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Q3 2010 Earnings Call
October 19, 2010 11:00 a.m. ET
Jerry Kircher – Vice President of Investor Relations
Bob Steven – Chairman, Chief Executive Officer and Chairman of Executive Committee
Bruce Tanner – Chief Financial Officer and Executive Vice President.
Richard Safran – Buckingham Research Group, Inc.
Jason Gersky – Citi Investments
Doug Harned – Stanford Bernstein
Joseph Nadol – JP Morgan Chase & Co
Myles Walton – Deutsche Bank AG
Noah Poponak – Goldman Sachs
Peter Arment – Gleacher & Company
Cai Von Rumohr – Cowen and Company
Troy Lahr – Stifel Nicolaus & Co, Inc.
Previous Statements by LMT
» Lockheed Martin Q2 2010 Earnings Call Transcript
» Lockheed Martin Corporation Q1 2010 Earnings Call Transcript
» Lockheed Martin Corporation Q4 2009 Earnings Call Transcript
Thank you, Jevon, and good morning, everyone. I’d like to welcome you to our third 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.
I’d like to remind you the Statements made in today’s call are not historical fact or 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, everyone. As our release this morning outlined, operational performance continued at a good pace during the third quarter and we achieved solid financial results, including sales expansion of 6% and continued exceptional cash flow generation.
Our focus on operating cash has been the center piece of our strategy that enables sustained investment in the business and sustained returns to shareholders through sharing purchases and increases in our dividend, and I think this strategy is working well as evidence by our ability to increase the quarterly dividend by 19% this quarter, extending our double digit dividend increase 3 consecutive years.
Let me start with an update on matters relating to the external environment which we’re operating in, and address some emerging trends.
When we last spoke in July, I highlighted what we termed the new reality that we’re facing. Greater security means emerging with fewer resources available to meet them. To address this environment the Defense Department has continued to clarify its objective of implementing major changes in the way equipment services are procured from contractors with a goal to save more than a $100 billion over the next 5 years, from overhead and other accounts without negatively affecting war fighters.
Once realized these savings would be invested in new equipment and applied to reserve troop strength, even as military budgets flatten in the future.
On September the 14th, under Secretary Defense Acquisition, Dr. Ash Carter, provided additional detail into 23 areas of improvement to make the department’s procurement offices and Defense contractors more efficient.
These actions were broadly characterized into 5 majority areas targeting affordability and controlling cost growth instead of [inaudible] productivity and innovation in industry, promoting real competition, improving trade craft in services acquisition and reducing non-productive processes in bureaucracy.
Within each of these categories, there are more specific areas of focus, like advancing the use of should cost modeling, eliminating redundant government reporting and review requirements, shortening acquisition cycle times, and increasing the use of fixed price incentive type contracts.
Since implementation of these initiatives by the department was planned to be phased in over time, we’ve not yet seen their total effect on our business. And we’ve been advised that some areas will require additional study and be subject to more detail future guidance.
We have however, agreed to be use of a fixed price incentive type contract on our F-35 program in the Lot-4 low rate initial production lot, which I’ll cover later in greater detail. And we certainly welcome the focus on shortening cycle times, as we’re seeing the opposite effect.
Components of the acquisition process have been consuming more time. Some negotiations have taken longer, some awards have been delayed. All having the effect of putting pressure on future growth prospects.
So we’re looking forward to working with the department and seeing some tangible results from these streamlining initiatives and we’ll keep you posted as they unfold.
Relative to our strategic focus, cost reduction, and efficacy initiatives, we’re making good progress. We’ve entered into an agreement to the rest of enterprise integration group, to Varitop capital for $815 million in cash. While this transaction is subject to government anti-trust review, we expect to close before year end.
Our Pacific Architects and engineers unit continues to see solid interest from potential buyers, and we’re on a timeline that supports closure, either late in the fourth quarter of this year, or early in the first quarter next year.
These actions, plus the rebalancing of our global logistics and training business, will provide a most crisp focus for our operations.
We also previously announced implementation of a voluntary executive separation program, designed to right size the company, reduce layers of management, enhance affordability, tighten reporting relationships, and allow for more direct lines of communication both inside the company and with our customers.
This program has been a solid success with approximately 600 employees participating. We will backfill some of these positions but not all of them. And we’ve all ready begun the process of organizational transition of knowledge transfer as we move to a more efficient model.
I want to thank those executives who are participating for their valuable contribution, and many years of service to our company and to our customers. Their work has been professional and it’s been highly valued.
Our focus on reducing overhead cost, travel expenses, and capital expenditures continues with a renewed emphasis on working with our supply chain. With approximately two thirds of the cost of our products procured from vendors, we must continue to drive down cost and improve quality, delivery, and reliability.
These actions are essential to enable us to deliver the best value to customers and financial performance for shareholders.
Turning operational performance, we had a solid quarter with key accomplishments across all business areas. In Aeronautics, I’ll highlight 3 programs where special attention warrant.
On the F-35 Joint Strike Fighter, we continue to see progress across many areas of the program, but challenges remaining in others.
In the flight test program, the overall tempo of flights continues to ramp up, as evidence by completion of 133 flights this quarter, or almost as many flights in the quarter as the 136 that were completed during the first 6 months this year. This acceleration in the flight test program was planned, and expected. Flight test performance continue to head a plan on both the conventional takeoff and landing, and the carrier variants, while the short take off and the vertical landing of flight completions remain behind schedule. Overall, we’re 26 flights ahead of plan through September, and are tracking toward achievement of the plan 394 flights for the year.