洛克希德·馬丁 (LMT) 2010 Q2 法說會逐字稿

Good day and welcome, everyone, to the Lockheed Martin second-quarter 2010 earnings consults 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, Devon, and good morning, everyone.

I'd like to welcome you to our second-quarter 2010 earnings conference call.

Joining me today on the call are Bob Stevens, our Chairman 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 today that we plan to address during the call to supplement our comments.

Please access our website at www.lockheedmartin.com and click on the investor relations link to view and follow the charts.

With that I'd like to turn the call over to Bob.

Thanks, Jerry.

Good morning, everybody.

Thanks for joining us today.

I hope this call finds you well and maybe finding some ways to survive the heat of this summer.

We have a lot to update you on today and I would like to get right to it, so I 'l proceed on the basis that you've had a chance to read the earnings release and see our updated guidance.

I'd like to start with a operational overview and I;ll walk you through the highlights on a business area by business area basis.

In Aeronautics there are three programs I want cover and I want to start with the F-35 program, as the Joint Strike Fighter remains our program of greatest opportunity and greatest challenge.

And I want to spend a bit more time on some additional detail with you here so you have a good feel for where we are on the program.

In the quarter the government completed the Nunn-McCurdy recertification process, finding the F-35 to be essential to national security and a high priority.

Extensive cost assessments and risk analyses were conducted and evaluated by the DoD, highlighting areas requiring additional focus, adding resources to the development program in flight tests and in software development, while lowering the near-term production ramp rate by 122 airplanes.

The program executive officer, that is the senior-most government official on the program, that position was elevated from a two-star billet to a three-star billet and Admiral Dave Venlet, a superbly qualified professional with lots of relevant experience, is now this role.

And recognizing that there are program uncertainties and risks remaining, DoD called for a series of what will be routine, on-going reviews to monitor performance and to make adjustments.

And the first of these reviews under Admiral Venlet, known as a technical baseline review, is now underway and likely to be completed by the end of the year.

Let me look at the program now in two segments or phases; first, the system development and demonstration phase.

The work here I regard as the front end of the program, where it's essential to get the design, the development of the aircraft and test of the aircraft and its systems right, I think of this as the nonrecurring part of the program.

It's important to get it right here to assure that our customers get systems that meet their needs and I think it's critical here to focus on overall performance to assure we get it right.

And then I'll thought about the production phase of the program, which includes long-term aircraft delivery profiles that we think on a Joint Strike Fighter are likely to extend over decades.

In my mind, this is where the majority of the cost resides and this is where affordability will ultimately be determined, so here it's critical to focus on costs.

We are now at a critical juncture on the program, as I think you all know, of transitioning from the development program more fully into the production program.

In the system development and demonstration segment of the program, we're about 80% complete.

We have 15 of 19 test articles currently being evaluated and the four remaining are in build.

This 19 test article total excludes the prospect of an additional carrier variant that was discussed during the Nunn McCurdy recertification process.

Of the 19 aircraft, 13 are flyers in the flight test program and six are structural test articles, and all of those six structural test articles either are in test or have completed their test.

And of the 13 fliers, nine have now flown.

In the quarter we added the first carrier variant to the test fleet and early reports from this airplane are that it's flying very well.

Also on the carrier variant, we completed a successful drop test of the ground test article, which simulates the intensity of carrier landings.

Now here envision dropping the airplane from progressive heights that go up to about 12 feet, and in this test program we noticed no failures or no load exceedances.

So that is a very good set of results from this important test, which is essential for demonstrating the structural integrity necessary for carrier operations.

In testing the conventional take off and landing variant early flights already exceed the 7g loading conditions, which is good.

Static testing, or measuring the ultimate strength of the airframe is complete with no structural failures.

And weve begun durability testing to verify that the air frame will meet the plane's 8,000 hour life.

We have two airplanes, equipped with mission systems; one short take off and vertical landing and one conventional take off and landing.

These mission systems aircraft give us early insight as to the performance of advanced avionics, like the active electronically scanned array radar, the electronic warfare systems, the communications suite, the advanced targeting systems and so forth.

The goal here is to get some sense of sensor fusion, or the ability to assemble information from different systems to generate greater levels of situational awareness.

Not just for the pilot, but for all those who would have information streams linked to the Joint Strike Fighter.

And I think all are pleased with the early results of the test of the mission ship systems airplanes.

Let me give you some detail on the status of the flight test program.

Year to date through June, we have flown 136 flights against the plan of 118 flights.

So overall, we've had a good tempo and we're running ahead in total numbers.

When I break down that total for you by variant you will see that the conventional take off and landing airplane has flown 56 times against the plan of 22, and the carrier variant has flown six times against the plan of one.

So we're getting solid early performance here, performance on flights that was better than planned, and we're getting good feedback from the airplanes and all this is very positive.

On the STOVAL airplane we have flown 74 times against a plan of 95 times.

Here we wanted to accomplish more vertical landings, satisfy more test points, and get more information sooner, but we've thus far been unable to do so.

So the question becomes why are the CTOL and the CV aircraft running ahead of plan as STOVAL runs behind plan.

The answer lies in the early reliability of selected components on the STOVAL aircraft, where we're seeing failure rates that are higher than predicted.

Now I'd describe these components to you as the ones would you probably not view as major systems, like the engine, which is working very well -- recall we've flown supersonic and we've hovered with the airplane -- or the lift band or the control laws or other such major components.

The components that are failing are more of the things that would appear either smaller or more ordinary, like thermal cooling fans, door activators, selective valves or switches, or components of the power system.

So when these components don't work because of their initial low reliability we don't fly and we don't fly because assuring safety is our uncompromised highest priority.

And often the maintenance action to address these components takes longer than you'd think given the less-significant nature of the parts involved.

In some cases we've had to remove the engine to get access to the component.

And because we're in the early phases of flight test where we all exercise an abundance of caution, it's important to perform an additional series of tests when your take the engine out, including ground tests, which consumes a lot of time to get to a more ordinary part like a cooling fan.

We're now working with our customers on a variety of actions to address the STOVAL flight test pressure.

They include identifying the troublesome components and working with suppliers to understand and improve their reliability, perhaps examining supplier/manufacturing processes or examining whether we need to have them change the design of the parts or change the sparing, or provisioning on the program simply to have more parts available.

Given what we've seen, both we and our customer subject matter experts believe this component reliability condition can be corrected and the inherent reliability can and will be improved.

Together we're also looking at ways to improve the overall flight test efficiency, with the goal of improving tempo.

Here we'll look at rephasing activities, adding some selective resources that we have already begun to do, looking at additional aircraft instrumentation, and perhaps looking at different concepts of operation.

Now let me give you one example of the family of things we might consider here.

We'll look at hot pitting the aircraft, which means that we don't turn the engine off, on the airplane.

We refuel it with the engine running and we go fly again on the theory that when the aircraft is flying well and when weather conditions are cooperating we keep flying the airplane as much as possible.

This will reduce the turn-around time of the jets and interestingly could create a condition where we'd have fewer flights because a flight is actually measured at the end of the mission where we shut the engine off.

If we don't shut the engine off to get more data by reducing turn-around time we'd have fewer flights, but we can certainly generate more information, which is the essential purpose of the ultimate goal of the flight test program.

So, we are working with customers throughout the test community to envision ways to get more utility out of the assets that we have.

During my last visit to Pax River where the Navy is testing the airplane, in going through not only a series of reviews but walking the facility and the flight line, talking to the pilots who are flying the airplane and all those working on the aircraft, getting the advice of subject matter experts and meeting with Navy leadership, you just couldn't help being very impressed with the quality of the team.

And this is a fully integrated test force, which means that the United States Navy and United States Marine Corps personnel are working in conjunction with other government personnel and industry personnel in a completely seamless way.

The subject matter experts that are at Pax River are genuinely impressive.

They have lots of experience and they have lots of relevant knowledge and they are a first-rate team.

And they're working smart and they're working hard and we have the full and complete engagement of senior Navy and Marine Corps leadership.

So I want to take a minute and extend my thanks and appreciation for their professionalism and dedication as they work on this flight test program.

Also, in the SDD phase we're developing software for the Joint Strike Fighter in five blocks.

The second block of software, known as block 0.5, which is the first mission systems software, is now flying on two airplanes.

This block includes about 5.5 million lines of code.

The early experience here is the software is a very good quality and functionality, and importantly, it's demonstrating stable performance.

So we've been very pleased with the results here although it took a little longer and required more resources than planned to deliver this block into the test program.

Block 1.0 is now in development and scheduled to be released later in the third quarter.

This block will add about another million lines of code to the prior software.

With this software delivery the airplane will have more than 80% of its total software.

We're going to spend a concentrated effort with our customers over the next several months during the technical baseline review process that I described earlier, looking at the overall software program, examining stability, quality, complexity, productivity, and we'll make adjustments accordingly, appropriate because getting the right software on the program that demonstrates full mission capability is absolutely critical as a component of the SDD phase.

In the production segment we have 31 airplanes in the first three low-rate initial production lots flowing in fabrication or assembly.

We previously received long-lead authorization at Lot 4 at 32 airplanes.

We're now negotiating Lot 4 at present, receiving a thorough and detailed review by the government customer that we expected.

And Lot 4 will likely result in a fixed-price, incentive-type contract when the negotiations conclude.

And DoD also authorized $522 million for long-lead material associated with the next low-rate initial production option, that's LRIP 5, at 42 airplanes.

We continue to see improved cost performance and our learning curve projections, including those associated with Lot 4, continue to support long-term affordability objectives.

And I think it's fair to say that the production cost trends overrule remain on the favorable side of prior estimates, which is where we all want them to be.

As with any accelerating production program, we do have some challenges and our focus here is on retiring risks; working with the supply chain on phasing, and quality, and reliability, and schedule maintenance; on reducing travels or out-of-cycle installations that put pressure on aircraft delivery schedule, which we're seeing; and working with the government independent manufacturing review team as they continue their assessment in the next regularly-scheduled review cycle.

On some other mattles -- matters we have an agreement on the corrective action plan to improve our EBMS system and appreciate the help we've received to establish a better foundation here.

And international partners continue to express interest.

The Italian Ministry of Defense signed an agreement for $1 billion final assembly and check-out facility that'll be used for aircraft for Italy and the Netherlands.

This is part of our worldwide supply chain strategy.

Canada recently reaffirmed interest in 65 airplanes and Israel continues to look at Joint Strike Fighter as a potential FMS buyer.

On balance they've taken as a whole the Joint Strike Fighter is showing strength in many areas of accomplishment with some areas needing more focus.

In flight test, the conventional takeoff and landing aircraft, this is the airplane that will be sold in the greatest numbers.

And the carrier variant are doing well and STOVAL needs more attention.

In software development quality, functionality and stability are good, and we need to focus on productivity.

And in production, our learning curves support overall cost reduction and affordability objectives and we need to address some schedule pressures.

On the C130J airplane our production build-up from 16 aircraft last year to 26 this year is on track.

We delivered six airplanes in the second quarter and customer interest here remains strong.

In the second quarter we received orders from Kuwait and Israel.

On the C-5 modernization program we inducted the third Airlifter into the line.

I think you'll recall overall plans call for 52 airplanes to be modernized by 2016 and we think this approach to life extension provides great value to customers.

In Electronic Systems, let me highlight two areas.

In ballistic missile defense our THAAD program achieved its seventh consecutive successful target intercept, demonstrating the ability to destroy a unitary target in the lower earth atmosphere, known as an endo atmospheric intercept, and this success expands, again, that operational envelope for this proven and capable system.

This system is strongly supported as a DoD priority and offers, both domestic and international sales potential.

On the Littoral Combat Ship program our second ship, the Fort Worth, remains on cost and on schedule, with now 55% of the construction completed.

Our offer for the 10-ship buy has been submitted and we should learn of the Navy's decision, we think, some time in August.

We have been listening very carefully to the Navy and their expectations, and have fashioned a low-risk, cost-competitive approach to the program on a vessel that we think would also be of interest to international buyers.

In Information Systems and Global Solutions on the next-generation identification system for the FBI we've begun to fully develop and deploy a new capability to transform how law enforcement officials will search a wanted person database.

In one of our horizon market initiatives we were pleased the Tech America Foundation named Lockheed Martin's ironclad the most innovative cyber security and authentication technology of the year.

Ironclad is a new technology that shrinks a laptop's hard drive, operating system, software applications and files on to a secure USB flash drive.

This program's another example of leveraging our overall expertise in data security as we work to provide cyber protection solutions to customers.

Lastly, in IS&GS, earlier this month we were awarded a contract by DoD to manage the Special Operation Forces Support Activity, a contract known as SOFSA.

This award, with a value up to $5 billion over the next 10 years, represents a reinstatement of a contract that we had initially won last year, and enables us to move forward to support our nation's Special Operation Forces.

As a result of our recent organizational realignment, the SOFSA contract will be managed by Electronic Systems as we move forward.

Finally, our Space Systems team continues to demonstrate progress on the Orion program by successfully completing the flight test of the launch abort system.

The system pulls the crew module away from the launch vehicle during an emergency and will significantly improve crew safety for future human space flight.

Other progress includes the successful completion of phase one safety reviews of NASA's human rating requirements addressing the designs and operational concepts for the capsule.

Beyond operations, on May 8, Secretary Gates challenged the Department of Defense to examine its internal cost structure and overhead expenses, with a goal to change the way the department does business.

Secretary Gates outlined a goal to save more than $100 billion over five years, beginning in fiscal 2012, by reducing unnecessary expenses.

The objective is to redeploy adequate funds to pay for troops and modernization while sustaining a growing top-line defense budget.

On June 28, Undersecretary of Defense for acquisition, Ash Carter, outlined this new focus to acquisition professionals and the defense industry.

The new initiatives are designed to achieve cost savings in the defense acquisition system to enable funding for war [glider] capability to grow at approximately 3% annually while maintaining a vibrant and financially=healthy defense industry.

We understand this new reality of escalating demands on our customers and increasing constraints on the resources available to achieve their missions.

This new reality requires that we adapt and drive affordability to ensure that we're doing everything possible to make every dollar count.

In support of these initiatives we've implemented a number of actions.

First, we've rebalanced our IS&GS portfolio, announcing plans to divest most of our Enterprise Integration group and the Pacific Architects & Engineers unit and there seem to be honest a good level of interest in these businesses.

We also realigned our Readiness & Stability Operations in our Savi Technology business from IS&GS to Electronic Systems.

These actions will strengthen our focus and our performance over the long run and help provide the best, most-affordable solutions to customers.

We've implemented a voluntary executive separation program, designed to reduce layers of management, improve affordability, tighten reporting relationships and allow for more direct lines of communication, both inside and outside the Company.

We reduced our presence at the Farnborough Airshow by 50%.

We've cut our advertising budgets and reduced our travel expenses and we're going to continue to work at every aspect of this Company with a focus on reducing costs.

These actions reflect that new reality and are designed to enable us to continue to deliver the best value to customers, while positioning us for financial success for our shareholders.

Even with this changing domestic framework we continue to see strong alignment of our portfolio with overall program priorities, and believe we will grow more than the rate of growth in the base defense budget.

And internationally, we see solid and expanding demand for our portfolio of products and continue to drive on our goal of increasing international business content to approximately 20% of corporate revenues by 2012.

Well, with that slightly-longer summary for you I want to turn the call over to Bruce for some additional detail on the second-quarter financial results and then we'll open it up for your questions.

Thanks, Bob.

As we've done in prior calls we've included charts on our website to help with this part of the discussion, and at this time I'd encourage you to open the charts and follow along as I make my comments.

Let's begin with chart three -- excuse me -- which is just a reminder that all financials in today's web charts reflect the impact of the portfolio shaping we announced earlier this quarter.

First, Pacific Architects & Engineers will move from the continuing results of IS&GS into discontinued operations, as we have decided to sell that business.

As a result of this, we have lowered our sales guidance for the expected level of annual sales but we were able to offset the earnings impact and our EPS guidance as you will see in later chart.

EIG, on the other hand, will remain in continuing operations, as we evaluate a sale versus a spinoff to our stockholders.

Finally, we realigned our Readiness & Stability Operations, our RSO business, from IS&GS into Electronic Systems where it will be combined with Simulation, Training and Support to form the Global Training & Logistics line of business.

If you now turn to chart four and our second-quarter sales summary, overall the corporation grew 3% in the quarter, with all four business areas achieving growth above prior-year's levels.

IS&GS had the highest level of growth of 6%, due primarily to growth in our civil line of business due to work with the census program and other IT work for numerous federal agencies.

Electronic Systems generated revenue of $3.5 billion with 4% growth in the quarter.

This was driven primarily by Global Training & Logistics and tactical missiles at Missiles & Fire Control.

Aeronautics grew 2% in the quarter, primarily from expansion on how -- on the F-35 low-rate initial production contracts and higher C130 deliveries.

Space Systems grew 1% in the quarter due to expansion in government satellites and growth in the Orion crew exploration vehicle work.

This was tempered somewhat by the wind down of external tank fabrication resulting from the upcoming retirement of the shuttle fleet.

If we now look at chart five and our cash from operations, again this quarter cash was very strong as we generated in excess of $1.2 billion.

And I'll point out, this is after making a cash contribution of $350 million to our pension trust in the quarter.

The $2.9 billion through the first half of the year represents $500 million more than at this time last year.

And looking forward to the second half of the year we remain committed to contributing at least, $1.05 billion, additionally to reach our previously-announced $1.4 billion in discretionary contributions to our pension plans.

This remaining contribution to achieve the $1.4 billion level will be made entirely in the third quarter.

And because of the strong cash generation this quarter, we're increasing our full-year cash from operations guidance to at least $3.4 billion, or $100 million above our prior projection of $3.3 billion.

If you'll now look at chart six for a discussion on our ongoing activities and share repurchases, we increased our share repurchases by almost 50% above first-quarter levels, repurchasing 9.7 million shares for $782 million.

This brings the year-to-date level to 16.2 million shares for $1.3 billion, well above our stated goal to allocate $1 billion for share repurchases in 2010.

Our share repurchase actions brought our balance sheet shares outstanding to around 360 million at the end of the quarter, a new low level in the corporation's history.

Our next chart, chart seven, will highlight our debt exchange that took place in the quarter.

This chart shows all of our bond maturities over time, which graphically shows that there are no debt maturities until 2013, which we've mentioned in the past.

The yellow portion of the bars shows the amount of our high-coupon bonds that were exchanged for new 30-year debt in 2040.

Coupons ranged from 7.2%, to 8.5%, versus our new debt with a coupon rating of 5.72%.

As the chart says, this extended our maturity while lowering the average coupon of our overall portfolio.

Moving next to chart eight and our earnings per share performance, second-quarter earnings per share, from continuing operations was $1.96.

This reflects a 5% increase from our prior level of $1.87 and the improvements resulted from improved operational performance and lower share count.

On the right-hand side of the chart the adjusted EPS of $2.41 per share increased 16% above last-year's level, including the discontinued operations items, and $0.19 for the FAS/CAS adjustment.

Finally I'd like to turn to our full-year 2010 EPS guidance reconciliation on chart nine.

From what we provided in April we were able to increase our guidance by $0.15 to a level of $7.15 to $7.35 per share due to our reduced share count outlook and improved operational performance in Space Systems.

This level includes the impact of removing the annual earnings for PAE.

Moving down the chart to our GAAP EPS outlook, including discontinued operations, our outlook is for $7.45 to $7.65 per share, which includes the PAE earnings removed from continuing operations, plus a tax benefit from the difference between our book and tax basis, which is required to be recognized as we classified PAE as being held for sale.

I will remind you that the values on this chart do not consider the effects of our previously-announced voluntary executive separation program and we expect to have the impact -- net impact quantified during our third-quarter earnings call.

Overall the second-quarter results were solid and particularly strong in the area of cash from operations and I look forward to the rest of the year.

I think we'll continue to see the second-half revenue will have higher growth than the first half, with overall margins fairly consistent with what we experienced in the first half.

We expect third-quarter cash to be down considerably as we make the over $1 billion investment in the pension plan payments to get to the $1.4 billion level we previously discussed.

One final comment before we open for questions.

We're revising our prior practice and will now wait until January to provide our initial financial guidance in 2011 -- for 2011, excuse me.

We're still seeing tremendous volatility in both stock market performance and interest rate movement, and on top of that, cash harmonization still remains undecided at this time.

So because of that we believe it makes more sense to wait until we have these numbers at year end rather than provide interim numbers in October.

I also think this aligns us more closely with what our peers are doing in this area.

And with that I think we're ready for your questions.

Devon?

Thank you.

(Operator Instructions).

Our first question comes from Joe Nadol of JPMorgan.

Thanks, good morning.

Bob, thanks for that update on F-35 on the flight testing and everything you gave.

I was wondering if you could give at more detail on where you are in negotiations on both LRIP 4 and the redo or the update to the SDD contract?

Any sense as to when this stuff gets concluded and if there are any -- because we're late now relative to when we usually sign the contract, usually it's May, now we're in late July?

And any color you can give.

Yes, happy to, Joe, thanks for your question.

So, I think the most accurate answer on LRIP 4 is that we meet recurringly and are going through great detail on the program.

My sense is -- I share your view that it's taken longer, Joe, but I think the time that we're investing is sensible time to make sure that all the details are right.

I will tell you from my point of view, as we will take a fixed-price incentive-type contract here, we certainly want to get this right so that we undertake -- understand the risks and expectations.

I think there is a corollary for the people on the government's team to want to get it right from their point of view.

So I don't feel there's any particular distress here, there's no particular pressure.

I just think it's a genuine effort for everybody to want to get it right.

My feel is we're weeks -- a couple of weeks away to finalize it.

As I said, the ongoing discussions are fulsome, they are interactive and we are exchanging views and listening to proposals and counter proposals and options and thoughts and things.

So I will tell you it's gone a little longer but I would not characterize it as getting off track in some way.

On redoing the SDD contract, I think that's going to take a bit of time and I think that's going to take a bit of time because, as I mentioned to you, there are a couple of reviews that I think we should all begin to internalize as ordinary and even routine on a program of this nature and it might even grow to be routine on other programs that meet a threshold in the Department of Defense.

In our case it is a technical baseline review that's already commenced that I think we will be done -- I will tell you October or November.

I don't control the date on that but we're certainly working in close conjunction with the review team, as well as an update to the independent manufacturing review team, and that's how I phased in my mind, Joe, the likely resolution of matters remaining in the SDD phase of the contract.

Thank you.

Our next question comes from George Shapiro of Access 342.

Yes, good morning, a question on Aeronautics.

First, this quarter had 11.8% margin.

I'm thinking that you probably increased the margin on some programs, maybe the F-35 production, so if you could go into that?

And then the second-half guidance implies that margin's going to go down to 11%, or so, when it seems like it should, if anything, get better because you will have more C130 deliveries, F-35 production will probably be higher.

So if you could explain why you'd expect it to go down in the second half?

Thanks.

Yes, thank you, George.

Maybe just a couple comments on the quarter itself.

As you said, you're right at the 11.8% margin in the quarter and I think of that as I compare it to last-year's second quarter as we've got much more F-35 volume, bringing in with it lower margins than the rest of the portfolio.

We also have in the quarter three additional C130s, and those bring with it typically probably higher margin than the overall portfolio.

Those are being offset by reductions in both the F-16 and F-22 program so that's kind of how we got to the second quarter here.

The -- I'll give you just a stat on.

I just found it kind of interesting, as I was looking through some of the data, George ,just to put it in perspective.

For the first half of 2010 the development program that Bob mentioned for the F-35, the SDD contract, is two-thirds of what it was in the first half of 2009, while the LRIP contracts, particularly the early production contract, is twice what it was in the seco -- in the first half of 2009.

So you see the phenomenon where we're shifting significantly from the SDD contract over to the LRIP contract.

It's -- or contracts, excuse me.

As far as why we're seeing some down side in the second half of the year, you're right that there are higher C130J sales, both quantity-wise and dollar-wise in the second of half of the year.

But at the same time we're seeing some acceleration overall F-35 activity and, of course, that brings with it the lower margins in total that the F-35 program brings with it.

There was -- you mentioned a profit step up.

There was a profit step up in the LRIP contracts in the first half of the year and we're not seeing likely a step-up in the second half of the year, and that's another reason why we'll be down in the second half versus the first half.

Our next question comes from Richard Safran, Buckingham researcher.

Hello, Rich?

Rich?

Are you there?

Devon --

Hello?

Rich?

Yes, can you hear me?

Can now.

Okay.

Don't know what that was.

Did not have the mute button on.

Okay.

So, just a quick question on the cash.

You have a tremendous amount of cash reserves, you're generating record cash, doesn't really seem like you're interested in a large acquisition, so just a couple of things here.

You bought back a lot of stock in the first half, does that continue in the second half?

Will you be slowing that in the back half?

Is there a 100 dividend yield likely?

Is there a special dividend?

Can you just go over what you think the plans are for cash here?

I will take a shot at that and Bob can add to it anything I leave out, Rich.

Cash has been strong.

As I pointed out, cash was strong in the second quarter, even making a $350 million pension payment in the quarter.

I tried to tee up in my comments that the second half of the year will bring with it $1 billion-plus contribution -- discretionary contribution to the pension plans and that's -- we try to characterize that as being at least $1.4 billion in total for the year.

So, we do have the potential, as we always do in the second half of the year, particularly in the fourth quarter of this year, to take a look at where we sit pension-wise, funding-wise, and cash on hand-wise and decide if there's additional contributions or not that'd be beneficial to make in the latter part of this year.

You asked about dividend yield, Rich, and I'll say we always take a look at that in the third-quarter timeframe.

We'll do that again with the board directors at the September board of directors meeting.

I think we've had some seven consecutive years of 10% or more increase in our dividend rate on the annual basis.

We'll take a look and see what the board wants to do in the September timeframe, as I said.

And lastly, I think you mentioned the potential for special dividend yield.

I don't see that happening.

That's not under consideration at this time.

Okay, thanks very much.

Thank you.

Our next question comes from Myles Walton of Deutsche Bank.

Thanks.

Was wondering if you could talk about a bit about the moving parts in Space has moved from 2010 into 2011 and in particular, the equity accounting for USA and what you expect there given the manifest?

And also, what your plan is currently for Orion as you see the authorization and appropriations fight out and come to some resolution here?

Okay.

How about, Myles if I take the equity part of that and maybe I'll ask Bob to comment on the Orion piece overall?

Sure.

On the equity -- well, let me back up, Myles, and just give you an overview of Space in general.

Space had a very strong first half, a very strong second quarter, and as I look at the second half of the year, I think that's an area where we potentially have some better performance coming in even than what we're showing in our guidance numbers there.

So real strong performance coming out of Space, particularly on the EBIT side of that.

And I think as I teed up likely a -- I've lost track if I did that in the fourth quarter call but I know I did in the first quarter call, I talked about there being a spike in the fourth quarter in Space Systems margins, primarily because of the cessation of the shuttle program and profit adjustments we'd make there.

I'll point out our current guidance does not include the effect of that adjustment as a result of the fly out of the shuttle.

It's Kind of a right on the bubble as to whether that's going to be a fourth-quarter event of 2010, or if it's going to roll over into 2011, but right now, that is not in our planning for the 2010 timeframe.

Once that final event has happened for the United Space Alliance and flight of the shuttle we would expect to see the equity earnings of that drop fairly dramatically.

You should think of the -- between the two of them I'll to say between United Launch Alliance and United Space Alliance probably somewhere in the order of $120 -- $200, excuse me, million worth of equity earnings in total.

USA is probably two to three times the size of -- excuse me, United Launch Alliance is two to three times the size of United Space Alliance, so the impact won't be the full $200 million, obviously.

We showed that reduction and I gave you guidance.

I think in the third quarter of last year we talked about longer-term views of Space's margins -- Space segment's margins and I still think that even with the reduction in the USA equity earnings, the margin level that we're seeing for Space can sustain primarily because of some adjustments we're expecting to see in some of our government satellite contracts.

So I don't see large margin cliff coming -- going from 2010 to 2011.

And, Myles, let me talk a little bit about interactions we're having with not only NASA but other members of the administration about exactly what the human space flight plan forward ought to look like.

I can tell you members we're talking with are working lard and very focused on developing a balanced approach.

Balanced with regard to funding, balanced with regard to probabilities of success, certainly balanced with regard to overall risk.

And there is an interest in leveraging the investments that have been made in Orion, and Orion's performance continues to be rated very good on a programmatic basis.

So we think they're trying to develop a formula that gives them flexibility going forward and we think that Orion will lay a role in that flexible approach.

Perhaps first as a crew rescue vehicle, which I think we've talked considerably about.

Not launching astronauts from the earth but sending the capsule to the space station, such that in an emergency the crew could evacuate, get on the crew rescue vehicle, and return to earth.

But also, having flexibility in the Orion configuration that over time, it can evolve into a crew exploration or a crew transport vehicle that would include lifting astronauts from the earth.

And of course, the capsule discretion in Orion is also unfolding with regard to a variety of propulsion systems, what rocket or type of rockets will be available to ride when.

So there's a pretty comprehensive review right now.

But our sense is that we have performed well, that individuals see the merit and risk reduction associated with Orion and that there will be a role for the Orion space craft in some fashion as the strategy unfolds.

And I think we'll learn a lot more about this in the second half.

Thank you.

Our next question is from Heidi Wood of Morgan Stanley.

Thank you.

Bob, a question for you on the F-35.

When the program was awarded, Pete Aldridge put restrictions on it, insisting that spiral development would be necessary to contain cost growth.

And we now read about the Pentagon complaints about cost growth and no discussion about requirements creep but one presumes they're related.

I believe also know that's the issue that reported -- is repeatedly heard or sank programs, so as we look forward what's the likelihood that we're going to be seeing continual cost growth on the F-35?

Or put another way, Bob, when can we see the cost growth has peaked?

Where are we on the bell shaped curve?

Heidi, that is a broad, pretty sweeping question.

Let me give you the best deal I can.

I do envision the program as having two discrete components, as I mentioned in the remarks; the development phase and the production phase.

The development phase, while lasting a number of years, is the shorter phase and for me the criticality there is invest everything you need to invest to get a fully mission-capable system while focusing, in the production program, on driving out the costs of recurring production of that fully mission-capability system.

So, we saw through the Nunn-McCurdy process, and we may see in an iteration or two in the future, some adaptations or adjustments associated with making sure we're allocating resources in a smart way to get everything we need to have on the program.

Now in that development phase I would say resides at least part of your concern about requirements creep and I will tell you we're not seeing requirements creep, or the generation of a lot of new things, let me say, in some significant or major way.

And I attribute a great deal of appreciation to customers who came forward early, and who made sure that the airplane would meet their operational needs and focus.

And I think Admiral Dave Venlet here is a real strength because he brings an operator's background and he ran the Naval Air Systems Command and he understands knowing to think in terms of operational needs and he works with his colleagues in that way.

We will see the manifestation of these developments of how well we're doing in demonstrating the performance of the airplane and if there are any additional features.

We'll probably see that unfold in the test program where people might, under reasonable circumstances, want to see some tests added to demonstrate or assure some aspect of the overall performance.

We may see it in some software, but I pretty much think and has been reinforced by the tests that we've completed, the hardware is progressively locking into a good configuration and there are no major technical show stoppers, to date, on the program.

We believe that.

I believe all in the government who have responsibilities of overseeing the program believe that.

So for me, I know the numbers of airplanes are big, the size of the program is large and therefore, the cost numbers are significant, but I think within a substantially large program we're seeing adaptations that we'd expect to see.

But, again, I want to disabuse you of any sense you might have that requirements churn or creep are driving either our performance on the airplane or within the program, or the overall cost of the program, because that's really not a source of cost concern at present.

Thank you.

Our next question comes from Doug Harned of Sanford Bernstein

Good morning.

On IS&GS, when you look at the performance in the quarter and look at it with the new alignment compared to past quarters, the margins really didn't change much in the quarter and backlogs were down about $700 million.

Could you talk about what's happening there?

And some of the programs I would assume that you've had issues with those should be moving behind you, yet we haven't really seen the improvement in margin.

So could you talk about both those issues, both the backlog and margin there?

And, Doug, I'll take a shot at that.

I think your starting premise there that the programs that we discussed in the second quarter of last year that caused the margin pressure last year, that the performance on those programs is largely behind and I'd say that's true.

What we are seeing, though, is that if you look -- take at the look at the newly-configured IS&GS, we still operate under the civil, the defense and intelligence line of businesses and you should probably think of those businesses as comprising probably about 40% civil and roughly 30% defense and intelligence and what we're seeing happening is that the civil piece is growing at a very, very fast clip relative to the other two.

In fact, the other two in the second quarter, actually intelligence was fairly flat, defense business was actually slightly down.

And so, while we're seeing in the quarter both defense and the intelligence lines of business, doing, I'll say, north of double-digit margins, the growth that we're seeing in civil, think of that as the high single-digit kind of Ross business is offsetting that performance in the defense and intelligence and resulting in a flatishness in the margins that you're talking about overall.

Relative to the backlog, I think some of it's just the timing of orders.

I don't particularly see -- and I'll speak to backlog in general for the corporation, not just IS&GS.

But we don't truly have a whole lot of large-scale competitive orders.

The largest one of note, obviously, is the Littoral Combat Ship, which should be decided next month.

Most of the rest of our orders across all the business areas, not just IS&GS, you should think of them in the norm of firm and follow-on orders.

And I'll tell you particularly in IS&GS this year is particularly spikey in the fourth quarter where a large number -- it's always high to begin with but this year it seems abnormally high for the number of orders in the fourth quarter versus the rest of the year.

I think overall, just backlog in general, we ended up a little bit down in the second quarter compared to some.

Some of those because of the delays, frankly, in getting the -- getting the LRIP 4 negotiation done out of Aeronautics.

But as I still look forward to the rest of the year for backlog I think we're going to see growth in the third quarter and then growth in the fourth quarter, as well, and I would expect that we probably end the year close to where we started the beginning of 2010 with.

Devon --

Thank you.

Our next question comes from Jason Gursky of city group.

Thanks.

Just a quick question on the Space Systems and looking out to 2000 -- as far as 2012.

I think in the past you've talked about the classified satellites that'll come in starting in 2012.

Can you remind us if that's still the case and what the scope of the contract is there for the classified satellites?

Yes, Jason, I think [it is a classified opportunity[.

I think in this world we can describe it as the next-gen satellite for the US government and it is a large opportunity.

We still see that as likely occurring in the 2012 timeframe in terms of the -- I'll say the quantity orders.

We're right now performing some development work as we speak.

We're already under contract for this, and I'll just remind you this is a contract that was awarded to us sole source some time, I guess, in the beginning of 2009 or late 2008 timeframe.

But I think the order you're talking about is more the production order and that's still on track for 2012.

And the scope of it and the size of it?

I used to think of that as being multibillions of dollars worth of orders and that's about as specific as I guess I want to get here.

Thank you.

Our next question comes from Ron Epstein of Banc of America.

Good afternoon, guys.

Hi, Ron.

Bob, when you think about F-35 in Europe and the current push for austerity in Europe, what impact do you think that'll have on orders out of that region and how do you think that could be offset in Asia?

Yes, I think that's a great question and, of course, one of the things we do, as you do pretty often, Ron, is push back and look at how the global economy is changing and what conditions will likely result as a function of those changes.

I note that the architecture of the program is such, and the nature of the program design is such that most nations, I think, pretty soberly look out at a set of risks.

The risks haven't really gone away and one of the considerable risks is the proliferation of surface-to-air capabilities.

Think of area of denial capability.

So what might have appeared more routine with regard to their use of tactical airplanes in the past is going to be anything but routine in the future because of the area of denial circumstances.

I think it's human nature that almost everybody doesn't want to think about the circumstances but some people are forced to think what happens if there is unrest, what happens if there's instability.

I think that is one driver of looking and balancing economic needs and security needs.

I think there still is a sense that we need to recapitalize on a security front.

I think also the way we've integrated global supply chain here, so many of the discussions that we are all quite familiar with on these types of programs extend beyond security to issues of economics and employment, and interest.

And that all makes a great deal of sense to us and I'm sure you, as well.

The Joint Strike Fighter architecture, in addition to being an interoperable system that shares the design and development on the security capabilities also shares a component of the industrial base and it's very strongly integrated into the fabric of the program.

So if you think of it in these terms there is a bit of offset on the economic viability, or vitality front because this generates value economically, as well as consuming value economically.

I think we have seen countries like Italy recommit, particularly with the final assembly and check out, a facility they were looking at the range of 131 airplanes.

Norway has committed.

We know that Denmark is running a competition and they'll make a determination.

The Netherlands and the United Kingdom are reviewing the program.

Previously they have been favorable.

And Canada recently committed to 65.

Just to round it out, Turkey committed to 100 airplane.

But we're also seeing early expressions of four military sales prospects in three of those countries, in addition to Israel, that is thinking about a total of 75 airplanes.

Three of those countries include Singapore, Japan, and South Korea.

They've very much been in alignment with the framework of your question that either there will be additional demand from countries like Singapore, Japan, Korea and others in Asia, or potentially offsetting demand.

And I would think that over time we would see an additional area of interest emerge and that would be the Middle East, where we have very important security cooperation relationships between our government and many government in the region.

And probably in a fashion not terribly dissimilar, from the Korean peninsula there is a region of potential instability or, at least, concern there where there'd also be proliferation of systems and sophistication in area of denial that would highlight the advantage of a first-generation airplane like the Joint Strike Fighter.

So, we may see some interest a little beyond the scope of our planning right now emerging from the Middle East.

Our sense is, if you make the right investments in a development program to get a fully mission-capable airplane, if we keep our focus on production, work near-term production pressures and make sure that these are affordable airplanes at the acquisition price, by driving down the learning curves and assuring just a sufficient level of volume to give us the volume to drive down the curves, keeping stability in that supply chain, we'll create the most-affordable, most-capable fighter that still will have interest in Europe, will probably have growing interest in Asia and growing interest in the Middle East.

Devon, this is Jerry.

I know we had some extended comments at the beginning of the call, so if we could extend the call to at least another 15 minutes to at least 1215 we want to go ahead and get some more callers out of the queue.

Yes, sir.

Our next question comes from Howard Rubel of Jefferies & Company.

Thank you very much.

Bob, when you took over leadership of Lockheed there were a number of things wrong and you set about methodically fixing them and, frankly, created an enormous amount of shareholder value and trust and you name it and it was done right.

Now we've kind of entered into a little bit of a more unsettled period and you've talked a lot about the F-35 and your initiatives to fix that and make -- I remember when you used to talk about the T-46 and the shock you had in that program and how that happened and how that just caused you to think about enterprises and so on.

And so maybe going forward could you outline some of the other things you're thinking about in terms of where you're not satisfied, Because it looks like you're starting to move pieces around to make the business better?

Yes, well, first of all, Howard, I want to thank you very much for reading the intro to your question exactly the way my mother wrote it, she'll be very grateful for that.

The -- there's -- I don't find that -- honestly, Howard, when I was given what for me is a huge privilege and opportunity to play a leadership role here, that the Company was all that awful.

There were things we wanted to do better and more of and things we had been doing that we were very proud of and we wanted to continue, and I tell you, that's my appraisal of the environment today.

There's things that we're doing enormously well in this Company, but we have spoken, I think, with great clarity about a new reality we're all facing and everyone of us is going to face a few reality every day and it's going to require us to behave differently.

I'm very proud of the workforce here, I think they are first rate.

Their technical skills are high and their commitment is unequaled.

These are professionals who believe in the mission and will do everything and anything they possibly can,to be successful.

Our job's to create the climate.

So I think you can look at the things we're engaged in now.

Portfolio reshaping is a careful examination of all of the lines of business and all the activities that we are in, and we want to make sure we're tightly aligned.

We're proud of the PA&E business.

These individuals in the business do great work around the country, but the customer demand is moving in a way that is progressively moving away from our strategic orientation and we're realistic about that.

In the case of EIG we're enormously proud of a 40-year-plus franchise here that we built, but we recognize the customers want to raise the bar on even the perception of OCI, of conflicts of interest, and we're going to respond, I think, professionally and well there.

We will work on cost reduction.

On the F-35 we're going to work on getting it right.

There isn't any human alive who has even come approximately close to programs like this who don't pressure the challenges involved.

I think I'm grateful that we're working with a customer who understands this, a customer who is committed to getting it right.

A customer who will add resources to a development program when they believe that's a prudent investment in the long-term viability, and I think they should speak in a voice that has expectations of us to be focused on cost and to do all the things we know how to do to get this right.

I want to stay focused on attracting the best talent to this Company and assuring that we're giving them a high-vitality environment to work in because the commitments we're making on the F-35 today are not commitments that will be extinguished in four quarters.

It will be here four decades from now.

So, we do the business in terms of generational evolutions and we're focused on that.

I don't see in any way -- and I know this is in your question, Howard -- the velocity of events or the volatility associated with changes, diminishing in the near term.

I think you and us and everybody involved in this process is simply going to have to prepare for a more robust set of circumstances and we're working to try to build that robustness in our processes and in our strategic planning and in our -- the agility with which we adapt to changing circumstances, which we think they're going to continue and they're going to require more agility.

Those are the kind of things we're thinking about.

You and others will make sure how well we're able to do.

Thanks for the question, Howard.

Thank you.

Our next question comes from rob Spingarn of Credit Suisse.

Morning.

Morning.

Wanted to ask you, Bob, about this sizeable Canadian F-35 deal.

Could you talk a little bit about if there is any customization of the aircraft or anything different there and to what extent the contract accommodates that or any other elasticity in the price, just given the cost situation now and how far out that is?

And then just separately, Bruce, how are you sizing SOFSA on an annual basis.

What do you think the flow is going forward and how much of that is war exposed?

Yes, on the F-35, Rob, we have had a partnership relationship with Canada and eight other countries, as well as three US services, for quite some time here with the award of the SDD contract in October 2001.

There's been a huge amount of collaboration and that collaboration includes the configuration.

And I think, you will probably hear when we explore opportunities in the future more oriented toward foreign military sales, the discussions about how much flexibility there'll be in the configuration.

But I'll tell you a considerable amount of flexibility is already built in the configuration to meet the demands that the operational command in various countries would have, because that was he point of developing the kind of partnership and consortium we have on the F-35.

So specifically to your discussion about Canada, there's very little discussion about some need for extraordinary tailoring of the air vehicle confession ration or its mission systems because, frankly, it's already there.

There will be discussions, I think, on a country-by-country basis that make a lot of sense about how those nations and those militaries will best support the airplane, and so there may be some tailoring of support requirements that would include some levels of industrial participation, and so forth.

I'll tell you that I believe you're not unfamiliar with this and we are certainly not unfamiliar to this, even as we just looked back of our F-16 experience.

So there's various ways that we can help to support or enable customers to improve their operational availability, improve their mission capability and so forth.

In the Joint Strike Fighter, at least in the near term it doesn't look like there'll be a lot of configuration adaptability, as much as there'll be flexibility in approaches for sustainment and support.

Now, Rob, you asked -- I think your second question concerned SOFSA and the level of activity we've got there and perhaps what the war exposure there is to the SOFSA contract.

Just a couple of thoughts from my perspective.

First off, this is an IEIQ contract and we're in the middle of about a -- I think it's a 120-day transition period to move from the previous prime contractor to ourselves.

So, we're in the early stages of recognizing any high level of activity, frankly, on that program.

Going forward on a steady-state basis, at least near term, as we look into 2011, I would think from what I know of the contract we're probably going to expect somewhere in the -- I'll say the $400 million to $500 million a year range in sales.

And I thought a lot about your question, on the war exposure and, frankly, my reaction's, I'm not sure I know what the normal is for this activity.

Special operation troops are so engaged all over the world, in any event, that I'm not sure how much of that changes as a result of, say a slow down in Iraq or Afghanistan, for instance.

So, that activity has not seen a whole lot of change from what we can tell from a number of years, but I will say all those years included the Iraq and Afghanistan conflict.

So I don't know that I have a very crisp answer for you there other than I'm not really sure what's going to happen there.

Thank you.

Our next question comes from Sam Pearlstein of Wells Fargo.

Good morning.

I guess, Bob and Bruce, can you talk about the planned voluntary reduction that you have hinted at.

And I know you don't know the details but can you at least size some of that?

Are we talking about something in the $10 million range, the $100 million range, or what should that look like in terms of one-time costs?

And then, is that something that is an allowable cost, and how should we think about the cost savings in terms of what you'll be able to keep versus what the customers might take back in pricing?

Yes.

Well, I think -- this is Bruce and I'll try to answer it, Sam, to begin with.

I think Bob characterized it right -- well to begin with.

This is part of our offering to essentially vice presidents and director levels across the corporation and we're early into the stage of the voluntary executive severance program.

The participants, or the eligible people have until December 7th to actually declare, so I don't have a quantification for you at this point in time.

I would expect to have that -- obviously September 7th falls in the third quarter.

I would expect to have that quantification in time for the third quarter.

Our expectation is that this would be allowable cost, that we're doing this with the idea of lowering our cost projections going forward as a result of this.

And I'll say we would expect to have some cost reductions, in particularly -- in particular as we do not backfill all these positions, first off.

And second off, perhaps if we backfill at the lower levels we're looking at that, as well.

So from an overall perspective I would think this would essentially pay for itself in fairly short order, and that's the reason I think it is an allowable context.

And, Sam, I'd only add -- and I must just for clarity and accuracy, I have not had a specific discussion with Secretary Carter about this initiative.

But generally, as we have all listened to Secretary Gates, Secretary Carter and others about asking not only the Department of Defense but all of the companies that support them in their mission, to take a very serious look, even an innovative look, or doing things that may feel a little nontraditional to get a better control of overall costs and value that support affordability, even to the extent of talking about ways to support initiatives with additional profitability or incentives or for other measures.

I'm not trying to put words into Dr.

Carter's mouth, but I think spiritually, notionally, this is very much aligned with the kind of initiatives that we all ought to be thinking about, and it is absolutely the right thing to do to tighten up span of control, to improve reporting, to lower the costs of structure to be effective and efficient in a time where efficiency matters more rather than less.

And that would certainly be part of a conversation we would have about whether the costs are allowable.

Because they're very good returns we think, for both the customer and, we think, for ourselves, and the goal of Secretary Carter's initiatives are to find these areas that work for the government and work for us.

So I've felt -- I think Bruce and others here have felt that this is very much in alignment, with the general sense of what we ought to be doing.

And as Bruce said, in September we'll know the total level of participation.

Again, the program is entirely voluntary and we ought to appropriately allow individuals time to consider their alternatives and then we'll be better able to report out to you more detail here, Sam.

Thank you.

Our next question comes from Cai von Rumohr of Cowan and Company.

Thank you for extending the question period.

A two-part question.

F-35, Bob, you've mentioned the need to maintain supplies, stability and you've also said several times this should be a very affordable plane if you hit the quantities.

Could you.

A, give us some color in terms of what is the leverage if the quantities are a little bit shallower build at the front end because funding considerations, what kind of threats that poses?

And secondly, maybe give us what your year-to-date pension return is, separate question?

Yes, I don't often think of the F-35 production ramp rate and pension in the same sen -- I'll ask Bruce to jump in on the pension side.

We've talked about some sensitivity.

Let's go back a little bit.

We look at 122 airplanes have been taken out of the near-term build rate, we're looking at 32 airplanes in Lot 4 that's under negotiation.

We're looking at the likely prospect of having 42 airplanes funded in the next low-rate initial production option.

The independent manufacturing review team, Cai, which is not a Lockheed Martin-staffed organization, but a government-staffed organization, we work supporting them in concert with them.

They've done a review of the program.

They will do another review of the program.

I think it's likely they'll continue to review the program.

We welcome that review because it gives us a lot of insight.

I think they have looked at a multiple of airplanes year over year, that history instructs all of us, let me say, with some latitude would more or less, be optimal.

Now that's not tied down to a specific aircraft or two or maybe three, depending upon volume, but it is a multiplier of about 1.5.

So if you wanted to hold a number in your head that may be a nominal point of departure you might think that every year you're adding about half again the number to keep that 1.5 multiple.

It varies a little on how much automation you have in the factory, how much machine-pace versus labor-pace learning.

I don't want to get into all the gorey details unless the audience here does, which I suspect not, but it its sensitive to that.

What's really fundamental to the overall affordability issue, in addition to volume, which is embedded in your question and important is, what costs are you starting at and coming down from and what learning curve is most likely to be able to be fit to those costs and that's the curve against which volume matters.

And right now, on the things that are favorable about the program -- I know there's more work to do, but on things that look good on the program, with more of the cost being in production, the early learning curve data, and the early initial cost positions look pretty good.

And of course, we're going to have to work really hard to hold and sustain that good profile and we're looking to help from the government to help us do that.

And we'll be able to give you an update at the completion of the independent manufacturing review team updated assessment that we think is coming up here in the next two quarters.

And that will probably run concurrently, at least in part, with the technical baseline review and it'll give us all good sensitivity about where we think we are, where the government thinks we are, where we need to make adaptations.

So we're not overly sensitive in the near term to production quantities but we're mindful that in the long run you've got to cope the volume balanced with the overall learning curves balanced with the overall cost architecture and we'll be working on that.

Cai, you'd asked about the pension return.

I'll just say we -- first off, I'm pleased to say we have positive results year to date on the pension plan's returns.

We're not quite at the 8.5% level, so we have some more work to do for if rest of the year.

I think maybe the bigger question there is what's happening with the discount rates because we have more liabilities than we have assets in the plan.

And as far as the discount rates are concerned, if we were to strike a line in the sand right now because of where we sit from an interest rate perspective it would probably be down somewhat.

And so as I said to my opening comments.

One of the reasons why we are pushing out the guidance for 2011 into the January call instead of October is because of the volatility we're seeing here, both on the asset side, as well as the interest rate side, frankly.

Devon, this is Jerry.

I think we'll get -- we're a little past 12:15, let's do one last call.

Yes, sir.

Our final question comes from Troy Lahr of Stifel Nicolaus.

Thanks.

Yes, thanks for taking my call here.

Just one question.

You talked about faster growth out of the civil IT business.

Is that mostly driven by the census work and when does that peak?

Is that second quarter or third quarter, or does that stretch out to the end of this year?

Yes, Troy.

Yes, two things.

The really sharp curve we saw in census in the first half of the year was due really to two main contracts.

The first one was the census contract, and you're right, that'll start to slow down in the second half.

I believe we hit peak in the second quarter and I think we start to turn down and that contract essentially phases out by the end of the year.

The second piece of the contract -- or second piece of the growth that we're seeing in the civil is really the Department of Energy Hanford site contract that you may recall was under protest.

Took awhile for us to get going.

We're now seeing the growth in revenue coming from that contract and that'll stay fairly constant over time.

Not just the end of this year but in next year, as well.

Is that ramping up enough to offset some of the census work in the back part, do you think?

I still think we're going to -- on that particular contract the answer is probably no, but we're still expecting to see the same sorts of growth going forward in 2011 that we're seeing in IS&GS today in its new configuration just because of other activity, particularly in the civil area besides the two contracts I mentioned there.

I think with that.

Devon, I'd like turn it over to Bob and let him give his final thoughts before we break up today.

Yes.

Well, just thanks very much for being on the call.

I know we went a little longer than we usually do, but we did want you to have a sufficient detail about our business.

I thank you for your patience.

We'll see you next quarter.

Devon, thanks for your help on the call today.

You're welcome, sir.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program, you may all now disconnect.

Thank you and have a nice day.