洛克希德·馬丁 (LMT) 2008 Q2 法說會逐字稿

Good day, everyone.

Welcome to the Lockheed Martin Corporation second quarter 2008 earnings conference call.

Today's call is being recorded.

During the question and answer session we ask that you limit yourself to one question and one follow-up question so that everyone will have the opportunity to ask a question.

At this time for opening remarks and introductions I'd like to turn the call over to Mr.

Jerry Kircher.

Please go ahead, sir.

Thank you, and good morning, everyone.

I'd like to welcome you to our second 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 which supplement our comments today, and with that I'd like to turn the call over to Bruce.

Thanks, Jerry.

Good morning, everyone.

Welcome to the call.

Consistent with our expectations, we had a strong second quarter.

Our results reflect the operational, strategic, and financial progress we are making across the Corporation.

This progress is enabling us to build upon our continuing momentum in delivering values to shareholders and customers.

As our press release outlined, second quarter results across the Corporation were strong, highlighted by an 18% increase in reported earnings per share.

We also achieved a 50 basis point increase in segment operating margins that helped generate our earnings growth.

This margin expansion is a result of improved performance and successful risk reduction activities across multiple programs.

Electronic systems continued to generate operating margin in excess of 13% and our other three business segments all expanded margins this quarter.

In the area of cash flows we generated $1.5 billion in cash from operations in the quarter, bringing our year-to-date total to $2.4 billion.

Our cash performance has us well positioned to achieve full year cash goals and generate free cash in excess of the earnings for the eleventh consecutive year.

This long term performance is a direct demonstration of our strong focus on management of working capital and cash optimization.

With this established success in cash generation we remain focused on optimal utilization of our cash to enhance shareholder value.

As part of that focus, we are continuing to implement our long stated practice of making opportunistic share purchases.

During the second quarter, we repurchased over 7.3 million shares of our stock for $770 million.

This activity brings our year-to-date share repurchases to 18.6 million shares for $2 billion.

Our repurchase actions have enabled us to continue to reduce our weighted average diluted share count to approximately 410 million shares for the second quarter, the lowest quarterly average diluted share count level since the third quarter of 2000.

In addition to share repurchases, we also pay a second quarter dividend to shareholders of $168 million.

With our year-to-date dividend payments and share repurchases we have already exceeded our committment to return at least half of our annual free cash flow to shareholders for the sixth consecutive year.

Based on our solid first half performance, we are increasing our 2008 full year financial guidance, reflecting an improved outlook for additional growth in sales, earnings, cash flow, and return on invested capital.

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

These strong financial results and improved guidance are direct reflections of our focus on program execution.

Delivery of critical products and services to our customers consistent with their needs and expectations is a foundational goal of all of our 140,000 employees.

Each of our business areas successfully made noteworthy accomplishments this quarter in support of their customers requirements.

In aeronautics on our joint strike fighter program, the F-35B, lightning 2, short take off vertical landing aircraft conducted its inaugural flight with successful accomplishment of all flight objectives.

The STOBL aircraft returned Code 1 without any flight anomalies and was immediately ready to refly.

The superb performance of this inaugural flight is a testament to the quality of the aircraft being produced by our worldwide design and manufacturing team.

The F-35B flight marks the first flight of an aircraft with a combination of supersonic speed, stealth, and STOVL capability and will provide unmatched capabilities for the U.S.

Marine Corps and UK Royal Air Force and Royal Navy.

Aeronautics also continues their outstanding quality and manufacturing performance across other aircraft production lines with the F-22, F-16 and C-130J, programs delivering increasing numbers of zero defect aircraft to customers this quarter.

This outstanding performance is a direct validation of our world class factory efficiency and ongoing pursuit of flawless program execution as we strive to provide customers the highest quality products at the best value.

Turning to electronic systems, our team continues to demonstrate their technological expertise in the increasingly important area os of missle defense.

The terminal high altitude area defense weapon system, or THAAD successfully detected, tracked, and intercepted a separating target.

This challenging test was a strong verification of the target tracking and discriminational capability of the THAAD system.

In other missle defense activities, the Aegis ballistic missle defense weapons system successfully intercepted a short range unitary ballistic missle target from the terminal phase of its trajectory further validating the expanding capabilities of the Aegis system.

Recent test firings of offensive missiles by international countries demonstrate the growing risk of missle proliferation around the world and are creating a significant increase and interest in missile defense systems.

This interest is resulting in international customers examining our proven systems for potential deployment to protect their national interests.

Space systems continued to achieve significant accomplishments both on earth and beyond.

The Phoenix Marslander spacecraft successfully landed on Mars and began its science mission research regarding environment suitable for life and the history of water on the planet.

The experiments completed to date have confirmed the existence of frozen water and the spacecraft continues to conduct other scientific analysis.

Closer to home but also in space the first telecommunications satellite for the nation of Vietnam was successfully launched this quarter.

This satellite enables state-of-the-art communications to all quarters of the country and expands the international use of our proven A2100 satellite platform.

Finally, the Trident 2, D-5 fleet ballistic missle for the U.S.

Navy achieved its 122nd consecutive successful test launch, a record extending back to 1989.

Turning to IS&GS, several key milestones were achieved this quarter, but this portion of our portfolio continues to build momentum.

Our support of the national air traffic system continued with delivery of the newest versions of the end route automation modernization software to five government sites.

This software is used to manage the nations air traffic and build upon our legacy systems upon which 60% of the world's air traffic flies.

IS&GS also achieved initial operating capability of a key data storage module for the national archives and records administration.

This module will be used by the executive office to electronically process and store key data in the national archives.

This major initiative enables the move to government wide electronic records preservation.

The system will capture electronic information regardless of format, save it permanently and make it accessible on future generations of hardware and software.

This is a direct application of our diverse information technologies and systems integration capabilities.

In addition to program execution, another essential component in our drive for expansion of shareholder value is our success in winning new business.

Significant new business awards were achieved this quarter and I will highlight a few of the most noteworthy new contract wins.

In space systems, new awards include their successful receipt of a $1.4 billion contract from the U.

Air Force to build the next generation global positioning system called GPS3.

This award builds upon our demonstrated legacy of success on prior GPS systems.

This program will improve position, navigation, and timing services for war fighters and civilian users worldwide, and provide advanced anti jam capabilities, superior system security, accuracy and reliability.

We are honored to have been selected to construct these critical national assets with deliveries, scheduled over the next decade.

Aeronautics new business wins continued for both domestic and international customers.

From the joint strike fighter program, we received authorization of $2.2 billion for six conventional take off and landing aircraft for the U.S.

Air Force under the low rate initial production LOT 2 contract.

Based on the recent successful STOVL flight, we expect a near term award under LRIP-2 for six STOVL aircraft for the U.S.

Marine Corps.

Additionally over $200 million were received for long lead funding for 19 additional F-35 aircraft under LRIP-3.

These awards enable us to move forward and continue production ramp up on the F-35 program.

Aeronautics also received an award from the U.S.

Air Force for six C-130J aircraft for special operation forces.

This award demonstrates the strong user community support and validation of the proven capabilities of this aircraft and begins the critical recapitalization of the Air Forces and aging fleet of Sea Star and Special Operation forces C-130s.

The high operational tempo and aging of existing airlift assets make it increasingly important to expand our national airlift fleet.

The FY '08 GWAT supplemental budget recently approved $2.9 billion to purchase up to 34 new C-130J aircraft to help address this critical airlift shortage.

Internationally, aeronautics successfully secured an award from Morocco for the purchase of 24 F-16 aircraft.

This marks the first sale of F-16 aircraft to Morocco and expands the global footprint of this multi-row fighter to 25 countries around the world.

This award is expected to enable extension of F-16 production line to at least 2013 and demonstrates the continuing viability and ongoing new business opportunities for this aircraft.

The F-16 program continues to generate new order interest from current and new international customers as they seek proven, cost effective solutions to their fighter aircraft requirements.

The electronic systems segment, expanded their international presence with the award of a contract to provide turnkey military flight training to the UK Royal Air Force, Navy and Army Air Corps.

Turnkey flight training to the UK Royal Air Force, Navy, and Army Air Corps.

This 25-year effort will be performed in our joint venture between Lockheed Martin and BT Group and has a potential order value in excess of $1 billion.

Electronic systems also received a $107 million contract from the US Air Force and Australian Air Force for a seventh production lot at the JASSM cruise missile.

This award serves as validation of the recertification of the program after recent successful flight tests proved the reliability and capability of the missile across a wide variety of targets.

The JASSM has potential production quantities in excess of 4,000 missiles and should provide significant long-term sales opportunities for US and international defense customers.

Finally, our IS&GS segment continue to develop momentum in key areas.

In early July, we received an award worth $1.2 billion for the integrated hiring operations and personnel program from the Transportation Securities Administration.

The work to be performed will include recruitment, hiring, payroll, and benefit administration for TSAs personnel previously performed by three separate companies.

Our effort will include streamlining and integrating these previously separate activities.

This builds upon our prior experience in providing integrated human resource administration systems to other government agencies.

Also in the quarter the protest of the FBIs next-generation identification system contract was resolved and work resumed on the program.

This 10-year, $1 billion contract had been awarded in the first quarter of this year.

This resumption of work enabled us to move forward in providing state-of-the-art, multimodal biometrics systems needed by local, state, and federal authorities.

Finally, IS&GS was awarded a contract to support the US Navy's joint medical information system.

This system will provide key information assurance capabilities including network operations, security, and identity management.

These awards demonstrate how IS&GS continues to broaden its customer footprint by offering cost-effective and innovative solutions.

These wins across all of our business segments show the broad customer support of our products and have us well positioned and on track for our increased revenue growth in 2009 and beyond.

Beyond our success in new business awards this quarter, we also continue to execute our strategy of making acquisitions that provide us with new technology, capabilities, or customer access.

During the second quarter we completed the acquisition of Eagle Group International.

Eagle is a proven provider of integrated logistics, information technology, health care services, and base operations support to the US Department of Defense.

Their work is primarily in support of the US Army activities here in the United States and will be managed by our IS&GS segments.

These highlights demonstrate our strong program and operational execution, solid win rate, and financial performance.

These results and the positive business outlook have us solidly positioned to continue our momentum as we deliver increased value to shareholder and customers.

Finally, we are proud to be recognized by Aviation Week and Space Technology magazine as the best performing large cap aerospace company in their recently released top performing company study.

Our high scores in all four measurement categories of financial health, return on invested capital, earnings momentum, and asset management underscore our daily focus and commitment to provide value to shareholder is a direct reflection of our talented work force.

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

If you would, please, open up the lines.

Thank you, sir.

Ladies and gentlemen, our question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS) Our first question is from George Shapiro from Citi.

Good morning, Bruce.

Good morning, George.

If you could go shoo a little bit in the arrow business.

Obviously, F-16 sales were down based on the deliveries and will probably go down some more.

But where did JSFs stand and F-22, and C-130 was up despite the same amount of deliveries.

Could you just provide a little more color there.

And then also the performance issue that was mentioned on the C-5.

Sure.

You're right, George, as I look at the aeronautics business area.

Let's start with the F-16 program first.

We were down quarter over quarter compared to 2007, Five aircraft -- I think I keyed up previous calls that we had 41 deliveries last year, and we were moving to around 28 this year.

Five of that reduction was in the first quarter, and the other eight are pretty evenly split between the third and fourth quarter.

So that -- that really drove the reduction there.

F-35 was actually fairly close, fairly flat to where we are.

I don't see a lot of change there.

F-22, a slight downer but not much change there.

Pretty flat as well.

We actually had some good growth in our other sustainment business, which also contributed to the margin growth there.

And obviously the performance on our Legacy production programs, C-130J, F-16, F-22 was strong and significant, and that led to the improvement in the margins there on those three programs.

The C-5 issue that you brought up, we did talk about that.

I would characterize this as dealing with an early transition from a development program to a production program.

I should add that we've had a multi-year, very successful development program, C-5 program for both the RERP, this is the replacement of the engines and reliable enhancement part of the program as well as the avionics modernization program.

Those -- those are concluding very well.

We had three aircraft in the test program.

They're all coming out well.

This issue was on the very first lot.

The production and contract.

There's only one aircraft in this lot.

And I -- again, I would characterize this as an early production issues.

Primarily associated with the amount of timing and expenditures on our tooling required to perform the contract.

As well as just achieving our basic learning curve expectations on the first lot of the production bill cycle.

At the end of the day, this is -- production programs are what we do well.

Especially in the aeronautics business.

I think we're going to get this right coming out of here.

What -- as follow-up, Bruce, what -- why wouldn't you sit there and -- if you had to take issue with only one plane in lot one on the C-5, why wouldn't you spread that over a bigger lot -- other lots?

We're only under contract for the first lot right now, George.

That's per contract accounting.

That's the way we reflect it in accordance with accounting rigs.

Okay, thanks very much.

Next we go to Robert Spingarn with Credit Suisse .

Good morning, Bruce.

Just on the F-22, sort of follow-up to that.

What -- what point is the commitment date on future aircraft beyond the contract?

Aren't you nearing that point?

Let me talk just broader terms first.

We're still in the middle of a multi-year contract.

And that multi-year contract runs with deliveries through the end of 2011.

And think of it taking about three years from contract award to delivery of aircraft.

So toward the end of 2008 is the time frame, end of this year is the time frame when we'll need to have a decision as far as whether or not we're going to get advanced time frame as far as when we'll need to have a decision as far as whether or not we're going to get advanced by money or well refunds to procure lots beyond the current multi-year time frame.

So something like October?

We actually go a little later than that.

Yes, think of it as within fiscal year '09 budget time frame.

Okay.

Then just on space, looks like the second half of the year we have a sequential sales decline from the first half.

Kind of flattish I guess with last year.

Can you talk a little about that?

Yes.

It's -- space was up to your point in the first half of the year.

We actually had some -- an additional satellite launches in the first half of the year.

We actually had zero deliverable items in the second half of the year of '08, whereas we had three in the second half of 2007.

So that's -- I think everything else is tracking pretty much according to plan.

But for those delivery events, two satellites and the third quarter and one in the fourth quarter of last year.

Zero in the third quarter of this year and zero in the fourth quarter this year.

Thanks very much for the help, Bruce.

You bet, Rob.

We go next to Troy Lahr with Stifel Nicolaus.

Thanks.

Just another follow-up on the last space question there.

How quickly is GPS 3 going to start ramping up?

Are you going to start seeing growth this year out of that program?

GPS 3 is starting off pretty well.

We're having meetings with the customers to get our strategies together and to get our plans in place, baselines in place and the like.

And get our customer buy-ins to those approaches.

I don't see huge levels of growth in 2008 associated with that bid.

But I would expect that to be more significant in 2009 and beyond.

Okay.

And then -- why the margin falloff in the back half at space also?

I wasn't quite following that.

Is that just kind of volumes, or is it -- is that the mix ramping up on GPS 3 some lower margin contracts?

No.

We had one item in the first quarter where we had a contract, we had a successful negotiation on a terminating contract.

We don't expect that to replicate in the second half.

Pretty much everything else is fairly constant.

Maybe a little bit of bouncing around with -- our -- our cost plus contracts performance there.

But I don't see that as any kind of issue from first quarter to second quarter or from first half to second half there.

I should add also, Troy, we also had in the first half, we did have the one commercial satellite which had quite a bit of improvement over the commercial satellite in the second quarter of last year.

Quarter over quarter.

Okay.

But at space, I mean, should we be thinking Orion CEV is flat now or are you still seeing growth out of that program?

We are still seeing growth out of Orion going forward.

Thanks, guys.

Thank you, Troy.

Our next question we go to David Strauss with UBS.

Good morning, Bruce.

Hi, Dave.

The growth you're seeing out of your sustainment business in aeronautics, is that C-130, F-16, what else is in there?

Are you getting any benefit from some of these performance-based logistics contracts you recently signed up?

Yes.

We're seeing pretty much broad brushed growth in our sustainment business and aeronautics.

The thing with that as we continue to -- as we field more and more F-22 units, we continue to see the F-22 sustainment business growing.

We are still seeing growth in the C-130 business.

You might recall the discussion we had earlier, first quarter I believe, about the Canadian deal where we've got a 20-year sustainment contract to keep the Canadian C-130J's flying up there.

We're also seeing, which may not be on your radar, we're also seeing growth, we've got activity, we just recently started putting additional wings on P-3 aircraft.

And we've seen some international activity there both in Norway as well as with the US Government with some of their Customs and Border Patrol aircraft.

Pretty much, again, broad-brushed support for sustainment and all it going in the right direction for us.

And your margins in the sustainment business, are they meaningfully better than the 12% average or so for aeronautics.

I always like to characterize the margin at that level as being fairly consistent with the overall margin within the business area.

Fair enough.

And your (inaudible) plan performance for the first half of the year, what is it roughly?

Well, as you might expect if you look at your own portfolio, I know I can speak for mine, it hasn't been as high as we'd like it to have been.

We're not yet on track for 8.5% asset return that we'd hoped for the year.

But it's too early to tell.

We won't make the decision as far as what the expectations are until the end of the year.

Performance has actually been a little better than the market in general but not up to the 8.5%.

Okay.

Well, congratulations for that.

Yes, thank you, Dave.

Yes.

We go next to Richard Safran with Goldman Sachs.

Good morning.

Good morning, Rich.

Just first thing, and I fully recognize, you don't give quarterly guidance.

If we take a look at 3Q, looks like you're finished delivering commercial satellites just about.

F-16s as you mentioned before are done.

And you had an extra week in 1Q which will be offset by one less week in third quarter.

My question is how much pressure or is there pressure being put on your third-quarter results?

Well, two comments, Rich.

One, I guess, you're right, we don't give quarterly guidance.

But you're pretty accurate in your assessment of what we think's coming up in the third quarter.

I'll try to give kind of a high-level view of where I see the third quarter going, and maybe a couple items thrown in there at the end, as well.

We -- we talked about F-16.

I think ultimately I was pretty clear on that.

We're going to be down some eight F-16s in the second half of the year.

Again, think of that as pretty evenly split between third and fourth quarter.

What's probably not apparent is -- we still expect to have obviously six C-130J deliveries.

But just because of the planned phasing of those aircraft deliveries, we expect to see more in the fourth quarter than the third quarter.

And I think that's going to have some headwind effect on the third quarter and some lift in our fourth quarter.

You also mentioned the fact that we have zero commercial SATS in the third quarter, whereas we had two of those in the same timeframe of 2007.

You mentioned the one less week in 2007.

One other item I'll mention is there have been electronic systems.

We actually did have a higher level of deliveries on our kind of delivery recorded sales for things like the MPA aircraft for the US Coast Guard PAC-3 missiles, fire control systems, et cetera.

So that will be a little lower in the second half.

And just overarching, I would look at -- at third quarter as probably being closer -- probably being lower than the 2007 level.

I'm thinking somewhere in the 10.5, 10.6 level.

On the flip side maybe of that discussion, I would like to tee up I guess, that there's the potential as we see it today, we look at the manifest out there, to have two unusual events in the second half of the year.

These are associated with the proton launches, probably one in the third quarter, one in the fourth quarter, as we sit here today.

And this is not premised in our numbers because they are unusual events.

But these are the last two events that allow us to recognize the deferred gains that we talked about before, we recognized we had a little bit of that deferred gain in the first quarter.

That would retire that risk and recognize that deferred gain probably equally split between third and fourth quarter.

Thanks.

And just last thing is -- and just simply so you raised your ROIC forecast by 1% to 20%.

Right.

I just wanted to know on the invested -- if there was anything there that was benefiting on the invested capital side?

Yes.

Couple of things.

Obviously the numerator went up because we increased profit on the upside.

Right.

On the denominator side we increased cash flow, the $100 million.

And we actually have a little pull to the left in the timing of our cash flow.

So we're seeing a little bit lower invested capital over the timeframe there.

And that's the -- that's the biggest driver.

Thanks a lot.

All right.

Thank you.

We go next to Joe Nadol with JPMorgan.

Thanks, Bruce.

Good morning.

Hi, Joe, how are you?

Good.

My first question is just on the F-35.

I heard your comments in your introductory remarks.

But -- a lot of conversations, in the press and such this quarter about schedule, timing of the I guess the next 17 development aircraft.

And international partner competitions.

I was just wondering I guess on those two items, the international competitions and the -- the development schedule of those next bunch of aircraft if you could kind of give your latest use?

Sure.

Maybe I'll start with just kind of an overarching view of the F-35 program in general.

I think, hopefully you're aware, I'm sure you are, that we did fly the Stoval earlier in the second quarter essentially on schedule from a schedule we put together 18 months, two years ago.

So that was gratifying to us.

We've now got both the AA-1 version as we call it, and the Stoval aircraft flying.

The Stoval aircraft has had multiple flights since that initial flight.

Both are progressing well.

And I think we're very satisfied with where we're performing on that contract.

You talked about the remaining 17 aircraft in the development contract.

The build cycle.

I think we're progressing well there, as well.

I think the next big milestone you'll see on the program from a delivery perspective will be the -- the rollout of the first aircraft for the -- the carrier variant, aircraft for the US Navy.

I believe that's in the -- the latter part of the first quarter or early second quarter of next year.

And then we start rolling out aircraft pretty regularly thereafter.

That timeframe.

So -- I think we're progressing well.

I don't see anything that -- that causes me alarm there.

As far as the international partner status and competitor aircraft evaluations, I think you can fully understand when you're going to spend the kind of money that these countries are in the percentage of their defense budgets on buy up aircraft as large as a plant or division, they want to make sure they're getting the best deal and evaluated all alternatives and oftentimes that's literally the laws of that country to have these sorts of competitions amongst multiple contractors.

So we're not surprised by that and we're not discouraged by that at all.

We think the aircraft will fare very well in those competitions.

We are having ongoing discussions, I think there was some -- at one of the briefings.

I know Tom Burbage talked about some of the consortium buy discussions we're having with international partners.

I think we're getting good momentum on that discussion front right now.

And a lot of talk amongst those eight partners who will allow us to build or to develop a more predictable build sequence and build schedule that will add some stability to the program as we go forward.

I'm particularly encouraged by some of the early indications from some of the noninvestment partners, the (inaudible), in particular Israel, has come forward with an LOR for 25 aircraft and an option for 50 aircraft.

So I think that's -- that's indication both of the preference for the aircraft and the confidence that the international community is putting in our place to produce these aircraft on a timely basis.

Okay.

Thanks for that.

As a second question, you reeled off a whole bunch of big wins that you got in the second quarter.

Your backlog, though, was down in the first six months.

And it was particularly down I guess in the electronics systems.

I'm just wondering if you could kind of put that into context?

I know obviously backlog is lumpy and you only show unfunded or total backlog as opposed to just funded.

Any color you can give on electronics in particular would be helpful.

Yes.

Let me try to give color on all of the backlog and beyond electronics.

You're right.

Electronics was down on the first half basis.

I've looked at the -- at the profile of the electronics orders, and as is typically the case in electronics systems, they're very, very heavily loaded.

Actually not just in the second half, but actually in the fourth quarter of the year.

Now an awful lot of those are, I'll say sole source follow-on production contracts like, for instance, the -- the next fiscal year award of PAC-3 missiles for instance is one example.

I don't know that I'm surprised -- I'm not surprised by where we sit today.

Backlogwise and electronics systems.

I think we've won the competitions that were scheduled to occur at a clip that we're very satisfied with in terms of our win rate.

And we've won the strategic wins that we've talked about.

And I just -- I did talk about in my prepared remarks such as the GPS 3, AMF JTRS and other contracts such as that.

As I look forward, Joe, I expect third quarter as I look at our orders profile will probably actually show a drop, a further drop in our backlog, and I expect to recover in the fourth quarter, and I still do expect to actually grow backlog for the year, year over year, versus 2007.

Okay.

That's helpful.

Thanks, Bruce.

You bet, Tim.

Go next to Myles Walton with Oppenheimer.

Thank, good morning.

Hi, Myles.

Bruce, I was hoping you could offer some information on '09.

The last few years on the second-quarter call, you've been kind enough to provide some -- some teasers on how the next year is shaping up.

So maybe if you're able to do that on top-line margin opportunity and EPS growth?

I know it's early but conceptually some of your early thoughts there would be helpful.

Yes.

Well -- as you'll hear, in my closing statement, we're obviously going to provide guidance in the third quarter for 2009.

But as I sit here today, looking at 2009, I think, a couple of things I'll comment on.

One is, we've looked at aeronautics and we teed up for a long time the drop in the F-16 sales in 2008.

And the fact that we believe that will be offset by primarily F-35 growth going forward.

We still believe that to be the case.

We still believe aeronautics will come back in 2009 higher than 2008 and probably comparable or higher than what we saw in 2007.

I think the other three business areas we're still hopeful and strongly believe that the IS&GS business area is our strongest growing business.

I still think that's probably a double digit, year-over-year revenue-growing business.

Electronic systems is probably steady Eddie for us.

Always kind of in the mid-single digits.

That's probably what I see in 2009.

I think I teed up in the past that space is likely to be flat for a couple of years at least, including 2009.

So that's -- that's topside, Myles.

Then as far as -- as far as bottom line, I still think there's margin improvement out there amongst our business areas.

I think it's becoming more difficult for us, but we've not given up on that, and I still think there's opportunity to exceed in that area.

Okay.

That's really helpful.

So the only other one I had for you was on clarification of the PT&E.

I guess charge or ESA adjustment or performance claim that you -- you mentioned in the press release?

I think that was -- it's PTE -- are we sure you're talking PTE?

It says declines in operating profits at PT&E due to mainly performance in the second quarter.

Yes.

We've had very strong growth in our PTE business quarter over quarter, very strong top-level growth.

Top-line growth.

And margins are down year over year within our PAE group.

Think of that as -- think of that as probably down about 100 basis point or so.

This is a -- PAE is a -- I'm sorry, you said PTE and I'm talking PAE to you Myles.

Yes, that's okay.

Within electronics systems, there was a commentary in the press release regarding platform training and energy.

Yes.

My apologies.

I've giving you a different explanation than you asked for.

The platform integration piece of the business, that was what's in the press release.

Think of this, this was an international electronic warfare contract.

And this was a contract that has a very, very complicated environment that it operates in.

And an incredibly set of different requirements.

Both we and our subs for that matter have not performed as well as we would have liked and we did have some issues there.

This is a single contract.

Their is no follow-on business, on this contract we simply have not performed very well.

We think we have this effort understood and we think we have the problems behind us at this point.

Okay.

Thanks.

Thank you.

Sorry for the distraction there.

No, don't worry.

We go next to Robert Stallard with Maquarie.

Good morning.

Bruce, first of all on the C-130J, we talked last week about how the prospects of that are looking good and you intend to ramp up production.

How do you think that is going to phase in as we move out into 2009 and 2010?

Yes.

We did talk out at Farnborough, Rob.

And I know there was break in by Ross Reynolds on the program out at Farnborough, as well.

As we look at the current backlog of aircraft, the Canadian order we just recently received, some of the C-130J's, I mentioned in the prepared remarks, the G-1 aircraft for instance, we do see a ramp-up taking place on the delivery profile, the C-130 program.

I said in the past that we think of us as currently building about 12 aircraft a year.

I do believe that ramp rate will double probably by the end of the decade.

To the 24 level or even slightly higher than that.

And you can -- I won't give the -- necessarily the ramp rate between those years.

But you can imagine that it won't be a -- you know, a stair step, it will be a more leveled progression from where we are now to the doubling of rate.

And do you think as a result of this that you'll be able to realize higher margins on the program, as well?

I think that certainly sets us up for that, Rob.

And it helps from a -- an overabsorption issue if nothing else from that.

I think this -- this program is performing exceedingly well.

I'd like -- I'd like to see us continue that even with the ramp rate increase we're talking about.

And that's obviously the objective.

Great.

And secondly, electronics systems.

Your guidance suggests that margins ease off a bit in the second half.

What do you think of the factor that might cause it?

Well, I don't know that I see margins slackening off in the second half to be honest with you.

I think they're going to be fairly consistent, what we saw in the first half at the end of the day.

Okay.

That's great.

Thank you very much.

You bet.

(OPERATOR INSTRUCTIONS) We go next to Doug Harned with Sanford Bernstein.

If we go back to space for a minute, when you look at Orion, Orion being up, military satellites being down, if you take out ULA for a moment, how have margin trended there?

ULA was obviously a big contributor in margins.

Let's see, for the second quarter, first half, or all of the above?

Second quarter.

Just second quarter?

I think our Stat business has actually improved over from -- excuse me, from the second quarter of '08.

The second quarter of '07, we had some nice -- I think I mentioned earlier, some nice improvement on our commercial satellite that we launched this -- this quarter.

Compared to what we did last year.

It was actually a very good program for us.

That was the biggest driver.

And everything else I'll say on the government business, the Orion contracts and the like is fairly flat.

Profitwise, marginwise.

And then the ULA contract as you mentioned, is actually the other piece that's kicking up some margin boost in the quarter.

Okay.

And then on IS&GS, you mentioned -- you mentioned global services that you've seen some weakness in margin there.

And that's a mix issue.

Yes.

Could you comment perhaps a little bit more on that, on then the mix issue as well, you mentioned a contract restructuring in the information services area, as well.

What was the impact of that?

Let me start with the -- the PAE first.

I apologize again.

I apologize again, I started giving this response to Myles.

I'll try to give a similar response to you, Doug.

That's okay.

That was my question, so I'm glad you got started on it.

Gave a good head start here.

I think I started to say that the margins were down year over year.

I think somewhere in the neighborhood of about 100 basis points or so.

And this is really not a performance standard.

There have been no writeoffs or those sorts of things.

There has been a mix issue.

We're having extremely high growth at the top line.

But most of the contracts we see happening on PAE are what we call the IDIQ contracts, indefinite delivery, indefinite quantity contracts.

Those have a tendency, not a tendency, but those tend to be recorded from a sales recognition perspective via service contract accounting.

And that tends to create more variability between the quarters especially at the early start of those programs than in the latter parts.

I don't see that being an issue, and again, I think margins are going to improve in line with our expectations in the second half of the year, just -- I'm sorry, your second question, I've lost it?

On information services, you referred to a contract restructuring that you benefited from?

Yes.

I think we actually mentioned that in the first quarter.

I think that's probably in the -- in the press release talking about the first half of the year.

So there's nothing new there on--?

There's nothing new.

We did have a contract restructuring in the first quarter.

It was a fairly -- had much more impact in the first quarter, but it does actually benefit us in second and beyond, as well.

But I take it on margins, that's not a -- a material impact in the second quarter in terms of your margins--?

No, it's not.

Okay.

Great.

Thank you.

Thank you, Doug.

We go next to Cai von Rumohr with Cowen and Company.

Yes.

You performed very well in the aeronautical sector with sustainment up, given that I guess sustainment is going to continue to rise and the F-16 down a little.

But going forward looks about the same.

What's the chance that the margin in the second half there could be close to where you were in the second quarter?

Close to where we were in the second quarter you said?

Right.

Or at least, your guidance for the year just on paper looks like it has some opportunity.

Yes.

As I look forward, Cai, the big drivers that are going to make margin improvements to the second half are the same things we've been talking about for the last 18 month or so.

And that's the big three production programs.

The F-16, F-22, and the C-130J.

I will tell you those programs are performing superbly.

Collectively and individually.

And assuming that we continue the kind of improvement going forward in the second half of the year, I think we have opportunities to have improvements there.

I think your question of could we get to the second half margins in -- I think that's possible.

But we have to continue the kind of performance levels we've seen in the past to make that happen.

Okay.

And then, I guess on cash redeployment, you raised your op cash flow target for the year.

You had good cash flow in this quarter.

Any kind of sense in terms of priorities?

Are you seeing more in terms of -- on the M&A front, more interested in the tough market buying your stock, and how do you look at that?

Yes.

Just thinking out loud, Cai, I would think that we would see some reduced level of share repurchases in the second half.

That's obviously dependent upon what the stock does.

And we're still bullish on our stock or we wouldn't be buying at the levels we are.

And depending what happens the second half, that will determine what we do with more or less share repos.

We don't intend to have the option exercises and the east op contributions for our plan dilute the -- the share count.

So you'll see at least purchases for that level in the second half.

And again, the rest of it will probably be dependent upon what the share prices do for the rest of the year.

Relative to -- your second question, I'm sorry, Cai, was the--?

In terms of if in fact you're going to decelerate the share repurchase, even though you kind of have the debt issue.

You still have very substantial cash flow, any thoughts of greater interest in M&A?

Yes.

I think, we obviously think our work in the fourth quarter at our dividend policy and that's a decision we'll discuss with the Board at that time.

Relative to M&A, I do see as I look at the pipeline of what we've got hopefully on our horizon, I do think we're going to see more opportunities for M&As in the last six months.

It wouldn't surprise me if we do two to four kind of the smallish level of acquisitions that we've done in the past and get those closed in the second half of the year.

Great.

Thank you very much.

Yes.

We go next to Ronald Epstein with Merrill Lynch.

Hey.

Good morning, Bruce.

Hey, Ron.

Question for you with regard to the Aegis system.

There's been a lot of talk in the press and on the Hill about the faceoff between DDG-51 and DDG-1000.

If we were to see the DDG-1000 go away and see more 51s, what's the net opportunity for Lockheed?

Well, the net opportunity for -- the Aegis weapons system, which is kind of the backbone of the DDG destroyer, first off it's performed superbly over the past few years.

And it's grown.

Its capabilities have grown immensely from kind of an anti-aircraft missile tracking system to where it's now very effective as is evidenced by the last two launches we've had with ballistic missile defense.

I think the weapons system has grown capabilitywise.

We have also been able to shrink its footprint to have it to be usable starting with cruisers down to destroyers, now to frigates, including on the international marketplace.

So it's a very flexible, very capable system first off.

Relative to our possibilities going forward, we were looking at doing Aegis sorts of retrofit is probably not the right word, but enhancements on the existing fleet of Aegis systems to begin with.

This would be over and above that obviously.

My reaction I guess is the Navy like every other service has its own set of budget pressures.

I'm sure that's why they're exploring this option.

And quite honestly, we stand ready to support the Navy in its decision.

Okay.

Great.

And then -- maybe I can follow-on with another question.

Could you just give us some more color on maybe what your laundry list of upcoming programs would be, and what can we keep an eye out for for potential things you're competing for?

Sure.

Again, third quarter, let's just talk about -- I mentioned in the prepared remarks the (inaudible) contract.

That actually is a third-quarter event that was not reflected in the second-quarter numbers.

But it was literally -- I think we won that July 3.

But that's a big, big win.

Continuing the trend of large, significant wins within our IS&GS business area.

We have a large -- a fairly large opportunity.

I think TSAT probably three month ago or so, I'm not sure I would have thought that that had quite as much opportunity to be an award this year.

But I think the current thinking, the current planning on the part of the customer is that that's a September, possibly a later fourth quarter award.

And that's one that you ought to be watching there.

From kind of a strategic perspective, we do expect probably at the end of this summer, the joint light tactical vehicle, down select from six to three players on the tech demo phase to occur.

And we're going to watch that closely.

You ought to watch that, as well.

I'm hopeful, I think I teed up -- as it turns out I was wrong.

But I teed up in the third quarter the thought that we would get -- hopefully get a C-130 international contracts signed in the second quarter.

I think that's still a possibility in the third quarter without naming names there.

For probably, think of it up to four C-130s or so.

And then we've also got the DOE Hanford contract which is a large -- another large competition for the IS&GS business area in the third quarter.

Fourth quarter, we think there's -- the large weather satellite for NOAA.

The RGOESR satellite is upcoming.

We're hopeful although it's -- it's on the cusp of whether or not it can happen this year or not that we'll get some positive news on Romania for F-16s.

And then maybe finally, I didn't mention the third quarter, we're hopeful that there will be a down select on the JAGM the joint air-to-ground missile competition that we're pretty excited about as well.

That's a handful, that's sort of the larger ones that I see on the horizon.

Hopefully those are ones you'll track with us.

Great.

Super.

Thank you.

Thank you, Ron.

We go next to Howard Rubel with Jefferies & Company.

Returning to cash flow for a moment, Bruce.

Your customers access for the first six months are essentially flat relative to a source of I think $700 million a year ago.

How would you see the second half playing out?

I mean that clearly will make your already strong numbers look a little better.

Yes.

Thank you, Howard.

Let's just talk working capital in general.

I think we talked in the first quarter and there was some concern about the high level of accounts receivable we saw in the first quarter and the high working capital growth.

We teed up the notion that we thought we would see improvement in both AR and as a result in working capital in the second quarter.

That's exactly what happened.

As I look at the second half of the year, I actually see some growth probably to the -- $0.5 billion level or so, and of working capital account.

Most of that growth coming as a result of lower advances occurring.

So think of that as probably, it's helping about $200 million or $250 million between now and the end of the year.

That's not, -- that's pretty good precision.

One -- given the volatility in that business.

With respect to international, there are a number of foreign military sales that are outstanding.

Some that you alluded to, and some that are in the pipeline.

Do you find that the negotiations are taking a little bit longer, let's say, than some of the nonaeronautical areas, or is it -- is it just -- it's just the typical lumpy nature of the business?

I would honestly, Howard, characterize -- I worked most of my career in parts of the business that had large contents of international business.

And the one constant is the fact that it's hard to predict when international customers are going to buy their products.

I don't see this as out of the ordinary, out of the expected results.

And I'm not aware of any sort of peculiar stretching out associated with international sales.

Thank you.

And then just if we were to look at your programs, I mean, it was good that you highlighted a couple of challenges.

As you look at your entire list of programs, are there still just a handful of red ones or is there anything really changed where red has gone to yellow or green?

No.

We talk internally about kind of the headline part, the ones that catch people's eye, gets people's attention.

And they're the usual suspects, right?

I mean, got the VH-71, LCS, a number of programs like that.

The SIPRS contract.

I can honestly say as I look at those contracts and where we were at the start of the year, I think each and every one of those contracts is doing better today than it was at the start of this year.

And I'm very encouraged by the trend that we see in those, again, high profile contracts.

I teed up, or we discussed two programs in the second quarter here, the C-5 and the platform integration electronic warfare program that kind of popped up.

Those things happen.

Is it our job to minimize those and stretch those out so they don't happen as regularly as -- as we prefer they not happen.

But no, we're talking still just a handful of contracts.

And I don't see any performance issues besides that.

Thank you very much, Bruce.

Thanks, Howard.

We go next to Harry Nourse with Banc of America.

Good morning.

Hi, Harry.

Hi.

Can you just remind us when -- how far out your F-16 backlog stretches to?

Sure.

With the award of the Moroccan deal, first off I think we're standing at about 115 aircraft in backlog.

And at kind of the current build rate that takes us out somewhere toward the end of 2013, I believe.

Yes.

So it's a good long time still to go.

And again, I sit back in amazement sometimes as I look at the F-16 program.

I started my career in that program.

And that's -- that productionwise, that started in the production phase in probably 1978.

Here we are 2008, and we just sold to our 25th international partner.

The program is still as vibrant today as it was a number of years back.

I'm very excited about the opportunities and prospects going forward.

So obviously the timing of these things, that's out of your hand.

But beyond that and the Romanian thing and also the Indian, are there other things out there that we don't know about that are a possibility, as well?

Well, I think there's been a lot of news, or a lot of press rather about the potential sale for 66 F-16s in Taiwan.

That's clearly been asked for by the new Taiwanese administration.

But that's clearly a decision that needs to be vetted at the government-to-government level.

We're happy to sell the aircraft but we'll only do that, obviously if the Department of State says that's the right thing to do.

But that's 66 aircraft.

If it were to happen, it would probably happen the late part this year, sometime early next year.

Or else it's likely going to get pushed off or deferred into the next administration.

Yes.

Okay.

And on this F-22, obviously the decision is moved off into the next administration.

What level of commitment might you have to provide to keep the line going?

Commitment, you mean financial commitment?

Yes.

Well, we've not committed to do anything financially to keep the line going, quite honestly.

Yes.

Would you -- in the absence of orders?

I tell you what, we're not going to make white tail F-22s.

I can tell you that much.

And if we can figure out a way to minimize the build sequence or the build timing, the schedule, how long it takes to build an F-22, or if there's some low dollar suppliers that would build us some timeframe there, we might look at that.

But we're not talking anything of any size whatsoever.

Okay.

Thank you.

This is Jerry, I think we're coming up on the time.

Maybe one more question.

And then we'll wrap up.

And our final question will come from Joe Campbell with Lehman Brothers.

Actually good morning, it's Carter Copeland.

Good morning, Bruce.

Hi, Carter.

How are you?

Good.

Just piggy-backing a bit on the question on M&A and you go talk about opportunities for a couple of things in the second half.

I wondered if you might characterize some of the things you're seeing in terms of the attitudes of potential sellers.

Obviously valuations have come in a bit here.

Are you seeing expectations change given where the budget outlook stands?

And given where some of the various opportunities within the budget stand, are people more or less willing to sell, or what sort of things are you seeing in general from sellers?

Yes.

Just the overarching view.

We've had the tendency to lock at a lot of private deals here recently.

And I still think we're seeing potential opportunities in the private arena that we're excited about.

And I t think those deals we wouldn't be doing if we didn't think they were reasonable.

I don't know that we saw the huge variation swings in terms of valuation in the private market that maybe we did in some of the public market.

Particularly with some of the international money chasing some of the public deals.

So we've not seen that.

That's not the -- not the element that we were targeting in any event.

And I've not seen that.

Great.

Thanks.

You bet.

With that, Mr.

Tanner, I'll turn the conference back over to you for any closing remarks.

Okay.

Thanks for joining us on the call this morning.

I do appreciate the time.

I'd like to close by thanking you for your questions and for joining the call.

We look forward to talking to you again in October when we discuss our 2009 financial outlook and guidance.

That concludes our call.

Thank you, sir.

And again, ladies and gentlemen, this does conclude the Lockheed Martin Corporation second-quarter 2008 earnings conference call.

We do appreciate your participation.

And you may disconnect at this time.