Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Lockheed Martin Corporation (NYSE:LMT)

JPMorgan Aviation, Transportation & Defense Conference Call

March 5, 2013 11:10 am ET

Executives

Bruce L. Tanner – Executive Vice President and Chief Financial Officer

Analysts

Joseph B. Nadol – JPMorgan Securities LLC

Joseph B. Nadol – JPMorgan Securities LLC

All right, we’re going to get started here. Next on our Aerospace and Defense track, we’re pleased to have the largest defense company in the world, Lockheed Martin. Bruce Tanner, Chief Financial Officer is to my left and Jerry Kircher, who many of know is in the front row here in front of me. We’re going to structure this as a “Fireside Chat”, but if there are burning questions in the audience, we’ll definitely move to those, after we get through, run through the company a little bit up here. So Bruce, welcome.

Bruce L. Tanner

Thank you, Joe. If I could maybe before we get started Joe, I know you guys have probably got eyes sore looking at these charts, but this is our Safe Harbor chart and I’ll remind you that we will likely be making forward-looking statements and projections and the actual results may differ if you want to take a look at our 10-K, which was just filed last week for a complete listing of our risks, so I’d encourage you to do so. Here we go.

Joseph B. Nadol – JPMorgan Securities LLC

Well, thanks. So I’ll just kick right in and I’ll ask the question that everyone, I’m sure you’ve already received a couple of times today and is the natural question to ask as it is March 5, what is the update on the sequester. What do you in day-to-day, and do you still feel comfortable with what you’ve told us would be the impact over the last couple of months sort of kicked in?

Bruce L. Tanner

Yeah. So we haven’t seen anything changed frankly from Friday at midnight I guess, when it kicked in officially. I still feel as I said in previous sessions and previous earnings calls that the effects of sequestration will play out a little more slowly perhaps for other companies, that is primarily because so much of our 2013 sales will derive from backlog that was funded with prior than fiscal year ‘13 funds, and the way, I think of it Joe is I’d kind of characterize, we now operate in five business areas, and two of those business areas primarily aeronautics and space are very long cycle businesses.

So I think of that from my perspective is you get an order to build an aircraft, practically any aircraft, C-130, F-16, F-35 or you get an order to build a satellite, and it takes roughly three years from the time you get the order to the time you deliver your first product to either an aircraft or a satellite. So the 2013 sales for both aeronautics and space, think of that is sort of coming from orders that were led in 2010-2011 timeframe. So the full effects of sequestration in our long cycled business areas will take a little large longer to kind of go through the system conversely, our information systems in global solutions business, IS&GS, I always refer to as fairly short cycle business, kind of one years worth of sales and backlog, they probably derive I don’t know 35-ish percent of current year sales from current fiscal year funding. So they will see the largest reduction of sequestrations effects in the calendar year, and then the full effects for the corporation will be felt I’m going to guess throughout 2014 and ’15.

Joseph B. Nadol – JPMorgan Securities LLC

In the services IS&GS and services businesses for other companies in the industry are always the toughest for I think us as investors and analyst to analyze because there are so many different types of services that provided and lots and lots of generally smaller contracts, but we’ve seen variety of memos coming out of DoD in recent weeks, and I think here in the last couple of days, some companies have seen an impact, planning for sequester in the last month or two a lot more than others because is there a way of characterizing, what your folks in that division in particular or seeing and where they’re seeing it.

Bruce L. Tanner

I ask that constantly we meet fairly regularly as a an executive leadership team and Linda Gooden, who runs that business for us today, I have ask that question, I pose that question are you seeing that? I have asked my finance person who is there for IS&GS the same question, and at least so far we haven’t I shouldn’t say, we’ve seen no effect because we have seen some minor effects primarily on the IDIQ contracts with some perhaps some orders being delayed from one we’re expecting to be awarded, but nothing of great consequence at least through the first, what two months of this year, so I’ll say we do expect stability that they might have or not have in their business, I think there’s still sort of sorting through that process as we speak today.

Joseph B. Nadol – JPMorgan Securities LLC

Okay. In the sequester, of course isn’t the only thing that we’re looking at here it’s the status of the 2013 budget, are the CR or whether we get a full-year budget. And there has been some back and forth even the last day or two on that in D.C. There can be it’s generally bad news at the CR, if we get a full-year CR, because new starts are a problem, but on the other hand, if you’re the incumbent.

Bruce L. Tanner

Right.

Joseph B. Nadol – JPMorgan Securities LLC

You can get a push out and maybe the incumbent with a higher margin then you’re going to get and re-compete, might actually be good news, how would you characterize as you look at your book of business coming at this year, the puts and takes as to whether we get a budget or full year CR?

Bruce L. Tanner

Yeah. Well, this may be counterintuitive after what I say but we would prefer obviously to get some full appropriation as opposed to having a full-year continuing resolution even though we don’t necessarily have a huge amount of growth in our existing province right now. So I’ll just thought a couple of programs as an example, so a little to a combat ship, there were two ships in the FY ‘12 funding there’s two ships on the FY ‘13 funding, continuing resolution doesn’t impact littoral combat ship a lot. The F-35 program domestically has 29 aircraft last year, 29 or 30 I have lost track and we’ll have 29 or so this year essentially at flat level of domestic aircraft between fiscal year, so not much impact there as well.

Having said that, we’re very aware that on the current continuing resolution, the government has probably spent on O&M at a greater rate than they have if you were to carry that out for 12-year period. So that’s causing them some concerns and then some issues. So I think the House last night, I believe they passed and send on to the Senate a full defense appropriation bill which we think would give the Pentagon some flexibility, it changes some of the programmatics from the current CR to get them a little more flexibility to operate and a sequestration it doesn’t resolve the sequestration what’s so ever obviously, but I think it does give them a little more latitude, we love to see that appropriation bill get passed and if it does get passed my guessing Joe is it will happen by the end of the current CR March 27.

Joseph B. Nadol – JPMorgan Securities LLC

And when your folks in Washington and you as a management team anticipate that we are going to get resolution on 2013 here soon, but when did the hard decisions the services that are going to have to eventually make, you can’t shutdown training and deployments and et cetera forever they are going to actually decide what they are going to do with that smaller budget. When do you think those decisions get laid?

Bruce L. Tanner

It’s fun I think we were probably out in front of the lot of the industry, and I will say we are probably out in front of the lot of the government for that matter. I think kind of said to jokingly to other people, I felt little bit like the village idiot in the square shouting out about sequestration a year ago, and frankly no one joined us on the square at that point in time, and what we are really commenting on wasn’t so much the just serious loss of business to Lockheed Martin, it was the manner by which sequestration requires the government to cut, and we think – we thought then and we still think today that the indiscriminate nature of not allowing the government to make strategic cuts as opposed to sort of the in my words, the peanut butter cuts is just not smart for this country, never mind Lockheed Martin in the total scheme of things, but just not smart for the defense of this country.

I’d much rather have the Pentagon protecting programs that they think are in the best interest of protecting U.S. citizens as opposing to happen to cut that the joke, I used this morning was, I want people who can actually find programs to track the next al-Qaeda network as opposed to funding the next [MIL-22 eight] program, and I don't think those should be but equally under a sequestration, but under sequestration that 's the way it happens.

So I think we've been very well called out that for the whole year, what’s changed here recently is the government has reached out to industry. I don't think that's unique to Lockheed Martin in the last several weeks, Marillyn Hewson, our CEO has been in the Pentagon multiple times talking to very senior leaders of the Pentagon, where they have reached out to us and said we want to understand the impacts not just on our programs, not just on the O&M accounts within the building, but also on industry, and specifically Frank Kendall has send out a memo here recently I believe that. It’s actually tells all of his program executive officers, now these are the people who sort of run the program for the government, reach out to your industry counterparts, and see if there is not a way to help mitigate the impacts of sequestration cuts, not just on the program itself, not just on the government employees, but to industry, and I think that’s a very positive statement and it is not one that's been is passed for a long period of time, but I'm very encouraged that the department is now taking that tactic, with the industry again I don't think that's just unique to Lockheed Martin, I guess with all the total industry, and the fact that there are in conversations with us, and asking our opinions I think it’s a tremendous step ahead.

Joseph B. Nadol – JPMorgan Securities LLC

Let’s step away from the immediate short-term here and the way this going to play out, there's a lot of very specific things that are happening to Lockheed Martin; one is you've had a leadership transition that on the one hand it’s been thus far incredibly smooth, on the other hand there is been transition, there is ongoing transitioning of all the senior leaders of the entire corporation from a P&L standpoint. And I think to a large extend, a functional standpoint as well, your only one inter fee, Marillyn of course is still there. And I mentioned this in this last conference call and I addressed it to Marillyn, but maybe I would like to address this to you here, what are you seeing of course Bob Steven is still there for a time, stay in the strategy, but what are you seeing brings out the environment here, what’s different, what’s the same at Lockheed Martin and how do you see everyone fitting into their new roles?

Bruce L. Tanner

It’s funny and I guess this is something that – it’s hard to have an appreciation for from sort of the outside looking in, but I think if you talked to anyone within the company and I am not just talking the leadership of the company, but if you talk to employees as well, the people who have been tasked to carry on for the changes that we have made at the end executive leadership team, they are not rookies in this industry or in this company. So I’ll talk couple of specifics of recent changes, Rick Edwards who is now running our Missiles and Fire Control Business, Sondra Barbour who is going to succeed Linda Gooden in IS&GS, Rick Ambrose is going to succeed to Joanne Maguire.

I think every single one of those individuals has been with Lockheed Martin for approximately 30 years. So their known commodity is internal to the company and I would argue, while they may not be known to you or maybe to some of our shareholders, they are very well known within The Pentagon as well, every single one of those individuals and so we operate as a what we had referred to as an executive leadership team. We meet very regularly at least weekly as a group.

We have strategic discussion just kind of as a group we’ve done that for years under Bob’s leadership. We continue to do that in the Marillyn’s leadership. So the same people that I was just referring to are now taking over for to Linda Gooden and to Joanne Maguire have been intimately involved in those executive leadership team discussions for the last four or five years, in their previous roles. So while they maybe sort of new to the outside, they’re surely not new to some in the inside.

Again, I think if you took the polls of the population within the company and as their confidence in the leadership team going forward, they will say of course, I’m confident, because I’ve known these guys in some cases for 30 years myself. So we don’t see it as a huge [benevolent], I don’t think you will either.

So just looking over the last number of years under Bob’s leadership, Bob has done a fabulous job. I would say his job has been easier the last few years than it’s going to be for Marillyn and your entire team. The next few just given the environment and Bob had a very difficult start that he managed to do well. So he already put his time in about 10, 12 years ago. But now it’s really up to the new crew to handle this environment, different companies are already responding differently to this environment, branching out a little bit, you’ve done some very small M&A in non-defense areas, but really you’ve been just beating the drum the last few years operating well, incredibly well and returning that cash flow. How long does it take before this new environment really is going to require, the teams to make some incredibly important strategic decisions for the company.

Well, I mean I would argue, we make, I would argue, Bob made strategic decisions for the company throughout his tenure. I do agree the future looks a lot different, say the last 10 or 12 years, I mean if I look back and I know if I’ve looked at my own data for the company and I have looked at Aerospace and Defense in general, but I want to say as an industry we probably grew from 2000 to 2012 at just under 6% annual compound growth rate as an industry. We were right at that level ourselves, I don’t see that going forward, so clearly it’s a different environment going forward than we have had in the past.

We are very conscious of sticking with what we are good at though and not wanting to deviate too far from what we think we do well and what we think we do well is, large projects, typically federal projects. We kind of get an internal quote that we would like to use, which says, we do difficult. And we take that to heart.

We think we do things that not a lot of companies frankly in the world are capable of doing with the sort of systems engineering, with the sort of technical talent that we bring to solving these problems as Lockheed Martin. And wherever we see those sorts of problems, even if they are little bit outside of our sort of coordinating, we think we have a play there, so we’ve been pretty vocal Joe about where we see that opportunity and where we think we see that opportunity is evolving into this more of the cyber security, more healthcare IT, if it ever becomes more federally driven as opposed to state and more local driven. If it stays in that area, we won’t have a big play there.

And then the last part is more on the energy side and I am not talking about the creation of energy here, I am talking about protecting the industry or the gas industry from a cyber perspective or we do a lot of materials work within our research and development and we think we has some really, really interesting applications as far as efficiency within the current grid structure from an electricity perspective especially, and we also think we have a lot to do from a systems engineering perspective relative to smart grid, and getting more. If you just take a look at some of the losses that are sort of embedded in the current system, and if you can save those efficiency losses you would eliminate a lot of the need to find new energy to fill those grids. And that sort of where we think we can play actually pretty effectively, but we don’t feel and we’ve never felt.

And I’ll say, Bob has been very consistent, during his leadership and Marillyn is exactly on the same page. We don’t feel the need to pull a crazy (inaudible) with the company. We do think our portfolio is very, very well aligned. I know you guys here this probably from every speaker up in front of the room, but we really do think our portfolio is a line not just with our domestic customer but with the needs of our international customers, and that’s particularly as we go forward we do believe there still fairly significant growth in our international marketplace. We tweet up, we did just about 17% of our sales on an international basis last year, we feel very confident that that will grow to 20% in the next few years and frankly Joe I think it can higher than that. And the good news about the international sales is they’ve never heard the word sequester and they’re not subject to sequester.

And we think the products and services that we offer up are very much needed in their areas I mean specifically I’m talking here, missile defense, so PAC-3, THAAD, you just assure those sorts of programs, tactical airlifts for the C-130 and ultimately F-35 and that there is a bit of a mitigating effect as we look going forward to – even if we see somewhat of a shrinking domestic budget, we do see some growth occurring on the international arena that we think helps to mitigate that tremendously.

Joseph B. Nadol – JPMorgan Securities LLC

Now let’s switch into cash deployment which is always a favorite topic and you guys have suddenly and IWIN maybe suddenly, you have adjusted what you are doing. The last few years you have moved more towards dividends and a bit away from share repurchase. You have continued the constant has been returning more than half, well more than half, almost all of your cash to shareholders as you promised for years, but you have changed the allocations of that. And then the other thing that’s living in the background of course is the pension and there was I think some surprise which you explained in your call and with the rationale, quite surprised with the large contribution that you made in the fourth quarter and the fact that you weren’t anticipating share count reduction to be too significant this year. That’s all one big sort of question, bulk of question for you, but what’s been driving the evolution and specifically in terms of the share repurchase, have you been adjusting, can you comment more about that not reducing the share count?

Bruce L. Tanner

Yes. I will just raise my hand and say, fairly guilty as charged. I think I’ve had a lot of conversations with on the call, I’ve had this conversations at this conference with investors and what I have tried to convey to everyone is that, it was my intention, it was not our intention to signal a huge student body lift from the cash deployment practices that we’ve had over the last 10 years or so since we started the share repurchase program.

I think as we look back, I will make this number a little bit off. I think I am pretty directionally accurate. Since 2003 we’ve bought back $25 billion worth of shares and our total cash deployment has been 102% of free cash flow of that 10 year period of time. So I think we’ve been pretty good stewards and consistent stewards over a decade or so since we've had the program. What we try to tee up on the call in January was truthfully from my perspective not a lot different from what we said in the last two years relative to share repurchases and feel like differences as opposed to giving an absolute number, which the past two years was a $1 billion dollars. I said this time we are going to reduce share count creep of our growth and that turns out to be about $700 million.

Interestingly had I give that number a few years ago, the actual share count reduction would have been about the same, because we had higher share count at that point in time where we had the $1 billion reduction. So it's not a shift in our cash to (inaudible) practice, We weighted the dividends increase hourly after a lot of conversations with investors and I asked that question when I would meet investors continuously, that said, we and the environment we were in. We were generating a lot more cash than we needed to internally fund the growth of the Corporation and I literally asked shareholders, investors how best should if we have the excess cash, how best should we manifest that to our investors, I'll be honest with you Joe, we kind of got mixed single that half the room said, we’d like share repurchases, tax plays there, we can actually affect that on our timetable, half the room said dividends because we collect the actual cash that comes from dividends.

So we made, I’ll say a conscious debt few years back to increase the dividend because we just had a sense that there will be more beneficial to the stock that continued share repurchases and I would argue that that strategy is being rewarding. I think he is creating a big of a base in the stock price, so obviously it's the stock price fluctuates downward the yield goes up and I think we attract more yield investors.

The older subtlety that I look at, I think it’s kind of better stability in the ownership base as well. I think we’ve had stable owners since we come up with this approach, which is also I think kind of eliminated some of the volatility we were seeing in the stock price a few years ago.

So we like that, we think we have going forward the cash generation ability to continue that, I don’t see that that’s the end of our dividend strategy at all, was not settling that those in with our share repurchase strategy. I will say, we’ve always viewed ourselves is opportunistic in our share repurchase practices and frankly, the stock took a pretty good run at the end of the last year. So there should be no secret, I definitely tone down the share repurchase at that point in time, just stock got some $10 or so since it’s high this year. I’d like to tell you that we’re being as opportunistic as you’d us to be in that sort of environment, I don’t think that’s changed at all. The only other thing, Joe, that may not be well understood, I don’t know that we certainly would be understood until you read the 10-K, but we have changed our executive compensation plans as well. So there is a pretty significant portion of our execution compensation was provided in the form of stock options starting in 2013 and forward, we’ve eliminated stock options from executive compensation. So we’re just giving RSUs and performance stock units.

And the significance of that is its current sort of valuations from perhaps, sales perspective versus the price of the stock. It takes about eight shares options to generate the same compensation as the single share of RSUs. And so think of that is we’re tapping in to fewer shares to grand our equity compensation going forward than we’ve done in the past. So going forward, I think we’ll have even greater ability to reduce share count with same levels of share repurchases we had in the past because we are not seeing the dilution of the increasing stock options counts if you follow them.

Joseph B. Nadol – JPMorgan Securities LLC

And that took a few years to kind of roll in.

Bruce L. Tanner

Yeah. I think we’ve got and I maybe a little off, the 10-K will show this. I think we’ve got some 14 million shares there in the money right now of options. We did 6.5 million last year. The plan this year, the premise on the share repurchases we assume we’d have about 3 million options to exercise this year. So if that were to be the case, we would have about 11 million shares left over the future. And then that amount would never be replenished again?

Joseph B. Nadol – JPMorgan Securities LLC

And so on the dividend specifically, you’ve increased your payout ratio quite a bit. You are now on our estimate of pension adjusted earnings, you are in the high 40s of payout ratio right now. Do you think about it that way or do you think how exactly are you thinking about it right now and obviously there is a variety of scenarios, budget scenarios looking forward and I imagine the variety of dividends here, how high are you in dividend payout ratio?

Bruce L. Tanner

We were asked that question a lot. I think we have thoughts attribute to us and maybe to me specifically sort of 50% is sort of a magic number. I am not sure I am there, because you always ask the question what else are you going to do with that cash. If 51%, what do you start doing with that 1% above the 50%, so I don’t look at that way, I look it at maybe a little differently and I will just give you sort of my gambling perspective on it. So we’ve increased dividends by 10% or more in each of the last 10 years, so I always tell people I think our track record is the best indicator what we are going to do in the future than anything else and that’s a very consistent track record.

We’ll do $1.5 billion in rough dollars worth of dividends this year. $3 billion of free cash flows quite 30% or 50%. I look at it though, double-digit increase in the dividends at the current dividend amount is $150 million. $150 million is not a huge cash draw on the corporation going forward. So our ability to continue sort of with the track record that we’ve shown in the past, I don’t see that as a huge hindrance to us at all. And the other thing that I’d like to point out is two-fold, one is we kind of peaked in the past year or so at the amount of capital expenditures and capitalized software needed to support our large programs certainly F-35.

We’re sort of on the downhill slide of capital expenditures needed to build aircraft and the quality levels that we’re expecting in the future, so CapEx in capitalized software, because we’ve done some fairly large sort of enterprise wise software applications that should be going down as well. So we’re literally – I think 2012 is the first year we actually generated cash, we had more depreciation than we did capital expenditures that number I guess figure going forward is the CapEx goes down and we could recover that depreciation.

And the last thing, I’ll say Joe is we feel really good about our cash generation abilities going forward, even in a fairly flat revenue environment potentially, because we have this sort of locked-up pension bank that is yet to be reimbursed by our government customers or government contracts. So I think at the end of 2012, we have some $8 billion of funding that’s in advance of recoveries on our government contracts, specifically for pension trust and with cash amortization that we talked about in the past.

We should start recovering that excess pension contributions say in the years 2015, 2016 and 2017. So as counter intuitive I’ve seen many years or maybe other people would think you got cash pressures, we actually expect them to have cash increases because in almost any scenario interest rate environment I can see we’ll be generating more cash flow from the recovery of our pre-funded pension plans and the requirements of our rest of contributions.

Joseph B. Nadol – JPMorgan Securities LLC

Lets turn to your largest program, the largest program the F-35 any color or context you can give on discussions with your customers given the environment rate now. I think the air force has come out and talked about scaling down potentially there buy, sort proportionally obviously the unit cost, has to go up, the fewer they buy, so just in the recent weeks just given that I guess not the penalty but the close to it of sequestration here what are your conversations been like.

Bruce L. Tanner

I don’t think it’s surprising, I think you’ve read the papers as well as I have had. I don’t think the conversations that we’ve had are a whole lot different than what you’ve read about in the paper. New funded F-35 aircraft are at risk under the sequestration, I think the only question is if you did the full sequestration for the year, was the quantity that we would lose. The good news side from my perspective is we’re having this – there is not much good news frankly because I think about it, but the good news part I’m looking for in these conversations is well there is a potential for reduction on the domestic side. Its occurring about at the same time as we’re seeing a ramp-up in our international buyers, so its not necessarily true that we’re going to have reduced built rate going forward even in a sort of a sequestration environment because we’re starting to get higher international orders, I think the current plan of record over the next five years, I want to say international aircraft quantities are some 48% of the total aircraft quantities over the next five years. So it’s a significant player going forward and that helps to mitigate some of the potential year-over-year reduction there. But I would be kidding myself, if I said we weren’t expecting under sequestration to loose some aircraft at the current fiscal year by.

Joseph B. Nadol – JPMorgan Securities LLC

It seems like you have been saying lots and lots of contracts after the F-35 after a couple of years, so very, very, very slow progress on these sequence of olives. There was a leadership change in the program office, but at the same time, you have also had this urgency created by the sequester. So in there is still some outstanding issues to be resolved, I think on the SDD program for example and so how do you characterize the relationship there, those are the moving pieces, but in terms of how this all is going to progress margin wise, what you have assigned the outstanding issues, how are you feeling about your margins?

Bruce L. Tanner

I was telling some folks earlier this morning and I was kidding with Jerry on the first row here that I probably have a different perspective though that F-35 pulling a lot of people, because I am probably one of the few people knew the government side or the company side, I was actually here from the beginning. I mean, I literally was in Fort Worth, Texas working on the team that developed concept demonstration phase that led to the development program for the F-35 contract, so this is probably 1997. So I am 16 years this year into the F-35 program, and I think that gives you a little different perspective than maybe some other folks who have had more recent experience with the F-35 program.

I will just say from my perspective, it’s never been in a healthier spot from a performance perspective, from a cost management perspective, from a capabilities demonstrated perspective that is today. And I mean that very sincerely, I think you’ll see coming up that even the government’s projections of what the ultimate cost per aircraft and full rate for the F-35 are going to be lower in the current government estimates for what the cost per aircraft are going to look like, and I think they will be very comfortable to what we’ve described in years past as the company as far as what the end cost for that airplane will be.

So if I just add up all those 16 years worth of costs, we’ve probably incurred between development and the production contracts we have under contract now, $50 billion worth of cost on the F-35 program, and we’re probably at the mid single-digit level of profitability right now, hugely driven by the fact that the SDD is low single-digit profitability, we’re doing a little better on the production contracts, but heavy, heavy volume on the development contract.

I’ve said before now, I’ll say it here again, I do believe when we get into full rate production, and we don’t have the dilution of the development program in the overall profitability of the F-35 program. We will achieve profitability rates comparable to our other production programs with the F-16, F-22 or C-130. And I still believe that’s the case today, and I don’t think that’s any different and expectation on the part of the government to drive that any different than what we’ve experienced on those previous programs.

Joseph B. Nadol – JPMorgan Securities LLC

Looking at the other major programs in aeronautics, you have a little bit of a zag this year I guess on the C-130 and the orders have been slower in the last couple of years than they had been in the prior Q4, C-130, and for F-16, so what's the latest on not this year's production, but what the orders are, what the order outlook is and what you need to sustain what you’re doing them for?

Bruce L. Tanner

For just the C-130 and F-16?

Joseph B. Nadol – JPMorgan Securities LLC

Yes.

Bruce L. Tanner

C-130 we did lower the build rates from 34 air craft to on an annual basis to 24. We never expected when we increased the rate to 34 that there was a permanent fixture. We thought we would get maybe three or four years at that level. We probably didn't get that because we did have some aircraft orders that slipped that to the right, we feel really good about the 24. I think of that has been a little more than half or 60% of that probably is sort of domestic orders from the U.S. government in various fashions, and types of aircraft and then the rest of it is international orders.

International orders, we are getting more discussions here recently on the international C-130 orders than we’ve had I'll say throughout the whole of 2012, so I am optimistic that something is actually going to pop out here fairly quickly, and maybe a little bit unexpectedly on the international front on the C-130. I don't think that will change our build rate, I think we will feather those new orders into sort of a 24 aircraft per year build rate, but I think that extends the production line out.

F-16, a pretty similar story right now, I think we have got, and I look at Jerry when I say this 2016-ish timeframe is what the aircraft currently build through. We have a couple of opportunities this year to extend that, most recently second buy for Iraq, for probably another 16 plus aircraft, we know at the right we're building at four, think of that as we're building kind of 1.5 aircraft a month. So 16 aircraft is not quite a year, but it’s almost another year’s extension. And then we’ve got to find some buyers after that, and we think the aircraft program still has legs.

I’m particularly pleased that with the modernization of the upgrade program that we just signed last year for the Taiwanese aircraft that we sold a number of decades ago. We’re going to be incorporating a lot of improvements on the aircraft including an ISR radar, actively scanned radar system that literally brings the F-16 at whole new capability level for sort of the fourth generation aircraft that package or upgrades can be used for multiple countries users of the F-16 program, including by the way the U.S. Air Force.

So if they’re looking to get service life extension on their current F-16 fleet, this is a nice fairly cheap way to do that to help bridge maybe some budgetary issues there, but primarily as we think we have opportunities to do that modification program whether its new F-16s or not to have a significant portion of F-16 business to upgrade the existing fleet around the globe.

Joseph B. Nadol – JPMorgan Securities LLC

I can get handful for one more here. And I’m going to make it on margins.

Bruce L. Tanner

Sure.

Joseph B. Nadol – JPMorgan Securities LLC

You’ve had great performance in recent years, I would say fairly steady solid performance on EAC adjustments and some others out there had a bit more of a ramp the last few years, but yours have been very steady at a high level through very solid and steady execution. You’ve been aggressive taking cost out and getting in front of a tougher sales outlook. But there is sort of expectation that the industry is pregnant with future declining margins, when things get more difficult.

So just sitting in your seat and seeing all the different moving parts, how much of an issue that you think this is for the industry, and where do you think, just given where things are today, the sequester, the environment, and where the industry margins, when did they actually start declining, when did they bottom?

Bruce L. Tanner

Well, we teed up that our margins in 2013 are going to be less than 2012 before sequestration, but the way I have characterized it that’s more of a mix issue, I was call sort of the algebra. We are back to the F-35 program and the margins on that. We are growing proportionately the F-35 business higher in bringing down particularly in the aeronautics business area because of the C-130 and F-16 quantity reductions were bringing down the volume there. C-130, F-16 is a higher margin business currently then is the F-35, so just as I call the algebra is bringing down the margins for both aeronautics and the corporation.

The rest of the business areas are really holding fairly constant between 12 and 13, maybe a little bit down in space systems because of one of our JV equity place with the United Space Alliance is down lower but if you look at the other business areas in the guidance we have provided we felt that was fairly consistent. I still think that’s the case and as we look longer term sort of our long range planning, we don’t see that drop off. We do see aeronautics maybe still having a little more pressure, simply because of the F-35 volume, but not because everything else is going down.

Somewhat mitigating that, still though is the fact that we do expect to have the international sales increase from where we are today. As I had mentioned 17% to 20% I think we have the opportunity to do greater than 20%. We typically do better margins on the international side of the house than we do on the domestic side of the house. We use kind of think with simplistically as you are kind of selling on the margin in the lot of cases internationally, and we see that typically as a helpful offset to the margin sort of compression we’re seeing from the algebra due to the F-35 program.

So I don’t see if I look at same programs year-over-year-over-year, it’s not as if we are planning for that programs margins to go down, because of some invisible hand strategy that’s just not what we’re thinking.

Joseph B. Nadol – JPMorgan Securities LLC

You don’t foresee just finally, on the EAC side, again, this is not as true for Lockheed Martin as this is for some others in the industry. But from an industry standpoint, the net benefit from EAC is at highest level probably of all-time last year. So you don’t foresee at least for looking in your shoes, looking at Lockheed Martin, any reason to believe that that’s going to be lower and say 2015, there has been in the last…

Bruce L. Tanner

The reason it would be lower, it’s probably not for the reason there I think you’re poking at, I mean I’ve always said that a lot of this has to deal with our practice for how we recorded profit. And at least, and look I don’t go round checking my peers, and say tell me your profit booking strategy, but as I do read other people’s documentation, it looks like we tend to start-off a little more conservatively than a lot of other folks, and I would argue that where we’ve had in the past sort of some multiyear contracts, you can picture in your own minds eye, if you’ve got a contract in the last one year, the amount of variability you can have in booking that contract frankly didn’t matter a whole lot, you’re going to book in that year anyway. If you have a contract in the last over three years or better yet if you had a multiyear that last seven years, which we’ve had some with the C-130 contracts, and some other programs in the past, F-22 as well. You can imagine that the profit step-up if you would do with that might actually occur later in the time, then as you’ve had annual buys. And I think we saw that for the past few years. I think going forward and we have opportunities to do some multi yearly we’ve done recent one of the MH-60 helicopter. I think we have a potential for the C-130 to do as well. If we do that we might see similar levels, if we go back to sort of the annual buys for Europe literally retiring risks on a short-period time. I think the profit step-ups that we’ve historically have seen might actually decrease. So a little bit of this is or lot of it frankly is that the duration of the tenure of the contracts that we sign and the other point is just simply I think we tend to start a little more conservatively with some others too.

Joseph B. Nadol – JPMorgan Securities LLC

Rate adjustments that would happen for that reason you’d expect the underlying accrual rates to actually be higher.

Bruce L. Tanner

Correct.

Joseph B. Nadol – JPMorgan Securities LLC

Yeah. Correct so. All right Bruce thanks so much for your time. Thank you.

Bruce L. Tanner

Thank you.

Question-and-Answer Session

[No Q&A session for this event]

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Lockheed Martin's Management Presents at JPMorgan Aviation, Transportation & Defense Conference (Transcript)
This Transcript
All Transcripts