A lot of of their revenue is, again, based on deliveries so some of the international orders, I think PAC-3 is an example are again more back-end loaded so you get the volatility based on the mix, but nothing of concern to me.

Thank you.

Thank you, Howard.

We'll go now to Joe Campbell with Lehman Brothers.

Good morning.

Good morning, Joe.

I have a question that's very much like Steve Binder's.

I am struck by the nature of the press commentary and I don't mean this to be particulars of the LCS or deepwater or anything.

But there is a fairly constant set of press in the defense and aerospace world with regard to defense contracts that leaves the impression that the customers and the Congress are irate and upset, and that they're not getting what they thought they paid for.

Sometimes they're ecstatic when they finally get the product, as I'm sure they are with the F-22, for example.

But that is then contrasted with the continuous good results of your company and frankly often the rest of the industry as well.

And I'm trying to figure out whether your answer to Steve is because this is just the normal noise, or because you are protected by all these cost-plus contracts so the performance on a class basis can be pretty terrible, but you can still be fined for the investment community.

And maybe way to answer this is to, to tell us about how you think the Air Force and Navy and army customers actually feel about how you're doing on the programs, as distinguished from the fine performance, which is hard for us to judge, whether it's really related to the fact that you can't lose on a cost-plus contract or whether it's related to the press is really overstating all this stuff.

Thanks very much.

Well, that's a leading question if I've ever had one, Joe.

But, I guess we don't get a lot of inquiries from the press asking for the latest update on the F-22 and the fact that we delivered our eighth zero defect aircraft as Meg mentioned.

To put it in perspective, it's over a $40 billion corporation.

We have 3,000 major programs and the best I can tell is the press tends to focus on three of those programs.

I think part of it is, there's a new Congress.

It appears to me that the '08 election is starting incredibly early.

So a lot of this, I can't ignore the fact that it's somewhat maybe politically motivated or otherwise.

The end of the day, the corporation as has performed very well, as has the industry as you've suggested.

And the key is always to get the requirements from our customers finalized, get the funding stable from Congress, and execute on our program.

We're open to changes and suggestions on how to improve.

There have been studies for decades on acquisition reform.

I think our business model and the approach we've taken with our partnerships is innovative.

And pulling together the best industry partners to meet our requirements.

So you're right.

I can't tell if it's just me working here, being more sensitive to the article.

It just seems like there's some bad press.

But again, major corporation, good processes, great management team, and getting the right contract vehicles for these programs in the life cycle is the key.

And that's what we're doing.

That's what our customer expects us to do.

So I think if you talk to our customer in some recent press, I saw something come out from the Navy where they were very pleased with the progress we've had on the presidential helicopter, and it's out there if you look for it.

So I think we have great customer relations and we're meeting their commitments and we'll continue to do that.

So we'll see how the year progresses.

Thank you.

And I didn't mean it to be leading one way or the other.

I think it actually is a kind of dichotomy that investors face between the terrific financial results and the press.

And if you think the customers are happy, then there isn't probably any real reason for us to be worried that the financial performance won't continue because it's a sort of backlash from the customers that's really the only way that would be dangerous.

So I take your answer to be that by and large, you considered it the customers on not just the thousands of smaller programs, but all of these major programs, to be happy with your, we'll leave out your partner's performance.

Absolutely.

Terrific.

I knew that was the answer, Chris.

I appreciate it.

And it actually made me, speaking of the press, I guess it does make me think of the fact that we do have our annual meeting coming up this Thursday down in New Orleans.

And I really just wanted to take a moment and we'll get back to maybe another question or two.

But relative to this management team, and the Board of Directors, I think it's pretty well understand stood that we clearly value and focus on outstanding corporate governance.

And at our annual meeting on Thursday, we're going to be electing not om our Board of Directors, but our auditors and we'll be voting on proposals that affect shareholder value.

I just want to comment that we have received notice from an external shareholder governance review service that has actually recommended a withhold vote on all 15 Lockheed Martin directors due to the retention of a single supermajority voting provision that deals with anti-green mail.

At last year's annual meeting, you may recall that our Board proposed eliminating all but one of those supermajority voting provisions in response to a shareholder.

The proposal was overwhelmingly approved by 90% of our shareholders and it resulted in no new shareholder proposals for the revisions in this area.

I guess with our demonstrated pattern of addressing shareholder concerns and the satisfaction of our voting structure, I believe that this external governance rating with hold recommendation is inappropriate.

Also have to point out the fact that under the stewardship of our current board of directors, Lockheed Martin has outperformed our peers, and the overall market on a five-year, a three-year and a one-year basis with last year's shareholder return of 47%.

I believe the Board has demonstrated its value and deserves to be re-elected and therefore I'm asking for your support in voting for the Lockheed Martin Board of Directors.

I will just quickly mention that there are other proposals, number three, four, and five, which are presented by different Lockheed Martin shareholders, those are detailed in the proxy, and I'm asking you to vote against each one of these proposals, if you have any questions in the next couple of days, I encourage you to call me directly, Meg, Jerry, Jim Comey, our General Counsel, would love to talk to you and give you a lot more information on these topics.

But Joe, somehow you made me think of the meeting on Thursday.

So I guess we ought to get back to the questions.

Sorry about that.

Jamie, I think we have time for one last call if you have one in the queue.

We'll take our last question from Robert Stallard with Banc of America.

Hi, guys.

How you doing?

Fine, thanks.

Just throwing up the rare.

Chris, I was wondering if you could elaborate on your diversification of revenue strategy.

Where do you think, as you look at 2007, you'll end up with a percentage of sales from the department of defense versus other U.S.

government agencies?

And also military exports?

Okay.

I see us kind of in that 55% to 60, 55 to 60 DoD, we tend to be right around 15% on the international whether That's direct or for military sale.

And I see the remainder, you know, almost 25% maybe up to 30%, being from intelligence agencies, civil government agency and the like.

So we're making progress in that regard.

And maybe Meg, you want to give a little more?

Yes, it's also worth adding that in some of our business areas, we are diversifying more quickly than in others.

We already see that in our electronics systems business, about 30% of our business is international.

And they anticipate strong international growth where the margins are quite high, that helps the -- margins as you've seen already and will continue to see.

We also anticipate that diversification will be more swift in our i.

And gs business where we already of course have the pae business which brings us a whole set of new customers and capabilities as well as savi business and we're finding that our core capabilities in intelligence and systems are very easily adapted to other government customers.

So we're seeing diversification -- and is and gs more quickly than we are in other two business areas as you would anticipate, given the type of business they do.

Okay, just as a follow-up, do you see any major defense export announcements over the next 6 to 12 months which could help this diversification?

If you're fishing on F-22, we don't know the answer to that one.

That's a decision that our customer has to make.

We do anticipate some additional F-16 sales and we hope that we'll be able to make some announcements on that later on in the year.

We also are watching for the C130 definitization of the contract, we hope that that will occur later in the year.

But we can't make any promises about timing.

It's great.

Thanks, Meg.

Okay.

Well, thank you.

I want to thank everybody for the support of Lockheed Martin and for joining the call today.

Hope to see many of you in New Orleans on Thursday.

And look forward to speaking to you soon.

Thank you again.

Thank you.

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

Thank you for your participation.

You may disconnect at this time.