洛克希德·馬丁 (LMT) 2007 Q3 法說會逐字稿

Good day and welcome to the Lockheed Martin third quarter 2007 earnings results conference call.

Today's call is being recorded.

At this time, I would like to current the call over to the vice president of investor relations.

Mr.

Jerry Kircher, please go ahead, sir.

Thank you, Stacy.

I would like to welcome you to the third quarter 2007 earnings conference call.

Joining me today on the call is Bruce Tanner, our executive vice president and chief financial officer.

Statements made in today's call that are not historical facts are considered forward-looking statements and 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 descriptions on some of the factors that may cause actual results to vary materially from anticipated results.

We have posted charts on our web site which supplement our comments today, including details of our financial outlooks by business areas for both calendar year 2007 and 2008.

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

Thank you, Jerry.

Good morning, and welcome to the call.

During my first two months as CFO, I had an opportunity to broaden my view of the corporation and get a better appreciation of the depth and breadth of this great company.

I have also been working closely with Bob Stevens and the executive leadership team to develop our operating plans for the next three years.

And finally, I tried to meet with a number of analysts and investors, including many of you on this call in order to get better acquainted with each other.

I'm confident in our overall strategy.

We will continue to build upon our current programs and platforms, seek new opportunities in adjacent markets and execute our disciplined cash deployment activities.

These strategies continue to provide solid financials and positive prospects for the corporation.

Let me now turn to our third quarter financial report.

We had a strong quarter, with financial and operational contributions from each of our four business areas.

Our results reflect solid financial performance of operations across the corporation, as we work to provide value to our customers and shareholders.

Before I move into specific details of our third quarter performance and accomplishments, I want to provide a brief update of DOD budget discussions and the global security environment.

As we outlined during our second quarter earnings call, congressional deliberations on the finalization of the FY 08 budget are still in progress.

These discussions continue to indicate broad budget support for our programs.

DOD initiatives to replace critical aging assets for recapitalization activities are receiving increased bi-partisan support, and should provide growth and extensions for a number of our programs such as the C-130J and F-35 Joint Strike Fighter .

One example of this critical recapitalization need was the award of five C-130J aircraft under the FY 07 supplemental budget to increase the air mobility fleet of the U.S.

Air force.

Growing requirements in the defense and the global security environments are expected to require significant expenditures.

Specific areas of increased interest by domestic and international customers include improved missile defense capability and C4ISR systems.

Our portfolio of missle defense programs such as FAB, PAC 3 and Aegis are well positioned to provide solutions to satisfy customer requirements.

Current and emerging threats will require broad-based solutions to address the global security needs of our customers.

Our unique capabilities and our portfolio of innovative programs will be invaluable in providing critical solutions to these threats for our domestic and international customers.

In addition to our DOD and international business, our civil and IT business continues to experience strong growth across an ever increasing set of customers.

Let me now highlight some of our operational accomplishments and recent awards in each of our business areas.

I will start with information systems and global services which continues to generate the highest revenue growth of all of our business areas, and also expanding the backlog by $1 billion this quarter.

New business awards from multiple customers, including the general services administration, health and human services, and NASA's jet propulsion laboratory demonstrate the increasingly diverse customer portfolio and full spectrum of information technology and services that we offer to customers.

These offerings continue to serve as key differentiators in securing new customers and contract awards.

In electronic systems, we continue to work through challenges on certain developmental programs, but let me focus on three areas where we've had decades long relationships with customers, missile defense, air crew training, and mission systems.

First, the patriot missile program delivered its 500th PAC 3 missile to the U.S.

Army, further expanding critical air defense capabilities.

Second, we were awarded a $1 billion contract to provide air crew training and rehearsal support to the U.S.

Air force.

This 10-year extension builds upon our 20-year contractual relationship and is a reaffirmation of customer satisfaction achieved through operational success.

And third, the U.S.

Navy awarded a $1 billion multi-year contract to produce and integrate advanced electronic systems for the M860r helicopter.

This award further builds upon 20 years of providing systems engineering and integration support of key helicopter programs for the navy.

I will move next to our space systems segment where we had a number of key operational successes this quarter.

In interplanetary exploration, the Mars Phoenix lander was launched from Cape Canaveral and is on track to explore the Martian surface in 2008.

Another key operational event was achieved with the delivery of our third commercial satellite this year, marking the 34th consecutive successful delivery of our A2100 spacecraft.

Finally, in aeronautics, the F-22 Raptor program delivered its 100 aircraft to the U.S.

Air force with deployment recently expanded to five bases.

The operational success of the F-22 program was a key catalyst in the U.S.

Air force awarding us a multi-year contract this quarter.

This multibillion dollar order for 60 aircraft solidifies our production line through 2011.

Next, our F-35 Joint Strike Fighter program continues to make progress on all three aircraft variants being produced under our development contract.

The progress achieved on the design maturity of the aircraft and associated systems was validated with the award of the first low rate production contract and long lead authorization of LRIP 2.

These contracts are significant events that were awarded in recognition of key contract milestones and enabled the program to move forward towards production for our domestic and international customers.

If I look back to when I was in aeronautics in 2002 and had told you then that we would receive both a multi-year contract for the F-22 program as well as authorization for the first two LRIP contracts for the F-35 program in the same quarter, I doubt that many of you would have believed that possible and yet here we are and I'm awfully excited about what we've accomplished.

These operational achievements represent a small number of the milestones that we accomplish daily in support of our customers' critical missions, but we do have some challenges.

We understand them.

We are focused on them, but overall, our successful portfolio contributes to a very solid quarter.

Now I would like to give you some observations about our third quarter results to put things in perspective.

Our solid operational performance continues to drive strong financial results.

Third quarter sales increased 16% over last year's levels, with strong organic growth across all business areas.

This growth was consistent with our outlook and continues the pattern of variability in our quarterly sales result.

We expected the third quarter to be our strongest for the year and we expect that our fourth quarter will return to a level closer to what we achieved during the second quarter.

We also achieved a segment operating margin of 11.1% this quarter, reflecting an increase of 90 basis points from prior year which demonstrates our continued strong market expansion.

Backlog increase in the third quarter after a slight reduction in the second.

We expect that we will continue to grow backlog in the fourth quarter to approximately $75 billion by year end.

Operating cash flow was over $900 million this quarter, bringing our year-to-date cash from operations to $3.8 billion, and enabling us to execute our cash deployment strategy.

In the third quarter, we repurchased over 4 million shares of our stock, bringing year-to-date repurchases to 18.6 million shares, and continuing the reduction of outstanding shares.

In September, our board of directors approved two resolutions which will allow us to continue to meet our share repurchase and dividend objectives.

The first provided an additional 20 million shares in stock repurchase authority which increased our total outstanding authority to approximately $4 billion of our stock at current market prices.

The second resolution approved a 20% increase for the quarterly dividend rate which is now $0.42 per share.

These actions are consistent with our commitment to return more than 50% of our annual free cash flow to shareholders.

As we turn to the guidance we provided, you have seen our update for 2007, but I'm sure you are more interested in our 2008 guidance.

Our revenue guidance should come as no surprise with IS & GS and electronic systems fueling our growth and offsetting the expected downturn in our aeronautics business.

Our 2008 operating segment profit range reflects our ongoing focus on improved operating performance and market expansion and enable us to meet our operating margins by 100 basis points over our 2006 levels, and we are well on our way to achieving our second stated objective of generating $5 billion in EBIT by the end of the decade.

Our 2008 earnings per share outlook is driven primarily by higher segment operating profits and represents an 8% improvement in recurring annual EPS above 2007 levels.

Our guidance for 2008 operating cash flow is at least $4 billion, and reflects our continued strong cash generation through earnings expansion, and working capital focus.

Finally, we anticipate that we will continue to be an industry leader and return our invested capital with 2008 ROIC projected to be greater than 18%.

In summary, our third quarter results reflect solid operational performance, strong, firm execution and excellent financial performance.

These operational and financial achievements highlight just a few of the ways in which our 140,000 employees work to implement our strategy and initiatives to create value for our customers and shareholders.

I would now like to open the call for your questions.

Stacy, please open the

Thank you.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to assemble our question roster.

We'll take our first question from Steve Binder with Bear Stearns.

Good morning.

Bruce, maybe you could just touch on cash flow.

It looks like customer advances, I'm assuming the F-35 repayment was in the customer advancement lines.

If you back that out, it was pretty much unchanged from the first half and I think you've been talking about a $500 million decline, at least Chris was, your predecessor.

Could you maybe just touch on what events look like for the year, number one?

Sure.

I will let Jerry give us some of the details.

Let me just give you a broad brush view of the cash.

You are right, we had a great quarter for the third quarter, some $912 million of cash generated.

That's well on the track to delivering the $4.2 billion in our guide.

That will be a record year for cash flow generation for us.

I would also like to point out that for the fourth consecutive year, we are generating positive cash flow out of our working capital account.

And I'm going to turn the discussion over to Jerry to get into more of the details as far as advances, Steve.

He's typically very good at responding to these questions.

Okay, I will sure try, Bruce.

Steve, if you remember, in the 2nd quarter, we did say that we anticipated a second half burnoff of about $500 million in advances.

As you pointed out in the third quarter, we did see 300 of that in the third quarter.

Our year-to-date through the third quarter is showing a positive, about $100 million of favorable working capital.

We do see some anticipated burnoffs yet to occur as we move to the 4th quarter, probably in the order of a couple of million dollars as we move towards the end of the year.

Encouragingly, here in the third quarter, we did also see an improvement in our receivables, as we told you in the 2nd quarter we had expected.

When you net the two between receivables and advances, we still believe a little more burnoff in the back half on advances but yet positive, as Bruce said, for the fourth year in a row on working capital.

So that's really where we are.

Can you maybe just touch on UL A?

You identified (inaudible) a charge you took with respect to the Delta 2 program.

Can you maybe touch on what event hat was?

The ULA actually net of that charge lose money in the quarter?

Sure, Steve.

If you take a look and I'm sure you have.

If you take a look at the space systems margins for the quarter, you will see the impact of the ULA charge was not significant in our results.

We are still around the 10% level for space.

Let me just remind you, ULA has been existent about a year now, about a year in December.

The primary customer for Delta 2 announced that they are no longer intending to use Delta 2s for future launches.

The ULA is a separate company from us, although we are 50% owners of that, along with our partners.

ULA deemed that some of the Delta 2 assets as impaired and reported a loss in the quarter.

That did reflect an overall loss in the quarter, Steve, to your point.

And the amount of the charge we took was simply our share of that loss reported by ULA.

All right.

Thank you, Bruce.

Thank you, Steve.

Thank you.

We'll take our next question come from Richard Safran with Goldman Sachs.

Hi, good morning.

Good morning.

Just, first on aeronautics, your sales came in a lot higher than I thought and I just want to know if you can provide, you know, what your expectations would be for fourth quarter.

And, you know, any of the key drivers there.

Sure.

Thanks for asking that question.

You're right.

We did come in a little high in the third quarter for aeronautics.

If you look going forward into the fourth quarter, I expect what we are going to see is about a half billion dollar reduction in aeronautic sales Q3 to Q4.

And as I think of that, you might break that into three chunks that explain that half billion dollars.

We're going to be down two F-16s and a C-130 aircraft in the fourth quarter relative to the third.

That's kind of the first third.

The second third, expect we will see lower volume on a number of our POC reported contracts.

That includes the F-22 program.

where we're starting to see the first parts of a delivery reduction from 24 aircraft a year to what we negotiated on the multi year of 20 aircraft a year.

And also we saw higher subcontractor requests in the third quarter on the F-35 program than we expect to see in the fourth quarter.

Kind of the last third is in the third quarter, we also saw higher non-aircraft deliverables.

Think of these as items that are delivered on a-- or recorded as sales on a delivery basis in the third quarter.

We are not expecting quite that level of sales for those same items in the fourth quarter.

Does that help?

It does, thanks.

And just as a follow-up, I just want to know, if it'spossible if you could just walk through and put some additional color on what you have been saying for that '08.

You know, for example, like why -- what is driving the $1 billion decline in aeronautics for '08.

Why space is flat.

You know, and then maybe if you could comment on if you are on track for 10% growth in IS & GS.

Sure, absolutely.

As I look at the '08 guidance-- Let me just go around the business areas first off.

We have teed up hopefully, maybe too many times (inaudible) the fact that we believe aeronautic sales will be down $1 billion sequentially from '07 to '08.

I think the biggest driver is combat aircraft, probably two-thirds plus of that $1 billion.

And within combat air, we're seeing a reduction in the F-16 build rates from somewhere north of 40 in 2007, to less than 30 in 2008.

Similarly, I just described the reduction we're seeing in the F-22 ramp from 24 aircraft a year to 20.

So that's contributing part of that as well.

You may not be aware that the F-117 program is facing retirement in 2008.

So we're actually seeing a decrease in that business as well.

As a side note, I'm sad to see that go, for a lot of reasons.

One, it's been a great program for us for 25 years.

It really established us in the PBL business - performance-based logistics - and set us up to perform on the F-22 business, as well as F-35 going forward.

So a big loss in our portfolio there, unfortunately.

If I go to space, and you'd asked about that looking a little bit flat.

That's right, that is a little bit flat.

We are down in commercial satellites in 2008 relative to 2007 that's being offset partially by the CEV contract, Orion vehicle that we talked to you about previously.

If I move to electronic systems, electronic systems is growing about 5% year-over-year, and that's a business that has typically performed very steadily, continuously, growing about that rate.

What I like about that business is that each of the LOVs within electronic systems, MS 2 and fire controls and platform training and energy are all growing at about the same rate, within that 5%.

So pretty steady growth amongst the LOVs within there.

And then as I look at IS & GS, we are expecting overall to have about 10% sales growth year-over-year.

Our strongest - if you look at the LOVs.

There are three LOVs we consider within the IS & GS.

Information services and global services, I expect will both be north of 10% and I expect mission systems will be less than 10%.

But overall, IS & GS, again, 10% year-over-year.

Does that help?

It does and thanks very much.

Thank you, Rich.

Thank you.

And we'll go next to David Gemmell with Thomas Wiesel.

Thanks, good morning.

Good morning, David.

Bruce, I believe that last quarter, I recall that Chris talked about double digit EPS growth in '08 after stripping out the nonrecurring item.

It looks like the going in position now is around 6% adjusted EPS growth in '08.

I'm just wondering if anything has changed since last quarter or if this is just normal, you know, Lockheed's normal conservative guidance.

Well, given this is my first call, David, I'm not sure what normal is to be honest with you.

As I look at the EPS for 2008, I'm actually looking at a recurring perspective, about 8% when you strip out the unusual items in 2007.

So that's probably a little bit south of the 10% that you talked about.

I will flip it around and say as we look at the margin of each of the four business areas,we are seeing sequential growth year-over-year in each of our business areas.

That's the third consecutive year we've experienced that.

I looked at all of our business areas, I think we are getting great segment operating margin increases there and we'll try to do better than that, but right now it looks like 8%, David.

Okay.

And then just on the -- on the JSS overbilling issue.

Can you just walk through real quick how that impacted the P&L and the cash flows in the quarter?

Because I think that was around a $300 million hit to cash flow, but the cash flow number, you know, still looks pretty good there.

So I'm wondering if you could just walk through that.

Sure.

You are right, the number is around $300 million, and if you break it into chunks, think of that in big dollars, it's about $270 million of an overbilling and roughly $28 million of interest associated with that overbilling.

We did pay that all back in the third quarter, as a use of cash.

The $28 million of the interest impact was reflected in the segment operating earnings of aeronautics reflected in combat air.

Does that answer your question?

It does.

Thank you.

Thank you, David.

Thank you.

And we'll take our next question from Troy Lahr with Stifel Nicholas.

Thank you.

Can you just maybe give me a head's up on what you guys are modeling it for '08 at Space regarding GPS 3 and T Sat.

Are you kind of maybe banking on winning one of those, or are you going to do it as a probability basis, and do you have a 50/50 chance on winning GPS 3 and T Sat?

Thanks, Troy.

Just for others on the call, maybe, we do look at TSat and GPS3 as two of the bigger pursuits we are doing for space.

If possible, T Sat could actually happen, from an announcement perspective, as early as this fourth quarter.

GPS is likely to happen in the fourth quarter of next year.

We take a look at these and really kind of view them from a probabilistic perspective, Troy.

So we would not have both of those in at the full value.

We would have that kind of, again, on a probability basis as far as what that impact is.

In any event, even if we were to win one or both of those programs, the impact to 2008 would not be too significant due to the start-up on those programs.

Either way we wouldn't see the guidance change that much.

I wouldn't expect it, to be honest with you, Troy.

Okay.

Then on the margins next year, you have some pretty good margin improvement at space.

Can you go through what's really driving that?

And are we seeing increases on margin at Orion?

And if not, when should we start seeing that?

I assume you are booking at a pretty conservative rate right now?

Yes, that's right, Troy.

You are right.

We are up about 100 basis points in margin at space from 2007 to 2008.

I kind of like to look at that in two pieces.

One, we expect to have improvements in our satellite business and step up some programs there as we accomplish the milestones as we expect to accomplish in 2008 to we allow to increase the booking rates in the year.

And secondly, and actually back to Steve's earlier question, we do expect better performance from our ULA, 50% share in 2008, and both of those combined is what we are looking at to get to the 100 basis point improvement.

So Orion would just be kind of mid single digit margins and not really changing in '08?

Yes, that would be my expectation, Troy.

Thanks, guys.

Thank you.

Thank you.

We'll move next to Heidi Wood with Morgan Stanley.

Good morning.

Good morning, Heidi.

Can you give us greater granularity on the margins at ES and what was the percentage of international content in the quarter?

Let's see, the margins at ES are down just a bit in the third quarter.

We had a couple of events that occurred in the second quarter, some incentives and the like, Heidi, that I'm sure Chris keyed up previously that had the margin increase in the second quarter relative to what we are seeing now.

I expect maybe similar levels going forward in the fourth quarter, and then as you say we expect to have some increase in margins in electronic systems sequentially between 2007 and 2008.

All three LOVs are double digit margins both on a quarter and year-to-date basis and also full year '07 and full year 2008.

I'm sorry, you asked about the international sales comps?

I don't have that data specifically here by the quarter but I think electronic systems is likely somewhere in the high 20s, around 30% or so for the year.

I don't expect that to change for the year a whole lot.

Can you touch on -- give us an update on V871 and SBIRS and JASSM?

That's three questions there!

Let's start out with V871.

Let's start withV871.

V871 is progressing along.

We are still in the Increment Two phase, trying to get that aircraft on the ground.

The White House, with an I/OC date of 2009.

I think we are making good progress there.

We are in discussions with the customer as far as what capabilities will be on that aircraft for the Increment Two Phase of it.

As you recall, the first phase, Increment One, is for five aircraft, and Increment Two is improvements above that for the remaining aircraft that they use in the fleet.

I think we are making good progress there.

I don't think there's anything due to report that hasn't already been said.

SBIRS, you've seen a lot of headline news there on SBIRS, so--

Could you talk about the steps you're taking to remediate that?

I assume you based in your space guidance in '08 some conservative estimates on SBIRS?

Is that fair?

Yes, I will ask the -- I will answer the second question, yes, we did, we are taking a fairly conservative look at SBIRS in '07 and '08.

You asked what was the mediation steps being taken there.

We did have an issue with some software elements of the spacecraft.

As it turns out, we have actually experienced some of those same sorts of software issues, believe it or not, in the development of the F-22 mission processor and the software that goes on that aircraft.

We've made that connection and, you know, as we think broadly about our horizontal integration aspects of the corporation, we're actually bringing in some talent from the folks who did the F-22 and utilizing those people to help with the SBIRS contract going forward.

I'm hoping we can make some good progress in bringing that to resolution quickly.

Lastly, I think your question was JASSM.

JASSM, we are progressing through the combined government-Lockheed Martin reliability improvement program.

I think we have made some great success this year recently.

You have seen a lot of press about some of the captive tests, validating some of the issues that had occurred before, such as the GPS dropout and the like.

We are on track as far as that reliability improvement program goes, and we are moving towards probably in the first quarter, maybe early second quarter of next year, a series of launches of that weapons system and hopefully getting a recertification of (inaudible) 30, upon successful completion of that program early next year.

Great.

Thank you.

Once again we ask you to limit yourself to one question and one follow-up.

Next we go Cai von Rumohr with Cowen and company.

I think you mentioned electronics development challenges.

Could you expand on that beyond Heidi's question?

Sure.

As we look at the developmental challenges in electronic systems, I'm familiar with it since I was there for about four and a half years.

And we really think the V871 program, LTS, the Deepwater programs and the like, those are the challenges we are talking.

Those are the headline risk programs we were talking about.

I have to be honest with you, there's a lot of discussion about, oh, gee, is that because these are adjacent market (inaudible) or what's the cause of some of these developmental challenges.

I view the common thread there is the fact that they are developmental programs.

And developmental programs in general are difficult.

I look back at what it took to get the F-22 program, which is clear as the day is long in our core set of products and yet we still had to put some effort to get through that development program.

Same thing with the C-130J.

So those are the challenges we are talking.

I don't think they are unique to the adjacent market strategy we're pursuing, but I think they are peculiar to our developmental program.

While I would agree with that, certainly are any of those where you have cost exposure because they are on the fixed price or fixed price incentive-type contract?

No.

Okay.

And then IS & G, the numbers, the guidance, came down for this year and looks pretty good for next year.

Why did that occur?

Was that essentially just a slip?

Is that execution?

What's happening there?

It's not execution, Cai.

I looked at.

That I think we were down maybe a couple hundred million dollars from what we had outlooked previously.

I don't see that as a huge miss by any stretch.

We are forecasting year-over-year 10% growth.

As I look at -- one of the things I'm pleased about, again, is that we did grow a backlog, $1 billion for the quarter.

It's taking a little longer to translate some of that backlog into sales, but I don't think there's anything earth-shattering as far as what we are doing there.

Okay.

And could you update us -- you know it seems like there's good opportunity for foreign sales.

Do you have any foreign sales that could close here in the fourth quarter and bolster your results for next year and your advances for the fourth quarter?

Probably a two-part answer to that question, Cai.

As I look at the opportunities for the fourth quarter of this year, and going into 2008, probably the largest international opportunity is the C-130J Canada deal.

I -- I suspect -- I think we are making good progress there.

I think we are close to negotiations.

I think it's going through the Canadian government's chain of command for approval there.

I think there's a chance that could actually close this quarter.

Of course, even if it did, that would not impact 2008 revenue (inaudible) because of the time it takes to bill those aircraft.

It's probably a more likely scenario that that will happen in the first quarter of next year.

I think other opportunities that we see out there.

We do have some potential sales of HIMARS activity.

It could happen early or in the latter part of this quarter.

If that was to happen, also some weapons, hail fire missiles and the like, electronic systems.

If those were to happen, I think it's a possibility we could get some sales from those wholesalers in 2008.

Okay.

Terrific.

Thank you very much.

Thank you.

We will take our next question with Myles Walton with CIBC World Markets.

Great, thanks.

Question for you, again, on backlog, if you will.

On the space, I know it's pretty lumpy in nature, but have there been any debookings over the course of the year and also what is the biggest driver to get you to the $75 billion backlog by year end and how much of a delay in appropriations does that contemplate?

Thanks.

Thanks, Myles.

First off, I don't think there's been any debookings as far as the space backlog is concerned.

And as we look -- as we look forward, could you ask the question again?

I'm sorry ,

The $75 billion backlog that you talked about, can you just touch on what is the driver?

It is a pretty healthy fourth quarter to get you back to that number.

Yes, I think it's improvement across the board.

We've got a number of smaller programs, perhaps that could be running up in the quarter.

The biggest individual opportunities is CFED opportunities coming in the fourth quarter.

There's also some [VOE] business.

The [UK MSCF] contract, a final word may happen here as well.

And we could -- in the aeronautics business we could see the final closure, which will result in some pickups in backlog on the F-16 Pakistan and the F-16 Greece contracts as well.

Okay, good.

And then one follow-up, if I could.

On space, ULA, you mentioned the improvement in next year is that contemplating the $60 million proton deferred gains?

No, it is not.

That is not in your guidance?

That is not in my guidance.

Thank you.

We'll take our next question from Ron Epstein with Merrill Lynch.

Hi, guys.

Good morning.

Two questions, I'll stick to two, right?.

We saw that the Lockheed JLTV down at [AID-USA] USA, and I've got to say it was a pretty impressive vehicle.

Can you give us your outlook for that program and vis-a-vis how it interplays with (inaudible) and how you think about it?

Sure.

Well, I'm glad you liked the vehicle.

We think it's a pretty neat vehicle ourselves.

And it really builds upon some of the technology we acquired a few years back with the H & P vehicle transaction that we closed three years or so.

JLTV is a very exciting program.

It's been pushed out a little bit to the right here recently.

We're starting talking about 2011, 2012 timeframe.

This was a big program, a big opportunity for us.

This is really different and distinct from the (inaudible) program.

These are still going to be hum-vee replacements.

And this vehicle is not intended to be an [emrat] replacement by any stretch.

So if you take a look at the total number of hum vees out in the forces, I want to say there's 240,000 or 250,000 hum vees in the army and marine corps right now.

This is the vehicle that'll be used-- the JLTV is the vehicle they'll use to replace those.

Compare and contrast this to the 'em rats which I think, at the high end, we are talking about 21,000 vehicles.

So think of it as a lot more vehicles, a lot more agile, lighter, quicker, et cetera, but a whole lot less costly as well.

Okay, great.

And then on the M & A front.

I mean, what is your current thinking now and has the change in the credit market changed any of the pricing?

I mean, what do you think?

Yes, thanks, Ron.

I think the markets from what we can tell, I think the market is becoming a little bit more rational.

I think the credit risk has actually made some of the sellers a little more reasonable from my perspective.

I think we are starting to see some momentum with some deals getting closed.

We are surely seeing some more activity as far as invitations to look at different entities.

So I'm optimistic that we are going to see hopefully some deals that can be closed and still make economic sense for our shareholders.

Is there any specific areas you are interested?

No, just across the board.

I mean, we are -- you know, we, in the past, looked at various niche acquisitions.

We are trying to focus on those that provide us customer access, and specific capabilities that we don't think we have and we want to do it all at fair value.

So that could affect any one of the business areas and it's just kind of on an opportunistic basis.

Great.

Thank you.

Thank you, Ron.

And we'll move next to David Strauss with UBS.

Good morning, thanks.

Good morning, David.

Bruce, it looks like your initial guidance is calling for about a flat share count with where you are?

Is that correct?

No, we're actually saying -- premising within the guidance a slight reduction.

I think we are going to have in the guidance about -- somewhere around $428 million, our 28 million shares in 2007, and that's supposed to decrease to about a little over 420 million shares at the end of 2008.

Okay.

So think of that as a 7 million share reduction.

Okay.

Great.

And you talked a little bit about JSF in your opening remarks but can you give us an update exactly where you are on the program?

I had understood that the airplane was still grounded, post some of the problems that you found back in March.

Can you give us an update, you know, is it actually flying and if not, when is it expected to fly again?

Yes, you are right, David.

It is not flying as we speak.

But it should be flying -- I'm looking at my calendar here.

It should be flying within the next month or so.

We have done a number of fixes as you probably read about some of the issues with the motor that had separation.

We have done some checks to make sure it's all still performing as expected.

You know, the next milestones going forward is return to flight for the AA 1 vehicle as we call it, the very first flying vehicle.

Later part of this year, we should see the first rollout of the stoval aircraft, the short takeoff vertical landing, this is the aircraft for the U.S.

Marine Corps.

Again, that will roll out probably somewhere in the December time frame and then the first flight of that particular aircraft should take place sometime probably in the second quarter of 2008.

Those are three milestones that we've got our eyes on.

Great, thanks a lot.

Thank you.

We'll move next to Joe Nadol with JP Morgan.

Hello.

Hi, Joe.

First question is back to aeronautics.

I believe there's some major swing items for new 2008 in terms of your phantom performance there.

It's been an area in the past where you've had some pretty big swings relative to your initial guidance.

I'm wondering if you could walk through those and kind of what's in your guidance, and specifically thinking about F-35 milestones, but is there anything else as well?

I'm sorry, did you say advanced performance?

I didn't count --

No, milestones.

Basically swing factors relative to your guidance, your financial guidance, like what could change relative to your initial aeronautics guidance for 2008?

Well, let's see, the F-35 program, Joe, is a POC contract, so it's not necessarily dependent on the milestones that we are going to accomplish to recognize sales on that.

How about EBIT?

EBIT is more linked to the milestones that will be accomplished, although not all of those that we will accomplish in 2008 are the ones that have an impact on the EBIT in 2008.

We are taking a look there.

I think there are some potential step-ups associated with F-35 in the '08 timeframe.

And as you see the progression of some of the milestones I mentioned, making sure, again, that we roll out the stoval aircraft at the end of this year and have the first flight in the second quarter of next year.

Those are the sorts of milestones that will trigger those events.

Do you have any of those step ups baked in or would that be incremental?

Some of those are baked in, Joe.

Okay.

And then the second question is, just over on IS & GS, your -- it appeared from the language in your press release that the IT margins declined in the quarter and that was -- that was probably the line of business that contributed to the margin decline.

I'm just wondering if there's anything going on there and what your outlook is for next year, for that line of business specifically.

Yes, sure.

You know there was a slight reduction in the margins of IS & GS.

I don't think there was anything fundamentally different that happened.

This is our business area that has the largest proportion of service contract, accounting contract.

So you do see some volatility, as far as the earnings from quarter to quarter.

Let me point out that I do expect the fourth quarter to be the highest margin quarter for IS & GS of all the quarters in the year, and a large reason for that is because that's the big quarter for that particular business area in terms of the award wins from those customers that we deal with in that arena, and we expect to have some good performance that results in those pickups.

As we look going forward to -- from 2007 to 2008, we are actually seeing about a 20 basis point, if you just take a midpoint to midpoint increase there, and I think that's right in line with what our expectations are.

In terms of reduction in the guidance, though, was that the IT line specifically or is that a combination up to two or three of the three?

It was really a combination.

Actually, the IT business, if you just pull out and look at the information system by itself, it's pretty much tracking to the 10% growth that we talked about.

It's the other two lines of business within IS & GS, global services and mission solutions, where we're a little bit lighter than we expected there.

Okay.

Thank you.

Thank you.

And we'll take our next question from Joe camel with Lehman Brothers.

Good morning, Bruce.

Hi, Joe.

How are you?

I'm good.

Could you do two things for us?

One, remind us of what it is about contributes to the pension plan that are in that guidance that allows the pension expenses to go down and whether there might be -- whether you are contemplating doing any more or whether this has sort of contributions about as fast as they could reasonable go?

And second, would you revisit for us the amount of growth this year that's likely to be organic versus that which is coming from the acquisition benefits, and then given the acquisitions that have been made this year, how much of '08 is from acquisitions and maybe remind us where it is.

Thank you.

Okay.

Let me try to get all of that down.

I may have to ask you that second question again.

Let's start with the pension.

There's no assumption as far as the contribution assumed in the number.

No prefunding assumed.

The biggest change is the change in the discount rate that we are assuming going to 2008 from currently 5.875% to 6.25%.

You will recall that's -- that our pension numbers are very sensitive to the change in the discount rate.

Think of it as every 25 basis points or so about a $90 million swing in terms of pension estimates there.

So, you know, as we look going forward to the fourth quarter, we will take a look at where we are from our cash perspective, whether or not we contribute to our plan to provide the free cash flow to shareholders or not, and if we have some excess there, clearly, the pension plan will be an opportunity for some of that going forward.

Your last question, I'm sorry.

Yes, could you remind us of how much of the growth in '07 is coming from M & A and given the guidance that you've provided us, how much of next year's growth will be organic and how much will be due to acquisitions and then just remind us where in the businesses the acquisitions have been.

Yes, I think overall, we are hitting about 1% nonorganic growth for the year.

For '07?

For '07 in total.

Where that has all happened or mostly happened is IS & GS.

For 2008, all of that growth is organic.

We have assumed nothing as far as inorganic growth going forward.

What about the growth that comes from the owning for a full year in '08 the things that were bought in '07?

It's got to be minimal.

And on the IS & GS, that's contributing 1%, but of the IS & GS number, how much of that number, which I'm struggling to grab here real quick.

So it was 950 is the guidance for this year and it looks like it's 1075 or 1070, how much of that, which is about 10% is really organic and how much of that is -- I mean, I guess I could do the math, if it's 1% of the total.

Well, let me just give you something.

I will save you doing the math.

If you look at the full year 2007, and you just look at our range, total revenue growth is probably in the 13 to 16% range.

Organics for the year is probably in the 7 or 8% range.

So that dealt us the piece that you are talking about.

And for '08?

'08, again, it's fairly minimal.

I think the largest piece of the business was about $100 million acquisition in 2007, so it's fairly noticeable as you look into 2008.

Great, thank you very much.

Thank you, Joe.

And we'll take our next question from [Doug Harnett] with [Sanford Bernstein].

Oh, yes.

Good morning.

Hi, Doug.

Hi.

Going back to space, we're looking at flat for '08, the backlog is down by about 9% off of Q2.

Could you describe what is happening within the individual business area, that's SNDMS, military, commercial satellite and space transportation?

Sure.

2008 -- I think the -- as you said, we are relatively flat year-over-year.

I think the look at the line of the business within space.

We think about satellites split between government sats and commercial satellites, and space transportation, and our strategic and defense missiles.

If I look at year-over-year, I'm just taking a look here.

I think we're down slightly in sats overall.

We are actually up, I think of it as probably $100, $150 million up in space transportation.

Again, a lot of that from the CEV, the Orion vehicle.

We are actually getting some growth in strategic and the defense missiles.

Probably in the order of $75 or $100 million in that line of business.

Is that -- is that the fleet missile program?

Yes, the fleet ballistic missile program is in that line of business.

That's right.

When you look at the flat out look, relatively flat out look for '08, is this something that was expected?

Is this something that we are seeing a push back so we may see growth later '09 and '010?

How do you think about this?

If you take a look at the commercial satellites we are probably looking at -- depending on whether the series four launches in the fourth quarter, we are looking at four commercial satellites in 2007.

We are looking at closer to two at the current outlook in 2008.

So that's created a little bit of a head wind for us.

We've actually offset that again with the CEV business and the fleet ballistic missile.

We are doing some sustainment activity on the fleet ballistic missile that's helping that growth.

We'll take our next question from George Shapiro with with CitiGroup.

Good morning, Bruce.

Good morning, George.

How are you?

If I look at aeronautics, I mean to get even the high end of your guidance implies that the fourth quarter revenues will be $500 million below the third quarter and I know you will deliver three or four less F-16s, but it's got to be more involved in it than just that.

If you could just go through the rest of where that big sequential drop will come from.

Sure, George.

I kind of refer to this half billion dollar drop 3Q to 4Q as falling into four different chunks.

If you will, the first chunk, they are about equally distributed as far as the composition.

We are down about two F-16s and one C130, 3Q to 4Q.

We are also experiencing lower volume on a couple of our larger contracts that we sales on a POC basis.

That's the F-22 program, and there, we are really transitioning from the old lot 5, lot 6 aircraft that were 24 aircraft a year build rate to the new multiyear starting in 2008, getting some long lead materials and the like.

And those are 20 aircraft for your build rate.

The F-35, again, we just saw higher -- in fact, I think the third quarter for F-35 is the highest quarter possibly we've ever had on that program.

And what we really saw there was just higher subcontractor payments occur in the quarter than we expect to happen in fourth quarter.

Nothing more major than that.

The last chunk, the last one-third is there were a number of non-aircraft, but deliverables that we record on a delivery basis, on a POP basis that occurred in the third quarter.

We done expect that same level to occur in the fourth.

Okay.

To go back to the question before on space, it does seem like this quarter and prior quarters you've had quite rapid growth in the classified space business, maybe 20% or so.

Does that significantly slow next year as well, because otherwise, it still seems that this space guidance that you have given would be too low?

No, I think as I look at it, George, the government, as I told you before, with all the -- all the facts look fairly flat year-over-year.

So I don't think that's the case.

Okay.

Thank you.

Thank you, George.

And we'll go next to Howard Rubel with Jefferies & Companies into thank you.

Two questions.

One, on mission solutions, you talked about higher volume in both missions and in combat support activities, and then also with related to sustainment services activities in aeronautics, what specifically is sort of driving that?

I mean, where kind of customers or what markets are you getting those sort of levels of higher volumes now?

Yes.

Sustainment services, one of the things -- let me just mention that first in aeronautics.

Sustainment services is one of the areas that's growing is the F-22 sustainment.

I mentioned in the prepared remarks, we are expanding to five bases now with 100 aircraft.

As that fleet gets larger we are the sustainment provider of that aircraft and as that aircraft is deployed further and further, then we will see some growth associated with that deployment.

As I look at the growth in the mission solutions business, I think some of that is coming from our AFSS business, I will just name a few of them here.

The AFSS business, the FBI sentinel, the GSA alliant contract, amongst others that are contributing to some of that growth.

And then, I suppose those should be ongoing expanded business opportunities, Bruce, as opposed to just a one-quarter event?

Yes, I think that's right, George, uh, Howard.

Excuse me.

You are not the first person to do that.

So don't feel bad about it.

I was afraid you were going to call me Chris, to be honest with you.

With the dollar as weak as it's been against the Euro and then given the problem that the A400M has enjoyed, the C130 today is probably half the price of an A400M, what are you doing in terms of market opportunities in Europe?

Because the capability of the aircraft surely isn't half?

Look, I think it's broader than Europe, Howard.

If you take a look at the Canadian deal.

If you look at the Canadian dollar versus the U.S.

dollar, those are about on par for the first time in a long time that I can remember.

That's clearer making those products cheaper for the Canadian.

We are seeing good interest around the world, practically for the C130, again not just in Europe.

India, Israel, Norway which we talked about last quarter.

Getting four aircraft here recently.

So there's continued activity on the international (inaudible) for C130s, in particular.

We are also seeing additional interest on the F-16 for the same reason you're talking about, George.

Howard.

I'm sorry.

Yes, Jerry.

My apologies.

That's all right.

Thank you.

Thanks for those answers.

Thank you.

And we'll take our next question from Robert Spingarn with Credit Suisse.

Going back to IS & GS for a moment, could you comment on the status of the F.A.A.

outsourcing program situation there, and then possibly on where Wildcat 4 stands with regard to protest, et cetera?

Okay.

The contract you are talking about, that is the AFSS contract is the one you're talking about, the outsourcing.

There's been a lot of press recently about some unhappy customers with that.

I think we did experience some issues relative to responsiveness and whether folks had the right training for the particular areas that they were providing services for.

I think most of the discussion that you are hearing now is a little dated.

I think that was actually reflected in the performance, probably back in May, June time frame.

I believe we have done an awful lot to improve that performance there over the last three months and I think, as I recall, there's regularly scheduled plans, briefings at Congress.

I think what you will see going forward is improvement in that category of our performance.

Bruce, how have you been booking the margins there?

This is a -- if you recall, I made the comment earlier that IS & GS, these have the largest portion of the service contract accounting.

This is actually booked on a service contract basis.

So as cost is incurred, expense, when we get the revenue, we record it that way.

So it's not your typical booking rate contract methodology.

And then just on the LogCAP.

Yes, LogCAP, we did not protest, but there's a protest -- protest, but there is a protest underway.

You know, this is a piece of business that may have some activity with PAE down the road, but we are not the ones who are in the protest mode.

But you would benefit, potentially?

Potentially we'll have a benefit, you're absolutely right.

Of course, none of this is in any plans?

That's correct.

Thanks very much.

Thank you, Rob.

Stacy, this is Jerry.

I think we have time for one more if we could.

Our last question will come from David Gremmels with Thomas Wiesel.

A quick follow-up, longer term, looking at IS & GS.

This is the one segment where we haven't seen as much margin improvement and you've talked, I guess, again your predecessor, Bruce, talked about a 10% margin target by '09 or '10, can you bring us up to date on your thinking there?

Is that a reasonable target and what has to happen to get you there?

Sure.

I think -- you know, I will be honest with you.

I think that's still a target that we are pursuing.

It's still being determined whether or not we can actually make that.

As I look at the business, the three LOVs that make up IS & GS, we've got, I've repeated this several times now, but the information systems, global solutions and mission solutions.

I think in two of the three, we probably met that objective or exceeded it or close to meeting it and that's the information system and the mission solutions.

We've to do a little better job with global services.

In part, that's the challenge going forward and that's the key to getting that double digit growth -- double digit margin, excuse me.

Thank you.

Thank you.

That will conclude our question-and-answer session.

I will turn the conference back over for any additional or closing remarks.

Thank you, Stacy.

I would like to close by thank you for your questions and joining the call today.

We are proud of our 2007 performance to date and remain focused on delivering the financial results expected by shareholders and the operational performance required by customers.

We look forward to speaking with you again in January, when Bob Stevens will be joining the call to provide his comments on our final 2007 performance and offer his future perspectives.

Stacy, that concludes our call.

Thank you and that concludes our conference.

We thank you for your participation, and you may disconnect at this time.