洛克希德·馬丁 (LMT) 2008 Q1 法說會逐字稿

Good day and welcome, everyone to Lockheed Martin Corp.

first quarter 2008 earnings 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.

Thank you, and good morning, everyone.

I would like to welcome you to our first quarter 2008 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 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 today which supplement our comments and with that I would like to turn the call over to Bruce.

Thanks, Jerry.

Good morning, everyone.

Welcome to the call.

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

Our results reflect solid operating performance across the Corporation, driven by our focus on program execution as we deliver value to our customers.

Our world-class employees and leadership team continues our momentum by delivering critical services and products to our customers.

During the first quarter, we achieved progress in providing value to shareholders, winning new business and executing on programs for our customers.

As our press release outlined, the first quarter results across the Corporation were strong.

Our earnings per share grew by 9% on a reported basis and 24% on a recurring basis.

We had solid margin expansion with a 70 basis point increase and segment operating margins helping drive our earnings growth.

This margin expansion is a result of successful risk reduction and strong performance on key programs.

These same factors enabled us to generate almost $900 million in cash from operations in the quarter.

One key component of our cash deployment strategy is share repurchases.

We are continuing to execute our stated practice of making opportunistic share purchases.

During the first quarter, we repurchased 11.3 million shares for $1.2 billion.

This represents the highest quarterly purchase level in terms of dollars in corporate history, and reduced our weighted average diluted share count for the quarter to just under 417 million shares, achieving a reduction of over 15 million shares since the first quarter of 2007.

Our remaining repurchase authorization at the end of the quarter was over 21 million shares, or approximately $2.2 billion at current market values.

During the first quarter, we also paid a dividend to shareholders of $172 million.

As a result of the dividend payment and our quarterly repurchase activity, we are well-positioned to achieve our commitment to return at least half of our annual free cash flow to shareholders for the sixth consecutive year.

We are once again solidly on track to deliver strong annual financial results in 2008.

Based on our first quarter results, we have increased 2008 guidance for earnings per share and return on invested capital, while maintaining our other prior financial estimates.

Today's press release and our supporting webcast charts outline the details of our new guidance.

Another important catalyst in our ability to provide value to shareholders is our ability to win new business.

Key new business awards were achieved this quarter across all business segments.

Our IS&GS business area had a particularly strong quarter, highlighted by their win of the AMF JTRS program.

Initial contract award was for $0.75 billion to provide tactical communications and networking to the U.S.

Air Force, Army, Navy, and other users.

This program has multi billion dollar future sales potential as radio systems are deployed across this broad user community.

IS&GS also won a 10-year $1 billion contract from the FBI to develop and maintain the next generation identification system.

This program will provide state-of-the-art multi model biometric systems produced by local, state and federal authorities.

This contract award, however, was recently placed under protest and we have not yet included it in our backlog.

These wins demonstrate that our IS&GS segment continues to differentiate itself from competitors by leveraging their organizational framework and offering cost effective and innovative solutions so customers.

As a result, IS&GS expanded its backlog and worth to record levels and is well-positioned to generate robust organic sales growth in 2008.

Our electronic systems segment continues to expand its international work with the award of a $200 million contract from UK Ministry of Defense for the land environment, Air picture provision program.

This program will provide ground troops with a new level of situational awareness.

Further international expansion was achieved with France's selection of our HELLFIRE II missile for use on their Army helicopter fleet.

This selection marks the first time that the HELLFIRE missile has been sold to France and is another demonstration of the strong international demand for our proven products.

Aeronautics also achieved important new business awards this quarter.

The C-130J program received orders for eight new aircraft with the purchase of two tanker aircraft for the U.S.

Marine Corps and six aircraft for India.

In addition, aeronautics received approval from the DOD to proceed with the low rate initial production for the C5 RARP program to modernize a total of 49 C-5 aircraft, potentially valued at $5 billion.

This program will greatly enhance mission readiness rates and ensure continued service from these critical national airlift assets for years to come.

Finally, our space systems segment received a $350 million contract for long-lead activities for the third SBIRS satellite and the third highly Earth orbit payload.

These orders further expand our work on this vital element for our national missile warning and defense system.

One of the primary drivers in our ability to secure these new business wins is our focus on program execution.

Significant achievements were made this quarter across our portfolio of programs and I will highlight a few of those noteworthy accomplishments.

In electronic systems our successes include the delivery of three missionized Maritime patrol aircraft and an AC-130J surveillance aircraft as part of the -B-Porter program for the U.S.

Coast Guard.

These aircraft will greatly enhance deployed assets and surveillance capabilities on this important modernization program.

Also this quarter, our Aegis Ballistic Defense Missile Weapon System was used by the U.S.

government to destroy an errant satellite and eliminate the danger of an uncontrolled reentry of this nonfunctioning satellite.

Other achievements this quarter included progress on our Littoral Combat Ship, with successful power on of key propulsion and electrical systems.

We look forward to completion of our ship and the commencement of sea trial valuations by the U.S.

Navy later this year.

We believe the delivery of LCS number 1 will validate our innovative design and demonstrate the capabilities of this world-class solution called the Littoral Mission.

International interest in our ship remains high with multiple countries evaluating our platform for their future Naval requirements.

Electronic Systems also continued to make progress on the VH-71 Presidential helicopter program.

Under the increment 1 contract, we have begun integration of missile systems aboard a third test vehicle and have completed nearly 700 flight hours on all program test vehicles.

Additionally, we are currently meeting all key performance parameters, including, weight, range and speed of the aircraft.

Delivery of these new critical assets to the President and Navy is expected to occur in 2010.

In space systems, we successfully launched our sixth GPS2-R satellite and achieved operational status in record time.

Our demonstrated track record on this program has us well-positioned for the upcoming multi billion dollar award for the next generation GPS III program.

Also this quarter, space achieved a major milestone of 200 cumulative years of successful in order operations for he A2100 satellite fleet, validating the proven reliability of our platform.

Turning to aeronautics, I would like to provide a status report on our largest program, the Joint Strike Fighter.

We are continuing our progress on the STD development contract for the three aircraft variants.

Our developed progress to date is validating that the design decisions we made early in the program are resulting in aircraft that are achieving all key performance parameters.

The first conventional takeoff aircraft is progressing through the flight test program with 40 flights completed to date and has exceeded performance and reliability expectations.

In over 80% of these test flights, the aircraft has returned code one or immediately ready to refly, demonstrating a level of reliability unheard of at this stage of the flight test program.

Additionally this quarter, the aircraft successfully completed aero refueling trials, another milestone in a series that will lead to longer range flight tests and first production deliveries in 2010.

The STOVL aircraft also continues to progress through final fabrication and remains on to achieve its inaugural flight later this quarter.

The engine was powered up for the first time on April 17, a key step for verifying its readiness for the first flight.

The upcoming first flight will consist of a conventional takeoff and landing profile per the original test plan.

Later this year, or early in 2009, we will conducting the first short takeoff vertical flight of the aircraft.

All 17 remaining development aircraft are in various stages of assembly at our manufacturing facility in Fort Worth, Texas.

We are realizing learning curve improvements from our completed aircraft and components that are comparable to legacy F-16, F-22 programs while achieving quality levels that are significantly higher than either program at similar stages of production.

The carrier variant aircraft for the U.S.

Navy continues under development and remains on schedule for factory rollout in 2009.

The carrier variant will help transform the U.S.

Navy by placing fifth generation fighters in a position to reach enemy targets without ferrying or refueling, due to the tremendous fuel capacity of the aircraft.

Risk reduction activities are also being accomplished with ongoing flight tests of our cooperative avionics flying test band.

This aircraft is outfitted with all the F-35 sensors and software, integrated and fused to retire avionics risks that have traditionally plagued legacy programs.

By significantly accelerating the development and integration of the avionics system, this test bed will also help vibration in the form of the F-35.

It's test bed is on track to complete its first fully missionized flight later this year, a full year before the first fully missionized F-35.

In addition to our ongoing development contract activities, we are fully funded and making excellent progress on the first low rate initial production contract.

This contract is for construction of the first two aircraft for the U.S.

Air Force.

We had also been previously funded to procure long lead items under the second element of contract for six more aircraft to the Air Force and six aircraft to the Marines.

Recently in recognition of the progress being achieved on the program, the Defense Acquisition Board approved full funding for the six LRIP2 CTOL aircraft with the balance of the full funding for the sixth STOVL aircraft to be released after its successful inaugural flight.

Looking forward, the proposed FY '09 budget contains a request for LRIP3 production for 16 aircraft, equally split between Air Force and Marine versions and reflects a continuing ramp up in production quantities.

In the critical area of cost performance, we remain intensely focused on aircraft affordability for our domestic and international customers, helping ensure that we deliver the world's first multi row, fifth generation stealth fighter to customers at affordable levels.

International interest in the Joint Strike Fighter remains strong with our eight international partners continuing to make substantive commitments and investments to a production phase of the program.

Elsewhere within aeronautics outstanding manufacturing and quality performance is being achieved across all three of our other aircraft production lines.

Aeronautics ongoing pursuit of flawless program execution on the F-22, F-16, and C-130J programs is resulting in our delivery of increasing numbers of zero defect aircraft.

This performance is providing differentiating solutions to our customers and future financial opportunities for shareholders.

With that, I'd like to open up the call -- open up the lines for your questions.

Please open up the call.

Thank you.

(OPERATOR INSTRUCTIONS) And we'll pause for a brief moment to assemble our roster.

We'll go to Robert Spingarn with Credit Suisse.

Good morning.

Good morning, Robert, how are you?

Wanted to ask you, Bruce, you talked about the 50% return of cash generated, free cash generated.

You have done really almost half of that here in the first quarter.

You talked about that.

So how should we think about that number going forward?

Especially since here in the second quarter, your average share price is below what you paid in the first quarter.

Well, Robert, I think we've got a fairly longstanding policy that says we're going to return 50% of our free cash flow to shareholders in the form of share repurchases or dividends, and I think, as you point out, we are well on that track as we -- as we looked at where we are today.

We'll take a look at all options coming up.

We will take a look at dividends probably in the fourth quarter, as we typically do.

I like having the flexibility of where we sit right now.

And it just depends, from an opportunistic perspective, Robert, what lays out in front of us.

If we see some acquisition opportunities we like, we may take a different path.

If we don't, we may continue with the share repurchase program.

So it's much more opportunistic than I can kind of predict at this point in time.

You have done almost 1.4 in the first quarter with the share repurchases and the dividend and, half the free cash for the year would be 1.6, 1.7.

So it's not far at all.

Right.

The other question I had for you was on your sales guidance, relative to last year.

It's fairly modest.

You grew around 7, 8% in the first quarter.

Clearly F-16, you've talked about that's coming down.

I think you said last call you would do about 20 to 28 of those this year.

You did nine in Q1.

Can you talk a little bit about the sales trend as we go through the rest of the year?

Yes.

Rob, you are talking about for aeronautics or for the total all business areas?

Entire business but certainly we do understand that aeronautics plays a big role here.

We did -- you're absolutely right, I think I mentioned 28 aircraft on the last call last time.

First quarter is probably the highest quantity of aircraft we're going to see.

It drops consecutively from that point down.

Fourth quarter will be the lowest quarter of the year for F-16 years.

As I look at Aero going forward, I expect a little bit flat, probably for the next couple of quarters.

I do expect still the fourth quarter to be probably the lowest quarter in the year, consistent with the expectations that we provided on previous calls.

Again, I think we are talking about being down somewhere around $850 million range from last year.

That's still what we see as we look going forward.

Space has got a couple of POTs.

In fact, they already happened.

We had a launch here to satellite, both of them happened in the second quarter.

Those are the last two POT items for us, our package of title items using delivery methodology sales events.

So we will probably see a little bit of a spike in space in the second quarter and then a flattening out going forward.

As -- probably expecting some slight growth quarter-over-quarter to the -- the guidance midpoint is in the 3 to 5% range.

I think we are on track for that.

And IS&GS, obviously very, very strong in the first quarter at 17%.

I suspect they will have sequential growth through the next three quarters.

And still within line with what we talked about in the past, like the range we had given you, 8 to 11.

We still think we are on track there as well.

Bruce, thank you for the color.

You bet.

Thank you, Robert.

Thank you.

We move next to Doug Harned with Sanford Bernstein.

On IS&GS, could you talk about the margins there?

I mean the margins are a little lower than would you expect given your guidance for the year.

And I know you mentioned in your release the benefit of the contract restructuring.

Yes.

Could you talk about how that looks for the year marginwise?

Yes.

Well, let me talk about the contract restructuring first.

We did have a contract restructuring in the first quarter, and as I kind of look at that, and the effects of that on the first quarter compared to, say, the first quarter last year, it's probably somewhere about $10 million benefit we're seeing net-net in the quarter.

The important thing I would like to leave you relative to the contract restructuring, this is not a one-time event.

This is a contract restructuring over the life of this contract.

Now, we kind of had good indications as we started getting the guidance in the prior year that this event was going to happen.

So really our guidance, considered the effects of this when we talked about the margin improvement year-over-year.

I still expect to see IS&GS have sequential improvement in its margins quarter-over-quarter and I still expect consistent with what happened in the fourth quarter of last year, that the fourth quarter this year will be the highest margin year.

I'm optimistic about our results going forward in IS&GS on a margin basis.

Okay.

And then on space, you had -- you had particularly good margins there.

Right.

Could you talk about what led to this.

Were there some one items in there.

Yes.

We had one little BlueBird that came in.

We had a termination settlement but we had some folks who made some things happen from a negotiating perspective to make that happen sooner than we expected.

So that was a bit of a BlueBird opportunity.

Most of the benefit we are seeing in space is because of improved performance with the United Launch alliance, the equity associated with that.

We are really seeing quarter-over-quarter significant improvement there.

I think that's just reflective of the fact that we are, in fact, hitting stride with that organization.

It's only, what, a little bit over a year old and we are starting to see good performance coming out of it.

And -- and this quarter reflected that.

And so that benefit should be sustainable?

That benefit should be sustainable, that's right.

Okay.

Great.

Thank you.

You bet.

Thank you.

We will go next to George Shapiro with Citi.

Yes, good morning.

Good morning, George.

Bruce, you had a $500 million increase in receivables.

I mean, the cash flow is still pretty good, but less than what we had last year.

Can you tell us what happened with the receivables and does that good down the rest of the year?

Yes.

Good -- good look at it, George.

I took a look at the receivables myself.

I really think this is more a reflection of when the snapshot was taken for measuring receivables.

I went back and took a look -- and this is all about -- for the last five years, I think accounts receivable grew four of those five years in the first quarter.

In fact, if I look back at 2007, between first quarter and second quarter of 2007, AR grew by $600 million combined on those two quarters and yet we still had a reduction at the end of the year.

So my expectation is that this value will come back down in the second quarter and I actually expect we will be closer to 2007 end of year levels than we are right now.

I think it's just a pure timing issue.

You discussed just another little thing.

You mentioned you had a loss on marking-to-market some securities.

Could you discuss what that was?

Yes, I think there's a couple of things going on here.

We have some deferred compensation items that are in investments and there was some loss mark-to-market in that.

That's reflected, for those of you on the call -- there's a couple of places.

One, we had some -- some -- over on the liability side we had an other unallocated items down about $25 million.

That reflects the liability side of it.

We also had some loss within embedded within the $100 million reduction in nonoperating income.

Think of that as 70, 75% is actually reduction or interest income in our cash balances.

The remainer is the mark-to-market loss that we are talking about there.

George, the way I think of it is the mark-to-market loss on the asset was kind of offset by the reduction in liability and those are about a push.

And the net/net is down because of the interest income on the cash balance on the balance sheet.

Okay.

Thanks a lot.

Thank you, George.

We will go next to Troy Lahr with Stifel Nicolaus.

Can you guys just specifically talk about electronics, where you are doing 11% in the first quarter but then you're calling for 3 to 5% growth the rest of the year.

Is stuff getting pulled forward there also in the electronics?

Yes.

We didn't pull forward.

There was electronics had the benefit of a couple items actually mentioned on the program execution side.

I remember those in particular aircraft deliveries for the U.S.

Coast Guard, the MPA aircraft and so forth, those are reported from a sales perspective on a delivery basis or POT basis.

We had the benefit of that.

We see a little bit less of those sorts of items in the second quarter and that's the main reason for that, Troy.

Okay.

And then also I think electronic systems you had two acquisitions last year, August and December.

Did that help at all this quarter or were those pretty meaningless?

Those had no effect in electronic systems in this quarter, due to acquisition.

There's only a slight impact within IS&GS for a little smidgen of what we did last year but electronic systems was completely clean.

We go next to Joe Nadol with JPMorgan.

On the F-35 program, you told us in the past that you have been booking around a 4% margin.

I'm just wondering what's in your plan for the year and what you did in the quarter.

Is that changing at all?

We didn't change anything in the quarter and, again, Joe, I don't see events happening the rest of the year that would suggest that I'm going to make any changes the rest of the year either.

Okay.

And then secondly, just following-up on the cash flow question.

Wondering if you could give us maybe by segment or the segment where you saw less cash flow because I know in Q1 is usually a good quarter for you guys.

I went back and looked and I think this was the lowest cash flow, operating cash number since 2003 for Q1.

I mean, I know it's probably just timing but was it aircraft, was it aeronautics or where was it?

Let me give you a couple of pieces.

You are right.

We are down, as I looked at it, we are down about $600 million quarter-to-quarter compared to to first quarter of last year.

That is mostly due to the timing of international receipts.

So some of those -- a lot of those within aeronautics but not all of them.

But even with the downer in cash -- in cash quarter-to-quarter, free cash still exceeded net earnings.

I think we had a 1.1 ratio there.

I fully expect 2008 -- it's probably a little different trend in 2008, maybe than what we experienced in past years.

I expect 2008 to be a little more level loaded in terms of our cash generation.

I think each of the next three quarters will probably start with a number with 1 billion in it.

I think we will be again, a little more level loaded but, look, at then of the day we've had ten consecutive years of free cash flow exceeding earnings and I fully expect 2008 will follow suit.

We'll move next to Cai von Rumohr with Cowen & Company.

You had an extra week, 14 weeks in the first quarter.

Could you talk going forward about the impact of, A, what impact did that have on this quarter?

And what impact will dropping out of the rate have on the third quarter?

Just to be clear, so we had 13 weeks versus 12 last year.

I looked at that and I scratch my head a lot, to be honest with you, as far as what impact that has.

I think it has probably the biggest impact in two of our business areas and that's IS&GS and space.

But to say it's the full impact is probably overstating it because of the timing of when some of our contractors give us billings and invoice, in the month, in particular versus when we bill.

I don't know that we fully lose the full one week impact there.

I think we have had some benefit.

There's some benefit when we got the 8% in the quarter, but to assign a number to that is just difficult to do.

Okay.

Terrific.

And then I saw two issues in space.

First, you have $57 million deferred gains in ILS still to go.

Would you comment kind of on when that is going to run out, how many launches, when we might see it?

And secondly, the backlog in space was up substantially more than one would expect with the announced bookings.

Maybe give us some color on that trend?

Let me start with the $57 million.

That's dependent upon the itineraries.

These are tied with the old proton locks.

So it depends on when the itinerary for those launches are scheduled to go.

There are two launches left.

That I can be very specific on.

And right now, I think the -- I think the proton is under investigation because of the misalignment in orbit of the last launch there.

So it's -- my guess would be, Cai, it's probably in the latter half of the year.

So I don't know that I want to get any more specific on that because I don't have insight at this point in time to specific itinerary when those launches are going to go off.

I would guess both of them are happening this year and later in the year.

Jumping to your second question, I think backlog was down.

So I'm a little confused by your question in space.

I think the only business area that went up was IS&GS for the year-to-date.

So I unless you are reading it wrong there I think we had, like $1.9 billion in sales and $1.4 billion in sales.

I think backlog actually dropped.

It did, but it was up from the fourth quarter.

It was up from the fourth quarter, not year over year.

I'm dealing from fourth quarter.

Okay I will I believe double check.

Thanks, Cai.

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

Good morning.

Thank you.

Bruce, can you quantify how much the gain was in space in the quarter and then just talk about space margins looking -- you kind of touched on this before, but look at space margins on the longer term basis.

I mean, this is for the most part a cost -- a cost reimbursable business where you are now making relatively high margins.

Yes.

Okay.

So start with the space gain.

I assume you are talking about the BlueBird I talked about earlier.

Right.

Yes.

Think of that in the -- the overall improvement we saw at the end of the year that I committed to and the new guidance, think of that as probably, I don't know, about a third or so of that number.

And the rest of it is really due to ULA and, again, the ULA I will expect to continue throughout the rest of the year.

Your second question was about performance there, relative to the cost flows business and we have got some good-sized margins there.

We are getting the benefits, obviously, I think our Cost Plus business in that arena is performing well, as you would expect a typical cost plus environment to perform.

We are getting the benefit of the equity earnings.

We've got the income coming from ULA without the sales and that's the appropriate accounting for that and that's helping to boost those margins somewhat.

Okay.

And as a follow-up, can you just run through the timing on the big competition, obviously the satellite competitions and maybe JLTV, what you are expecting there?

Yes, let's talk about a couple of those.

GPS III has been moving around a little bit here in the last few weeks, but I think the latest I heard is it should happen probably sometime in the first, early part of May.

And we're feeling good about that one.

I think again the success we had on the GPS II R bodes well for that one.

JLTV is going to be a tech demo, probably in the third quarter of this year.

This is going to be the -- I believe there are six teams competing.

It is going to go from six to three.

I think there will be three individual awards.

None of them overly large from a dollar perspective, but obviously strategically important to be in that down slope to three.

Later on in the fourth quarter, satellite-wise, we have the GOES-R satellite which is the weather satellite out of NOAA.

That's probably it from the larger ones, from the satellite perspective coming up.

And TSAT, any update there?

TSAT is still moving is the short answer there, and I'm not sure if that honestly stays in this year or not.

I think that's to be determined yet still.

Thanks a lot.

Oh, you bet.

We'll go next to Myles Walton of Oppenheimer.

Thanks.

Good morning.

Question on the C130, at what point do you consider increasing the production rate there as opposed to stretching out the delivery horizon with the closure of the pending supplemental?

With the closure of that put upper pressure on the production rates as early as '09, or would that be a little further out?

And just kind of -- if you can give some perspective on where you think those rates could go over the next couple of years?

Well, let's just say we are not worried about having to stretch out the C130 line, because we think there's a pretty the hot market for the C130 aircraft.

If anything, to your other point, I think there's the possibility we are going to see increasing production rates on the C130 line in the not too distant future.

Obviously, that's dependent upon a number of orders happening here in the near term that we are hopeful for.

I wouldn't be surprised to see production rates -- the C130 production line increase in the 2010 time frame, to some level higher than where we are today.

We will probably have to gradually build to that over time, but it wouldn't surprise me at some point, 2010, 2011, we are at double the rate that we are today.

Okay.

That's really helpful.

And maybe on the -- the pull down of debt in the quarter, I think this is the first time you have done a net pull down of debt for quite sometime.

Obviously, you have a good rate on it, but the cash interest rates is obviously not a great trade at the moment.

Right.

So I guess, can you give a little bit of rationale there as to why pull it down now, and also, I guess, is the deployment of capital given the cash and the balance sheet returns now, at the same point lower than it was, is it -- are you getting more attuned to M&A at all or should we expect it to be more share repurchase?

Yes.

Good question, Myles.

Let's talk about debt purge.

We did do the $0.5 billion in the first quarter.

You have to put yourself in the frame of mind of what we are looking at at that time.

It was a very, very opportunistic play, I think, on our part.

We have -- I believe we have $100 million of debt coming up this quarter and we have about $1 billion convertible obviously in the August time frame.

This was really a matter of maintaining our flexibility going forward.

It was not any kind of thing for any particular reason, surely not any large acquisitions or the like.

So I don't -- I wouldn't read more into that than otherwise what we intended there.

On the M&A front, I think we are seeing better prospect than we have in the recent past.

I'm hopeful we'll see some of those close soon.

I think looking forward, back to the question that Rob asked early on about share repurchases versus M&A, I'm optimistic we can have some M&A activity come to fruition in the not too distant future.

Let's talk a little about the acquisition candidates there.

I think someone once described our acquisition practice as building a string of pearls and the like, I think that's a pretty good analogy.

I still see that us we go out forward, the ones we are looking at are probably on the $0.5 billion list, bolt-on niche acquisitions that give us access to either some technologies we didn't previously have, customer intimacy, customer access, those sorts of things.

So what we are planning on doing is probably no different than we have done in the past, but there could be a greater volume of those coming up in the not too distant future.

Thanks, Bruce.

We'll go next to Ron Epstein with Merrill Lynch.

Good morning, guys.

Hi, Ron, how are you?

Secretary Young was out saying earlier, maybe last week about the F-22, that he thought maybe upgrading the Sting airplanes and that which is planned to be built is a better idea than extending the production.

Do you guys have any thought on where the F-22 program is going to go beyond the 183?

Well, the first thoughts, we are currently under contract for a multi year contract.

That goes up to the 2011 time frame.

I believe the supplemental budget being talked about right now adds four aircraft to the mix.

So that pushes us out, think about somewhere in the early 2012 time frame.

That's a decision that needs to be mad -- it's a simple budget decision that needs to be made in the latter part of this year.

My view is -- I mean, you are not going to get a cheaper aircraft.

I think Bob spoke very eloquently last time we talked about the variance of the F-22 program but you are never going to get a program at the production curve cycle that it is right now in terms of hitting on all cylinders from a quality perspective, from a low cost perspective than you are right today.

So I think the actions that we are seeing right now is a little bit of pushing that decision off next year and likely pushing it off to the next administration.

So I think we're doing everything we can do on part to control that outcome and we'll wait and see what happens.

Great.

And I guess as a follow-on to that, can you give us an update on the international sales campaigns for F-35 and potentially the C130 and any other aircraft program?

Yes, sure.

Let's start first with F-35.

I think -- I think we're seeing some progress there.

In fact, a couple of the countries have at least informally, if not formally notified their various parliaments, legislatures and so forth about the need to buy some accelerated flight test aircraft, in particular I think we are talking the Netherlands and the UK there.

So I think -- I think the prospects are at least as strong as they were previously, if not stronger, to have some pull to the left from our international community.

It helps I believe, quite significantly with the dollar in the situation it is right now, to have the benefits from selling in U.S.

dollars.

We've also got renewed interest.

I think you have seen on the F-35 from both Israel and Japan.

We've had some fairly recent meetings with both parties there that I think expressed some interest that we are hopeful consummates into a deal, maybe as quickly as anybody is going to buy the aircraft in an international perspective in the marketplace.

I think those are all on the up side of news.

On the C130Js, we still see or we just closed on the Indian deal here recently.

I think there is a potential of international order we will get in the second quarter that may be a bit of a BlueBird for us.

I won't talk about the names until we get there, but I'm optimistic we can sell four or so in the quarter that may be a little quicker than we previously expected there.

I won't limit it to just the C-130J.

I think we are going to sign the Moroccan F-16 deal in the second quarter probably as well for 24 aircraft.

So I think the international marketplace is looking pretty good for us across all the products there.

Great.

Thank you.

You bet.

We'll go next with Steve Binder with Bear Stearns.

Bruce, just a follow-on of the F016, is Taiwan looking unlikely this year?

Do you think before the change in administration?

Steve, that's about anyone's call right now.

I think the Taiwanese, with the recent change in administration, I think that's a favorable position compared to the old administration in Taiwan, I'm talking about the U.S.

So I mean, that -- the platform that that particular party ran on included additional need for additional F-16s.

I think there's a more positive outlook with that administration that we had with the previous Taiwanese administration.

So I think those signals are both positive.

Whether it gets done or not is bit of a call, I think the actions were in place to align for that to happen.

Whether they happen or not is, again, kind of tough to call at this point.

As far as the language, did you say in your opening remarks first flight of the carrier Variant being late '08, early '09; is that correct?

I said we're going to roll out the first carrier Variant aircraft in 2009.

Okay because it's consistent with your language in the (inaudible) which is sometime in '09 first flight?

That's correct.

And also on cash flow, I know you touched a little bit on receivables and international receipts.

I'm just wondering were there any collection issues domestically with any of your customers in the quarter.

No.

I wold look at that statement, I think we had -- just, I can tell you stories about this stuff.

We had a large payment that literally paid the Monday after accounting closed.

I mean, those are the type of things that just drive you crazy when you report results and you show increases like that.

I don't think there's anything to it that's systematic or systemic, it was just a timing issue.

One other think on acquisitions, are you communicating kind of level of activity greater than we achieved in '06?

Which is a little over $1 billion of cash out the door?

I don't see it at quite that level, no.

Okay.

Thank you very much.

Thank you, Steve.

And we'll go next to Carter Copeland with Lehman Brothers.

Hi, guys.

Hi, how are?

Just real quick on IS&GS and the revenue growth, I wonder if you might provide a little color on the moving pieces there and just characterize the three subsegments relative to the 17% for the group as a whole?

Yes.

Happy to do that.

First off, I think all three LOBs within IS&GS and there we are talking information systems, global services, admission solutions, all three of them grew fairly significantly.

There was not a slacker amongst the bunch there.

Good, strong growth across all of them.

Probably led by the mission solutions and global services more so than the information systems piece, as I look at it.

And the margin improvement that we saw, the operating EBIT we saw from that LOB was pretty much widespread there as well.

So good, strong performance across all three LOBs within IS&GS.

Which piece would have been above and below the average.

It sounds like mission solutions and IS was ahead and global was behind?

From an absolute growth perspective, the largest growing LOB was actually the global services.

I was looking more at the dollars there, but the actual growth rates were the highest in global services and I will say mission solutions and information systems were about on par with the growth -- or slightly -- slightly less than the overall 17% growth rate but still very healthy.

All of them -- every single one of them was double digit growth.

Great.

Thanks for the color.

And just a follow-on, you touched on this briefly with Myles but with respect to the changes you made in the cash interest assumption that are buried in the non-income -- operating income guidance, they look pretty substantial and offset the yield side you had elsewhere.

But when you think about how this may continue to apply for the full year and how that could still change below the line, with respect to the convert, you mentioned it's callable in Q3, am I correct in assuming that the interest impact is negligible, should you choose to call those bonds?

Meaning, since the assumed cash interest rate is now roughly equal to the convert rate?

I'm not sure I'm following the question there to be honest with you.

We do have the convertible that's due in August.

It's about -- it's a $1 billion fixed amount.

But should you -- should you choose to call it, there's no -- that's encompassed in the guidance now?

That's solid -- there's no impact -- let's back up.

This is a convertible.

The share impact in there is already in our diluted shares.

I did not understand your question in the first place.

That's already reflected in the share count so there will be no impact on that whatsoever on the overall diluted share count.

Okay.

Great.

Thanks, Bruce.

We'll go next to Howard Rubel with Jefferies.

I just want to go back to aeronautics for a moment.

Bruce, you talk about the F-22 making good progress and, in fact, I guess it's a little ahead of schedule.

Yet when we look at the commentary, there doesn't seem to be any discussion about improved profitability.

Are you just being a little conservative or am I missing something?

No, look, I think we are in the seventh year of a 12-year program, Howard, and I think we're making great progress, but, I -- as I look at the milestones that we see on the F-35 program and what could kind of trigger an unexpected profit improvement, I don't see a lot of those happening in 2008, to be honest with you.

I think we need to get some more of those behind us before I really am comfortable with increasing that outlook there.

I don't know if that's being conservative or not, Howard, but that's where we are.

You may have misheard me, I said the F-22 and then you made the F-35 comment.

You said F-22 but I thought you were talking F-35.

I read that into your line.

You're talking F-22?

Let me go back to F-22.

I'm sorry.

F-22 had an outstanding quarter for the year.

Just -- if you recall, we had a number of adjustments at the end of the last year, all throughout the year into 2007, as we retired a number of risk elements there.

Last year we had the benefits of pickups associated with those adjustments that absolute profit level is continuing into 2008, and as we go forward into 2008, I -- if we continue on the trend we are now, with continued success with the GOV type aircraft and kind of manufacturing improvements that we are seeing, the levels of efficiencies we may see something there but I'm not ready to commit to it at this point.

That's fair.

Just sort of two things related to cash.

One is, it's pretty clear that it makes sense to force conversion of the -- of that $1 billion.

Does that sort of -- how should I say -- are you sort of thinking about going forward to lower just absolute level of debt than you have had in the past to just allow you to buy back more stock, when you think about capital structure?

A lower level of debt?

I think -- I think that's a capital structure decision we are going to make at the time, but we are comfortable with our cash flow structure as we speak.

We will make the decision on the convertible, as the time approaches and, again, I made the comment earlier, we are talking about the debt.

I like the flexibility we have right now.

That's a decision we will make down the road and we will do that when it's appropriate.

And then you started the year with only $100 million in CapEx and I think you are targeting closer to $900 million or so and I know the first quarter is always slow.

Right.

Is there anything there that--?

No.

In fact, first quarter was actually higher than the previous year's quarter.

We're actually looking at about $1 billion of CapEx and it doesn't surprise me whatsoever that we only spent $100 million in the first quarter.

Thank you very much.

You bet.

Thanks, Howard.

(OPERATOR INSTRUCTIONS) We'll go next to Heidi Wood with Morgan Stanley.

Yes.

Thanks a lot.

Bruce, I have to go back to space just to dot the I's a little bit and make sure I understood it.

If I assume a $15 million profit on ULA and normalize to that commercial satellite launch, the commercial satellite about $125 million, it looks like structurally you are at about the 12.3% margins that you reported on an ongoing basis.

The question I don't think I understand yet is how much of that terminated commercial launch contract and is the Orion ramp up diluted?

Is that part of the reason why it seems like you are arguing that 1Q margins are not sustainable going forward?

I apologize if I was arguing, Heidi.

I didn't mean to.

No.

No.

When I look at space, I think what I tried to key up was that of the guidance increase we had at the end of the year, probably a third of that comes from the satellite adjustment that we talked about, the termination.

The other two thirds is ULA.

That will continue going forward.

We are seeing growth in the CEV Orion program.

That's helping to minimize the increases going forward and we will have that one-time BlueBird in the first quarter there.

So I think actually you've got it pretty accurate.

And then you have only got one commercial satellite left, though, in terms of zero margin, there's only another $125 million of head wind.

So if you can get performance, then arguably you could do better than what you are presently guiding for the rest of the year in space.

Is that fair?

I think that's probably fair.

All right.

Another question, can you give us some sense of what employee productivity measures that you monitor and what matters?

When I look at the sales per employee trend, it's obviously been on the rise the last several years.

You know from '01 to '07, but in 1Q '08, sales per employee turned down.

Does that matter?

Is that something we on the outside should be watching.

I've got to be honest with you, Heidi when I take a look at employee productivity, most of my metrics are internal to the Company because I think the sales are going to take care of themselves when we get out of the dip in aeronautics.

Internal measures I look at, when we look at all of these, they are different from the manufacturing part of the business versus the technology side of the business, but we look at things like productivity measures in terms of what level of lines of code are we programming in for our software, what levels of defects are we seeing in our software per X amount of lines of code.

On the manufacturing side, in the aircraft business, it's how many hours per unit?

What sorts of efficiency levels?

What sorts of realization rates are we experiencing there?

There's nothing that I see in any of those metrics that I gives me any cause for concern.

Great.

One last question, can you -- you've obviously been in the news quite a bit on some of the problem programs.

Can you give us an update on some of the programs that are sort of broaching or currently in there?

You touched on BH-71, JASSM, SBIRS.

Any progress updates on those?

Let me see here, BH-71, JASSM, SBIRS.

Let me start with JASSM.

That's an interesting program to begin with because all [nunmcurries] are not created equal in the first place.

I like to characterize nunmcurries between performance, nunmcurries and administrative nunmcurries.

And I would characterize the JASSM nunmcurries as administrative nunmcurries, it's more a technicality than anything else.

It was surely not performance on our part.

So I think that program is likely to get recertified in the not too distant future and we are likely to get a new award for lot 7 missiles in the not too different future.

So I'm very optimistic about the outcome of JASSM.

The BH-71.

We are currently working the solution set there.

We are still working the increment one of the solution set.

There is going to be a decision.

We need some funding.

The FY '08 funding was a little short this year than what we would have liked to have done.

That caused a slip in the IOC date for those aircraft, the initial operating capability date of those aircraft to 2010.

There's a decision that's going to be made as far as fully funding the increment one solutions in the later part of that.

I would look for that in the FY '09 budget.

And then there's a decision later on for the 23 production helicopters for the BH-71 as far as how much of increment two -- or I should say how large of increment two are we going to do on those 23 aircraft.

And that's a decision that's yet to be determined in my mind.

That's likely to get pushed into early next year as well.

Let's see, SBIRS, I think SBIRS, the last data I saw on that, we are making progress on the flight service station software.

That was the issue that was raised there and I think we are making good progress there to rectify that situation.

As I look at all of those programs, kind of all of the high visibility programs that you talked about.

I think the trend is going out for each and every one of them, so I'm very pleased with where we are headed.

Great, Bruce.

Thanks very much.

Thank you.

Thank you.

And we'll take a follow-up from George Shapiro with Citi.

Yes, Bruce, I was just looking at IS&GS after the 17% growth in the first quarter.

If you are only going to get to the high end of your sales guidance for the year, the growth is really going to slow to around maybe 9% for the yet of the year.

Is there something that causes that to slow or was it just that the first quarter was that much quicker or you are just being conservative?

Well, again, I think I tried to tee up 17% in first quarter.

I said that although it's hard to figure out how much of that impact is due to the extra week, there was the extra week.

Of all the business areas within the corporation, IS&GS is probably the one most affected by that.

So that had lump sum, somewhat impact there.

As I look forward the next three quarters, I think we are going to see fairly consistent growth and still getting to about the double digit levels we talked about in the guidance.

I don't think there's a cause for concern there.

Okay.

Thanks.

Thank you, George.

And we'll take a follow-up from Joe Nadol with JPMorgan.

Bruce, just back to global services.

It sounds like the margins might have been down a couple hundred basis points there.

I am wondering where was that PA&E, was it somewhere else, and what was going on there?

I don't see the margins going down that dramatically in global services.

We did have some high growth there.

It wasn't as high from a margin perspective as information systems or mission solutions but, no, I don't think there's a PAE issue there at all.

What was the driver?

Because, you said that sales growth was better than 17%, but operating profit remains unchanged so -- what drove that?

Again, a lot of these contracts are, -- not to get into the accounting is specifics, but that's service contract accounting.

Depending on when the receipts come in, the quarterly numbers bounce around, but overall, I don't see a change that's worthy of discussing.

Okay.

Thanks.

Thank you.

And there are no further questions at this time.

I would like to turn the call over for any additional or closing remarks.

Okay.

Okay, thank you.

As we conclude, I would like to thank all of you for your continued interest in Lockheed Martin and for joining the call today.

Our results demonstrate the progress we are achieving across the Corporation in our portfolio of programs.

Our production activities and quality processes are world class, and our development activities continue to provide innovative solutions as we strive for flawless execution on customer requirements.

We remain focused on our strategy to create a balanced portfolio that will enable us to continue to grow revenues, earnings and margins while providing strong cash generation.

We believe achievement of this strategy will continue to deliver superior results and value to our customers and shareholders.

Thank you again for your support and we look forward to speaking with you in our next quarterly call.

That concludes this call.

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

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