洛克希德·馬丁 (LMT) 2007 Q4 法說會逐字稿

Good day everyone, and welcome to the Lockheed Martin fourth quarter and year end earnings results conference call.

Today's call is being recorded, at this time for opening remarks and introductions, I would like to turn the call over to Mr.

Jerry Kircher, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Dana, and good afternoon, everyone.

I would like to welcome you to our fourth quarter 2007 earnings conference call.

Joining me today on the call are Bob Stevens, our Chairman, President, and Chief Executive Officer, and 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 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 would like to turn the call over to Bob.

Thanks, Jerry.

Good afternoon, everyone.

I certainly hope 2007 was rewarding for you and your families, and that you all were able to enjoy your holidays.

And I hope you, like us, are looking forward to a prosperous 2008.

We were pleased with our performance in 2007.

As I start the call today, I want to give credit where credit is due, and begin by thanking our 140,000 employees and their leadership team.

It's through their professionalism, their dedication, their talent, and their extraordinary capabilities that we were able to provide mission-critical products and services to our customers, while achieving outstanding financial performance.

As you would expect, I'm very proud to be associated with this team.

In looking at 2007, our overall program execution was solid.

We won important new business, and we continued to shape a balanced business portfolio, designed to enhance shareholder value, while meeting current and future customer needs.

Let me spend a moment on each of these areas.

Program execution continues to be a top priority, and focus for all of us.

It's essential to customer mission success, and it's essential to our ability to extend value.

Our goal, while challenging, is to meet every commitment, on every program, for every customer, by completing key milestones on-time and on-budget, and providing continuously improving quality.

The professional standard against which we measure ourselves here, is perfection.

And when we do not meet that standard, and sometimes we don't, all energies are devoted to an objective understanding as to why, whatever the source, and to addressing the root causes with effective remedial action.

We believe we have the experience, the talent, and the commitment to assure continuous improvement in meeting expectations.

As a result we had thousands of successful operational achievements across all business areas in 2007.

I will highlight just a few.

We made continued progress on the F-35 Joint Strike Fighter development program, with completion of 22 test flights of the conventional take-off and landing aircraft.

In addition, we achieved production rollout in December of the short take-off and vertical landing variant, for the STOVL airplane, reflecting on-time achievement of a key commitment date.

We're confident this fifth-generation tactical combat aircraft, will serve our country and our allies well for decades to come.

Also in aeronautics, the U.S.

Air Force declared full operational capability for the F-22 Raptor, the world's only fielded fifth-generation fighter aircraft.

In Electronic Systems, we had a series of successful tests of THAAD, PAC-3, and the Aegis the missile defense program.

I'm certain that solid operational performance also acts as an important catalyst in our ability to win new business.

Customers have confidence in our capabilities, and that confidence enabled to us achieve the second highest annual level of new order bookings in the history of our company.

This booking level resulted in a near record backlog at year end, of almost $77 billion.

We believe this new business success is a result of effectively listening to our customers, a continuous drive for innovation and responsiveness, superior program execution, and our ability to leverage our experience and our skills through capabilities alignment, and horizontal integration across this corporation.

Examples of our new business success included the multi-year contract from the United States Air Force for 60 F-22 fighter aircraft, to extend the production line to 2011.

The first F-35 Joint Strike Fighter low rate initial production contract, and long lead funding for the second.

International C-130J awards from Canada and Norway, that extend the production line to 2011.

A 10 year $1 billion contract to train U.S.

Air Force and special operations command crews on a variety of military and weapons systems.

International F-16 awards from Turkey and Pakistan, that extend the production line to 2012.

A $1 billion multi-year contract from the United States Navy to integrate the MH-60 Romeo helicopter system.

An $850 million contract from the U.S.

Navy for production and support on the Trident II D-5 fleet ballistic missile, and civil information outsourcing contracts with the Internal Revenue Service, the FBI, the General Services Administration, and the Army Corps of Engineers.

In addition to solid performance in key new business awards, we continue to enhance our business portfolio through acquisitions.

During 2007 we completed four transactions.

These acquisitions have already provided strategic benefits in securing new technologies, and providing expansion of our capabilities, and new customer access.

This brings our total completed transactions since 2001 to 19.

We're confident that those that were closed in 2007 will provide the same positive value to shareholders that previous acquisitions provided.

During 2007, we saw significant new opportunities emerge in the international marketplace in our traditional lines of business, such as fighter and transport aircraft, and missile defense systems.

We also made significant progress into new adjacent business activities such as; logistics and sustainment, biometrics, business process solutions, and support for peace keeping and nation building efforts.

We also remain dedicated to fostering an inclusive workplace environment, where opportunity exists for those with talent and commitment.

It's very gratifying to receive recognition that Lockheed Martin is a desirable, and valued place to work.

We received more than one million resumes in 2007, and the company was cited again by Business Week magazine as a great place to launch a professional career.

Additionally, the Hay Group, in conjunction with CEO magazine, and Hewitt Associates in conjunction with Fortune magazine, recognized Lockheed Martin for outstanding leadership development programs.

This is important to us because, to have a business that builds upon the momentum that we've established, raises the bar on performance, and meets the expanding challenges our customers are facing, requires the very best in talent, and the very finest in leaders.

Sustained long-term success depends upon it, and we're committed to developing both, as we continue to make progress on our strategy to differentiate Lockheed Martin among competitors, to diversify our business, and to deliver for our customers and for our shareholders.

Looking ahead to 2008 and as outlined in our increased guidance, we anticipate strong growth in our recurring earnings per share, continued growth in revenue and margin, and excellent cash generation.

Let me describe for you our general sense of the overall market, and our vision for the future as we look at 2008 and beyond.

Long-term, there are many signs of continuing complexity and uncertainty in the global security environment, which will drive future demands for highly capable military power, strength in homeland security, and importantly, further initiatives aimed at international outreach, diplomacy, humanitarian relief and support for emerging democracies.

We see a growing desire in civil government agencies to have more efficient and effective services provided to citizens.

We see a growing international interest in security, and how our capabilities, products, and services can play a vital role.

To reduce uncertainty and gain clarity, all our customers are facing the need for increased situational awareness, through advanced sensing devices that will be linked to communication systems, that enable them to share information, and to be always connected.

With data everywhere, networks will continue to grow in importance and power, and unfortunately, in their vulnerability as well, as the corruption of information will be increasingly viewed as a weapon in the 21st century.

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

Looking at funding, the current fiscal year 2008 defense budget was enacted at $481 billion, reflecting a double-digit increase in annual funding.

The investment accounts in this budget were funded at $176 billion, also reflecting a double-digit annual increase.

Additionally, supplemental appropriations of $189 billion have been requested to primarily fund the operations in Iraq and Afghanistan, with budget approval yet to be enacted.

Looking forward, the president's proposed 2009 fiscal year budget for defense will be delivered to the Congress in February.

It's likely to be at least $513 billion, which is consistent with the president's prior projection.

Investment accounts here are projected to be about $188 billion, also consistent with the earlier request.

The FY '09 supplemental appropriations request has had an initial place holder value of $50 billion.

However, the administration is awaiting the next report from General Petraeus on progress in Iraq, before determining the final amount for the FY '09 supplemental appropriations.

Based on all that we see, we expect continued growth in both our core and adjacent markets for both domestic and international customers.

As we grow, we anticipate an increasingly diversified customer portfolio, with increasing levels of international and civil government sales.

We'll continue to expand our addressable government market in three ways.

By focusing on customers we know and utilizing capabilities we now possess, by extending value to customers and offering new capabilities, and by developing new customer relationships.

Looking specifically at our business areas, we want our electronics systems business to grow domestic and international sales in areas such as, missile defense, with the Patriot and THAAD systems, in missile and fire control systems, on programs such as Hellfire, the Guided Multiple Launch Rocket System, Sniper and TADS, in maritime systems such as Aegis, and in platforms and training, with systems integration on helicopters and military vehicles.

Growth also will come from continued creative approaches to adjacent markets, and our focus here is on the Joint Light Tactical Vehicle Program.

We want our information systems and global services business to continue their growth in government information technology, related to our traditional areas of defense, intelligence, and civil agencies, and new focus areas such as healthcare.

In our global services business, the focus will be placed on homeland security, with solutions for port security and cargo tracking, coupled with anticipated growth in infrastructure, peace keeping, and nation building activities.

In our space business, we expect future revenues to be driven by the government satellite market, and opportunities like GPS III, additional advanced VHF spacecraft, TSAT, and the GOES-R environmental satellite system.

Our ramp-up on the Orion Crew Exploration Vehicle, and potential space exploration missions for NASA will also provide additional opportunities for revenue expansion.

Looking at aeronautics, as we previously indicated, we expect sales growth to hit a low point in 2008, reflecting the reduction of F-16 deliveries.

However, sales growth resumption is expected in 2009, driven by the ramp-up on the F-35 Joint Strike Fighter, continued C-130J and F-22 production, and increasing levels of sustainment and logistics activities.

We'll continue to pursue balanced cash deployment, returning at least half of our annual free cash flow to shareholders, while using remaining cash flow to pursue internal technology initiatives, capital projects, and acquisitions that will add to productivity, and expand our capabilities.

In addition we have a share repurchase authority in excess of $3 billion, that will enable us to make opportunistic purchases to eliminate share creep, and return cash to shareholders.

Acquisitions will remain an important component of our strategy to build value in our portfolio, and our philosophy on acquisitions remains unchanged.

We would have an interest in companies with the right expertise, a good fit, and compelling value.

As we continue to grow our sales organically, and through acquisitions, we're also focused on ways to continue to expand our margins.

We're pleased to report that we've already achieved one of the two goals that we outlined for you during our earnings call last January.

In 2007, segment operating margins increased to 11.2%, achieving our goal of a 100-basis-point increase above 2006 levels, ahead of our previously projected target date.

We continue to see opportunities for additional margin expansion by successfully transitioning development programs to production, improving program performance, and adding higher margin international business.

We're also accelerating our commitment to achieve the second goal.

We now project achievement of our $5 billion in segment operating profit objective, one year earlier than previously forecast, with a new target date of 2009.

In addition to our continued focus on operating profit generation and margin expansion, we remain committed to strong cash generation and industry-leading returns on invested capital.

Our prior goal to sustain ROIC performance in the 15% to 20% range remains unchanged.

We believe that the keys to our future success are very simple and straightforward.

Continued development of critical competencies, attracting and retaining top employee talent, ensuring alignment of management and shareholder interest, listening to our customers, driving innovation, leveraging horizontal integration, and deploying cash wisely.

Dana, that concludes our brief summary of '07 and our outlook for 2008, so if you'd open the lines please, Bruce, and Jerry, and myself, are ready to take questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS).

We ask that you limit yourself to one question and one follow-up question.

We'll go first to Heidi Wood, with Morgan Stanley.

Good morning, Bob.

Thanks very much for your brief.

That was great.

I'm going to ask, though, a devil's advocate question for you.

You continue to take in a number of noteworthy wins the last few years, again in 2007, but we've also been seeing a number of problem programs surfacing.

I'm wondering if you could talk about the corrective actions you're taking within your organization.

I know you refer to personnel, but perhaps talk about T's and C's on the contracts.

And are there any common threads that you see, that might link things like SBIRS, and JASSM, and LCS, and VH-76, that could be important lessons learned, and which problem programs are you spending the bulk of your time on?

Thanks, Heidi, I appreciate the question.

I must tell you we spend a considerable amount of our time and attention on all of the 3,000 programs.

We don't really select among which programs, and which customers, are going to get the best professional performance in the company.

We pay attention to all program performance.

But I do know what you're speaking of in your question.

There are some high visibility marquee programs that we're all very familiar with.

You might add to that list the VH-71 presidential helicopter, or the Littoral Combat Ship.

You mentioned SBIRS.

I'm pleased to report that in a company that with more than 3,000 programs, we don't have a great number of these high visibility programs.

I also recognize that even having one of those programs is one too many.

It's interesting to me that as your question framed, you look at what might be common properties here.

Our observation is that most of the difficulties in execution on a program seem to reside in those that fall into the development portfolio, as compared to the production portfolio, and development programs have characteristics in common.

Among them is, assuring that even in the very early stages of the program's formulation that the requirements are well understood, that customers know what they want to buy, and that industry understands completely what it needs to deliver, not just what the contract terms and conditions are, but what the customer's expectation is, particularly aligning the system that is being delivered to the concept of operations in which it will be employed.

And I think one of the common themes, as we look at our portfolio, as to where there have been stress points, is this common notion of the developmental character of the system.

I will also tell you, a second independent area, but it's not entirely unrelated to development, is this aspirational goal that many have had about the use of non-developmental items, or commercially available off the shelf items, that would be applied to, let me say, very sophisticated military or intelligence gathering applications.

Because it seems to me, that there's a desire, very understandable desire, to want to field systems more quickly, and want to more economically use scarce capital resources in the acquisition environment.

And that makes non-developmental, or commercially available items, appear very appealing.

But sometimes after the contract is let, a view is taken of the capabilities embedded in these systems, with a desire to add some facility to them.

And we find some stress points associated with having a clear understanding there of what's expected, and how to efficiently take non-developmental items, and commercially available products, and tailor them appropriately for the demands and the rigors, of very demanding military applications.

I will tell you, we are our strongest when we go back to basics, when we follow the processes in our environment, when we have early visibility, when we have complete transparency, and when we work in close cooperation and good partnership with our customers.

When our programs have those features, even the very demanding ones, we tend to perform in a more superior way, and when those features are lacking, we tend to have stress points.

Okay, great.

Bob, as my follow-up, you've spoken about making Lockheed a global security company.

Talk today about expanding international sales.

Looking ahead, can you give us a sense where international sales could go in '08, and through the rest of the decade, and maybe outline the major competitions internationally that move the needle, and how you're focusing your team to fully capitalize on those international opportunities.

And maybe, Bruce, if you have it handy, tell us where international sales were in '07?

Let me come back to Bruce, and I will just give you sort of a cap stone sense of what we see and where we would like to make some advances.

Of course, our commitment here is to grow our international business, along with our entire business, but to grow the proportion of revenue generated from international sales from an about 14% or so, to about 20% or so, and we'd like to do that as soon as possible.

I think our aeronautics lines of business continue to offer real opportunities here with the Joint Strike Fighter.

I know it's in development, but we do have eight partner countries, and so far there's considerable international interest here, and happily I can report to you that the program is meeting critical milestones, and running pretty well.

We continue to see a broad interest in the C-130J program internationally.

I mentioned Norway and Canada as recent customers, but there certainly are additional opportunities in our judgment with an increasing number of countries, some of whom already have the C-130J, and for some the C-130J would be new.

So, we're looking forward there.

And I don't think the F-16 story is over yet, although, as you know, as you look at aeronautics revenue you see the number of airplanes in the F-16 delivery line coming down.

There's still interest in that system.

We have a full array of missile defense capabilities as protecting a homeland or protecting troops that are forward deployed, it's a very high priority for governments.

I think we have a superb portfolio in Patriot, MEADS, THAAD, the Aegis system that add real muscularity to a missile defense environment.

I also think in our missiles and fire control segment, we have quite a broad variety of military capabilities that governments have interest in, including Sniper, LANTIRN, TADS.

I mentioned the Guided Multiple Launch Rocket System, Hellfire, ATACMS, we have radar programs from our Electronic Systems business area.

In the United Kingdom there will be a search and rescue helicopter program.

In the United Kingdom there will be a census program.

So I do not feel that we have a shortage of opportunities internationally.

Actually, I think that the domestic opportunity horizon looks very good, but your question was specifically on international business.

And I will ask Bruce to comment on the '07 international sales.

Heidi, we did just over about $6 billion for the year ending 2007, roughly 15% of sales.

And we'll take our next question from Steven Binder, with Bear Stearns.

Yes, Bob, maybe you could just touch on the F-22.

There's been talk on the FY '09 budget, given the fact you're hoping to get advanced procurement money for another 20 planes.

Looks like they might just fund four planes.

But they're going to do it as a supplemental.

Assuming that's true what's the prospects for extending the line-- for getting money from Congress this year in the core budget, and how important an issue is it to get money out of the core budget as opposed to the supplemental for that plane?

Well, I'll tell you, Steve, our focus has, I think, understandably and properly, been on delivering very high quality jets.

We are certainly doing that.

It's of interest to us, that we're starting to see the artifacts of what is generally regarded as an aging fleet with high operational tempo, and we certainly saw in that the pair of F-15 failures, and we don't find that to be entirely unique, because it's embedded in the phenomenology of how airplanes age and fail.

So our sense is, the operational tempo is not likely to diminish in the foreseeable future.

The assets that are fielded, are getting older, and they're starting to move into the higher regions of their expected service life.

And we worked long and hard in conjunction with our customers, to get the F-22 line to balance and cycle, and get the supply chain to run effectively and efficiently, and I assure you, it is.

And a person like me, looks at shutting down a line, that has taken a good deal of time to bring to this configuration, with real reluctance, because there will never be a less expensive F-22, than the ones we can buy off an active line, that's meeting its learning curve objectives with incredibly high quality, incredibly high-performance jets.

And I think the convergence of the aging F-15, the demands in the operational tempo, the evolution of the threats, and the quality of this line, are creating a fairly compelling dialogue that's occurring in the Pentagon and on Capitol Hill.

I know you know there's not a perfect uniformity of views here, but we think it's a very healthy dialogue.

Whether or not the program is extended, is certainly not a decision that we make, and whether or not it is funded out of supplemental appropriations, or out of core budget appropriations, is a decision others will make.

Our job is to make sure that that option remains open, and that the jets that would be purchased would be performing to expectations.

So I guess our sense is, this prospect is looking more likely, rather than less likely, for the conditions I outlined.

Thank you.

And can you maybe just touch on the F-35, and your confidence level of achieving first flight in the May/June time frame?

That certainly is the plan we're tracking to.

We made the rollout on schedule on the STOVL aircraft in December.

That was a long standing commitment.

That was actually reinforced very strongly, by Deputy Secretary of Defense Gordon England with us, as an expectation he had, and we took that expectation seriously, and we were able, through the very good work of our aeronautics team, and our partners, to produce and deliver the airplane on time.

So we're tracking there.

And of course, AA-1 is flying, and we're gaining a lot of flight information on the first airplane, the conventional take-off version, so far that objective looks achievable, Steve.

And we'll take our next question from Troy Lahr, of Stifel Nicolaus.

Thanks.

Backlog was up nicely in 2007.

Can you just comment a little bit on what you're thinking for 2008 backlog?

Does it kind of level off, or do you think it continues to grow next year?

Troy this is Bruce.

I'll take that one.

We did have a good close to the end of the year 2007 backlog.

I think in the third quarter that I had teed up the notion that we might end up $75 billion or so.

We actually ended up just under $77 billion.

Most of that came with the benefits of getting the Canadian order late in the year.

But we also had strong-- every one of the business areas was up in backlog in the fourth quarter.

A lot of good awards there.

As we go forward into 2008, I expect to have a similar level, maybe a little bit higher, than where we ended the year 2007, but there's some really good big sized opportunities in 2008, the TSAT contract, the GPS III.

We've got a DOE Hanford award that's potentially out there.

Just quite a few-- a lot of them space-related, quite honestly.

CGX radar, and the electronics systems business area, and we're still seeking international opportunities of aircraft as I said earlier.

Okay.

Then just as a follow-up, how are you seeing spending right now in the classified market?

Seems like some companies are saying it's really slowed down, others are saying they're starting to see a recovery, so it seems kind of all over the map.

I'm trying to decide how to answer that one, Troy.

I'm not sure I want to comment on the level of classified business up or down, to be honest with you.

So just directionally, though, you're not really seeing any change in the level of spending that you guys are seeing?

If you're concerned about a large drop-off, I don't see that happening, no.

Okay, thanks guys.

We'll take our next question from Robert Spingarn, with Credit Suisse.

Good afternoon everyone.

Hello.

Bob, just thinking about your comment on $5 billion in profit, as a hurtle in '09 that you will achieve, or likely achieve, when I look at the numbers, there's sort of this cross-up between sales growth, and margin expansion.

Seems to me you could do even well better than that.

So in that vein, how do you look from a longer term three years and out perspective, at sales growth and margin expansion targets?

Well, I'd say carefully, and with good constructs here.

But generally, I think we've been as careful and as transparent as we are able to be.

Let's start with sales growth.

By looking at our four principal business areas, their book to bill, our backlog, and opportunity horizon, our likely capacity to go out and win in a highly competitive marketplace, we fold that into projections.

It is that kind of process that led to us offer you a projection sometime ago, that indicated in our judgment after coming off, say, mid single-digit annual revenue growth, that we would have a deceleration in that growth in 2008.

We're experiencing about that deceleration that we thought we would see, with an expectation that we would recover that top-line growth in the 2009 time frame, and that we would return after that relatively flat spot to about mid single-digit top line.

That's the very best indication we have, by looking at our core business and our adjacencies, our backlog, and our opportunities.

From that revenue forecast and that opportunity horizon, we then do as comprehensive a level of modeling we can, as to what our earnings expectation and cash flow generation ought to be, if we are able to continue to improve our operational processes here and cross-pollen nature the best practices from one part of the company to another, to assure continuous improvement, which means continuous expansion of margins, additions in absolute dollar value to earnings, expanding our returns on invested capital.

We've been applying that model now for years.

So, I would submit to you we've got a track record that you can certainly look at, and judge for yourself as to whether it is as effective as you think it could be.

We certainly look at that it way, and ask, is it effective as it can be, and how do we improve it?

And that's sort of the summary level, the composite view of how we approach these goals and objectives.

I guess what I'm getting at, Bob, is it seems your long-term growth could be more driven, at least in our model, by sales growth than margin expansion.

Is that incorrect?

No, I don't think it's incorrect.

I'm sorry if I conveyed that to you incorrectly.

We certainly believe, consistently with your view, that we have sales growth opportunities that ought to contribute to profitability, but that isn't to say we're finding ourselves without good conviction that we can look at further margin expansion.

And here again, that margin expansion is not independent of sales growth.

We think international business gives us margin expansion opportunities.

We think the transition of programs, from their developmental environment, which as in Heidi's question reflected some stress points, some stress points reflect award fees that may be a little suppressed, but when we get to production we're able to realize fuller margins because those programs tend to perform pretty well.

So I think we have both sides of that, revenue growth and margin expansion.

Thanks, Bob.

Quickly, Bruce, could you refresh us on the unit numbers for the major aerospace, or aeronautics programs in '08?

Sure.

In terms of number of deliveries?

Yes.

The F-22, C-130, F-16.

Yes, think of F-16 as somewhere in about the high 20 -- 28 range.

F-22 is probably a little lower than where we ended 2007, maybe 20 to 21.

And C-130, we're just at about one a month-- so think of that as about 12 in 2008.

Fantastic, thanks guys.

You're welcome.

Thanks.

We'll take our next question from Robert Stallard, with Bank of America.

Good afternoon.

Good afternoon, Robert.

Bob, I thought I'd first tackle the situation in the U.S.

economy, with the obvious slowdown in economic growth.

Do you think there could be any risk to some of your state and local service activity, as you move through 2008?

Robert, not that we see.

Believe me, as you would expect, given the-- I guess there's no shortage of information about speculation as to what the economy is looking like.

We've taken that into full consideration, and don't envision any, Robert.

Okay.

And as a follow-up, you mentioned JLTV as one of the adjacent market programs you're pursuing.

There seems to be quite a lot of other teams in the hunt as well.

What would you say is Lockheed Martin's biggest pitch to the military as they consider these different teams?

I think we've got an excellent pedigree in systems integration, so it depends on if you want to buy a truck, or if you want to buy a much more refined system, that really brings information into each crew vehicle, we have unique and I don't want to describe this any more fully than this, we have some unique approaches we believe to protecting that crew, and we look forward to this competition, because I think it gives us an opportunity to showcase some really dazzlingly interesting, and innovative technology, in a full systems configuration, and I'm confident that we'll put forward a very, very, persuasive offer here.

When are we expecting news on this program in terms of draw-downs or things like that?

I think, Rob this is Bruce.

I think there's a planning right now, perhaps a tech demo in the second quarter, perhaps a little later this year.

And our judgment here is, that at one time, I guess there was a conceptualization that the program might proceed without technology demonstration segments.

And I think there's been a more emerging discussion now about having technology demonstrators, and maybe opening the aperture and bringing in-- and down selecting, but not down selecting the one, but bringing in two or three companies to bring a more diversified view of the technology, sort of road-test those concepts, and vehicles, then have a second down select after that.

And we'll take our next question from Myles Walton, with Oppenheimer & Company.

Good afternoon.

Good afternoon.

Another follow-up on the international sales, if I could.

Bruce, what was the percent or dollar value of the international bookings in '07?

I'm not sure I've got that number off the top of my head, Myles, to be honest with you.

Okay.

The reason I ask, I'm just curious, we've seen a lot of the interest side, through the foreign military sales notifications, and I guess Bob, maybe this is a question for you.

Given the rollover in administration, do you think a lot of those negotiations will be somewhat fast-tracked to ensure that you get it in, under the current bodies that are in the policy making seats?

Well, I guess our view is that the rhythm is just going to continue at pace.

I'm not sure we're going to see a wholesale or significant acceleration.

I don't.

Maybe to ask one other, on the adjacent markets that you mentioned, healthcare and energy, Bob, can you cite kind of how large those are today, and maybe kind of a five-year plan, what your penetration rate could be in those markets?

I'll give you a sort of rounded feel of it, and I'll tell you, for example, in healthcare information technology, for our company today, it's a relatively small market segment.

But, one of the acquisitions that we highlighted, was a company called Management System Designers, who have not only expertise in developing healthcare information systems, but have an installed base so they've introduced to us a new customer set, like the National Institutes of Health, and what we intend to do is build that market from there.

So I would tell you quite candidly, it will start small, and we'll be deliberate and careful here.

But when we look at areas that are in need of improved performance, particularly improved performance that can be brought about by bringing either systems integration, software development, or business process improvement skills, we have a very compelling portfolio, in each of those areas, that have been applied to national imperatives in civil government agencies, previously, and we believe we can help address the rising cost of healthcare, and the general disfunctionality of the distribution of healthcare information, to superior information technology products.

So that's something we're going to have to work on, and build from the inside out.

Great.

Thanks.

Thank you.

And we'll take our next question from Joe Nadol of JPMorgan.

Thanks, good afternoon.

Hi, Joe.

Bob, I'd like goat back to the F-35 a little bit.

You've shared one major milestone with us this coming year, which is the STOVL first flight.

And I'm wondering if you could go into a little more detail on what some of the others are.

I think clearly last year you made some nice progress on the program, but you had a seven-month period of time where you didn't fly the plane, the conventional plane, and it seems to me that this year is a really important one to make a lot of progress on milestones, given the importance the program has to sales growth in '09 and '10.

You're absolutely right, Joe.

Bruce has the detail, I'd like Bruce to comment.

Joe, as we look at '08, the significant events or milestones that I'm watching at least, again Bob mentioned the rollout of the STOVL version in December of last year.

We talked about first flight of that particular vehicle in the second quarter of this year.

We've actually got the rollout of the carrier variant, that's the Navy aircraft for the Joint Strike Fighter program, in the fourth quarter of 2008.

We are going to be conducting throughout the year, a number of flights on the two aircraft that we'll be flying, both the current one, the AA-1, as we call it, which is the conventional take-off aircraft, as well as the STOVL, once it's up and flying, and we'll also be doing risk reduction with the so called CATbird, our avionics test bid.

And that's where we have the systems integration capability packed into a commercial airliner, and modified to simulate that, which is flying on the F-35 aircraft itself.

So we'll do some early risk reduction associated with that, through a lot of flights in '08 there as well.

The last piece of it, we'll continue to build the other 16 aircraft in the SPD program.

I'm wondering if you could share-- that's great, thanks for all that information.

I'm wondering if you could share more qualitatively where, maybe Bob, where you think you are, if the problems that you encountered last year are fully resolved, if you still have some questions in your mind on any particular aspects of why the aircraft was grounded, and weight issues, what is foremost on your mind with regard to the development program right now?

I think the development program is getting much more mature.

We're learning more as we go along.

The aircraft was down for awhile due to some engine performance issues.

We've understood those engine issues.

Our partners have gotten on that problem right away.

Every time you ring a problem like that out of the system, you gain a huge amount of information.

It's very gratifying, Joe, in the 22 flight tests that we've conducted on the conventional take-off airplane, its performance, its characteristics, its handling, it's up and away the basic fundamental engineering flight dynamics -- overall performance are meeting, or exceeding those targets.

If you were internal to an airplane company, you would learn a part of the vocabulary called code 1.

And code 1 is a statement indicating when an airplane lands, it just needs gas, and it's ready to go again.

It is exceedingly rare, to have the first flying article to land anywhere near code 1, and the AA-1 CTOL aircraft lands code 1 with some frequency.

We're confident, while our airplane is undergoing tests, the engine builders are also testing their configuration, so we have confidence that the lift fan is going to perform, that all the mechanics there are going to provide the appropriate and associated amount of thrust.

So I would tell you, the way we look at it is, how much risk reduction are we experiencing versus risk that we had forecast, as a function of time, and as a function of dollars.

And I think that we are on, or even a little ahead of the overall risk reduction.

You know, you can't really predict if the engine is going to eat a blade.

You just can't have that knowledge.

But you lay into your program schedule and you lay into your concept of development the prospect that something's going to happen, we call them unknown unknowns, which is such an inelegant phrase, but that's what it is.

We are making performance milestones on this jet, burning off points on the flight test cards in a fashion that we had expected, and the repository of knowledge we have about the flight characteristics of the airplane is superb.

And I would also go back and just underscore the comment Bruce offered about this CATbird.

Almost always, on airplane programs you develop these pieces in sequence.

And it makes perfect sense, because you don't have an airplane against which you've tested flying characteristics, so obviously you don't have an airplane into which to install avionics to test them when it flies.

You have to wait until you get there.

The CATbird enabled to us run parallel paths, and those parallel paths really do reduce schedule risks, because as we're gaining flight dynamic information on the AA-1 airplane, we're gaining a lot of systems integration knowledge about putting all the avionics together, so we will have, at that mate point, a much more robust avionics suite, to put into a much more robust flying article.

We'll take our next question from David Gremmels, of Thomas Weisel Partners.

Thanks, good afternoon.

Hello, David.

How are you?

Good, thanks.

Bob, you touched on margin expansion opportunities in your prepared remarks, and I'd like to ask about aeronautics profitability.

The guidance implies high 11% operating margin in aero, which of course, would be down from '07.

I guess we're getting used to only seeing that number go up.

So have you hit a ceiling in aero, or if not, what could happen to move the margin higher from here?

David, if I could jump in, this is Bruce, let me try and address that for you.

We experienced within aeronautics, particularly in the second half of '07, continued-- Bob talked about the JSF program, and risk retirement.

We've got the same sort of characteristics even on our production programs.

Risk retirements for things such as offset obligations.

Within the F-16 line, we actually moved that line at the end of 2006.

There was clearly some risk associated with doing that.

As those sorts of risks were retired and we started to see some production efficiencies, particularly in the second half of '07, we released some of the reserve.

We did some pickups associated with that, and that's why you saw the strong performance in '07 for both of those events.

That has the effect of the inception to date pick up, and that's why we had margins in excess of 12% in both those quarters.

That good performance, that good momentum is carrying over into 2007.

We did actually increase, if you take the midpoint margins from '07 to '08, we actually did increase that.

That's a direct reflection of that kind of performance that we had in 2007, carrying over into 2008.

You just don't get that inception to date benefit.

As we go through 2008 we've got the same sorts of risk/retirement profiles, and hopefully some production efficiencies that we'll see if we can do better on.

David, I will add, a couple of degrees of freedom removed from the immediacy of margin expansion, we've talked among ourselves in conversations like this quite a bit, about what environmental conditions or circumstances have to exist for the customer to get good value for the money they spend, and for us to be able to return good value to shareholders.

You're seeing the manifestation of some of those issues actually converge in our aeronautics business right now, because we talked about, do we have good command of the requirements on the airplane?

Well, that's true on the F-16, that's true on the C-130, that's true on the F-22.

Is there funding stability for the program?

Well, we have a multi-year now on the F-22, and we have a multi-year on the C-130J.

If you have funding stability and requirement stability, then it's the contractor's responsibility to get a line of balance that works, to drive that through the supply chain, to optimize, to make the right investments, to put the right labor on, to get the right training, to put the right process in place.

So it's a sum of the parts model.

It's real easy to say, and it's very difficult in reality to accomplish, and in our aeronautics business we think the sum of all these parts, and the convergence of all these prior initiatives on the part of our customer, on the part of our own workforce, and the part of our suppliers and our partners, have led to an environment where we're really optimizing the performance here.

The result is, the customer is getting very high quality airplanes that have no defects upon their delivery, all the parts work, all the systems work.

That degree of customer satisfaction clearly goes up.

Then as their interests are satisfied, our ability to return to investors, as you would expect, goes up.

And it's that virtuous cycle that we've all worked so hard to achieve.

That's why when there's a question about the F-22, or any other question about, do you want to discontinue the production line, I think a lot of careful consideration ought to be given about such discontinuity, because it's real hard to get and it's easy to give up, and you don't get it back.

That's great.

And if I could just ask a quick one on cash flow, you had a great year even after the half billion dollar pension contribution.

Just wondering how much pension contribution if any, is contemplated in your '08 cash flow guidance?

Not any now.

We'll always take a look at it, but there's no contemplation there.

Thanks very much.

You bet.

Thank you.

We'll take our next question from Doug Harned, of Sanford Bernstein.

Good afternoon.

Hello, Doug.

On space, when we look out to next year, your guidance is, I would say, flat at best in terms of revenues, and I know you commented in the earnings release that satellites were down some in Q4.

How do you see-- first, could you comment on what brought the satellites down in Q4, and then how do you see that mix between the three businesses going into 2008?

Let me make sure I'm clear on the three businesses.

I'm thinking of S&DMS, space transportation, satellites.

Well, we're looking forward to opportunities in government satellites this year, of a pretty significant number and dollar value, particularly when you think of the Global Positioning III contract here, you should probably think of a billion dollar class award, perhaps awarded in the second quarter.

I think we have a competitive offering there.

There will be an environmental satellite called GOES-R.

Here the customer is NASA, that will likely be awarded later in the year, perhaps in the third or fourth quarter.

Maybe think of that in the hundreds of millions of dollars, class of opportunity.

Then there's the transformational communication system, TSAT.

There's some discussion as to whether TSAT will be reformulated or not, but as of now we're competing with an offering for that satellite system.

Doug, if I could jump in, let me talk about the variability, you were talking about the satellite changes.

We're going from four commercial sats in 2007, down to two commercial sats in 2008.

So as you would expect, our satellite line of business is going to be down somewhat because of those reductions.

On the other hand, within space transportation we're actually going to see some good size growth there, that essentially is going to mitigate, being down the two commercial satellites.

That's really coming from the CEV Orion program.

Then we've got-- on the strat defensive missiles, the fleet ballistic missile line, a little bit of growth, but still fairly flat.

All told the three of them, the sat is down a little bit, space transportation offsetting that, and strategic and defensive missiles fairly flat as well.

Then separately, on aeronautics, could you talk about what you're seeing in terms of percentage of sustainment revenues today, and if you see that moving higher, as you go into '08, '09, and would that have a positive impact on margin potentially?

I'll try to address that as well.

I think sustainment revenue, one of the reasons we keyed up for quite sometime the fact that we thought aeronautics was going to be down about a billion dollars, year-over-year from 2007 to 2008.

I tweaked the guidance just a tad on aero, going into 2008, so it's somewhat less than a billion dollars.

That's almost entirely because of additional sustainment prospects within the combat air, both F-16 and F-22 as we start to position more and more F-22s at their various bases, where they're going to be located within the continental United States, we're seeing the sustainment business there, growing higher than would we have anticipated when I gave you the October guidance.

As far as margin is concerned, I'm not sure, that line of business for us within aeronautics is probably equal to the overall margins of the business, so it will probably bring with it, a similar level of margin going forward.

We'll take our next question from Cai von Rumohr with Cowen & Company.

Could you tell us what are you assuming for a tax rate for the year, and what is the impact since you're now not assuming the R&D tax credit, if it's enacted, what impact that will have on your tax rate?

Yes, Cai, thanks.

I think I'm the tax guy today, so I'll try to answer that.

I think for guidance purposes our tax rate in 2008 is just a little below 33%, and we did have the-- back in the October guidance, we did have the assumption that the R&D tax credit would be passed.

It's been passed every year for a number of years.

That was actually linked with the Alternative Minimum Tax Bill at the end of the year in December.

Those got separated.

The AMT did get passed, the R&D tax credit did not.

The effects of that on our overall tax rate is about 70 basis points.

Excellent.

That's all I had.

Thanks.

Thanks, Cai.

We'll go next to Howard Rubel, of Jefferies & Company.

Thank you.

I have one question for Bob, and we all expect to be out of Iraq at some point, but you talk to a lot of people that operate in that world, and one of your predecessors had a chart that showed that over time, the product you produced, would be just one missile, one airplane, and so on, and so one of the risks you always have, Bob, how do you make things more affordable, and what have you seen that Lockheed can bring to bear to solve this new war that we seem to be fighting?

I'll certainly say, Howard, if there's one missile, and one airplane, I hope we're the people who are making it.

We work very aggressively, at trying to reduce costs.

I think there's a part of the overall cost/value equation that gets a little hard to measure, and you're probably seeing it exemplified, let me just say, in fighter airplanes.

We are not replacing today, the existing fleet of fighter airplanes, on a one for one basis.

You see it in the F-22, the current buy is 183.

I don't know if there will be more F-22s ordered.

The Air Force talks about 381.

But that's to retire, probably two to three times the number of F-15s, because the systems, while we enjoy talking a great deal about their dollar cost, it's very difficult at times to talk about their value, and how you're retiring two or three assets, when you're replacing one.

So our goal here is to focus on costs, try to get the most economical possible environment in which to produce these systems.

I will just refer you, Howard, to my prior answer, where, when you get the conditions right, when the line balances, when there's funding stability, when there's requirement stability, that is the time when systems are produced at their most economical basis.

And then with we look at the cost of the system, I don't think that it's always taken into consideration that this, if I pick on the F-22, that it's likely to be in service for 25, or 30, or 35 more years, so we're really buying a capital asset that has a very, very, long life.

So the short answer is, we do all we know how to do to suggest economic order quantities, multi-year contracts.

The purpose in doing it is, we know we give greater value to the customer, and we know the customer always has more things to do, than there is money available to do it.

On a policy front, there's a very active discussion about what threats exist today, and what are the likely challenges that we will face tomorrow.

Will every future confrontation appear as an insurgency appears?

And that is the kind of spirited debate we all ought to be involved in.

Our answer is that you need a mix, an appropriate balance.

Because our judgment about the global security context as it affects America, is these threats have gotten much more complicated.

It isn't that you get to pick among them one or the other.

You must be prepared now for threats that act a lot like individual, non-state sponsored actors, terrorists, who can do an enormous amount of harm with the right technology, all the way through near peers, who may have the propensity to express some muscularity, to meet their individual interests, for which the United States has to be prepared.

So we're working with our customers on the broader front of preparedness, and trying to bring to bear all of our skills to help answer some of these very vexing problems and meet some of these demanding challenges.

Thank you.

Dana, this is Jerry.

I think we're getting right up against the hour.

Maybe one more question.

Thank you sir.

We'll take our final question today from George Shapiro, with Citi.

Good afternoon, Bob.

Hi, George.

Question.

If you look it at information services, I mean, that's been the one area that's probably disappointed a little bit this year.

The fourth quarter, you know, was only 5% organic growth, which isn't bad, but it's less than what you thought.

You lowered the guidance for sales growth in that particular area for this year.

Can you just go through what you think is going on in that business, and what can be done about it?

Yeah, well, Bruce will give you some detail and color.

I will tell you, when you use the word disappointing, I watched this business during the year undertake some important demands that I personally placed on them, and one is, to take what was our disaggregated information technology businesses, even in our organizational structure having two significant business areas, and consolidating them into one business area, which as you know, is no small task.

So I was very pleased with the operational efficiency that was undertaken in putting together our information technology capabilities, because now I think it gives us the kind of muscularity to move the market with a portfolio that no one else can match.

And by that I mean very high end system architecture, system engineering, highly complex, even classified programs, throughout the value chain down to desktop applications.

I don't know that there's a competitor in the field that can offer the breadth, the depth, the level of experience that we have, and the kind of muscularity that's in that portfolio.

If I look at their overall revenue expansion, if I compare '06 to '07, they were up 14% across that portfolio.

That may have not met everybody's expectation, but I would say to you, George, that ain't nothing.

And I think there's more opportunity here as we continue to refine the integration of the business, and we look for opportunities both domestically and internationally.

George, if I could just piggyback a little bit, Bob said we did 14% year over year growth within IS and GS.

Think of that as about half of that coming on the organic side, so that was not a bad year by any stretch.

This particular business area, by virtue of the contracts within that organization, has the highest level of service contract accounting, which creates in and of itself, some variability between the quarters.

I kind of teed up in the third quarter call, that we were seeing some transition from our recorded backlog to sales, a little slower pace than we expected to have happen, but quite honestly, the backlog grew by over $1 billion.

In fact, it was a record level of backlog within IS and GS.

I think that's the best indicator of future sales potential.

If you take kind of a -- just the midpoint guidance that we provided you, we're still showing 10%, year over year, from '07 to '08.

That is the expectation.

In excess of $1 billion of revenue growth, all while, we actually expect the margins for the business area to grow somewhat from, probably 10 to 20 basis points year-over-year.

So as Bob said, this organization has just been combined for just a little less than a year, and I think we're starting to see the synergies that come from that organizational combination.

And we're pretty excited about what's going to happen in 2008.

Can you highlight, Bruce or Bob, some of the bigger opportunities in that business this year?

Well, the first one we're looking for is actually-- let me say probably going to be awarded in the first quarter, and could actually be awarded in, say, weeks to a month, and that is a mission support contract for the DOE facility at Hanford, Washington.

This is not nuclear waste remediation, or environmental remediation, this is an information technology systems management job.

If you look over the lifecycle of a contract you might even see a billion dollar kind of class award here.

So that will be a good first test, we think, as to, have we been able to put forward a very compelling value offering for an important customer in the information technology domain.

Just to piggyback again, George, another big award we're looking at out of IS and GS would be the AMF JTRS is coming up, also likely in the first quarter.

That's a fairly good size order.

We've got a fairly large IDIQ contract, which is kind of the second round for it, for rapid response with the Army coming up in the second quarter.

That just gives you a little bit of an idea what's popping out.

And that does conclude our question-and-answer session.

Gentlemen, I will turn the call back over to you for any additional or closing remarks.

Dana, thanks very much.

Let me thank you all for your participation on the call today and your interest in Lockheed Martin.

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

We're committed to maximizing shareholder value by building a balanced portfolio of businesses, that will allow us to continue to expand margin, as we grow our revenues organically, and through acquisition.

We thank you for your support, and we do look forward to speaking with you throughout 2008.

Thanks again.

And that does conclude today's conference call.

Thank you for your participation.

You may disconnect at this time.