洛克希德·馬丁 (LMT) 2008 Q4 法說會逐字稿

Good day, and welcome, everyone, to the Lockheed Martin Corporation fourth 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.

Please go ahead, sir.

Thank you, Jason, and good afternoon.

I would like to welcome everyone to our fourth quarter 2008 earnings conference call.

Joining me today on the call are Bob Stevens, our Chairman, President and Chief Executive Officer, and Bruce Tanner, our Executive Vice President and Chief Financial Officer.

Statements made in today's call that are not historical fact 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 would like to turn the call over to Bob.

Thanks, Jerry.

Good afternoon, everyone.

I hope you've all had an opportunity to read today's earnings release and our updated 2009 guidance.

As the release outlined, our internal operational performance continued at a very high level and enabled the Corporation to achieve record 2008 results in virtually every key financial metric.

Our focus, operational tempo, quality, and overall execution remain very strong.

However, the release also shows the impact external factors have had our financial outlook.

The market decline in the value of securities and the reduction in discount rates used to calculate our pension earnings, have negatively impacted our 2009 earnings per share guidance.

The subject of pension accounting and the impact on our financial results is important to you, it's important to us, and a key area of our discussion today.

And I've asked Bruce to provide some additional clarity and depth on pensions later on during the call.

In these times of unprecedented market turmoil, economic uncertainty, and falling discount rates, at a time when it seems so difficult to make almost any judgements about the future, I want to focus my comments today on the current state of our Corporation and our framework for future performance.

Ralph Heath and his aeronautics team have been performing at an exceptional level across their portfolio.

On our largest program, the F-35 Joint Strike Fighter, we continue to retire risk on the development effort.

The conventional and the short takeoff and vertical landing aircraft are progressing well through their flight test programs.

The carrier version design and development is moving forward on schedule, and integration and verification of the mission systems suite continues in parallel on our cooperative avionics test bed aircraft.

This CATBird airplane continues to yield huge risk reduction benefits, as we hoped that it would.

Production activities in Fort Worth are accelerating, with all development aircraft and now the first low rate initial production aircraft in assembly.

International partner participation remains solid and we're seeing additional interest by non-partner nations.

By all measures, this program remains solidly on track to provide fifth generation multi-role stealth fighter capability to meet the needs of domestic and international customers for decades to come.

Each of our large aircraft production programs, the C-130J, the F-16, and the F-22, secured new domestic or international awards that enabled all three to extend their production lines.

Our C-130J program won new orders from India, Qatar, and the US government, solidifying production through December 2012.

To accommodate new orders, we're working to double our current annual production rate from 12 to 24 aircraft in 2010.

With the versatility, value, improved performance of the C-130J, we've gained the confidence of our customers and we believe the future market remains bright.

The F-16 program again added to the list of international customers with a new contract from Morocco.

24 countries have now chosen the F-16 and this contract extends the production line through December 2012.

Our F-22 Raptor program continued to demonstrate extraordinary manufacturing performance in 2008.

With the fabrication of aircraft that are meeting the very highest standards of quality, delivered on schedule, and on budget.

We recently received funding for four additional aircraft under lot ten that extends the production line through February 2012.

The decision as to whether to extend the program with additional aircraft orders will be made early this year, after discussions are completed among the Department of Defense, the Congress, and the Obama Administration, and we'll keep you advised.

As I think of our Space Systems business, I'm enormously proud of Joann Maguire and her team having won both the GPS3 and GOSAR competitions.

These wins are a direct measure of our world class expertise in next generation satellite systems and extend our foundation for years to come.

We're honored to be trusted as a partner, providing these mission critical navigation and weather solutions to the United States Air Force and to NOAA.

Operationally, our Space segment also performed flawlessly on the successful Phoenix Mars Lander mission, which captured world attention.

And the extension of fleet ballistic missile successes to 125 consecutive launches.

I was particularly pleased with the sales growth rate and the new business win performance in our Information Systems and Global Services business.

Linda Gooden's IS&GS team have led the corporation in top line sales growth since the business area was formed in 2007 and they continued that leadership position in 2008.

Their win rate was exceptional on new business awards and enabled them to close the year with a record backlog that is reflective of clear and compelling value delivery to customers.

These wins resulted in an organic growth rate of 13% and solidly positions the business for strong sales growth in the future.

With program execution and performance a top focus and hallmark of the Corporation, our team continually works to redouble our efforts on any programs where we might be falling short of customer expectations for any reason.

As we entered 2008, we had some challenging programs that required additional efforts to achieve mission success.

Those programs included JASSM, the Littoral Combat Ship and the VH-71 presidential helicopter.

Great credit is due Chris Kubasik and his electronics systems team who have been working jointly and effectively with our customers by focusing on program execution.

Together, we identified and implemented actions that have significantly improved each of these programs.

I'm proud of their efforts to restore customer satisfaction.

On JASSM, we implemented reliability improvements that achieved recertification of the program and new production awards.

On the Littoral Combat Ship, we completed sea trials that demonstrated unequaled speed, maneuverability and capabilities on the first ship in this new class of naval vessel.

The maturity and performance of the ship resulted in commissioning by the United States Navy in November.

In December, I had the unique opportunity to ride aboard Freedom from the United States Naval Academy in Annapolis, Maryland, to it's berth in Norfolk, Virginia.

My conversations with the captain and crew reinforced a universal level of enthusiasm for this ship and its capabilities.

And I couldn't be prouder of the team that produced this transformational vessel.

We look forward to providing additional ships to the Navy to satisfy their 55-ship LCS requirement.

We also continue to have meaningful and ongoing discussions with international customers where expressions of interest in our ship remain high.

The VH-71 presidential helicopter program continues to make progress on Increment One, with all aircraft meeting or exceeding key performance parameters.

We await a customer decision on Increment Two and the future production of these important assets for our nation.

Our focus on program execution means meeting our commitments to customers by completing key milestones on time and on budget, while continuously improving quality and focusing on affordability.

Our improvement actions on these programs demonstrate our strong willingness and ability to work with our customers to correct shortfalls in program execution and get acquisition right.

I'm encouraged with our progress in expanding our footprint in adjacent markets and very pleased with our recent selection as one of the winning teams on the joint light tactical vehicle technology demonstration competition.

We believe our test vehicle experience, customer intimacy, and innovative designs will be tremendous differentiators in the future production competition.

In our ongoing M&A activities, we completed the acquisition of Universal Systems and Technology earlier this month and have included them in our 2009 outlook.

Uni-Tech provides interactive training and simulation solutions to DOD and international customers.

They will be managed within our Electronics Systems business and will extend our capabilities and relationships in support of growing customer demand for operational readiness and training solutions.

With our long-standing focus on expanding our international presence to new customers, 2008 achieved significant progress toward that goal.

We successfully won long-term contracts in Canada to modernize the Halifax class Navy frigates and in missile defense, we secured the first sale in the Middle East of the PAC-3 missile defense system with a contract award from the United Arab Emirates.

These diverse awards demonstrate the broad spectrum of our product offerings and our ability to bring value to new international customers.

Moving beyond our operational and new business performance, we've been working hard to attract new hires and develop our work force.

We continue to shape a high performance culture at Lockheed Martin, by focusing on our values, strengthening diversity and inclusion, insisting on high standards for ethical conduct, and reinforcing our principles of full spectrum leadership.

For the third year in a row, Lockheed Martin was ranked by Business Week Magazine as one of the top ten places to launch a career.

The sustained recognition that Lockheed Martin is a desirable and valued place to work continued to fuel the inflow of more than one million resumes in 2008 and enabled our Company to hire over 13,000 new employees.

As we work to help our customers meet their current and future challenges, it's essential that we fuel a team that consists of the very best leaders and finest professional talent.

World class personnel provide the skills that will enable us to raise the bar on operational and financial performance and build upon our momentum in delivering value to our customers and to our shareholders.

Looking into 2009, we anticipate that revenues will rebound strongly above 2008 levels, with solid growth of approximately 6%.

Segment operating profit is projected to exceed $5 billion in 2009, positioning us to achieve that goal which we established with you on last January's call.

Cash flow generation is expected to remain above $4 billion and provide opportunities for further disciplined cash deployment.

In November of 2005, we discussed with you for the first time our strategy to become the world's premier global security company.

This evolution was based on our assessment of the global security environment, which we saw as growing much more complex and dynamic.

The very sense and definition of security for us had been changing.

Certainly including traditional military preparedness, but expanding further into more effective counterterrorism and intelligence capabilities, international cooperation requiring more inter-operable systems, humanitarian, peace keeping and stability operations.

Homeland Security and critical infrastructure protection, improved service levels for civil government agencies, more affordable logistics and sustainment, and a far more expansive use of Information Technology and knowledge-based solution, while providing vastly improved levels of network and cyber security.

We were confident we had the skill, experience, and global presence to make meaningful and valued contributions across this broader horizon.

Accordingly, we've been repositioning the Company; growing our portfolio, diversifying the business, adding focus on core defense capabilities in electronics, aeronautics and space, while expanding systems integration skills into adjacent markets that allow us to add more value, for example, in surface naval vessels, rotary wing aviation and land vehicles.

You may recall in 2006, we purchased Savvy, and Pacific Architects and Engineers, companies with capabilities that now align very well with emerging expectations for Homeland Security and the application of smart power.

We committed to higher levels of international growth, which we're positioned to achieve and we made disciplined acquisitions and investments to reinforce our market presence and skills in the information sciences domain.

Why?

Because expanded access to continuous high quality situational awareness will remain essential in assuring clarity and reducing uncertainty in today's environment.

The very need for this increased situational awareness will drive the linkage of increasingly robust communication systems, advanced sensing devices and the computers that control them.

This capability will enable the meaningful sharing of information and networks will continue to grow in power and importance to accommodate these new linkages.

The criticality of network security will become even more acute, resulting in increased demand for cyber security, and encryption security solutions.

We are confident that our strategy is the world's premier global systems security Company, global security Company is the correct one.

We're committed to building upon the leadership position we've established, by setting high expectations, reinforcing our culture, building on world class talent, and making smart and disciplined investments.

Let me next turn to an outlook for the US defense spending.

The 2009 budget provided mid single-digit growth above prior year levels and solid funding for our major programs.

The current outlook for the fiscal '10 budget is projected to provide a growth of about 2% to 3% over 2009 levels.

Despite this growth rate, we continue to believe that our revenue growth will exceed the overall DOD growth rate driven by strong expansion in our F-35 program and Information Technology sales.

We expect continued growth in our core and adjacent markets for both domestic and international customers, as we broaden our portfolio and remain committed to excellence in execution.

Before turning to your questions, I would like to turn the call over now to Bruce to provide some additional detail on pension accounting, cash deployment, and capital structure.

Bruce?

Thank you, Bob.

Before I begin the discussion of pensions, I wanted to briefly reinforce Bob's earlier comment about our 2008 record financial performance.

By any measure, 2008 reflects the strongest financial performance in the Lockheed Martin history.

Our record backlog of almost $81 billion was achieved by all four business areas growing their backlog throughout the year.

In cash from operations, we generated a new all-time high of over $4.4 billion.

We expanded operating segment margins by 40 basis points to 11.6% and achieved record return on invested capital of 21.7%.

Based on our continuing operational performance, we increased the 2009 sales and operating segment profit guidance in our January outlook.

As you've seen, these operational increases were more than offset by the negative pension impact of approximately $0.70 to 2009's earnings per share guidance we provided in October.

The primary driver for the change was the large and rapid reduction in interest rates, particularly in the latter part of December, that resulted in a reduction in the indices we used to determine the discount rate to value our pension liabilities.

These indices declined between 130 and 150 basis points from our prior outlook, leading to a reduction in our discount rate from 7.5% to 6.08% (Sic-see press release).

The return in our pension assets on the other hand, finished the year much closer to the performance at the time of the call with a negative return of just under 28% for the year.

While our CAS cost estimates for 2009 were unaffected by these changes, our FAS estimates for expenses in 2009 grew by $410 million resulting in a change to our GAAP earnings per share.

I think it's important to remember that in accordance with the federal acquisition regulations that govern how we cost and are reimbursed on our contracts, it is our CAS cost estimates that drive our cash requirements and ultimate profitability, not our FAS expense.

Looking forward, future pension funding obligations will be determined by ARISA levels in accordance with the Pension Protection Act.

As you know, large defense contractors were exempted from the PPA funding requirements until the planned CAS harmonization projected to occur in either 2010 or 2011.

The effect of the CAS harmonization will be to accelerate CAS expenses and recovery to better align with the accelerated thresholds required by the PPA.

To help demonstrate the significant annual differences that occur in FAS and CAS expenses, we've included a web chart today that outlines the history of these two expense lines since the creation of Lockheed Martin in 1985, 1995 pardon me.

While the chart shows the annual variability that occurred between FAS and CAS values, it also shows that the cumulative variance is relatively insignificant.

FAS recognizes expense impacts faster than CAS.

CAS expense will lag FAS to enable the government funds to be appropriated, contracts to be negotiated, and costs to be recovered on government contracts.

This variability and the timing of FAS and CAS can result in large annual swings, that result in non-cash impact to earnings.

The same factors that led to the FAS expense increase in 2009 also contributed to the reduction in equity described in our press release.

I will point out that the equity change has no impact on our debt covenants and we continue to have less than $250 million of debt repayments required through the year 2012.

In the area of cash management, we ended 2008 with over $2 billion in cash on our balance sheet and project continued strong cash generation in 2009 of greater than $4 billion.

These strong cash levels will enable us to continue to implement our cash deployment strategy.

We remain committed to returning at least half of our annual free cash flow to shareholders.

We have over $2 billion in share repurchase authority outstanding and we continue to make opportunistic purchases to return cash to shareholders and eliminate share creep.

That concludes our prepared remarks.

We're now ready for questions.

Jason, if you would, please open the line for questions.

Yes, thank you.

(Operator Instructions).

We'll go first to Richard Safran with Goldman Sachs.

Hi, good afternoon.

Good afternoon.

First, I just have a question on pensions.

I understand your remarks, Bruce, on FAS/CAS, impacting the income statement.

But I just want to ask you regarding cash contributions.

So you prefunded in the fourth quarter, but I did want to know if you could give us any comment on what you think cash contributions are likely to be in 2009.

Yes, Rich, thanks for the question.

The prefund that we did in 2009 should -- or excuse me, in 2008, at the end of 2008, should take care of our funding requirements for all of 2009.

The only thing that could tweak that a little bit is if some of our bargained units make some changes in negotiations that would result in a requirement to fund some of those changes.

But in any event, I wouldn't see that impacting our cash guidance that we provided to you.

Okay, and if I can, I just had one additional one I wanted to ask.

If I look at your guidance, it seems to be implying flat segment operating margins.

So my question, is you seem to be -- in difference to the remarks you were making earlier, you seem to be retiring risk on a number of programs, yet you seem to be guiding to flat segment margins.

So this leads me to think there's some other pressures in 2009.

I guess some of which are coming from Space.

So if you think I'm correct, I'm just wondering also if you could tell me where you think the upside would be to margins?

Yes, thanks.

If we take a look at Space, I think the, probably the biggest change that we see going on there is just a slightly lower level of ULA, the equity earnings associated with that.

There's also some growth occurring within the Orion contract on our Space transportation, the government portion there.

That's growing at a lower level, so that's more of a mix issue than anything else.

I think the, I think Electronic Systems is fairly constant at the 13%.

Let's see, we're guiding actually Aeronautics up slightly, and IS&GS is up slightly about a tenth of a percent.

So we see opportunity.

The thing that I always like to say at the start of the year is I think we have the same sorts of planning at the start of 2009 as we had at 2008.

And as those risks and opportunities are relinquished and put to bed, that we have some upside potential there, but they have to be done throughout the year.

And we'll obviously status you that as we update you every quarter.

Okay.

Okay.

Thanks a lot.

Thank you, Rich.

And we'll go next to Troy Lahr with Stifel Nicolaus.

Thanks.

Just wondering if you can talk about some of the adjacent markets.

You've had a pretty good job of expanding into helicopters, ships, ground combat vehicles, but, Bob, is there any other adjacent markets that you're trying to target for 2009-2010?

Or do you just kind of penetrate deeper into some of these markets that you're already in?

Actually, Troy, and thanks for the question.

I think a little of both.

I think we see that there can well be some opportunities in those areas where we have had starts previously.

For example, the follow-on to the technology demonstration segment of JLTV would be a development and then production program.

So we're going to continue to evolve our design, try to put forward our best concepts that we're quite excited about and I think we could see some market expansion there.

I think we've also defined a little broader aperture for what we is adjacent.

We think there should be and really needs to be considerable opportunity for operations and maintenance and sustainment.

If we look at the overall defense budget add the areas where that budget has been growing and we frankly look at the relative approach to providing logistics and support.

It's not a very modern information-based knowledge determined process.

And we think by adding better systems architectures here and adding better knowledge, we won't push so much inventory as much as selectively pull it and provide it to where it's needed.

Think of it in terms as though we were talking about our business of reducing work in process inventory.

Well we think there are lots of opportunities to align the supply chain, reduce that in-process inventory and have a much more evolved, much more sophisticated, much more affordable and lower cost and highly predictable logistics and sustainment business and that is a huge market aperture.

So some of that logistics will follow, if you will, our programs or our tails and some of it won't, but we've made a decided effort to expand our business in that respect.

I think we define segments of the Information Technology market as adjacencies and here again, I believe that to be a fairly broad market segment in which to work.

We have not spoken the last words about the need for cyber security and I alluded to that in the earlier remarks.

I think it will become an increasingly critical aspect of every action the US government undertakes on inner agency coordination or data sharing.

It's so very clear to so many that a real strength is in the knowledge that can be gained by sharing information rather than sequestering information.

And when that happens, you have to be a trusted person who can get access to the network and assure that the networks are not overly vulnerable and we think we will grow substantially there.

I think we may have mentioned in conversation an interest in overall healthcare, but with a focus on Information Technology.

As we have broken down the costs, particularly in the escalating costs of healthcare, there's a lot of relatively low value expense, because we don't have very sophisticated Information Technology capabilities that can move information around and provide simply a better catalog of your medical history and move that to the right physician at the right time.

We think we can make a contribution there.

Lastly, and maybe a little more embryonically, we are looking at the overall energy marketplace.

Particularly with a view on how we can use our analytical skills to determine better ways to conserve energy.

And we're seeing some real interest there.

Now, for the size of our business, it's relatively small today, but we think there will be continued emphasis here and we want to participate in that aspect of the market as well.

Great, thank you.

You're welcome.

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

Good afternoon.

Good afternoon.

Bob, moving to NASA.

With Mike Griffin gone, at this point, having stepped down, do you want to see the shuttle program extended?

And as a part two to that question, how do you feel about the EELV potentially as a substitute for the ARIES launch vehicle?

Yes.

On shuttle extension, I think it depends on what time span anybody wants to apply to a future horizon.

I think that probably, Rob, everybody that I have ever spoken with recognizes that shuttle is a design from years ago that has been flown through its design light and it is very near retirement.

I don't know if that retirement is going to be in three, five, or eight years, but it's very near retirement.

So when you think of a long-term national interest and commitment to space programs, particularly human space flight, I think we're all compelled to think about what's next.

I'm sure that the incoming Administration will be very wise and careful in their evaluation of the allocation of resources.

How much of a scarce resource should be put in to sustaining the system that exists versus how much in developing the new system.

Of course I think we're making very good progress on the Orion program and I think that will certainly be taken into consideration when we think about the future long-term strategy for US and human space flight.

This notion of the use of an EELV launch vehicle instead of the ARIES launch vehicle has been evaluated very thoroughly by NASA.

And in my participation in those evaluations, the leadership of NASA had felt strongly and compellingly that the ARIES launch vehicle provided the most flexibility and the most performance and that the human rate an EELV was not an inexpensive or easy thing to do.

So we've seen that data.

We understand that data and we've supported that overall program approach to designing, building and flying out the ARIES launch vehicle.

But I must say, I applaud the incoming Administration for a desire to look broadly, to examine programs, to examine resources that are available and how to best allocate those resources and whether priorities ought to change.

And what we want to do is participate fully and openly and transparently in talking about exactly where the programs of interest to us are, how well we're doing on them, and certainly be available to answer any questions they may have.

If I may, just a clarification or really a question for Bruce on capital spending.

Our understanding is the majority of the growth of the Air Force in the fiscal '10 budget is an acceleration of R&D for F-35 plus possibly that OSD may accelerate annual production by about 27 units per year of F-35, focusing on the CTOL variant, probably starting fiscal '11.

And I wanted to ask Bruce, what kind of capitalization, or capital spending does your current plan anticipate?

Would you have to fund some of that acceleration yourself and when would that start?

Good question, Rob, and I think the short answer to your question is at the funding levels that we have planned today for the next few years of F-35 productionization or facilitization at our Fort Worth facility, it has enough capacity within the funding levels that we are talking about to meet those stepped up production levels that you're talking about.

So incrementally, I would not expect to see any substantive increase to the capital expenditures than we already have planned in our current outlook.

Okay.

Wonderful.

Thank you.

You bet.

We'll go now to Cai von Rumohr with Cowen and Company.

Yes, thank you.

Could you give us the firm backlog at year-end in units for the C-130J and the F-16?

And comment a little bit on your highest probability of international order potentials over the next year?

Yes.

You said F-16 and C-130, Cai?

Correct, yes.

F-16s at the end of the year, we had a backlog of 103 aircraft.

On the C-130J line, we had a backlog of 86 aircraft.

I'll throw out my conjecture as to what the likely candidates are for growing that and I'll let Bob fill in any details that I've missed.

But in the F-16, I think we've talked in the past, kind of near-term events there is, there's a Romanian buy potentially.

There is a Taiwanese buy, and I think of the Romanian buy is probably 12 to 24 aircraft.

Taiwan, probably more in the 66 aircraft number.

The longer objective down the road of course is the Indian competition for the MMRCA, which is 126 aircraft.

And we still believe there's an opportunity to sell some within the Middle East.

Maybe somewhat surprisingly to you, we think there's some additional sales -- a potential not for additional, but new sales to the government of Iraq.

And there's potential for additional sales to the government of Egypt.

So those are probably again in the 12 to 24 aircraft, the latter two there I would say.

Relative to C-130's, really we've got large numbers of domestic C-130's that are still yet to be placed on order with us.

Internationally, there's still a number of I'll say middle eastern countries that are looking to replace, not huge quantities, but a few here or there.

Israel is particularly one that could buy up between four and six, I believe.

Australia's probably in the fours or so of their consideration.

But the biggest opportunity that we face or that we have the opportunity to achieve in C-130 sales is actually with the US government going forward.

I'll ask Bob to add some color to that.

Well, just a sort of simple thought, Cai.

On the F-16 program, let me say it this way.

I think demand is obviously narrow, but there are 24 countries that fly the airplane.

Bruce has highlighted the specific areas.

It is possible because 24 countries and Air Forces fly the airplane.

There could be some replenishment or replacement aircraft that would unfold over the next few years.

But as I said, it's a contained universe now we think on the F-16 other than those campaigns that Bruce highlighted.

That world is very different on the C-130.

It is a very broad, global market where overall the priority on air lift is huge.

And there is no better proven tactical air lifter on the planet than the C-130J.

It's met all its performance parameters, the customers who have it are hugely pleased with its overall performance.

And I would cite, it's hard to develop these kind of airplanes and insert them in the tactical operations.

We're probably seeing part of that story unfold with the A-400M, which was intended to compete for part of the market segment that a C-130 would have.

So given the, just the high performance nature of the airplane, the great interest in assuring that each country can contribute to the air lift mission, the difficulties that other potential competitors are having in this market segment, I think we're going to see broad and even a resurgence strength in the C-130 interest.

Thank you.

One very quick follow-up on the rabbi trust, you had a large loss last year.

Could you tell us the size of the trust, the asset allocation, and whether losses and gains are tax deductible or not?

Starting off, I think the rabbi trust, if you add all the pieces into it, it is somewhere on the order of magnitude a little north of $0.5 billion.

I think in the 500, $600 million range.

Asset allocation, I would say is very similar to what we have in our defined benefit master retirement trust.

It's not a whole lot different than what we experienced there.

And as far as the, the tax deductibility, particularly for the rabbi as they occurred in 2008, those are primarily unrealized losses and at this state, they are not deductible.

Thank you.

Thank you.

And we'll go now to Doug Harned with Sanford Bernstein.

Good afternoon.

Hi, Doug.

Bob, I have a more broad question.

And you've painted a very positive picture in terms of the outlook for the Company, but if you look out the next three years, what would be the three things that you would see as the largest risk to performance?

And how are you spending your time.

How are you focusing your time these days when you consider that?

I, Doug, that is where I focus most of my time and most of my attention.

We have got to execute against the commitments that we make to our customers and we have to do that every day, on every program.

And that's a commitment that we make and we take that commitment very seriously.

There are programs that we are engaged in now that for us either have operational or strategic significance in addition to having very considerable customer significance.

Obviously the F-35 program falls into that category.

Because it is a program that will be used by three services in the United States, eight partner countries today, and we think the long-term potential of that program is, as I talked about before, exceeds the potential that we've seen in the F-16 program.

So very obviously getting that right is important.

But we also have sufficient resources in the Corporation to make sure that we get other programs right.

I personally am excited about the Littoral Combat Ship.

I think -- I have ridden on this ship.

I've stood on the deck at 47.2 knots and seen this ship do things ships don't do.

And it is a game changer strategically and tactically for the United States Navy and I believe the demand for this ship will be superior.

So our job here is to focus on execution.

I probably think in expanding the definition of execution or reemphasizing the affordability part of that.

Because very clearly what we see in the global capital markets and the desire to have sufficient stimulus and fiscal policy to reinvigorate the economy also means that there will be pressure on funding and we're very aware of that.

And yet we can't take a step to the side or back on assuring the nation's security and reinforcing the relationships we have with allies.

So that means a considerate effort on our part to think about affordability, to help our customers be strategic buyers and to deliver for them values, value where they rightfully expect that.

I think, as we watch markets unfold, we want to make sure our missile defense capabilities are right, particularly in the terminal phase, with the THAAD program, PAC3 and Aegis.

And I think we have three excellent programs there.

I think when we look at risks around the world, we see those threats proliferating faster.

You probably don't have to do more than pick up a newspaper today and read about the proliferation of those threats.

So we want to get that right.

And sort of a separate category of strategic things to think about, we need talent in this business.

And I am hugely pleased with the position that the Company has today of being a highly desired place for the best and brightest people to want to come to work.

So the confluence now of years and years of careful attention is building a leadership model that all of us aspire to, to assuring that we have a Company that is open and inclusive such that when you bring your A-game here you get playing time.

And if you do well, you can do more and you can reach personal aspirations and professional aspirations.

That's a very contagious part of a culture here and we are really surrounded and actually quite blessed to have colleagues who are very excited, very focused on the mission, understand their connectivity to our customers, and want to do a good job.

And quite candidly, they understand that doing a good job means returning value to shareholders and they intend to do that as well, Doug.

Well, and if I can quickly, one of the areas you mentioned at the outset was also cyber security.

Can you dimension how large that could be for the Company in terms of revenue, say, within the next three years?

I mean sort of what order of magnitude are we looking at?

Yes, actually it's very difficult for me to do that, but let me tell you why, because already in much of our Information Technology work, you get an element of cyber security.

It might be an intrusion detection capability or a prophylactic that allows a network to remain secure and less easy to penetrate.

Or redundancies, such that if there were a denial of service attack the network could repopulate itself; the system would fail over easily.

So we already have a, I think a significant portfolio of those capabilities.

What I think will happen is the tempo and the criticality of assuring that all new systems that go into place have these capabilities and all legacy systems are brought up to this standard is an absolute imperative.

And the reason for that is networks fail at their most vulnerable linkage and it's all the nodes and all the connectivity.

So it's a very different model than some other overall models for security have.

Networks behave the way they do.

And I think to have any assurance that we're providing sound security solutions in these networks means you've got to go in and invest yourself and build the networks out right.

And I think there will just be more business.

It's just very hard for me to segregate it out of revenue today.

Okay.

Yes, I understand.

Okay.

Thank you.

You're welcome, Doug.

We'll go next to Peter Arment with Broadpoint Am Tech.

Yes, good afternoon, Bob, Bruce, Jerry.

Congratulations again on another nice 2008.

Bob, maybe just quickly for you, Department of Defense is getting ready for the QDR next month and there's been a lot of calls of rebalancing the DOD's long-term budget plans.

How should we think about that in effecting Lockheed Martin?

We look forward to QDR.

I think it's a very healthy examination.

It's very difficult for you and frankly for us to get any visibility about what makes sense if you don't follow a strategy, if you don't have some sense of, in the case of the QDR, what do global threats look like?

And geez if there's anything that we've learned, it's that the velocity and dynamic range of threats is simply increasing.

I mean, it used to be months or years and then it was weeks and then days and now it's even less.

And so it's healthy to pause and take an examination of exactly what threats are out there and then we'll have to collectively determine how technology can play a role in meeting those threats.

How much force structure will we need?

What will the assumptions be about Iraq, about Afghanistan, about other critical and sensitive places around the world?

Do we want to prepare for two theaters, one theater?

How broadly, how deeply?

Those are the most healthy discussions that I think we can engage in.

And from that, I think we'll unfold the prioritization across the portfolio.

But I say that with some confidence because I do believe we've been as careful as we can be working internal to our Company or with the prior Administration about understanding threats and security.

And I think that's not a political dimension.

I don't think it's a party affiliation.

I think threats tend to have a persistence.

And I think we've got most of the analysis right and while some of the priorities will change, most of the investments that we've made, most of the lines of business that we've crafted, all of our acquisitions, have led to focusing on what are the most enduring national imperative critical mission areas because that's what fuels our business and that's what gets our folks excited.

So, I actually think there will be pretty strong correlations between what we've been doing up to now and what we will have to do next.

There will very obviously be specific program discussions like will there be more F-22s?

That's a healthy conversation to have.

We have our views about that program.

Others have their views.

We ought to have that discussion in the open.

We ought to weigh the strengths and the weaknesses, make decisions and move forward.

Now, I'm very confident we'll be able to do that.

That's terrific.

And thanks very much.

And just quickly, Bruce, if I could have one follow-up.

Just you mentioned F-35 is retiring a lot of risk.

How should we think about that margin progression, at least throughout this year and maybe heading into 2010?

Thanks.

Thanks, Peter.

We do see some margin -- we are planning for some margin improvements on the F-35 program.

We've really got kind of a two-pronged approach that's benefiting there.

One is we do have some expectations that the STD program itself will retire enough risk to justify some level of step-ups there.

And those events that will justify that include obviously the first flight of the STOVL aircraft in the STOVL mode later probably in the first half of this year.

And then completion of another aircraft and also first flight of the Navy Variant, the CV as we call it Variant.

I think that will allow that -- the other prong that's contributing to that margin improvement is just the introduction of greater lower rate initial production volume, which is bringing with it slightly higher margins and then the STD contract.

Okay.

Perfect.

Thank you.

Thank you.

And we'll go now to Heidi Wood with Morgan Stanley.

Good morning.

Good afternoon, I guess.

Sorry.

I want to get a split -- sort of a split question between Bob and Bruce.

I wanted to ask about international.

Can you -- Bruce, can you talk to us about the international sales in 2008 by division?

Remind us what percentage of your backlog is international right now and what you expect sales growth to look like in international in 2009?

Yes, sure, Heidi.

Let's see.

Let me start off first I guess with the backlog percent of international business.

We have, as you might expect, given the level of sales, we have right at or a little slightly higher than 15% of our backlog is made up of international contracts.

That actually grew at a faster clip in 2008 than did the sales and we're happy about that.

As far as by business area, I think you well know the biggest two areas where we have international activity is the Electronic Systems business area, which is probably approaching 30% of the volume within Electronic Systems.

And then the Aeronautics business, which is -- I'm going to guess it's somewhere in the 20, 22, 23% range or so there.

And then as far as growth going forward, I think you're going to see growth in the international business, let's just talk Electronic Systems.

It's probably going to be at a higher clip than I'll say the mid single-digit level that the Electronic Systems is growing at as a business area in total.

And within Aeronautics, probably near term, probably some slight reduction just because F-35 will be growing at a much faster clip with the, well obviously the huge step-up on the US government portion of the business.

And then with some of the orders I talked about previously with the F-16 and C-130, that will contribute to higher international dollars, but I'm not sure the percentage will go up simply because it will be kind of overwhelmed by the F-35.

I can't do the math on those moving parts fast enough, Bruce, but where does that put international sales content in at '08 and where does it go in '09?

I think international sales in '08 were greater than $6 billion.

Think of it as in the 14, 15% range.

And I think it leaves for 2009 is probably going to be a similar percentage.

So whatever that works out to be on our sales guidance.

It's pretty close to that.

And you're not talking about lift in margins at ES even though now you secure the UAE PAC3 and it looks like you're going to get THAAD in a quarter or two from now.

I know those will be small, but won't those provide some amount of lift over the next two years?

Think of both THAAD and PAC3 as being delivery-based contracts.

They -- not too different than the delivery-based contracts we have within Aeronautics.

They are a little shorter duration, but typically think of them as about an 18-month cycle from the award to, to actual delivery of the products.

So the ones that we were awarded at the end of last year will actually not have the sales value in 2008 -- 2009, pardon me.

Okay.

And then, Bob, on international from your perspective, when you think about the skyline of the next couple of years, sort of how do you forecast -- how much of your forecast for sales growth includes Middle East?

And how does a change in oil price kind of alter your plans with respect to Middle East demand in the next couple of years?

Heidi, that's a great question, thanks.

Actually not very much and I'll tell you why.

This is one of those environments where if you've got oil and the price is low now, you've got oil.

And you also have a vulnerability and you will protect that vulnerability and the need to protect those vulnerabilities really drives the desire for security systems.

I think, I'm looking at about five or six areas, where in the near, intermediate and maybe a little longer term we're probably going to see lots of interest across our portfolio.

First is airplanes.

I think the F-35 will continue to have real appeal for international customers because it gives them a levered advantage from being connected to so much more Information Technology that that airplane let's you connect to.

So you're already interoperable, you're already connected and you're getting a fifth generation superior performance aircraft.

I also think the C-130J falls into that category as we've discussed.

Separately, missle defense systems.

Those are one of the highest proliferating threats out there.

You see it every day and almost anyone who had anything to protect is going to want to invest in some version of PAC3, THAAD, Aegis, or the command and control systems that allow you to link that with your air traffic management system or other things.

And we have superior expertise along those lines.

A little longer out, but not that far out, I think, protection of the Littoral's and the Littoral Combat Ship is going to be a huge interest.

Think pirates in the Gulf of Aiden.

I guarantee you haven't ridden on this ship, there won't be any more pirates in the gulf of Aiden because it's a 377-foot cigar boat that will run down anything else on the seas.

On land vehicles, we're probably a couple of steps away here, but I really like our concepts for the joint light tactical vehicle.

And I think that vehicle has legs not just for US forces, but opens up an international aperture for the Company.

As does our logistics and supply chain management and services businesses, because talent is a constraint strategically, not just for the Company, but for governments around the world.

And if we can start doing work, freeing up levels of talent for our partner governments internationally, that's a very appealing construct.

And of course we can now provide a much fuller array of turn key solutions for logistics and I think we'll see the same thing expand into services and Information Technologies.

So, there are multiple apertures in our Company in the intermediate and longer-term for us to look for expansion and growth.

Bob, you didn't touch on opportunities within Linda Gooden's world, but does this focus with the Obama Administration on both smart power and diplomacy and working with allies portend that maybe in the thrust for heightened global security her world gets more opportunities overseas?

Yes, Heidi, I'm sorry if I didn't do a better job in that with the remarks that we offered.

I highlighted Savvy and PA&E because I think they fit right in the sweet spot on smart power.

That was a judgment you know that we made in 2006.

In this strategic assessment that we did in the changing definition of global security and our changed strategy to be that global security Company, we saw very clearly that there was a huge appetite and global demand for the United States to take this prodigious power and influence that we have and express it in ways other than militarily.

I think that's absolutely unfolding now in the policy discussions that we're hearing.

And I think Linda's business is supremely well positioned to contribute right now to this evolving mission area.

Excellent.

Thanks very much.

Jason, I think we've got time for one more call.

Okay, great.

We'll go next to David Strauss with UBS.

Thanks, good afternoon.

Good afternoon, David.

Bob, the FY '10 budget, when do you think we'll see that?

How do you expect the '10 process to play out here?

Well, I know the Obama Administration's been in place now, what, a day or maybe two whole days, David, so I think all of us ought to give them enough time.

Probably what we will see is somewhere around February the 13th might be a day you would keep in mind.

We'll see what is actually quite a traditional view of sending up top line agency numbers.

Now, I'll go backwards a little bit and see if we can put flesh on this.

The '09 base budget was about $512 billion and the former Administration was looking at about a 1.5%, 2% growth in that to about 524 and then with discussions, that $524 billion actually went up to about $581 billion.

I think it's just fair game to ask and permit the incoming Administration to take a look at that and see what they want to do in sculpting that top line.

May not be $581 billion.

It may well be something less than that.

They will also need to look at the off tempo in Iraq and Afghanistan and make some critical adjustments about supplementals, which I know they want to do.

So I think the preliminary top line sort of organizing principles will go up in February.

And then probably in the April-May time we'll start to see more flesh about priorities and judgments and funding.

And I know all that will unfold against a backdrop of this discussion we're all hearing about what's the appropriate stimulus package.

So this sending up the budget in February with the top line is very typical in a transitional environment.

What is atypical is the desire to focus on the economic stimulus.

And I'm certain there will be some discussions about how much of the defense budget will in fact have the corollary and additional benefit of having the stimulative effect.

All of that will be good and welcome and we'll keep you posted as we learn more about it and as it unfolds in realtime, David.

Great.

That's great color.

One follow-up for Bruce.

Bruce, just directionally, pension as we think about it beyond 2009 into 2010, assuming that the discount rate doesn't really move and you hit your assume rate of return, is it fair to think about that the FAS/CAS judgment in 2010 would actually be higher than 2009?

Maybe start, start David by saying the one thing I'm glad about our FAS/CAS is that for all the variability we've had getting to this point, at least I know it's locked down in 2009.

And for that I'm extremely happy.

Right.

As we take a look at 2010, as you well know, and I heard your question, but as you well know, the rates can change dramatically between now and the end of the year.

ASA returns have yet to be played out.

The piece that gives me a little pause to answering your question the way you asked it is I don't know what's going to happen.

I mean ordinarily that kind of effects FAS more so than CAS.

The wild card today that could affect 2010 is the CAS harmonization that I mentioned.

Those words, or those discussions will take place throughout 2009.

And it could have a substantial impact whether they close and therefore are effective in the year 2010 or effective in the year 2011.

And because of that variability, I'm just hesitant at this time to even guess what that's going to look like in 2010.

We're going to provide, as soon as we know it, updated guidance and -- I shouldn't say guidance, but updated evaluation of what is happening with the CAS harmonization process and its impacts going forward.

Okay, thanks a lot, Bruce.

Yes.

David, thank you.

Let me end by reiterating that the Corporation has been performing at a very high operational level and we intend to continue to do so.

We have a record portfolio of long-term work, solid balance sheet, excellent cash flows, and sound credit ratings.

All of these provide a solid foundation that has us well positioned to weather the unprecedented financial turmoil in the markets.

Our financial strength and market position have provided the stability to remain on the operational and financial course we believe will generate solid returns for our shareholders in this challenging period.

I want to end by thanking our 146,000 employees.

This world class team has enabled Lockheed Martin to achieve outstanding operational and financial performance while providing mission critical services and products to our customers.

It's through their dedication and their talent that we continue to generate value to customers and shareholders.

I also applaud them for their unwavering focus on achievement of mission success in these dynamic times and this difficult economic environment.

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

We look forward to speaking with you throughout 2009.

And Jason, we'll sign off at this end.

Thank you all.

This does conclude today's teleconference.

You may now disconnect, and have a great day.