洛克希德·馬丁 (LMT) 2009 Q1 法說會逐字稿

Good day and welcome everyone to the Lockheed Martin first quarter 2009 earnings results conference call.

(Operator Instructions)

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, Michael and good morning, everyone.

I'd like to welcome you to our first quarter 2009 earnings conference call.

Joining me on the call today is Bruce Tanner, our Chief Financial Officer and Executive Vice President.

Statements made on today's call that are not historical facts, are considered forward-looking statements, and are made pursuant to the Safe Harbor 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.

Please also note that we've posted charts on our website which supplement our comments today.

With that, I'll turn the call over to Bruce.

Thanks, Jerry.

Good morning, everyone and welcome to the call.

I'd like to begin by stating that we had a solid first quarter with strong operational and financial performance across the corporation.

Financial highlights include expansion of segment operating profit margin above last year's level, generation of cash from operations in excess of $1.2 billion, and maintaining our backlog in excess of $80 billion.

Our operational earnings were particularly strong this quarter.

We've included a reconciliation sheet in our web charts that outline the 11% growth of adjusted earnings per share achieved by our operations, after removal of the negative FAS cash pension adjustment and nonrecurring gain in 2008.

Our GAAP earnings per share declined only slightly, despite the anticipated shift from pension income to pension expense that we disclosed in January and in our 10-K, and the lack of any comparable nonrecurring items in the quarter.

These results were consistent with our expectations and are enabling us to continue providing value to customers and shareholders.

Before I move into specific details of our first quarter performance, I want to provide an update on the Defense budget environment and a brief status on the progress of our continuing efforts to broaden our business portfolio.

The FY 2010 core Defense budget proposed by the administration in February, outlined a budget ceiling of $534 billion.

While this budget target reflects growth of approximately 4% above FY 2009 levels, we continue to believe that our revenue growth will exceed the overall DOD rate driven by strong future sales expansion on the F-35 Joint Strike Fighter program and in our -- Information Systems & Global Services business area.

In an April 6th press conference, Defense Secretary Gates proposed new program priorities for the upcoming FY 2010 DoD budget.

His proposed budget actions range from increases to selected programs to reductions and cancellations of other programs.

Key Lockheed Martin programs identified for potential increases included the F35 Joint Strike Fighter, Aegis, THAAD, Littoral Combat ship and 80 HF satellites.

Our programs recommended for potential decreases including stopping the VH-71 Presidential helicopter and ending F-22 Raptor production at 187 aircraft.

These recommended program revisions will be reviewed by the President and Congress in the coming months, as the FY 2010 budget deliberations are concluded later this year.

If these proposed revisions are implemented in the final budget, they represent both opportunities and risk for Lockheed Martin programs.

Going forward, even if all the proposed program revisions were enacted in the final FY '10 budget we see no change to our current 2009 guidance.

Looking at the overseas contingency fund portion of the FY 2010 Defense budget, an initial place holder of $130 billion was inserted in order to continue to fund activities in Iraq and Afghanistan.

Determination of the final budget will be made after evaluation of in-theater requirements.

Contingency operation budgets are projected to decline from the peak level in FY 2008 as troop levels are reduced.

With very little revenue exposure to the noncore defense budget, we do not see material impacts to our business portfolio from any future reductions in contingency operations budgets.

Turning to our nonDOD work, we continue to shape our portfolio to respond to changing requirements.

As I look back over the last 10 years, we have actively worked to expand our civil government portfolio from approximately 15% of revenues to over 25% last year.

This growing civil government work coupled with our international and commercial business, now comprises 42% of our total annual revenues.

Growth in civil government activities is expected to support the administration's new national focus areas such as smart power application, cyber security, healthcare IT and energy.

We believe our strategic actions and early recognition of emerging initiatives have us well positioned to provide key solutions to civil government customers.

New focus areas such as the application of smart power to support nation building actions have enabled us to expand our work in this area, which is expected to see an additional budget growth in future years.

The increased national attention on the critical need for cyber security solutions is another opportunity for our corporation.

The growing demand for increased cyber security is expected to provide a multi billion dollar future opportunity.

The need to provide IT solutions to digitize and manage government healthcare records is more acute than ever.

With the recent completion of our 14th straight year as the largest IT provider to the US government, and our established IT support on large scale data management systems for agencies such as the Department of Justice and Social Security Administration, we are well positioned to provide solutions in this area.

Finally we have a growing list of energy-related programs and activities within our business units.

These activities range from Smart Grid management to energy efficiency, security and alternative power generation.

While still in formative stages, we believe our energy solutions offer future growth opportunities in support of key national needs.

These emerging activities coupled with our focus civil government agencies and international customers are expected to provide continued growth in our non-DOD revenues.

Turning to our first quarter results, the corporation achieved solid financial performance, operational milestones and won key new business awards.

Financial achievements in the quarter included sales growth consistent with our expectations, segment margin expansion and strong cash generation.

With first quarter activities generating over $1.2 billion in cash from operations, we were able to continue to make opportunistic share repurchases.

During the quarter we repurchased 8.1 million shares of our stock for $555 million.

Based on first quarter accomplishments we have increased our 2009 full year guidance for earning per share, cash from operations and return on invested capital.

Details of the new increased guidance are outlined in the webcast charts and in today's press release.

Let me now highlight some of the recent new business awards and operational achievements in each of the business areas.

Starting with electronic systems new business wins included a contract from the US Navy authorizing construction of our second Littoral Combat Ship.

LCS will become a critical element as the Navy continues to modernize and expand its fleet, and we are proud to continue our partnership with the Navy on this revolutionary program.

Recent comments by DOD leadership reaffirm the need to purchase up to 55 LCS vessels to satisfy Navy requirements.

This high level domestic need, coupled with international interest in our LCS design offer solid growth opportunities on this program.

Internationally, Electronic Systems received a $665 million contract from Taiwan to upgrade their P-3 maritime patrol and reconnaissance aircraft.

Upgrades will include new mission system avionics and service life extension kits.

These upgrades will provide its navy with state-of-the-art maritime patrol and reconnaissance aircraft, and enable Electronic Systems to grow its international revenues.

In addition to the new business wins, Electronic Systems also adds significant operational accomplishments.

In the area of theater missile defense, our team conducted their 6th consecutive successful test of the THAAD system.

This flight test demonstrated the ability of the system to detect, track and intercept a separating target inside the earth's atmosphere.

The THAAD system is critical to providing ballistic missile defense to domestic and international customers, and was recently highlighted by DOD as one of the priority programs in the FY 2010 defense budgets.

Further validating the importance of this system, THAAD was on operational status and ready to provide missile defense protection during the recent launch of the failed satellite deployment by North Korea.

A final key accomplishment in electronic systems was the successful operational use of the View It systems.

This system provides realtime streaming video to Apache air crews improving situational awareness, intelligence and effectiveness against critical targets.

I should note that the electronics team was able to complete the design to production effort in less than seven months, and satisfy a rapid fielding request from the US Army to provide this new system to our war fighters.

I now want to turn to our fastest growing business, our Information Systems & Global Services.

The IS&GS team continues to lead the corporation in top line sales growth again this quarter.

The new business win rate of IS&GS differentiates them from competitors and enabled expansion of their revenues by 10% above last year's level.

Key awards this quarter included a contract from the US Special Operations Command to provide full scope logistic support to Special Operations troops around the globe.

This 10 year IDIQ contract has a potential value of up to $5 billion.

Although this award has been placed under protest by a competitor, we look foward to successful protest resolutions to work and proceed and enable us to provide critical logistic support to this key customer.

Other IS&GS wins include a $400 million award by the General Services Administration to provide systems support to the Federal acquisition service.

These wins add to IS&GS's solid backlog and we expect this to continue generating the highest revenue growth of all of our business areas this year.

Before leaving IS&GS, I wanted to reiterate our press release disclosure earlier today announcing the realignment of IS&GS's three lines of business effective January 1st.

This realignment to civil, defense and intelligence, better aligns the segment based on its core customers and business activities.

Current quarter and historical financial results have been realigned to provide comparative financial data.

Looking at the Aeronautics business, our team continues to perform at an exceptional level, and successfully won key international and domestic new business awards this quarter.

As part of Aeronautics continuing focus on expansion of their services and logistics work, they grew their international portfolio with receipt of a $300 million multi-year contract to provide sustainment services for the Royal Australian Air Force for its C-130J aircraft.

This contract will provide innovative solutions and maintenance and engineering, and will utilize our supply chain management expertise to reduce the cost of ownership of the C-130J aircraft in the Australian fleet.

This effort builds upon similar sustainment activities that we will provide to the UK, Italy and Canada for their C-130J fleets.

Aeronautics sustainment activities continue to improve aircraft availability rates and reduce the cost of fleet ownership.

Domestic new business awards this quarter included a contract from the US Air Force for additional modernization work on the C5M Super Galaxy airlifter program.

This contract provides funds for work on nine additional aircraft under the reliability enhancement and re-engining program.

Three modernized C5M aircraft are already -- have already been delivered to the Air Force and are demonstrating increased operational capability.

Current plans call for delivery of 52 fully modernized C-5M airlifters over the next seven years as we ramp up our work on this program.

Modernization of these strategic airlift assets should extend the service life of the fleet through 2040.

Turning to operational performance, our Aeronautics team continues to retire development risk and expand their low rate initial production work on the F-35 Joint Strike Fighter program.

Successful flight test milestones continue to be achieved on the conventional takeoff and aircraft landing -- and landing aircraft AA-1 including the 81st flight, as well as the first flight conducted by an active duty marine pilot.

Also this quarter our BF-1 STOVL aircraft completed the 14th flight in conventional mode, and the initial flight of our second STOVL aircraft known as BF-2.

The current test fleet has expanded to six aircraft, consisting of three flight aircraft and three static test aircraft.

As anticipated this quarter, we received the updated engine from the government which enabled the BF-1 STOVL aircraft to begin hover-pit testing in March.

To date, the testing has progressed exceptionally well with the engine generating more vertical thrust than DOD performance requirements.

We expect successful completion of hover tests this month, with the aircraft then proceeding to conventional mode flight test later this quarter, followed by the first STOVL flight to be conducted this summer.

These operational successes on the Joint Strike Fighter have increased confidence from domestic and international customers on the program's progress.

Part of the program's maturity was shown -- support of the program's maturity was shown by the Department of Defense for this award of $305 million in contracts for long lead materials for 32 aircraft under LRIP Lot 4.

Additionally, last week we completed successful negotiations on the LRIP Lot 3 contract for a total of 17 aircraft, consisting of 14 for the US and three for international customers.

International support for the program remains strong with the recent announced intentions from the United Kingdom to purchase three test aircraft and reaffirmation of its commitment to purchase 138 STOVL aircraft.

Also the Italian Parliament recently approved funds for the reconstruction of final assembly and checkout facility.

This facility is expected to become operational in 2013, to support in-country fabrication activities, and will add to the collective capacity of the F-35 worldwide supplier base and production capabilities.

Italy also reaffirmed its commitment to continue with its acquisition plan to purchase 131 aircraft for its national requirements.

Overall the F-35 program remains solidly on track as it ramps up production to meet the needs of our domestic and international customers for this fifth generation fighter aircraft.

Finally in Aeronautics we are pleased with the recent ratification of a new three year labor agreement with the International Association of Machinists and Aerospace workers.

These employees perform critical tasks for our customers and the nation through their work on supporting our programs.

This agreement is an essential element to workforce continuity and in our ability to move forward as we ramp up production on our F-35 aircraft line.

Turning to our space systems segment, operational performance was demonstrated this quarter as they continue to build upon its legacy as the leading provider of GPS satellites.

The space system's team completed fabrication of a modernized GPS satellite that was successfully launched for the US Air Force.

This satellite is the seventh of eight GPS 2RM satellites and will provide additional capacity in user access.

These modernized satellites provide enhanced operations and navigation signal performance for military and civilian users around the globe.

The GPS Constellation has become a mainstay in our lives by supporting a wide range of civil, scientific, commercial and military functions.

With the award of the Next Generation GPS 3 satellite constellation space systems last year, we are well positioned to continue our legacy of providing these critical assets to the US Air Force for decades to come.

In summary, our operational accomplishments, new business wins and financial performance across all of our business segments this quarter, have us well positioned for increased financial growth in 2009 and beyond.

With a solid financial foundation and diversified portfolio, we look forward to continuing to create value for shareholders and customers.

I'd now like to open up the line for your questions.

Michael, if you'd open up the lines, please.

Thank you very much.

(Operator Instructions)

And we will take our first question from Robert Springarn of Credit Suisse.

Good morning everyone.

Hi, Rob.

I have a lot of different things I'd like to ask about, but one thing I think a lot of us are focused on is the F-35 program and what happened on April 6th and, Bruce, you alluded to that.

Understanding that it doesn't affect fiscal '09, when I look at the puts and takes on what we saw on April 6th, I see Lockheed in the net positive position largely because of F-35.

Could you give us some specificity on what kind of increase we're actually looking at, what you know so far?

A lot of this has been characterized as a $5 billion plus up, but it's really fiscal '09 to fiscal '10 that we see the $5 billion increment.

What kind of increment do we see from what might have been the old '10 plan to the new '10 plan?

And how will that manifest itself in terms of spending -- the number of test aircraft they're adding versus other R&D?

Thanks, Rob.

Long question, but a good question.

Quite honestly, as we looked at the F-35 program and what was announced by the Secretary, in terms of the actual aircraft quantities that would affect our next few years of planning, we honestly don't see increases to those numbers.

I mean the numbers we are talking about for instance, in the FY '10 advance funding that I talked about in my script was for 32 aircraft, I think that is right in line with what Secretary Gates mentioned in his comments on April 6th.

The multi-billion dollar funding increase that you talked about is obviously something we noticed as well.

It's not entirely clear to us at this point without the details of the budget, exactly what that is for at this point to be perfectly honest with you.

So we're a little bit waiting or maybe a lot waiting at this juncture, to see what the details come out, from when they do come out later this month, or early next month to give more insight into the FY '10 budget to actually be able to answer that question.

Bruce, is it fair to say though, if we look at what the accelerated plans that various people had proposed, and there were numerous studies of an accelerated F-35 plan, that fiscal '10 was always going to be meaningfully above the $6 billion in fiscal ''09?

That's correct.

So the delta is something other than that.

That's correct.

Thank you very much.

You bet, Rob.

And we'll take our next question from Joseph Campbell with Barclays Capital.

Hi.

Good morning.

We wanted to ask the same kind of questions about either side, I guess, and somebody asked about the plus.

We'll ask about the minuses.

If they actually end the President's helicopter and the F-22 program, what will actually happen say if we take the F-22 as an example?

What will happen down in Marietta?

And how will that affect the other programs that are down there, if the F-35 -- F-22 line actually ends?

And I guess the other question I have about the F-22 is, I read that the Secretary wants to do this, but traditionally that's meant that Lockheed and the Air Force have gone over to the Hill and rounded up letters from 50 senators or 100 senators or as many as you can get to try, and reverse what the Secretary wants to do by winning on the Hill, if you lose in the Pentagon.

Are you still going to do that kind of battle to get your -- keep your planes sold or is this something that you've decided since the President and the Secretary don't want it, that you're going to leave them alone?

Well, let me see.

Where do I begin with that one, Joe?

You talked about the VH-71 and F-22, just a couple of maybe over-arching comments before I get into a specific answer to that.

Those are kind of two different discussions that were talked about in the Secretary's words.

I mean the F-22 is not a termination.

It's simply a lack of continuing production at the current level.

And the current program with the four additional aircraft to a total of 187 aircraft would take us out to about the first quarter of 2012 in terms of production of that program.

The VH-71 is an entirely different situation.

In the words from the Secretary were basically that we're going to end that program.

That would actually be a full blown termination.

You asked about the impacts of that --

Does that mean you don't expect to get termination fees for the F-22 and so on?

It's just no action taken?

That's your interpretation of what's happening here?

We think, Joe, that there are tail up costs which is kind of a little bit of a term of art perhaps in the industry, but there are tail up costs associated with the end of any production line.

And we would expect that be prevalent in the last four aircraft, as well as a potential mod or change resulting in overall recoupment of that tail up cost for the end of the program.

That's different than a normal termination on say in the VH71 where we have a pretty standardized process for terminations for convenience that reflect what costs are recoverable, which costs are not.

At this point, I think it's important to say, though is there's nothing actionable on either one of those programs at this point.

There is no notification, no letters from customers that would say you should proceed with a termination proposal and telling us what to do, for instance, with those assets.

So we're a little ahead of the game there as well.

You had asked about impact to Marietta, and I'll throw in the impact Owego as well.

Again, the Marietta impact is further out from the 2012 time frame.

We're fortunate in Marietta, that at the same time we're seeing a downturn in the F-22 production, we're seeing a significant uptick in production for the C-130J program.

As well as I mentioned in my prepared remarks a fairly significant uptick in production on the C-5 program.

So it remains to be seen if those things align perfectly to be able to avoid any kind of issue there.

And we'll have to take a look at seeing what elements of the F-35 program can be moved around between the Aeronautics locations, but that's something we'll obviously strive to do to have as little disruption as possible at the Marietta workforce.

The Owego situation where the residential helicopter is built, is a little different situation.

There is no C-130J coming along behind it if you will, in Owego.

And that's something if that were to come to fruition, along with the delay or the demise of the Combat Search and Rescue helicopter, the CSAR-X program for the Air Force, that would likely have some near-term reductions on our Owego workforce that we're looking at as we speak here today.

The last question you asked was about, do we team up with Congress and try to fight the F-22?

Now look, from my perspective, the Secretary, the Secretary of Defense, the Secretary of the Air Force, and the Chief of Staff of the Air Force, have for that matter -- could go with the Deputy Secretary of Defense, the Pentagon -- others within the Pentagon as well, are all completely aligned on this matter from top to bottom.

We've had our chance to lobby this matter.

We think we had a full hearing of that discussion.

We're disappointed by the decisions, but we'll accept those and go on.

And we'll take our next question from Robert Stallard with Macquarie Research Equities.

Good morning.

Hi, Rob.

Bruce, I thought if we could just follow in the same vein if you could just give us an update on the outlook for the C-130J.

It wasn't specifically commented I think on by Secretary gates but if you could update us on your volume there and the timetable for that.

Yes.

We still see we're very much on track.

We've teed up the fact that we're going to double production by the end of the decade.

I am very comfortable with that statement as I sit here today and we would see some potential growth beyond that in the years after the decade.

That would be our expectation.

I think the Secretary actually made some nice comments when he was speaking to some of the war college venues that he did after the announcement on April 6th where he talked about robust C-130J sales, which I think is affirmation of what we see in that regard as well, Rob.

Have you seen any interest on the export side for C-130J's at all?

Absolutely.

Internationally, we have I'll say an increased interest particularly with a couple of middle eastern countries and

think there has been additional inquiries.

I think we're real early in that regard but a couple of inquiries relative, to what could happen relative to the A-400M's lack of success on delivering aircraft at the time and dollars that they were committing

Great.

Thank you.

Thank you, Rob.

And we'll next go to Howard Rubel of Jefferies.

Thank you very much.

Hi, Howard.

Good -- it's still morning.

Good morning, gentlemen.

Good morning.

The opportunities that exist before you extend, not only in aeronautics, but also I think in space, and DNI Blair had some announcements the other day and talked about existing designs for some additional satellites.

Does that position you pretty well for some volume growth in that market?

I think the short answer is yes, Howard, but the longer answer is probably not necessarily in the near term, but we saw the comments by Mr.

Blair and we're encouraged by them.

This notion of the need for kind of these exquisite level satellites is something that we see as well, and something that we are particularly well suited to produce.

So those align very nicely with our interests and past capabilities, but I don't think it's a near term impact, but it does set us up for a longer term growth area, absolutely.

And then just, if you look at all your programs, you look like you're performing really well.

Are there any areas where you feel like you've got maybe a couple of red programs, and you'd like to highlight where there's some opportunities still for some improvement?

I probably never want to highlight red programs, Howard, but I'll try to answer the question nonetheless.

I think it was a very clear quarter.

We didn't really have any hiccups or pop-outs from a performance perspective.

The programs that probably I'm watching, that I would characterize as having that reddish tint to them, include several of the satellite programs where we're still in the developmental cycles, the MULOs program, as well as potentially the current build on the 80 HF satellites.

I think we're making very good progress on both those.

We've gone through a couple of interim tests, particularly with the AH -- the 80HS satellites that have come out very favorably recently, so I'm encouraged by that.

We have, I think I mentioned a few quarters back a ground-based EW program within Electronic Systems that we had an issue with a few quarters back.

That's still a locked item for us going forward, and one we're hoping to resolve here shortly.

Thank you very much, Bruce.

Thanks, Howard.

And our next question goes to Ronald Epstein with Merrill Lynch.

Hey, good morning, guys.

Good morning, Ron.

How are you?

Bruce, can you give us some color on the opportunity for Lockheed Martin in cyberspace, I mean in cyber security?

I guess in the Wall Street Journal today there was a big picture of the F-35, and talk about cyber breach.

How big an opportunity is it?

And what do you guys bring to the space?

Yes, great question.

We saw the picture as well.

Unfortunately we can't talk a lot about -- nor does the US government talk a lot about security matters, but nonetheless we actually believe The Wall Street Journal was incorrect in its representation of successful cyber attacks on the F-35 program.

I have not heard of that to my knowledge, and to our knowledge there's never been any classified information breach.

I mean like the government, these attacks on our systems are continuous, and we do have stringent measures in place to both detect and stop these attacks.

So -- caught us a little bit by surprise there reading that, to be honest with you.

As far as the opportunity for Lockheed Martin, I think the opportunity is as rich as for anyone else kind of in this business.

I think we've got great bonafides, in terms of our past practices particularly as I look back on what we've done with a lot of the business and with our intelligence customers.

We've probably had data encryption classified access only programs for probably a quarter of a century with that customer, and I think that is the kind of protection that we're looking.

This is not sort of the anti-virus Internet protection sorts of things you would buy going down to your computer retail store.

This is very sophisticated, very redundant capabilities.

And I think that we provide and have provided for a number of years that to a number of US government customers, and I think that sets us up nicely going foward.

The size of the market, I think everyone describes it as in the billions of dollars.

We describe it that way as well.

Although it is awfully hard to predict exactly how that market grows year-over-year.

I do see it growing faster than the DOD growth rate.

And the hard part about it, Rob, from our perspective is we really don't get, you know, orders, change orders or contracts themselves, that say put this cyber security application on the program.

We comment -- instead we get changes in programs that have requirements for, like I said earlier redundancies, and those sorts of things that are just part of the normal costing of the program or that change order.

So we currently don't see and we likely won't see, the specific dollars associated with cyber security opportunities, but we do see that volume growing as we go foward.

Okay.

Thanks, Bruce.

Thank you.

And our next question comes from Joe Nadol with JPMorgan.

Thanks.

Good morning

Hi Joe, How are you?

Good, thanks.

Bruce, could you talk to the IS&GS business a little bit, the margins were a little lower than they've been over the past couple years, edging below that 9% mark I think for the first time since '06.

You did the reorg in there, and wasn't quite clear from the MD&A here on the margins, as to why they were lower.

Said decrease in civil, was due to the absence of a benefit, but that doesn't explain why you were down overall.

I got the question, Joe.

Thanks.

Yeah.

Margins within IS&GS were 8.,8 last year was about 9.2.

Last year had the benefit that we did mention on the call, as well in the press release of the contract restructuring.

That was a fairly significant item, that if we remove that from 2008, 2009's performance actually exceeds that.

Now taking a look at the absolute value, if you will, and your comment I think is right relative to comparing it back to the 2006 time frame.

Margins at the 8.8% level are lower than what we've done in the last few years.

A couple reasons for that, one of which is is I talked about on numerous occasions, IS&GS has the largest percentage of what we call service contract accounting programs, where we have great variability in the quarterly flow of those costs.

Basically on service contract accounting, your revenue is fairly levelized but your expenses or cost of sales associated with those contracts are expressed in the period which it incurred.

So depending on what you've won and the early stages of those service contract accounting contracts, you can have great flexibility or great fluctuation, excuse me, in the cost of sales recognized on a quarter-by-quarter basis.

I think that's what what happened in the first quarter time frame.

There were no performance issues.

There was not a performance write-off on any of our programs.

It was strictly the timing of that cost of sales recognition.

Looking foward, I still see we talked about in the past that IS&GS has the largest share of award fees of any of our four business areas.

And those award fees tend to get lumped in the second and fourth quarter.

We actually had a fairly low portion.

We have award fees honestly in all four quarters.

But we also had a little bit lower award fee portion in the first quarter compared to say years past.

And yet we still expect to see in the second and fourth significant increases in margin, as we reflect the award fees that will be received in those two quarters.

So I still sit here today, looking out at the year confident in our guidance that we provided to you.

And I'll share with you one other comment maybe before I let you go.

Although you mentioned the '06 time frame, as we were going back and restating some of the history for IS&GS because of the restatement of the lines of business, if you take a look at the 2006 earnings out of IS&GS, compared to the 2009 earnings EBIT out of IS&GS, it's up 50%.

We have about $800 million worth of earnings in the 2006 time frame and $1.2 billion is what our outlook is in the 2009 time frame.

So I don't think that's anything to be ashamed about.

Thank you very much, Bruce.

That's very good color.

I just on the reorg, though, what drove the timing, I guess, specifically?

I think the timing was just driven by the fact that we've had some significant growth in what was formally the Global Services line of business within IS&GS.

And we were starting to get some contract applications that were cutting across, not just within the Global Services, but in all three business areas that were cutting across our customer base.

And we just felt that having this alignment more geared towards our customer set presented a more consistent face to those customers.

And was actually easier for us to align our resources in that way as well, nothing more than that.

Got it.

Thank you.

Thank you Joe.

And our next question will go to Cai von Rumohr of Cowen and Company.

Thank you very much.

Secretary Gates talked about in-sourcing contract acquisition work, and bolstering the government's workforce there.

And we saw, I guess, a Bloomberg article about how the VA has in-sourced that work from you, and Representative Kucinich kind of crowing about how they would save all this money.

Could you comment on the VA?

Is that an isolated incident and related to kind of what Gates said?

Where do you see, is in-sourcing really a threat and, if so, where and how much business do you have that might be subject to in-sourcing?

Yes.

First maybe a little correction.

It wasn't the VA.

This is actually for what's called DFAS which is actually the payment office, if you will, for the government in Columbus, Ohio there.

And the contract you're talking about and bringing in, what that announcement actually discussed, was the fact that they would not be exercising the next option on that contract.

That contract expires in the 2010 time frame.

And the comment from the customer was that they do not want to exercise the option past that time frame.

And we will support them in that endeavor and we will make sure the transition is seamless from our perspective.

That particular one was a fairly small contract, I'll say less than $50 million or so of annual sales, actually quite a bit less than $50 million of annual sales.

The things, probably the broader question, Cai, that you're asking about is so what does this portend for other programs that are similar ilk.

And I think in general just at a top level I'd say, A-76 programs that have recently been awarded are probably areas that will be scrutinized going forward.

And we have a couple of contracts that probably fall in that category, the AFSS contract, the Automated Flight Support contract out of IS&GS is one of them.

And we also have -- it was kind of called two different names.

I'll give them both to you, the IHOP or the HR Access program for the Department of Homeland Security.

Those are ones that, I'll be watching going foward because they were fairly recent awards.

Most of the rest of our kind of support of customer, government customers, for things like sustainment activities and so forth, I don't particularly see those at risk.

And I think we've got, you know, well established kind of ground rules or boundaries say between ourselves and the depots, where we have a very, very comfortable working relationship there.

In fact, a partnering relationship on many of our program,s and I don't see that changing going foward.

Okay.

Could you comment, I mean Kucinich sort of has this combative, "Boy, they were screwing up, we're going to save so much money." Was this really kind of an isolated specific incident with politics?

Or do you see this as part of a broader -- or is this kind of related to what Gates talked about?

I think by any measure that the customer used to evaluate us, we performed very well on that contract, and I'll leave it at that.

Okay, great, thanks a lot.

And our next question goes to Sam Pearlstein with Wachovia.

Good morning.

Hi, Sam.

Hi.

This is kind of a multi-part question, but I am just wondering if you could talk a the bit about capital allocation.

If I just look at what the stock did this quarter and your buyback activity, while you certainly bought back an awful lot, the stock really had been down below 60.

And I'm just trying to think about the combination of your strength of your balance sheet, what the stock prices have done and then looking at your appetite for acquisition given current multiples.

Kind of could you just talk a little bit about how you're thinking about capital as we go foward?

Yes.

Good question, Sam.

Maybe just to give a start of that I'll just talk about cash in general.

And I'll start by saying the first quarter, and we're really proud of the results in the first quarter $1.2 billion.

The thing I'm probably as proud of or if not more is the fact that our free cash flow has stayed at $1 billion as well.

And just to kind of give you a preview what we're looking at in the next few years, or next few quarters, I think cash going foward will probably be, somewhat levellized to get to the $4.1 billion, probably each quarter in the billion dollar range, so don't see huge fluctuations there.

Relative to its deployment and its effect on capital structure, we did you know, That was lower than what we did in 2008.

But in 2008 there were significantly greater numbers of options that were exercised.

And as we tried to avoid, you know, our tried to at that time frame avoid some of the share creep associated with those exercising options, we ended up buying a whole lot more shares in that quarter than this quarter.

I'll also remind everyone that first quarter of 2009 the dividend payout, or dividend rates that we're paying out is 36% higher than was the dividend in the first quarter of 2008.

So we look at cash back to shareholder in the forms of both share repurchases and dividends, so we went up on the dividend side significantly, even though we came down a little bit on the share repurchase side.

Even with that I think we still reduced share count by 1.6% in the quarter, which is one of our highest quarters that we've ever done since we've had the share repurchase program.

Going foward and I still think we're trying to keep the powder a little dry from an acquisition perspective.

From an opportunistic use of the cash, we continue to like the string of pearls approach we've used and we're still looking at those situations as we speak today.

But is it the type of thing with the buyback that you're in the market every day?

Or is it when the price presents an opportunity you're more aggressive?

Well, the answer to that is yes.

We're typically in the market every day.

But we try to accelerate when we think the price has an opportunistic reason to buy back more shares.

Okay.

And then can I just ask a follow-on?

Does the FAS CAS adjustment, remember there changes in assumption that would have led to a $10 million shift in the last couple months?

Yes.

Good catch.

The FAS CAS did change 10 from when we talked to you in the January time frame.

We've got 18 or so different pension plans and at the time we put together the call, we were still crunching on all the actuarial assumptions behind the 10.

That happens every year about that time.

Most years -- I shouldn't say most years.

Last year, it didn't reflect a change in the first quarter when we presented results there.

In prior years if you look back, we've actually had kind of similar levels of adjustment, but all it is kind of trueing up for that actuarial data, nothing more significant than that.

And we'll take our next question from Heidi Wood with Morgan Stanley.

Good morning.

Hi, Heidi.

Bruce, a big picture question for you and then a couple of specifics from the quarter.

You guys were the first to focus in this shift from Defense to talking about global security, but I'm wondering what you think that means from a numerical perspective.

I mean what does this portend for margins?

Or do you see revenues growing faster?

And I better want to understand if we take a look at this set of smart power, cyber security, healthcare IT and energy as future growth opportunities, how big are they collectively and how fast do you see them growing?

I'm sure you can't give us the number for cyber security, but if it's part of an overall group that's a thrust of growth, perhaps you can give us color that way.

Yes.

So let's see -- big picture, I think those prospects for the four items that we talked about in the prepared remarks is for some potential for some significant growth, although again probably not in the immediate near term.

I think the one that probably has the quickest near term growth potential is in the cyber security.

I wish I could give more detail as to why that is, but I really just can't at this point in time.

The other ones that we're watching along that ilk, again I think the healthcare IT, is one that if implemented the way things are being talked about, we have some great opportunities there.

And that could be a nearer term revenue growth item, than say the energy business.

The energy is still kind of at its, nascent point right now, still starting from not much, but we do see great potential in that area.

And you asked about the margins going foward.

A little bit too early to tell at this time.

I would think that the cyber security margins would be comparable to the rest of our DOD business.

I would think that the healthcare IT would be comparable to what we experienced on our other Federal IT programs.

So I don't see necessarily an increase or a decrease in those margins going foward.

But the collection of the four including smart power, how would you bandwidth their size now, so we can watch this expand?

I'm sorry, I didn't mention the smart power.

That's one we think will grow.

I didn't mention that earlier.

That probably will grow, as fast or faster than the other two as well.

And that one probably in all honesty, has margins that are a little bit lower than the overall margins of the rest of the business areas, pretty in particular within IS&GS.

Again, Heidi, I think it's just difficult to quantify that near term.

I think other than saying cyber, healthcare IT and smart power are probably the near term chances to have some revenue growth, and at least on the cyber and the smart power those are potential for significant near term.

All right.

And then as it pertains to M&A it seems that most of the M&A we've seen you do, has been expanding on this global security paradigm.

Does that continue or do you think there's some opportunities to add more of the core over in 2009?

I think you'll see some core acquisitions, as I just look out over the horizon of what we're looking at.

I think there's some very promising core items that we are pursuing.

But quite honestly in terms of why we've done it in the past and why we still see opportunities in the -- within the IS&GS sorts of businesses because that is a fertile ground.

We continue to think that's fertile going foward.

Also compare the area going foward, is the sustainment part and we still see some benefit in potentially doing some acquisitions in that area as well.

(Operator Instructions)

We'll go next to Myles Walton of Oppenheimer & Co.

Thanks.

Good morning, guys.

Hi, Myles.

We touched on Secretary Gates comments on topping off on the 22 at 187.

But what I was curious on, was your perspective on the upgrading potential of the existing aircraft of the first 100 to bring them up to 3.2 increment?

And do you think that or do you have a read yet on his desire to put that full effort behind it, which I guess in Young's comments late last year put around $8 billion or so.

Yes.

Maybe just a couple comments on the F-22 to set the stage.

I think we continue to have in my words, exceptional cost and schedule performance, along with record quality levels on that program.

And thats in the midst of all the churn and turmoil and discussion that's been, flying around the program's head at that point in time.

So I'm very happy with the performance that we're seeing on the program even in the face of a lot of the discussions that are going on.

You talked about the potential for,I would characterize it as sustainment, mods, upgrades for the program.

We see those, those things literally, that aircraft will be flying for decades to come.

And the need for sustainment, the need for modification, the need for upgrades with this aircraft just as with any other aircraft will also continue for decades.

That won't change simply because the aircraft is out of production.

We see that the numbers that -- you mentioned Secretary Young's comments, we see those as being very, very viable, very feasible.

I think we're literally talking multiple billions of dollars mods and upgrades that will need to be done for the aircraft over the next five to 10 years.

Okay.

So would you expect those to kind of feather into the 2010, 2011 such that the wind down of the, I guess percentage of completion basis that would probably affect you in the latter part of 2010, you wouldn't really see much of a decline on overall F-22 in 2010?

And maybe you tart start to see it in '11?

I don't think so, Joe, because as we look at it right now we probably do about a billion dollars a year, in kind of sustainment costs on the F-22 program as we speak today.

That number is likely to grow.

I'm not sure it grows in the time frame you're looking at enough to offset kind of the planned reduction in the aircraft.

But beyond 2012, I think that's where we'll see a lot of the mod upgrade effort that you were talking about, and that I was referring to as well take place, and that will help mitigate some of that reduction in my judgment.

Okay, that's fair and the last one for me, CAS, I think your mark date is in May and so would you actually have almost at this point good visibility into what your 2010 CAS projection would be?

I wish I could say yes, Myles, but the answer is no.

Okay.

You know, there's still a lot of -- I mean the things that are going on -- I heard you chuckle there, but the things that are going on literally is, I could see what the asset return is right now.

We're no great secret here.

We're fairly flat as far as the asset return is concerned, not tracking with the 8 1/2% for the year, if you will.

But on the other hand the discount rate, if we were to strike a line in the sand today, that discount rate is significantly higher than what we had at the end of the year last year.

That's more on the FAS side, I guess as opposed to CAS, but we still got another what, two and a half or so months of performance on the asset side, still too early to call for what the CAS is going to be without the passage of those two months or so.

And our next question goes to Noah Poponak of Goldman Sachs.

Hi, good morning.

Morning.

Morning, how are you?

Good.

In the tactical vehicle world you guys are part of the JLTV down select, but, there's always conjecture of that being sort of pushed to the right.

Is there any opportunity for you to get involved in what might happen between now and then?

We've got MATV out there.

There's now discussion of ECV-2, where the sole source was taken away.

So what's your latest thinking on timing of JLTV?

And is there an opportunity for you to be involved in what might happen between now and then?

Yes.

Thanks.

I think the short answer to that question is we are engaged in the JLTV competition.

That's a 27 month tech demo phase.

And it's likely that there won't be an opportunities for to us get into the Tactical Wheeled Vehicle market other than that entry, if you will.

Okay.

One quick follow-up.

The revenue growth in the quarter is lower than what the full year guidance implies for the full year.

So you're expecting some acceleration.

Can you just give us the two or three things that drive that?

And kind of help us with the quarterly profile for the last nine months of the year.

Yes.

That's a good question given what we did in the first couple.

Maybe what I'll do, spend a little more time than maybe you're expecting on the answer to the question.

But I'll kind of go through each of the four business areas maybe just to set the stage.

IS&GS, growth at 10%.

Looking foward I would expect to see revenue growth within IS&GS, sequentially increasing quarter-over-quarter, and still within the numbers that we're looking at for the full year guidance.

I don't see anything that would cause us to back off of that assumption.

Within Electronic Systems, this is the one that might be a little bit of surprise to you listening there as we look into the second quarter.

The second quarter last year for Electronics Systems was the highest quarter of the year.

And that was driven by significantly higher deliveries in that particular quarter for air defense products, as well as tactical missile products.

We don't see that same level of sales recognition in the second quarter of 2009 time frame.

In fact, I would expect to see a reduction quarter-over-quarter in Electronic Systems in the second quarter simply because of the lack of those delivery items this year versus last year.

After second quarter, within Electronic Systems, we expect to see accelerating growth with each of the last two quarters growing at fairly good clips for the rest of the year, still getting to the level we talked about in the guidance obviously.

Within the Aeronautics business area, we were down slightly in the first quarter here.

We had one F-16 delivery less than we had the previous year.

We were also a little bit lighter on the F-22 volume.

And even though we had increased volume, it was a little lighter than we were expecting on the F-35.

I think those were pure kind of timing issues that will resolve themselves in the next three quarters.

Same quarter situation as IS&GS, strong sequential revenue growth quarter-over-quarter getting to the level we saw in the guidance.

And then just talking with some color on Space, Space I would expect to be down from a comparable basis relative to last year's second quarter.

Last year's second quarter had two delivery events, one launch vehicle and one satellite, a commercial satellite and a commercial launch vehicle, that we don't expect to have happen this year.

So that will -- that in and of itself will probably cause the second quarter to be lower.

And then from that point foward, Space is probably going to have fairly flattish growth, probably the fourth quarter being the highest quarter of the year there as we look there.

Also within Aeronautics I should make the point that, the quantity of aircraft, we're up three aircraft on the F-16 production line ,and up four aircraft on the C-130J production line.

Interestingly, for both those programs all the increase in aircraft occur in the second half of the year.

So overall, we're going to see probably a lower second quarter than a lot of people are expecting.

And then probably more rapid growth in the second half of the year that people are expecting as well.

So as I kind of plug those in while you're saying them it, looks like the second quarter growth rate will actually be lower than the first quarter growth rate?

And then 3Q and 4Q will be in the double-digit?

Yes.

I think the second quarter growth rate will be -- I think you said it right.

I think you've got it right.

Thanks a lot.

You bet.

And our next question goes to Doug Harned of Sanford Bernstein.

Good morning.

Hi, Doug.

Hi.

I wanted to ask a question on Electronics, and just to understand really from a margin standpoint, you highlighted two things in the release.

One was a one time item on the resolution of some simulation in training contract.

And then also some declines in the quarter in MS2.

Could you sort of scale those?

And in the MS2 side is this something that's really just a one time, a timing issue for the quarter and how do you see that going foward over the rest of the year?

Yeah.

A couple of responses to that.

One, we highlighted in the press release.

We did have as you said kind of a one time contract resolution/settlement in our simulation training business in Orlando.

I think of that in the tens of millions of dollars, but that drove Electronic Systems margins in the first quarter higher than probably what we're going to experience for the rest of the year, without some sort of unplanned performance improvements in the remainder of the year, if you will.

So as you said, that was kind of a one time event.

You also talked about the MS2.

That was, I'll say kind of seasonally lower in the first quarter than probably we're going to see for the rest of the year.

There were a couple of just talk about the revenue.

There was a number of deep water aircraft deliveries, the so-called MPA aircraft that happened in the first quarter of last year that brought the revenue down a little bit.

But the margins were also slightly less than what we expect for the rest of the year.

I think that's more of a seasonal thing than anything else, Doug.

Because you should be seeing good growth over time in that unit I would expect.

And we would as well.

I should point out that within Electronic Systems, we expect all three of the lines of business there, the MS2, missiles and fire control and platform training to have double digit return on sales.

And that's consistent with what we're outlooking to you.

Okay, great.

Thank you.

Thank you, Doug.

Michael, this is Jerry.

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

Okay.

And our last question will come from Jim McIlree of Collins Stewart.

Okay.

This will be easy.

All my questions have been asked and answered.

Okay, great, Jim, thank you.

Well, with that.

I'd like to offer some closing comments.

Looking foward, it is essential that we continue our efforts to execute on programs and deliver the best value solutions to our customers.

The future budget environment and changing customer priorities will require continuous focus on cost efficiencies and program performance.

Our 146,000 employees have us uniquely positioned to deliver on these requirements, and differentiate Lockheed Martin in the eyes of shareholders and customers.

I'd like to close by thanking you for your questions, and for joining the call today and we look foward to talking to you again in July.

Michael, that concludes our call.

This concludes today's Lockheed Martin conference call.

Thank you for joining us and have a wonderful day.