洛克希德·馬丁 (LMT) 2012 Q4 法說會逐字稿

Good day and welcome everyone to Lockheed Martin's fourth quarter and full year 2012 earnings results conference call.

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.

Sir, please go ahead.

Thank you, Karen and good afternoon everyone.

I'd like to welcome you to our fourth quarter 2012 earnings conference call.

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

I'd remind you that 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 Marillyn.

Thanks, Jerry.

Good afternoon everyone.

Thank you for joining us on the call today.

And I hope you've all had a good start to the new year.

Before I begin, I want to say it's a pleasure to be here on my first earnings call and I look forward to working with you going forward.

I hope you've had a chance to review our press release outlining fourth quarter and full year results.

I am extraordinarily pleased and proud of our Lockheed Martin team.

We have continued to achieve strong program execution and focus in a challenging environment.

These efforts enabled the Corporation to achieve exceptional operational and financial results in 2012.

Let me begin with a brief summary of 2012.

Strong order bookings in the fourth quarter resulted in our achieving a record annual level of almost $49 billion in new business awards from domestic and international customers.

Noteworthy awards included $4.4 billion on the F-35 Joint Strike Fighter program for additional production activities, $2 billion for two additional spacecraft on the advanced EHF military communications program for the Air Force, and $800 million for additional Patriot 3 missile defense components for the US government and Taiwan.

These new orders enabled us to finish 2012 with a record backlog of over $82 billion.

Our backlog of work provides a solid foundation for the future and is a direct indicator of the close alignment of our portfolio of products with customers' strategic priorities and requirements even in today's demanding fiscal climate.

Other record performance levels for the corporation included growing our earnings per share from continuing operations to $8.36, the highest EPS level we have ever achieved, increasing our segment operating profit to almost $5.6 billion, $300 million above the 2011 level, expanding our segment operating margin to a record 11.8%, an increase of 40 basis points above the 2011 level, and growing our sales to over $47 billion despite a challenging budget environment.

These achievements reflect our commitment to affordability as our team drives for increased efficiencies and improved execution for our customers.

We also continue to implement our cash deployment strategy to generate value to shareholders through dividend payments and share repurchases.

In the fourth quarter, we paid $373 million in dividends and repurchased $286 million in shares.

These actions brought our full year total for cash returned to shareholders to $2.4 billion, reflecting dividend payments of $1.4 billion, and share repurchases of $1 billion.

In addition to the cash returns in 2012, we generated 20% total shareholder return, achieved by stock price appreciation and dividend yield.

These results reflect the quality of our workforce, the strength of the Corporation, and the focus we all have on delivering value to our customers and shareholders.

Thanks to everyone in the Company for their contributions in driving these strong achievements.

In addition to these results, we also continued our strategic acquisitions under our string of pearls strategy with the purchase of two businesses in the quarter.

Both of these acquisitions expand our offerings in support of our customers' increased emphasis on advanced unmanned systems and are consistent with our goal to maintain a portfolio of technology advanced options that will generate value for customers and shareholders.

The first acquisition was for Chandler May, a Company that specializes in the design, manufacturing and support of unmanned aerial systems.

The second acquisition was for CDL Systems, a software engineering firm that specializes in the development and licensing of vehicle control software for unmanned systems.

These purchases followed our acquisition -- following our acquisition early in 2012 of Procerus Technologies, and will be part of our Mission Systems and Training business where they will be integrated into our growing portfolio of unmanned systems and technologies.

Turning now to operational performance.

Our five business areas continue to execute with exceptional skill and focus in providing critical products and services to customers.

While the quarter contained numerous accomplishments across the enterprise, I'd like to highlight two unprecedented successes in the ballistic missile defense test arena.

First, four of our five business areas provided equipment and support in the first ever integrated ballistic missile defense test of the Aegis, Patriot and THAAD systems.

These systems work together to successfully detect, track and destroy multiple ballistic missile and cruise missile targets in a live fire test.

This operational test was conducted by soldiers, sailors and airmen from multiple combatant commands and demonstrated the maturity and reliability of these essential missile defense systems.

It also demonstrated the benefits of layered interoperable missile defense solutions that can provide protection to the US and allies against the increasing proliferation of ballistic missiles.

With the proven reliability and capabilities of our Aegis, Patriot and THAAD systems, we look forward to growing domestic and international customer demand for our missile defense systems.

The second significant ballistic missile defense event was achieved by our Medium Extended Air Defense system or MEADS, successfully tracking and intercepting a target in its first ever intercept flight test.

MEADS is a next generation air and missile defense system that incorporates full perimeter 360-degree defense and provides eight times the coverage area of current legacy systems while dramatically reducing operational and support costs.

With this intercept demonstrating the maturity, next generation capabilities and cost effectiveness of MEADS, we urged Congress to provide future funding for the program.

Moving to the F-35 Joint Strike Fighter program, our Aeronautics team continued their momentum in this quarter, through significant advances on the development program and achieving an increasing tempo on production programs.

On the development program, key achievements included accomplishment of test flights for the year that were 18% ahead of goal, and accomplishment of test points for the year that were 10% ahead of the goal.

The aircraft also surpassed 5,000 flight hours and achieved the first aerial weapons release for CTOL and STOVL aircraft and maximum high angle of attack flight on CTOL aircraft.

In addition to the test flight success, I had the pleasure to attend the official delivery ceremony of the first operational STOVL aircraft to Marine Corps Air Station in Yuma, Arizona in November.

The ceremony marked the handover of the jets to the service and with the receipt of these aircraft, the base will start tactical operational training on this critical asset for the Marine Corps.

Also in the area of training, the 33rd fighter wing at Eglin Air Force Base completed the requirements allowing their wing to begin pilot training in 2013.

These events in Arizona and Florida demonstrate the increasing tempo and maturity of the training programs as we work to get these assets to the services.

Turning to production activities.

We continued to make progress on our production tempo, with delivery of 13 aircraft in the fourth quarter.

This brought our full year deliveries to 30 aircraft, more than double the aircraft deliveries achieved in 2011.

Significant contractual progress was also achieved this quarter with completion of negotiations on the LRIP 5 contract, award of an undefinitized contract action at LRIP 6, and long lead for LRIP 7.

These contracts provide significant stability to the program as we work with our partners to provide these critical aircraft to domestic and international customers.

These latest contract awards bring our F-35 production backlog at year end to 88 aircraft.

Our maturing production line, operational base standup and, expanded pilot training are all strong indicators of the F-35 program's positive trajectory.

Beyond the operational program accomplishments, we continue to take additional actions to drive affordability across the Corporation and to increase customer alignment.

Along with the previously announced reorganization of our Electronic Systems business area, into two new business areas, Missiles and Fire Control, and Mission Systems and Training, effective December 31, 2012, we also announced consolidation of several corporate functions at our headquarters designed to streamline and tighten the corporate staff.

These actions will improve collaboration and coordination across the enterprise, increase efficiency, and achieve greater synergy.

It will also focus us on the actions that best position the Company for success and growth in a demanding and dynamic environment.

I'd like to turn now to the status of DoD budgets and the continuing levels of uncertainty for fiscal year '13 and beyond funding levels.

Currently, the DoD is operating under a continuing resolution through at least March 27 for FY 2013 with funding constrained to prior FY '12 levels.

This limitation will cause funds to run short in some accounts and will continue last year's dated priorities that don't necessarily reflect the new defense strategy.

Because of this and other limitations associated with the full year CR, we are strongly urging Congress to pass a defense appropriations bill in March and not extend the CR for the remainder of the year.

The second area of budget uncertainty is associated with the pending threat of sequestration or automatic budget cuts.

Since our October call, some encouraging action was undertaken by Congress and the White House to avoid implementation of these across the board budget reductions.

In early January, the President signed legislation that deferred implementation of approximately $1.2 trillion in automatic Federal budget reductions for two months, until March 1. However, if sequestration is allowed to happen on March 1, it still would result in cuts of $0.5 trillion each in defense and non-defense accounts over nine years.

For defense, that's an additional $0.5 trillion in cuts beyond the $487 billion already imposed by the Budget Control Act of 2011.

While we recognize that both parties are strongly opposed to allowing sequestration to happen, we remain deeply concerned that sequestration could occur as the default outcome if negotiations fail to produce an agreement.

As the joint chiefs of staff just explained in a powerful January 14th letter, sequestration not only puts at risk our defense industrial base, it also harms military readiness and would quickly hollow out our military forces.

In the weeks you ahead we'll continue to work with our government leaders to encourage a more effective solution to our nation's fiscal challenges.

Despite the continuing uncertainty on US defense budgets, it is absolutely clear that there is a growing need for security solutions in a challenging global landscape.

Events this past quarter, such as the successful north Korean multistage missile launch, coupled with a continued rise in China's military strength, ongoing instability in the Middle East, and the expansion of terrorist activity in Africa, only highlight the complexity and volatility embedded in the mission of maintaining global security.

Our portfolio of products and capabilities remain in direct alignment with this global security mission and we look forward to helping domestic and international customers secure solutions to their most critical defense and security requirements.

While no one can precisely predict the impact of sequestration, or events that will unfold in the global security environment, there is one thing I know for certain.

Every one of our 120,000 employees stands ready to take on whatever challenges emerge.

Focusing internally, I want to reiterate the priorities that I have reinforced with the team since assuming my new role as CEO.

These priorities are consistent and unchanged from those that I helped formulate as a member of the executive office and working with Bob Stevens in my prior role.

I thought it useful to outline those priorities on the call today.

My direction to our team is to grow the business with key drivers being fighter fleet recapitalization from the F-35, missile defense in Aegis, THAAD, and Patriot, cargo aircraft fleet expansion with C-5M and C-130J, combat ships fleet expansion, and C-4ISR.

Achieve higher levels of program performance and execution excellence to satisfy customer requirements and provide financial returns to shareholders.

Pursue a strategy to secure and expand our core business and expand into closely aligned adjacent markets such as cyber security.

Grow international revenues to at least 20% of total corporate sales in the next few years.

Continue to return at least 50% of an annual free cash to shareholders through dividends and share repurchases.

Invest for growth through innovation, product evolution, and strategic acquisitions under our string of pearls strategy.

Finally, and importantly, continue our strong focus on talent development and employee engagement.

I believe achievement of these priorities will enable our corporation to continue to provide superior performance to our customers and shareholders as we move forward.

Before I ask Bruce to give you some color and details on our performance I want to highlight two organizational changes approved by our Board yesterday.

First, Joanne Maguire, Executive Vice President of our Space Systems business advised of her plan to retire from our Company after a distinguished career.

Since taking over the leadership role at Space Systems in 2006 she has grown the business while streamlining the cost structure for customers and expanding returns to shareholders.

Under her leadership and drive for innovation, Space Systems achieved a remarkable track record of mission success and continues to provide broad array of advanced technology systems for national security, civil, and commercial customers.

Effective April 1st, Rick Ambrose will assume responsibilities as Executive Vice President of our Space Systems business, replacing Joanne.

Rick brings over 33 years of experience in the aerospace and defense industry and has currently been serving as Vice President and Deputy for Space Systems, reporting to Joanne.

Rick's varied background within Space Systems, leading our Intelligence business in IS&GS and his leadership roles in our former Mission Systems and Sensors business will be extremely valuable experience as he moves the space business forward for our customers and employees.

Secondly, Linda Gooden, Executive Vice President of Information System and Global Solutions, has also advised of her plan to retire after more than 32 years with the corporation.

Linda assumed the leadership role at IS&GS in 2007 and has managed over 30,000 professionals who provide integrated information technology solutions, systems and support for worldwide missions to civil defense, intelligence and other government customers.

Her customer knowledge and leadership have been key catalysts enabling IS&GS to maintain its leading position as the largest IT provider to the US government for the past 18 years.

Effective April 1, Sondra Barbour will assume responsibilities as Executive Vice President of IS&GS, replacing Linda.

Sondra is currently serving as our Senior Vice President, Enterprise Business Services and Chief Information Officer for the corporation.

As CIO, Sondra is responsible for leading our internal IT operations including the protection of ours and our customers' infrastructure and information from cyber threats.

She was also instrumental in defining and launching our new Government and Commercial Cyber Security business.

Sondra's knowledge of IT systems, coupled with 20 years experience in IS&GS where she served in program management and as CIO and Vice President of Operations, demonstrated her strong leadership and track record that have prepared her well for her new role to lead IS&GS.

Both Joanne and Linda have had exceptional careers and are exceptional executives in every respect, through their dedication and professionalism, and I really want to thank them for their leadership and service to the corporation over their careers.

These retirements and their succession by proven leaders highlight why we've invested so much energy and time in our talent management and leadership development programs.

Our succession planning process is vitally important to the future of the corporation and provides the outstanding cadre of highly qualified executives ready to assume additional responsibilities and take our Business forward.

Both Rick and Sondra represent the depth and breadth of talent in our Company and bring proven leadership track records.

Each has decades of experience gained by working in diversified assignments.

They re leaders who have built superb teams in prior assignments and I look forward to their ongoing contributions as they assume their new roles.

I'll now ask Bruce to go through some of the details of our performance and then we'll open up the line for questions.

Bruce?

Thanks, Marillyn.

And good afternoon everyone.

As I highlight our key financial accomplishments please follow along with the web charts we included with our Earnings Release today.

Let's start with chart 3 and an overview of the year.

We grew sales for the year to $47.2 billion, exceeding the guidance that we provided in October.

I'll discuss sales in greater detail in the next few charts.

We increased our segment operating margin to 11.8%, or 40 basis points higher than our 2011 margin.

Our earnings per share were $8.36.

We generated $1.6 billion in cash from operations after making $3.6 billion of pension contributions.

I'll explain the reasons for the additional contribution amount in subsequent charts.

And our backlog finished very strong at over $82 billion.

We had said throughout 2012 that we expected backlog to end the year at about the same level as we began, but this obviously exceeded our expectations.

Chart 4 shows our sales trend for the past four years.

$47.2 billion represents the highest level of sales in our history, and I'm pleased that we've been able to grow about 8% since 2009, a period with significant economic and budgetary pressures.

Moving to chart 5 and looking at our new alignment of five business areas, three of our five business areas grew sales during the year including MST, Aeronautics and Space, while Missiles and Fire Control sales were comparable to 2011.

As expected, IS&GS showed a reduction in sales versus 2011, reflecting both the overall decline in the Federal IT budget, and the effects of the continuing resolution in the fourth quarter.

Turning to chart 6 and segment operating results.

We grew consolidated segment operating profit by over $300 million, with one quarter of the growth due to the higher sales volume mentioned previously.

The remaining increase results from the 40 basis point margin improvement to 11.8% reflecting the strong performance and proactive cost measures taken during the year.

If you'll turn to chart 7, you see each of the business areas' margins in 2012 compared with 2011.

Three of our five business areas improved margins in the year including Aeronautics, MST, Missiles and Fire Control.

And Space was comparable to the prior year reflecting the breadth of our execution and cost improvement actions.

On chart 8 we'll discuss the earnings per share for the year.

We grew EPS by more than 6% over the 2011 amount and this represents the first time we've exceeded the $8 per share level.

Our pension adjusted EPS grew to just below $10 per share.

On chart 9 we'll reconcile our actual 2012 EPS versus our last guidance range.

In October, we gave our EPS guidance as $8.20 to $8.40, resulting in a midpoint of $8.30 per share.

Our fourth quarter results yielded $150 million more in segment operating profit than was contemplated in the EPS midpoint resulting in a $0.31 improvement.

We had other items that reduced EPS by $0.25, including a non-operational tax item worth $0.18, and a special item in the quarter related to headcount reductions in our Aeronautics business that was worth $0.05.

Overall, the fourth quarter changes netted to the $0.06 increase over our October midpoint guidance.

The non-operational tax item was due to our $2.5 billion discretionary pension contribution in the fourth quarter, which caused our taxable income to be lower than the level planned in the first three quarters of the year.

This required a true-up in the fourth quarter, reducing the manufacturing deduction for the year and lowering EPS by $0.18.

Future years' taxable income will be higher as a result of the accelerated pension contributions into 2012, and we expect to capture most of the reduced manufacturing deduction over the next two years.

We made the contributions for several reasons.

First, with the possibility of corporate tax reform, this contribution locks in our pension deduction at the current statutory rate of 35%, and should the rate be reduced to 25% as has been discussed, this benefit will be worth $250 million.

Second, earlier contributions to our pension plans allow the assets to grow quicker, also lowering future required contributions.

Next, we had the cash on hand to make the contributions, which otherwise would yield minimal interest income.

And finally, the acceleration into 2012 increases operating cash in the future providing a fairly quick payback in a very low interest rate environment.

Chart 10 shows our operating cash results prior to the discretionary pension contribution.

Our guidance in October was that our cash from operations would be greater than or equal to $4 billion.

Prior to the pension contribution, our cash from operations was $4.1 billion, slightly higher than expected.

On chart 11 we'll discuss our backlog trends for the past few years.

We've grown our backlog since 2009 by $5 billion, more than our sales growth over the same time frame, and the $82.3 billion at year end 2012 represents our highest ever backlog level.

As you can see, our book-to-bill ratio has exceeded 1.0 in each of the last three years.

Chart 12 provides the assumptions embedded in our 2013 guidance.

Importantly, our guidance for the year assumes a continuing resolution through the current date of March 27, and it does not assume that sequestration reductions are implemented.

Our FAS/CAS pension adjustment of $485 million is based on a 4% discount rate and long-term asset return of 8%, consistent with our assumptions in October, and our planned contribution level in 2013 is $1.5 billion, equal to the level of CAS recovery in the year.

The expected earnings from the $2.5 billion pension contribution reduces our 2013 FAS expense by $200 million at the assumed 8% return level.

2013 will include both the 2012 and 2013 benefit of the R&D tax credit legislation passed earlier this year.

As a result of that legislation being passed in January, the 2012 benefit will be recognized entirely in the first quarter, as will one quarter of the 2013 credits.

We expect this benefit to amount to $45 million in the quarter, and approximately $75 million for the year.

Finally, our guidance assumes share count remains flat with share repurchases offsetting the effects of option exercises and new issuances.

Chart 13 provides our new outlook for 2013.

Our sales for the year are consistent with our expectations when we last spoke in October, despite the significant increase in fourth quarter 2012 sales.

Segment operating profit and the resulting margin are both higher than we indicated in October, with the expectation that our strong performance in 2012 will carry over into 2013.

EPS from continuing operations is expected to be between $8.80 and $9.10 for the year, and cash from operations is expected to be greater than or equal to $4 billion.

As for phasing in the year, we would expect sequential growth in our sales during the year, with the first quarter being markedly lower than the next three quarters and about $1 billion lower than the first quarter of 2012, due primarily to lower aircraft quantities in our Aeronautics business.

In the first quarter, we expect to have 10 fewer F-16s, 6 fewer C-130s, no C-5 deliveries and lower F-22 volume as there were production deliveries in the first quarter last year, and there are none this year.

Margins are expected to be fairly consistent by quarter, in the mid-11% range, but could obviously change depending on the timing of risk retirements.

Cash should be strong in the first quarter with the benefit of the large tax refund as a result of the discretionary pension contribution, and backlog will likely drop in the first quarter and first half of the year, as orders are expected to be more heavily loaded in the second half of the year.

Chart 14 shows the guidance ranges for sales and segment operating profit by our business areas.

Note that the reorganization of our former Electronic Systems business results in two nearly equally sized business areas in Missiles and Fire Control, and Mission Systems and Training.

Finally, we wrap up with our summary on chart 15.

2012 was a strong year for us both operationally and financially.

These results reflect the strong performance and proactive steps we've been taking for several years and our challenge is to continue that success into the future.

Our backlog positions us well and speaks to the alignment of our portfolio with the needs of our customers.

And we're proud of the 20% total return we provided our shareholders in 2012, and we stand ready to perform in 2013.

With that, we're ready for your questions.

Karen?

(Operator Instructions)

Jason Gursky, Citi.

Good afternoon, everyone.

Welcome, Marillyn.

And Bruce, I wanted to, if it's okay, target this question to you and talk a little bit about cash deployment.

I think this big pension contribution that you made here during the quarter may have caught a few of us by surprise and was wondering if you could just talk a little bit about whether you've contemplated kind of letting us know that this was going to be coming and perhaps why you didn't.

And then also maybe just talk a little bit about long-term capital deployment and what you see on the horizon with regard to the mix.

We just now had a big pension contribution.

Does that take that off the table now for a number of years and we get a much more steady stream of operating cash flow that can be used to deploy either back into the business or back to shareholders through repurchases and dividends?

Thanks, Jason.

I think you got your money's worth on that question.

So let's see, where do I start.

As for why we did it at the end of the year and why we didn't tell you and did we contemplate telling you, we did a fairly comprehensive study as far as pension analyses are concerned relative to our funding requirements.

The expectations in the future, the sensitivity of our plans through asset returns, discount rate changes and the like.

You may or may not be aware, we actually sent out in the fourth quarter an offering to our terminated but vested participants in the plan, offering to essentially give them lump sum payments in lieu of the pension payments over periods of time when they retired.

We got a fairly good return on that, actually reducing some of the volatility in our liability associated with those individuals going forward.

We were studying this issue right up until literally the end of the fourth quarter, Jason.

And we were studying at the same time the prospects of what was going on in Washington relative to corporate tax reform.

And we were speaking to the Board at that time, saying we think this might be sort of the confluence of a lot of different actions that should result in us potentially making a larger contribution for the pension plan in 2012 in order to, in my words, lock in the deduction at 35%.

We do feel there's a strong possibility for corporate tax reform going forward.

We think that number could be anywhere from a 25 to 28% rate as opposed to the current 35% and we very much wanted to, as I said earlier, lock in that rate.

I walk through the very dynamics that I said in the prepared remarks relative to we thinking that this is a very quick payback and the interest that we're earning on the cash on the balance sheet is probably about 20 basis points as we sit here today.

So the acceleration occurs within a low interest rate period of time and we're getting low interest on the cash that sits on the balance sheet currently.

It did accelerate the tax deduction as we talked about earlier.

And I like the fact that it also reduces the gap between pension adjusted and reported earnings as I mentioned earlier as well.

We looked at this Jason, I'll just give you some stats here, so taking a look at 2013, one of the reasons we did it, the $2.5 billion is we looked at how much cash did we want to have left on the balance sheet and how much flexibility did we want to have going into 2013 to enable us to do the sorts of cash deployment activities we've done in years past.

So in 2013, we're looking at $4 billion of operating cash, we're looking at roughly $1 billion or so of capital expenditures.

So $3 billion of free cash flow.

We do have about $150 million debt retirement that we were going to do in the year 2013.

So think of that as contributing $850 million sort of unencumbered of our free cash flow and we felt that that $850 million, plus the $1.9 billion on the balance sheet, so almost $2.8 billion, was very adequate to continue to do the kind of cash deployment that we've done in the past.

I think a fair question would be, so you guys have said you're not going to have share count increase, what's that level of share repurchase that you're counting on there?

And at least for our planning purposes, we're expecting about $700 million of share repurchase activity in order to affect that and that's our estimate of how many options will be exercised in the year and also how many new issuances of stock will occur for executive compensation, matching of our retirement plans and the like.

So collectively, we think from a cash deployment, between the current dividend contributions that we'll have in 2013 of roughly $1.5 billion, plus the $700 million of share repurchase embedded in our guidance, that's $2.2 billion.

And as I said, I think we still have adequate flexibility on the balance sheet and the unencumbered cash flow to remain opportunistic to do additional share repurchases or mergers or acquisition candidates if in fact they look fine for us to make those acquisitions.

Kind of a long-winded answer.

I think the other side of it is we don't see this as a change and I think Marillyn made those comments in her prepared remarks relative to our long-standing cash deployment practice of contributing at least 50% or more of free cash flow to our shareholders.

That is still our intent.

I think I said it earlier but I'll close again, the reason for the timing was we literally didn't have this discussion until late in December with our Board of Directors before making this contribution.

Kind of a long-winded answer, Jason.

Sorry about that.

Richard Safran, Buckingham Research.

Hi.

Good afternoon.

I had a question on IS&GS.

You're guiding to 9% margins for the year.

Given the margin pressure in this environment right now, can you discuss a little bit about what gives you the ability and confidence that you can sustain 9% margins?

And also maybe if you could comment if this is being driven by your cyber and intelligence business.

Thanks, Rich.

I'll take that one on as well.

So as we looked at IS&GS, I think we made a very conscious decision and I discussed this on previous calls.

We've tried to differentiate ourselves somewhat in this market by focusing on what I'll call mission IT where we're literally sort of providing the embedded capabilities in large measure for our customers, as opposed to what I'll call commodity IT.

You think of that as sort of back shop processing and the like, help desks, those sorts of things where really we didn't see -- we've done that work in the past, but really, we didn't see sort of a discriminator or a differentiator for Lockheed Martin in doing that work.

So we focused much more on the mission part of the IT service.

That tends to be a higher margin part of the service activity in the IT world.

That's one thing that gives me the confidence that we can continue to do that.

And as I look back, Rich, over the last probably eight or nine quarters, IS&GS has been 9% or the low 9% return on sales consecutively for those eight or nine quarters, so that gives me confidence again going into 2013 that we can continue to do that.

You asked about the cyber.

We're very excited about the cyber activity within IS&GS.

We've had some very successful wins including taking some business away from some of our competitors within cyber.

I believe we're the largest federal cyber provider in the industry.

And that work is very valued.

That's very much in line with that mission IT that I talked about and that work as you would suspect supports that 9% margins as well.

Doug Harned, Sanford Bernstein.

Good afternoon.

I'd like to follow on on Jason's question about cash deployment.

If I look at the last few years, particularly 2010 and 2011, and if you look at what I would call the cash yield to shareholders to the net repurchase of shares, plus dividends, you've been above 10%.

I think a lot of people found that very attractive.

Today when you're looking forward for this year we're basically at 5% if you assume no net share repurchases and about a 5% dividend yield.

When you look out to 2014, '15, how do you think about that?

Do you think about it in terms of what the yield to shareholders would be?

Is this a temporary period where you're handling a pension issue and then you may go up to, I would call, larger yields to shareholders in the future?

How do you look at this?

Doug, I'll try that one as well.

I'll speak for myself.

I think I speak for the Board.

We don't go about selecting share repurchase amounts from a what's additive to our dividend levels would get us to a certain level of return on our shares or a certain level of return on our market cap, if you will.

That's just not the way we think about that.

We very much look at this as opportunistic.

We've increased obviously the share or the dividend amount considerably over the past few years to where that in and of itself essentially takes care of the 50% or more of free cash flow without any contribution of share repurchases.

I think if you look at where our pension plan is sitting from a funding perspective, to me it's fairly obvious that you'd want to help that pension plan get a higher level of funding.

That's definitely a nearer term use of cash than maybe it was a few years ago with the rates going down.

That was very much part of the study that I mentioned in the discussion with Jason, is to what is the appropriate amount to contribute to the pension versus the real live possibility that interest rates increase and actually get us into an over funded situation.

But we are certainly not abandoning our share repurchase strategy.

We want to remain optimistic.

That's the reason I tried to give the color on the fact that we have lots of flexibility, not just this year, but you asked about 2014 and 2015, with growing cash as I expect to happen over the next few years, I think we'll have even greater flexibility in '14 and '15 than we do in 2013.

Peter Arment, Sterne Agee.

Good afternoon, everyone.

Good afternoon, Marillyn.

Question, Bruce, I guess on the backlog.

What's been impressive over the last few years with the defense pressure has been your ability to kind of grow the backlog.

Can you talk a little about how the backlog looks for '13 and what you need to see in terms of bookings in the second half of this year for international activity to kind of hold these levels, just given what we're going to see with sequestration kicking in?

Thanks.

Yes, let me give you sort of a wide, all-encompassing orders in backlog response to the question, Peter.

So expectation-wise, if I take a look at where we expect the orders for the year to end and where we are right now from a backlog perspective, I think we'll end the year close to the $80 billion level.

We might not be able to replicate the $82 billion, the highest level we ever have done.

I feel pretty good about being able to get to the $80 billion or so.

This will be an interesting year.

You've seen some of the correspondences come out of the acquisition community relative to delaying some of the near term awards associated with continuing resolution in anticipation of sequestration.

So we're definitely expecting to have a significantly more loaded second half of the year than in the first half.

So I would expect each of the first two quarters to be below a 1.0 book-to-bill.

I would expect the next two to be above a 1.0 book-to-bill.

And I'll say, we have a significant amount of international activity that we're counting on the year.

I'll just rattle off a few of the orders that I think are important both from a dollar perspective and maybe a strategic perspective.

I'll ask Marilyn maybe to comment on some of the strategic ones as well.

But we've got sort of near term think of these as first half, I hate to give quarters only because of some of the delays that have occurred.

First half we've got the two LCF ships for the FY '13 order.

We've got closure for the lot 6 international aircraft for five aircraft.

We're hoping and our customer is hoping to definitize the lot 6 and lot 7 for F-35 negotiations in the first half of the year.

I think an important one that I think is worth mentioning is we expect to get long lead funding for lot 8 of the F-35 program for some 48 aircraft.

Just the quantity alone versus the prior year's quantity is worth mentioning.

Think of that as 29 domestic aircraft and 19 international aircraft including 9 FMS, foreign military sales outside of the 8 initial partners on the country -- on the buy, excuse me.

Strategically, there's some things to watch that aren't necessarily big dollar events but they are strategically important to us.

The Aegis Combat Systems engineering contract within our MST operation, think of this as next generation Aegis development for the capabilities there.

The KC-46 training, and the interesting thing about that is we're actually -- the only reason we're able to bid that frankly is because of the acquisition of SIM-Industries last year that gives us some capabilities to do that training capability on the 767 aircraft that's the basis of the KC-46.

We have the air missile defense radar which is the next generation air missile defense, as the name implies, radar for surface combatants.

Second half of the year we have a couple of -- actually vehicles five and six for the SBIRS contract.

Some THAAD UAE follow-on production lot 5 contract for the THAAD order.

And some orders we tend to get on kind of an annual basis, the fleet ballistic missile and next order of the RERP.

Somewhere in that mix internationally, we've got the C-130 to Saudi as well.

We've got an Iraqi F-16 order for another batch of 18 aircraft we're hopeful for.

And scattered throughout that are other smaller international business -- I should point out that in the year 2012 we did about 17% sales and about 17% of orders on an international basis and that's roughly what we're expecting in 2013, maybe a little bit higher in the orders as far as the total content of our orders in 2013.

Let me just add to that.

We do have a strong focus on international growth in our growth portfolio, and so as Bruce has listed off several items, but certainly there's continued strong demand for air and missile defense in the Middle East and Asia-Pacific, and so we expect to continue to see a pull for PAC-3, THAAD, the Aegis, and in addition to that, air mobility, F-16.

Bruce has listed off several of those things that are out there that we're looking at, but we expect to grow our portfolio in the international side to at least 20% of our revenue in the next few years.

Myles Walton, Deutsche Bank.

Thanks.

Good morning.

Sorry, good afternoon by now.

First one is a clarification.

Bruce, is the $1.5 billion in 2013 discretionary or required?

I would be surprised if it were required given the pre-funding.

That's our plan level, Myles.

I think the required amount is less than that.

Okay.

And you mentioned the lot 8 quantities, 19 international, I guess 9 of those being Japan or Israel or a combination of the two, and then 10 partners.

From a partner perspective, it's obviously good growth overall but it seems like the partners are certainly slipping out to the right versus where they would have been 12 months ago in lot 8. Is there upward mobility to the lot 8 or is that kind of what the international partners look like?

I guess about 12 months ago I would have thought maybe that number would have been 30.

You now it sounds like it's 10.

What does that bode for the next couple lots thereafter?

I'm trying to think of the 30, Myles.

I can't imagine the scenario that would have gotten us to 30 aircraft.

I think perhaps the number that you were thinking that might have been a little bit higher was the Turkish aircraft in lot 8 that are now pushed out to the right.

I think if we actually go back a couple years, though, you would have seen fewer Israeli and fewer Japanese aircraft in there.

So that's actually helped to mitigate some of those Turkish aircraft at least in lot 8. You asked about the flexibility.

I wouldn't think we would see the orders bouncing around much, if any, from that level.

Customers, I will say this, we have ongoing conversations with our customers and they continue to look at the F-35 as we continue to perform and I think that's -- the more we can do and demonstrate the capabilities at aircraft and show that capability to customers like South Korea for instance, the more this aircraft will sell in the future.

I think as I talked about earlier in my remarks, we've made great progress on the program, it's maturing.

The development process as well as the production ramping up, we've got 5,000 hours on the aircraft.

We're committed to delivering an affordable aircraft.

We're on plan.

Actually we remain ahead of plan to the 2010 baseline that was put in place.

Joe Nadol, JPMorgan.

Thanks.

Good afternoon.

This has been a very smooth transition thus far in terms of leadership, Marillyn.

But when I look at the -- I have the 2011 annual report in front of me and there are nine folks in the picture.

One of them is in his current seat and that's the person next to you, Bruce.

Everyone else has changed.

My question is, in that context you have a very smooth transition, all the plans sound the same, but the combination of all these people here must have very different ideas on how to do things, including you.

I'm wondering if you could list a top two or three maybe that, off the top of your head, that in terms of how we should think about the Company, what might change.

Well, you know, we are all connected.

This is a very tight team, this leadership team, and that's why our succession plan has been so smooth and successful is that we -- we have been operating to the same strategy for a number of years and the results demonstrate the strategy is working.

We have very experienced team of folks and so even the ones that are moving into the new roles have been with the corporation for a number of years.

They're all experienced executives and we spend a lot of time working together on making sure everyone does understand our strategy.

So we, in fact, in another week we'll have the entire leadership team from across the corporation together to talk about our strategy for the coming year, to build on that.

We've all worked together for a long time and we're not in the mode of changing the strategy that we have.

Our Board of Directors is directly involved in talent development and the succession planning process.

In fact, as Joanne and Linda announced their intent to retire and we took that to the Board, we reflected back on our pipeline of talent with them and there was not even a hesitation on who would move into the next role.

So we've been colleagues together with a tight leadership team for a number of years and it's a well-planned transition process and I don't expect there to be changes.

We'll work together and deal with the environment that we're operating in and adapt to it.

Howard Rubel, Jefferies.

Thank you very much.

I actually want to follow up a little bit on sort of change in the environment that you see going forward and how you want to take advantage of that, Marillyn.

In one case you have Congress doing things like ring-fencing MEADS and in other cases you have what I call low cost competitors trying to unseed a very reliable solution in ULA.

How do you deal with those two competitive threats?

Well, as we -- any competitive threats, we take into account the environment that we're operating in.

I think we have a very strong portfolio and even MEADS I think is demonstrating success, the flight test that we had in November and the flight tests we have planned through this year, later this year.

We're going to operate to our technologies and our innovation that we bring to the marketplace is the hallmark of this corporation and we are very much proactively focused on cost efficiencies and that's a critical discriminator for it as well.

This competition that we're dealing with is really not new to us at all.

We're used to it, it's constant.

That's how we operate all the time is in a competitive environment and we'll continue to do so.

So I don't find that as something that is a big change for us.

We understand our competition.

We understand the markets that we're operating in and we're going to excel in those markets.

George Shapiro, Shapiro Research.

Good afternoon.

I'd like you to go through a little bit more detail some of the moving parts in Aeronautics.

Like one of the things that's in the release is that the operating profit is about comparable to '11 for the F-35 and the F-22.

The F-22 is down considerably from last year.

F-35's probably grown.

Can you discuss kind of how much growth we saw in the F-35?

Where you are, have you changed any of the booking rates on the margins, et cetera?

George, are you talking 2012?

Are you talking 2013?

I was just reading from the release in terms of your analysis that the operating profit for the December quarter.

There's a comment in there that operating profit was comparable to the same period in '11 for F-35 contracts and the F-22 and sales were comparable as well which says that -- it would imply the F-35 profit must have gone up because you were booking lower on the F-35 than you were on the F-22.

We know the F-22 revenues are way down.

Looking for some more clarity.

I think in the press release, I don't have that in front of me, George, I think what that's saying is that F-35 sales and F-35 profit this quarter are comparable to F-35 sales and F-35 profit levels last year, whereas F-22 sales and profit are comparable to last year's quarter as well, not that the two of them are comparable to each other, if you follow.

Karen, this is Jerry.

I know we're coming up on the hour, but because we have a number of people in the queue and with our sort of extended comments today we'd like to go ahead and extend the call at least another 15 minutes to 4.15 or so to let people ask questions.

Carter Copeland, Barclays.

Good afternoon.

Welcome, Marillyn.

Thank you.

Excuse me, wanted to ask quickly about the F-35.

The commentary from your customer last quarter before you signed the contract was that you were pretty far apart on terms, yet you closed that negotiation before the end of the year and I wondered if you might comment on how you reached a conclusion there.

And what the implications are for the follow-on negotiations from your perspective, as Bruce highlighted that there's several of the follow-on lot negotiations that are sitting in front of you this year.

Any color would be much appreciated.

Sure, Carter.

Basically on the F-35 LRIP 5 negotiations what was important was for both sides to understand the cost structure of their positions and so we had an opportunity to spend time with our customer and let them share with us how they viewed all the cost elements.

We had an opportunity to likewise share that with them and I think through that process, we were able to come to a mutual understanding and get to a -- close the negotiation and we reached a fair and yet challenging agreement.

And so it's not -- it wasn't -- I think it did take a little longer because we had a lot of time that we had to go through from both sides to really assess it.

It was nothing around the terms and conditions that drove that.

It was really around the cost.

So I think we're in a good posture for lot 6 and 7. We already have the undefinitized contract action under contract and we are in direct discussions right now at the program level on the lots 6 and 7 and the intent is to negotiate both of those together and get that done in the first half of the year.

Our customers really need us to lean forward and make sure that we meet the challenges that they put in front of us and that we're taking cost out.

In addition to getting LRIP 5 negotiated and getting on with LRIP 6 and 7, we are working very hard on taking cost out of our business and driving toward a more affordable product for them in all aspects of our business.

Rob Spingarn, Credit Suisse.

Good afternoon.

Question for Bruce.

This is building on George's question on Aeronautics.

I would like to take you up on the 2013 part of that and ask if you could refresh us on the manifest by program, quantities, the margins you see for the major programs.

And in particular, if you could talk -- just update us on the F-35, on the 36 aircraft, how we should think about which lots those are from and profitability on F-35 in '13 relative to '12.

Yes.

So Rob, you asked a question of me, I'll answer it.

So as we look at 2013, I think I said on the October call we're going to be down probably 10 C-130 aircraft.

So think of that -- we did I believe 34 in 2012 and we'll do 24 or so in 2013.

The F-16s, 37 last year, about 13 this year.

Think of that as really no change in aircraft deliveries from the Fort Worth line.

All the change we're talking about there was the aircraft that were delivered off the Turkish line so you won't see sort of cost fluctuations associated with that with the aircraft coming off the line in Fort Worth.

C-5 we talked, and I know we talked in the October call about the increased volume there.

We ended up delivering four.

We actually delivered maybe an extra that we weren't exactly counting on delivering in 2012, but we ended up with four for the year.

We're expecting somewhere around eight, so kind of a doubling of quantities on the C-5 program next year.

You talked about the F-35 deliveries.

We are looking at probably a 20% increase.

We did 30 this year.

We're looking at 36 next year.

You asked what aircraft those were.

I believe, and I may get this a little bit off, but I believe those are the tail end.

We started delivering lot 4 aircraft at the end of 2012.

We'll deliver all remaining lot 4 aircraft in 2013 and we'll start and I've lost track exactly, Rob, somewhere in the middle of the year, middle to third quarter-ish time of the year we'll start on delivering lot 5 aircraft and those will be the aircraft that we deliver all the way through the end of the year.

Margins on the F-35 program, we are expecting to go up in 2013.

If for no other reason than the absence of the profit adjustment we took, I believe in the second quarter on the SDD contract to lower the expectations on the award fee going forward.

We were also, because we did have success, I'll remind you we started 2012 with a goal of delivering 30 aircraft.

We had a multiple month strike at our Fort Worth facility and we still delivered 30 aircraft, and so as you might imagine, that says the efficiencies we're getting in the production line are starting to be self-evident and with those efficiencies we would expect in 2013 to actually have some profit step-ups on the production contracts, so we would expect the overall rate between the combined SDD contract and the LRIPs in 2013 to be higher than they were in 2012.

Cai von Rumohr, Cowen & Company.

Thank you very much.

I may have missed it but what did you say about the orders for the full year 2013?

And could you give us a little split between if there's no sequestration, I assume that's your assumption, and if there is sequestration, which parts of your business, which of your orders, let me put it that way for 2013, do you see as at greatest risk?

Cai, so 2013, the orders I was talking about were -- I think what I said was we expect to have orders given our sales level that would essentially get us back to about an $80 billion backlog, so you can kind of solve for the math on that one.

Think of it as, I don't know, somewhere $40 billion, $45-ish billion or so.

And as far as we're not assuming the effects of sequestration as I said in my prepared remarks.

And how that would manifest itself in terms of impacting the orders, we've always described IS&GS at a very short cycle business.

If you look at the numbers for IS&GS right now, we are expecting a downturn in 2013 over 2012, and to a large extent, that's because the federal IT budget has gone down frankly with or without sequestration.

I think a fair question is how much more can you take out of the federal IT budget even under a sequestration environment and still accomplish the tasks that you need to from an IT perspective.

We don't have a lot of -- we'll look at -- there's probably been a shift over the past two years to have more of these IDIQ task orders so I suspect -- and a lot of those, where they are occurring is in the IS&GS business so I would expect during sequestration we would see less exercising of those IDIQ task orders.

I said earlier in response to an earlier question, I've lost track who asked it, that I think we're seeing some of the sort of the push-out of orders right now in part because of Secretary Carter's guidance relative to preparation under the continuing resolution.

And I would argue under the prospects of sequestration that are pushing out some of the lower -- the larger orders, I believe anything over $0.5 billion has to go to him for approval before it's authorized.

So not knowing exactly how sequestration would be manifested in terms of what I like to call the peanut butter spread versus a targeted spread.

It's hard for me to say how those orders would be impacted, whether they'd be pushed to the right or reduced.

At this point I'd frankly be speculating at this point other than to say IS&GS would likely get hit the largest percent, would be my guess, and the longer cycle businesses would be hit less severely than IS&GS.

I would just add to that.

You know, on the sequestration front, that's why we have been so vocal about what a terrible policy that is to have sequestration to come into play.

While we're encouraged that we're trying to -- that our government and Congress is trying to get to a permanent elimination of those across the board cuts, because the fact is, if they have -- if they're going to take any cuts and they can do it along the lines of the national security strategy and do it in the areas that align better with what our administration and our Department of Defense is trying to accomplish, that's the best outcome.

And for us, as we look at it, I think we have a great portfolio that's aligned with those strategic priorities of the US government and of our Defense Department.

So if we get through sequestration and it doesn't happen and it allows our Defense Department to decide where they take cuts, we think we're actually very well positioned.

David Strauss, UBS.

Good afternoon.

Marillyn, a question for you.

You guys have gone after your cost structure very aggressively, best I can tell, both from a square footage perspective and headcount despite the fact that the budget hasn't come down that much yet and your top line has held up pretty well.

How much more room do you have to address headcount and square footage and just your cost structure in its entirety, maybe disproportionately what happens to the budget from here?

Well, I tell you, we're a large corporation and we have -- I think we still have more opportunity, particularly on the footprint side.

As we laid out a plan to take cost out, we put it in more aggressively about three years ago, and so we've been about this proactive approach to taking out costs in our infrastructure and our processes for a number of years.

As you mentioned, we have had some reductions in force.

We've taken out some management layers.

We've been collapsing some organizations in order to get some costs out in that regard.

And on the footprint side, we've taken out about 1.9 million square feet for the last couple of years and we are going to take another 2.9 million between now and the end of 2014.

So there is more to go there.

I believe there's also opportunities for us just to continue on an ongoing basis to drive cost out and so that we can meet the demands of our customers.

We've been getting out of leased space, for example.

We'll continue to look at even providing more affordable products to our customers, taking weight out, looking at how we can reduce cycle time, all of those things that would give them a more affordable product as well.

So we'll continue to do that.

That is something we set targets on every year to drive costs out of our business and we want to continue to do that to remain competitive and win more business.

Sam Pearlstein, Wells Fargo.

Good afternoon.

Bruce, I was wondering if you could walk a little bit through the cash in 2013, just as you get from cash flow from operations of about $1.6 billion to over $4 billion.

We know pension is certainly less of a headwind.

But what else is improving?

Taxes, interest, advances, working capital, what else are the drivers there?

Let me see if I can do that off the top of my head, Sam.

So $4 billion, as you said, in 2013 versus the $1.6 billion level, the biggest driver obviously is the $2.5 billion pension contribution, $3.6 billion I guess I should say versus the $1.5 billion in 2013.

We're actually expecting a slight increase in our working capital.

That's something, I'll speak for myself personally that I've got targeted to try to minimize that amount of working capital growth.

I think some of that might be a little bit of planning conservatism.

We tend to plan even in some of our international orders, maybe a little bit lighter relative to payment terms than we actually are able to negotiate.

That ends up manifesting itself in the form of higher working capital than maybe what we actually experienced.

That's one I'll be watching.

Income taxes, I'm trying to think what we're paying on income taxes.

Let's see.

We're actually down I believe -- I think we're down probably like from a -- actually, for what we're paying out relative to taxes, it's fairly close from what we're booking within our earnings, it's down probably about $150-ish million or so.

If you do sort of a cash walk down, you see the $150 million from an earnings perspective flowing down to cash.

That's probably the biggest drivers that I'm looking at next year, a little bit of change in depreciation and amortization, but not enough to talk about, so really just sort of the working capital and slight change in the taxes there.

Noah Poponak, Goldman Sachs.

Hi.

Good afternoon, Bruce and Jerry and welcome to the earnings call process, Marillyn.

Thank you.

Marillyn, I wanted to ask you sort of a follow-up to the question on cost cutting, but a little bit bigger picture and longer term.

One of the big concerns we still hear from investors on defense companies is with regard to the sustainability of margins and whether or not there's a shoe to drop there.

And in historical cycles you've seen margins come down pretty significantly, Lockheed Martin's been able to kind of hum along at this 11.5% segment operating margin right through everything we've seen thus far.

How do you think about where margins go and how sustainable they are?

Is there risk in your view that the part of the backlog with more favorable terms of trade sunsets and more difficult backlog layers in?

Just curious how you think about that given your many experiences operating the business, and then one quick one for Bruce.

Have you done the math on the 2014 FAS/CAS number with the hypothetical that nothing changes in '14 versus '13?

Thanks for the question.

I'll just kick off with the margins.

As you look at our portfolio, we had a lot of mature products that we don't -- that we have moved down the production line, things that have been in development moved into production and we're in a position where we can drive higher margins through the process of booking higher profit rates on those programs moving forward.

And then as I said, we're growing our international sales component and through that process because of the risk/return relationship there on international sales and we expect to get higher margins on that.

A lot of the portfolio is transitioning.

If you think about where F-35 is, it's still in development but concurrent to that we're moving into production.

With that production over time and with the volume that we're going to bring along in a fixed price incentive environment and then fixed price environment, that's going to allow us to improve our margins.

LCS, with our LCS program moving along as it ramps up with additional ships coming online, that will allow us to improve margins.

THAAD, a lot of our missile programs are well along in production so there's fewer development programs in place.

C-5M is coming along strongly And then typically in our international area, as I said, we see higher margins.

Bruce, you want to take the other part of his question?

If I remember right, it was -- have you done the math.

I think you said of FAS/CAS in 2014 under the current assumptions and we have done that math.

Actually, we've done it for '15 too.

I'll give you a bonus question there.

As we look at '14, we're probably seeing current course and speed somewhere about a $350-ish million improvement over the $485 million we have today.

I think the more interesting one, at least as I look at the '13, '14 and '15, think of the variance, the change I should say, the change in the FAS/CAS between '13 and '15 is roughly $1 billion.

So we -- think of the '15 number as just about on the opposite end of the zero bar going the other way.

So really, really dramatic swing in FAS/CAS with current assumptions, and obviously if the discount rate goes north any, like I sure hope it does sometime soon, then those numbers will change even more dramatically.

Karen, I think maybe one more.

Bill Loomis, Stifel Nicolaus.

Great, thanks for taking the question.

Bruce, when you talked about the first quarter being $1 billion lower, I just want to be clear that that was versus the year ago?

And then you talked about lower deliveries in Aeronautics, but obviously with that grouping $3.7 billion in the first quarter '12, that would be a pretty significant percentage drop, so is the bulk of it going to be there?

And if not, which of the other groups, and why do you see that coming back if it is coming from the other groups as well?

So Bill, you heard right.

The $1 billion I was talking about was comparing first quarter of 2013 versus first quarter of 2012.

I gave in my prepared remarks the aircraft quantity changes.

So very, very significant within Aeronautics.

And the reason we feel good about it coming back the other way is because those aircraft are higher on a comparative basis to the previous quarter and the next three quarters.

The other -- just as I look at the data, at least as I sit here today, part of the way I would look at sales going forward, again, I mentioned earlier it's sequential growth quarter-over-quarter.

So think of the -- it's obviously lower, I believe, every single quarter versus 2012, but it gets lower than 2012 by a smaller percent with each successive quarter.

Said differently, fourth quarter 2013 is not nearly as far off of fourth quarter of 2012 as are the first three quarters of 2013 versus the first three quarters of 2012.

And the other thing I looked at is we, and it may be self-evident in what I just said, but the second half of the year from a revenue perspective is about $1 billion for that six months greater than the first half of the year.

So we're definitely a level of back end loaded, in large part because of the aircraft quantities we have there.

But just some of the other shifts within the other business areas as well forcing it in the second half.

So I want to just wrap up here and tell you all thank you for joining us on the call today and we look forward to speaking to you again in April.

Thanks.

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

This does conclude the program and you may now disconnect.

Everyone have a good day.