Q4 2006 Lockheed Martin Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, everyone and welcome to the Lockheed Martin fourth quarter and year end 2006 earnings results conference call. [OPERATOR INSTRUCTIONS] At this time for, opening remarks and introductions, I would like to turn the call over to Mr. Jerry Kircher, Vice President of Investor Relations. Please go ahead, sir.

JERRY KIRCHER, VP OF IR, LOCKHEED MARTIN: Thank you, Jamie. And good afternoon. I would like to welcome everyone to our fourth quarter 2006 earnings conference call. Joining me today on the call are Bob Stevens, Chris Kubasik, and Meg VanDeWeghe. We have posted charts on our Web site which supplement our comments today. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. Today's call will be made available on our web page for downloading in MP3 format as a pod cast. With that, I would like to turn the call over to Bob.

BOB STEVENS, CHAIRMAN, PRESIDENT AND CEO, LOCKHEED MARTIN: Thanks, Jerry. Good afternoon, everyone. I hope you all were able to enjoy your recent holidays. And found that 2006 was rewarding for you and your families. And I trust you're looking forward to a prosperous 2007, as we are. As I start the call today, I would like to begin by thanking our 140,000 employees and their leadership team, who have enabled Lockheed Martin to make advances in effectively providing mission critical products and services to our customers while achieving improved financial performance.

During 2006, overall, our program execution was solid. We won important new business. And we continued to shape balanced business portfolio designed to both meet customer needs today and tomorrow, while enhancing shareholder value. Let me summarize briefly our accomplishments in each of these areas before providing you with an outlook for our future.

Our program performance continues to be a top priority for all of us. We're focused on execution and on meeting our commitments to customers by completing key milestones on time and on budget and providing continuously improving quality. Significant operational achievements included the first flight of the F-35 Lightning II, a fifth generation tactical combat aircraft that will serve this country and our allies for decades, delivery to the United States Air Force of 27 of our fifth generation F-22 Raptors,he world's most advanced and most flexible fighter. Successful tests of critical missile defense programs like THAAD, PAC3, and Aegis. And thousands of other successful operations across all our business areas.

These 2006 operational results are important in their own right. But I also think they've been important as drivers for our ability to win new business. Solid operational performance, delivering on all commitments, builds confidence in our capabilities, and that confidence contributed to the highest annual level of new order bookings in the history of our company, and a year-end backlog of almost $76 billion. We believe that business success is a result of superior program execution, effectively listening to our customers, our continued drive for innovation and responsiveness, and our ability to leverage our experience and our skill to horizontally integrated or align our abilities across the entire corporation. Notable 2006 contract awards included the Orion crew exploration vehicle, NASA's next generation human space flight transportation system, the air operation center weapons system integration contract, and the TMOS advanced global communications network contract for the United States Air Force, the joint air to surface standoff missile for the Australian Ministry of Defense, the first international sale of this missile, international F-16 awards that will extend production through 2010, the third advanced DHF satellite, a variety of domestic and international awards for air and missile defense programs, and civil information technology outsourcing programming such as the Army Corps of Engineers, DHS Eagle, [IFEZ 2] and the FBI Sentinel contracts.

In addition to performing on contracts and winning key competitions in 2006, we also focus on significant steps to reshape our business portfolio. We successfully completed the creation of the United Launch Alliance Joint Venture, to better align our Atlas launch vehicle business with customer needs, and ensure that our nation has continued high quality assured access to space. We also invested our Russian proton launch business to focus on higher growth, higher return opportunities.

Beyond using joint ventures and divestitures to reshape and trim our portfolio, we have made additions through acquisitions. We completed five during 2006, while announcing a sixth as we closed the year. We are confident these transactions will provide the same sort of value to shareholders that previous acquisitions provided. Our acquisition of Management Systems Designers, which we announced in December, should close in a few days, and should provide enhanced system and information technology capabilities for our ongoing health care initiatives, as well as access to customers such as the National Institutes of Health. These actions bring our total completed acquisition since 2001 to 16. And have greatly expanded our capabilities and customer access. All have been fully integrated and all are meeting objectives. Again, these achievements and many, many others are the result of the dedication and professionalism of our 140,000 employees. And I compliment them for delivering a very solid 2006.

Looking ahead, by now, you've already had a chance to review our 2007 guidance. So you know that for the year, we anticipate double digit growth in our recurring earnings per share, strong cash from operations and continued growth in revenue and margins. Let me describe for you our general sense of the overall market, and our vision for the future as we look at 2007 and beyond. Looking long term, we expect to see continuing uncertainty and complexity in the global security environment, which will drive future demands, to include not only highly capable military power, and strength in homeland security and law enforcement, but further initiatives aimed at international outreach, diplomacy and support for emerging democracies. We see a compelling desire in civil government agencies to have more efficient and effective services provided to citizens and we see a growing international interest in our capabilities. All our customers will face the need for increasing situational awareness, through advanced sensing devices that will be linked to communication systems that enable them to share information and to be always connected. With data everywhere, networks will continue to grow in importance and power, and in vulnerability. As corrupting information will be viewed as a weapon of mass destruction in the 21st century. We have the experience, skills, and breadth in our portfolio to contribute significantly to this future.

Looking at funding, the current fiscal year 2007 defense budget was enacted at $435 billion, with investment accounts funded at $157 billion. Additionally, supplemental appropriations of $70 billion have been approved, with the prospect of another $100 billion or more under discussion and review. The 2008 president's defense budget will be delivered to the Congress on February 5, probably in the range of $460 to $480 billion, with the investment accounts at about $170 to $180 billion. Based on all that we see, we expect continued growth in both our core and adjacent markets, domestically and internationally.

As we grow, we anticipate an increasingly diversified portfolio that will be progressively less dependent on U.S. DoD sales and which reflects increased levels of international sales. We continue to expand our addressable government market in several ways, by focusing on customers we know and capabilities we now possess, by extending value to customers and offering new capabilities such as those acquired with Savi and HMT, and by developing new customer relationships, such as those associated with our Aspen, PA&E, and MSD acquisitions. Looking specifically at our business areas, our systems and information technology group, we will work to grow domestic and international sales in areas such as missile defense, with PAC3, Aegis, THAAD and the MIAD system. Homeland security with solutions for port security and cargo tracking. And government information technology, related to traditional focus areas such as defense, and new focus areas such as health care. Systems and I.T. both will also come from continued creative approaches to adjacent markets, similar to the approaches we've taken about the littoral combat ship, the presidential helicopter and the joint light tactical vehicle programs. Now I recognize that we have a stop work order on one of our systems in I.T. contracts. The stop work order on the second littoral combat ship, which is based on cost concerns, is a matter that we take very seriously, because affordability was a goal the Navy emphasized, along with schedule, and sound technical performance. …