Lockheed Martin Corporation (LMT)

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Lockheed Martin (LMT)

Q2 2011 Earnings Call

July 26, 2011 11:00 am ET

Executives

Bruce Tanner - Chief Financial Officer and Executive Vice President

Bob Stevens - Chairman, Chief Executive Officer and Chairman of Executive Committee

Jerry Kircher - Vice President of Investor Relations

Analysts

Cai Von Rumohr - Cowen and Company, LLC

Robert Stallard - RBC Capital Markets, LLC

Eric Hugel - Stephens Inc.

Howard Rubel - Jefferies & Company, Inc.

George Shapiro - Citi

Joseph Nadol - JP Morgan Chase & Co

Heidi Wood - Morgan Stanley

Douglas Harned - Sanford C. Bernstein & Co., Inc.

Robert Spingarn - Crédit Suisse AG

Joseph Campbell - Barclays Capital

Richard Safran - Buckingham Research Group, Inc.

Noah Poponak - Goldman Sachs Group Inc.

Jason Gursky - Citigroup Inc

Troy Lahr - Stifel, Nicolaus & Co., Inc.

Myles Walton - Deutsche Bank AG

Peter Arment - Gleacher & Company, Inc.

David Strauss - UBS Investment Bank

Presentation

Operator

Good day, and welcome, everyone, to the Lockheed Martin Second Quarter 2011 Earnings Results 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.

Jerry Kircher

Thank you, Saeed, and good morning, everyone. I'd like to welcome you to our second quarter 2011 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 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.

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.

Bob Stevens

Thanks, Jerry. Good morning, everyone. Thanks for joining in the call today. In the second quarter, we continued the positive momentum we established at the beginning of the year. In the quarter, we achieved sales growth of 2%, grew earnings per share from continuing operations by 11% and generated $843 million in cash from operations. This performance enabled us to increase our full year guidance for segment operating profit earnings per share and operating cash. In the quarter, we also repurchased 13 million shares of stock and made dividend payments of $258 million. These actions continue to provide solid returns to shareholders while assuring we sustain appropriate investments in our business.

Since we were last together in April, the range of global security and economic challenges we described as we assess our strategic landscape has not diminished, and the environment remains fluid, particularly with regard to debt ceiling deliberations. Domestically, the highest priority focus remains on assuring that our nation does not default on our debt obligations, that we develop a balanced plan that reduces deficits and liquidates our national debt, and we establish a foundation for economic growth. We are under no illusions about the difficulty of meeting these demands and continue to provide all encouragement to the administration and Congress as they undertake this work. As there is yet no clear long-term course of action, we will not attempt to predict what elements will emerge in the final approved plan. What we can do and what we are doing with the resources we have is to redouble our focus on execution across the company as we drive for greater efficiency.

This quarter, we implemented staffing reductions in 2 business areas: Space Systems and Aeronautics. As a number of our programs transition from development to production, we'll look to flatten organizations, tighten the span of control and drive affordability. While these staffing reductions are very difficult aspect of running our business, they are essential in responding to the new realities and changing economic conditions we face. Our customers are being asked to do more with less on a daily basis, and the demands on them are enormous. It's imperative that our cost structures be as low and efficient as possible to provide affordable solutions to meet their needs.

Looking at our largest customer, key leadership changes were effective this quarter with the retirement of Secretary Gates and the swearing-in of his successor, Secretary Panetta. The department continues a roles and missions evaluation to determine what programs and levels of resources are required for our national security and the President's fiscal year 2012 budget request of $671 billion. That's $553 billion in the base budget request and $118 billion for Overseas Contingency Operations. It's currently under Congressional Committee review.

Looking at the international environment, world economic conditions vary. The eurozone is showing considerable stress with areas of high unemployment, low economic growth and large national debt levels impacting countries such as Greece, Spain, Portugal, Ireland and Italy. Other market regions are more positive, and demand for our products remains strong in a number of countries, particularly in the Middle East and Pacific Rim. Future sales growth in these regions is expected in fighter aircraft, Missile Defense and cargo aircraft as we continue to work to expand the content of international revenues.

Despite domestic and international pressures, our portfolio of products is well positioned to provide assistance in support of critical national security requirements. Let me turn to key operational events that occurred this quarter and start with our largest program, the F-35 Joint Strike Fighter, where we achieved multiple noteworthy events and continued progress on both the development and production programs. On the development program, flight test activities continued ahead of plan for each aircraft variant. Through June year-to-date, 448 test flights were completed, which is 18% ahead of the 378 flights planned. Test point achievement remained 30% ahead of plan with 3,907 test points completed against the plan of 2,996. At midyear, we accomplished 51% of this year's planned flights and 58% of this year's planned test flights.

Other development accomplishments included the successful delivery of 2 additional test aircraft to the Patuxent River Naval Air Station which completed deliveries of all carrier variant aircraft for the system design and development flight test program. One carrier variant was subsequently deployed to Lakehurst, New Jersey to conduct jet blast deflector ground testing, while a second carrier variant initiated Catapult hook up testing at the Pax River test site. Both of these events supported the expanded pace of Navy activities as we prepare for shipboard testing in 2013. The software development plan consists of 3 blocks of software with 2 releases in each block. The software that is flying today, release 1A, is performing well with respect to functionality and stability. The next release, 1B, is in the integration lab test phase and is looking to move to the flight test program. Release 2A is in initial system integration and release 2B has completed requirements definition and is in development.

Block 3, which provides enhanced war fighting capabilities is early in the requirements definition process. This software program has approximately 1 month of scheduled pressure, where we're focused on applying resources and mitigating impacts. Overall, we believe there are sufficient resources to accomplish this software program. The first full mission simulator was delivered to the schoolhouse at Eglin Air Force Base. This system will provide the next generation of F-35 pilots and maintainers with the most advanced training system in the world. Progress on production also continued. In the quarter, we delivered the first 2 production F-35 aircraft completing Lot 1 deliveries.

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