lockheed martin group (lmt) earnings report: q2,...

CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense

EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13

©2014TheStreet,Inc.Al l R ightsReserved Page1of21

LockheedMartinGroup(LMT)EarningsReport:Q2,2015ConferenceCallTranscriptThefollowingLockheedMartinGroupconferencecalltookplaceonJuly20,2015,11:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

JerryKircher;LockheedMartinCorporation;VPofIRMarillynHewson;LockheedMartinCorporation;Chairman,PresidentandCEOBruceTanner;LockheedMartinCorporation;EVPandCFO

OtherPart icipants

DavidStrauss;UBS;AnalystFinbarSheehy;SanfordC.Bernstein;AnalystRichardSafran;BuckinghamResearchGroup;AnalystMylesWalton;DeutscheBank;AnalystRobSpingarn;CreditSuisse;AnalystPeterSkibitski;DrexelHamilton;AnalystGeorgeShapiro;ShapiroResearch;AnalystHowardRubel;Jefferies&Co.;AnalystJosephDeNardi;StifelNicolaus;AnalystPeterArment;SterneAgeeCRT;AnalystRonEpstein;BofAMerrillLynch;AnalystHunterKeay;WolfeResearch;AnalystRobertStallard;RBCCapitalMarkets;AnalystCaivonRumohr;CowenandCompany;AnalystSamPearlstein;WellsFargoSecurities;AnalystSethSeifman;JPMorgan;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

Gooddayandwelcome,everyone,totheLockheedMartinportfolio-shapingactionsandsecond-quarter2015earningsresultsconferencecall.Today'scallisbeingrecorded.AtthistimeforopeningremarksandintroductionsIwouldliketoturnthecallovertoMr.JerryKircher,VicePresidentofInvestorRelations.Pleasegoahead,sir.

JerryKircher (VPofIR):

Thankyou,Abigail.Andgoodmorning.I'dliketowelcomeeveryonetooursecond-quarter2015earningsconferencecall.JoiningmetodayonthecallareMarillynHewson,ourChairman,PresidentandChiefExecutiveOfficer,andBruceTanner,ourExecutiveVicePresidentandChiefFinancialOfficer.

Statementsmadeintoday'scallthatarenothistoricalfactareconsideredforward-lookingstatementsandaremadepursuanttothesafeharborprovisionsoffederalsecuritieslaw.Actualresultsmadediffer.Pleaseseetoday'spressreleaseandourSECfilingsforadescriptionofsomeofthefactorsthatmaycauseactualresultstovarymateriallyfromanticipatedresults.




Wehavepostedchartsonourwebsitetodaythatweplantoaddressduringthecalltosupplementourcomments.Pleaseaccessourwebsiteatwww.lockheedmartin.comandclickontheinvestorrelationslinktoviewandfollowthecharts.Iwouldalsonotethatwe'reextendingthecalldurationuntil12:30todaytoenableadequatetimeforyourquestionsonourfinancialresultsandstrategicactions.Withthat,I'llturnthecallovertoMarillyn.

MarillynHewson (Chairman,PresidentandCEO):

Thanks,Jerry.Goodmorning,everyone,andthankyouallforadjustingyourcalendarsandjoiningusonthecalltoday.It'sadayearlierthanplannedsoespeciallygiventheshortnoticeweappreciateyoujoiningus.Withtoday'spressreleaseoutliningtwostrategicactionsweareimplementingtostrengthenourcompetitivepostureandpositiontheCorporationforprofitablelong-termgrowth,weacceleratedthecalltoenabletimelydiscussionofoursecond-quarterfinancialresultsandtheportfolio-shapingitems.

Startingwithourfinancialperformance,wehadastrongquarteroperationallyandfinancially,withallreportedresultsexceedingourexpectations.Andweareprogressingonachievementoffull-yearfinancialobjectives.Theseresultsreflecttheexecutionbeingachievedacrossthebusinesses,asthecorporationoperatedataverystronglevelinprovidingcriticalsolutionstocustomerswhilereturningvaluetostockholders.

Theyear-to-datefinancialperformancealsoenabledustoagainincreasefull-year2015guidanceforsegmentandconsolidatedoperatingprofitandearningspershare.Inadditiontotheseincreasestoguidancewereaffirmedourearlieroutlookforfull-yearorders,sales,andcashformoperations.Withthesestrongfinancialresults,wecontinuedtoreturnvaluetostockholdersintheareasofsharerepurchasesanddividendpaymentsthroughcashdeploymentinitiatives.

IwouldnowliketodiscussthetwostrategicactionsweannouncedtodayandthenIwillaskBrucetocoverinmoredetailoursecond-quarterfinancialresultsandincreased2015guidance.ToassistourdiscussionIwouldaskyoutoturnyourattentiontothechartsweprovidedonourwebsite,startingonchart4,reshapingourportfolio.ThefirststrategicactionweannouncedisoursigningofadefinitiveagreementtopurchaseSikorskyAircraft.SikorskyisanaturalfitforLockheedMartinanditcomplementsourbroadportfolioofworld-classaerospaceanddefenseproductsandtechnologies.Thisactionwillenableustoextendourcorebusinessintothe$30billionannualmilitaryandcommercialrotarywingsegments.

ThesecondmajoractionisthecommencementofastrategicreviewofourgovernmentITinfrastructureservicesworkatInformationSystems&GlobalSolutions,toourtechnicalservicesworkatMissilesandFireControls.Thestrategicreviewwilladdressthechangingmarketdynamicsaffectingthesebusinessesandwillhelpusdeterminehowtobestpositionthemforfuturegrowth,andisexpectedtoresultinaspinofforsaleofthebusinesses.Theseactionscontinueourpracticeofcontinuouslyshapingtheportfoliotosecurethehighestvaluecreationforcustomersandstockholders.

TurningtoanoverviewofSikorskyonchart5,Sikorskyiswell-knownasaworldleaderinthedesign,manufactureandsupportofmilitaryandcommercialhelicopters.Theirinternationalpresenceiswide-ranging,withoperationsin20countries,andtheirproductsareusedinover40countries.Sikorsky'srevenuecompositionisshownonthepiechart,withapproximately75%oftheirworkformilitarycustomersandtheremaining25%tocommercialusers.Withapproximately50%oftheirannualrevenuederivedfrominternationalcustomerstheywillaidusinmovingforwardonourgoaltoexpandinternationalrevenues.

Theacquisitionrationaleisoutlinedonchart6.SomeoftheimportantstrategicbenefitsofthisacquisitionarethatSikorksyhasfamiliarcustomers.Thisfamiliaritywillassisttheintegrationprocess




throughutilizationofsimilarknowledgeandinteractionwithcommoncustomers.Theyarealsoextraordinarilywell-positionedwithanestablishedbrandandarobustbacklogoffuturework.Theyalsohavea40-yearhistoryasafrequentteammateofourMissionSystemsandTrainingbusinessareas,andtodaywecollaborateontheVH-92presidentialhelicopter,combatrescuehelicopterandthenavalMH-60Romeohelicopter.Theirstrongaftermarketbusinessisalsoexpectedtoprovidealong-termsourceofearningstotheCorporationandanotherleverofvaluecreation.

Theopportunitytoaccesscapitalintoday'shistoricallylowinterestrateenvironmentisanothersignificantcontributortotherationaleandvaluecreationoftheacquisition.BeyondthestrategicbenefitsIoutlined,anotherkeyelementoftheacquisitionrationaleisaSection338(h)(10)taxelectionforthetransaction,whichisexpectedtoprovideapproximately$2billioninnetpresentvalueforourCorporationandstockholders.

Futuregrowthprospectsoftheacquisitionareoutlinedonchart7.Oneofthekeyelementsofourstrategicplanningistosecureandextendourcoredefensebusiness,andwefeelconfidentthattheadditionofSikorksywillcontributesignificantlytothegrowthobjectives.Astheprimecontractorformultiplecurrentdevelopmenthelicopterprograms,suchastheCH-53Kpresidentialandcombatrescue,Sikorksyiswell-positionedtogrowastheseprogramstransitionintoproductionscheduledin2018.Withtheirextensivepresencearoundtheworldinover40countries,weseefurtherexpansionofourinternationaloperationsaswewillbenefitfromtheirinternationalfootprintandcustomerrelationships.

Sikorksy'sfootprintinthecommercialaviationsegmentiswell-establishedwithextensiveactivitysupportingtheoilandgasindustry.Whilethissegmenthasbeenunderrecentpressureduetolowoilprices,itisexpectedtorecoverinthefutureandaddvaluetothecorporation.Webelievethesecurrentpressuresenabledustomakethisacquisitionatalowpointintheeconomiccycle.Alloftheseelementsindicatesignificantopportunitiesforgrowthinthefuture,andvaluecreationpotential.

Iwouldnowliketooutlinethetransactionvaluationonchart8.Theagreementannouncedtodayoutlinedthepurchasepriceof$9billionandwillbefundedwithacombinationofnewdebt,andavailablecash.Itisimportanttonotethatourjointelectionofthe338(h)(10)taxbenefiteffectivelybringstheadjustedpriceofthetransactiontoslightlyover$7billion,withanadjustedmultipleof10.3timesEBITDA.ThesemetricsdemonstratethatwearepurchasinganactiveparticipantinoneofthelargestareasofDODexpendituresatanattractiveprice.Ialsowanttoreiteratethatthistransactionwillnotchangeourpreviouslyoutlinedplantoreturncashtoshareholdersthroughdividendsandstockrepurchasesbetween2015and2017,andreducingouroutstandingsharecounttobelow300millionsharesbytheendof2017.

Anoverviewofsynergiesisshownonchart9.Whiletherearemultipleelementsofsynergythatwehaveidentifiedfromthistransaction,thelargestcontributionwillbefromtheapproximately$2billionthatwewillrecognizethroughtheelectionoftheSection338(h)(10)taxtreatment.Intheareaofcostsynergies,weexpecttoachieveasteadystatelevelofaround$150millionannuallyafterintegrationactionsarecompleted.Intheareaofrevenuesynergy,weseemultipleopportunities,byleveragingourrelationshipswithinternationalgovernments,andourabilitytomatchtheirsecurityneedswiththefullspectrumofoursecurityofferings.Sikorksyproductsandcapabilitieswilladdtoourexistingportfoliosandenableustoofferanevenbroaderrangeofsolutionstointernationalcustomers.

BeforeleavingSikorksyIalsowanttooffersomeadditionalperspectiveonournewteammembers.Wehavesimilarcultures.Wehaveasharedpassionforinnovation,andacommitmenttosupportingthemenandwomenwhodefendourfreedom.Together,wewillofferastrongerportfolioofhelicopterandsystemsengineeringsolutionstoourglobalcustomersasweacceleratethepaceofnewtechnologies.Atthesametime,ourcommitmenttobringthebestwehavetooffertoourworkwithotherhelicoptermanufacturersisabsolutelyundiminished.IamconfidentthatSikorksywillbeanexcellentfitwithinour




MissionSystemsandTrainingbusinessareaandastrongcontributortotheCorporationaswemoveforwardtogether.

Iwillnowturntochart10andspeaktothesecondportfolioactionweoutlinedtoday,thestrategicreviewofITandservicesworkinourIS&GSandMFCbusinessareas.Letmestartbysayingthatwehaveaproudlegacyasaworld-leadinggovernmentITservicesandtechnicalservicesprovider.However,marketdynamicsandtrendsledustobelievethatthesebusinessesmaypotentiallyachievegreatergrowth,whichisgoodforouremployees,andcreatemorevalueforourcustomersandstockholders,byoperatingoutsideofLockheedMartin.

ThematrixshownoutlinesthebusinesseswithinIS&GSandMFCthatcomprisethestrategicreview,aswellasthosethatwillberealignedunderotherexistingbusinessareas.Foryourreference,thebusinessesunderstrategicreviewareexpectedtogenerateapproximately$6billioninannualrevenuethisyear,withmid7%margin.Withaseriesofrecentwins,thebusinessesunderstrategicreviewarewell-positionedtogeneratevalueunderanexpectedspinofforsale.

AsIsummarizetoday'sannouncementsonchart11,Iwouldliketoconcludebyreiteratingthatthetwostrategicactionsweannouncedtodayrepresentpowerfulportfolio-reshapingactivity,andprovidestrongopportunityforcreatinglong-termvaluetoshareholders.Webelievethereareopportunitiesforsignificantsynergiesandareconfidentthattheriskofexecutionislow.Bothoftoday'sactionswillfurtherpositiontheCorporationforgrowthandvaluecreationforinvestorsandcustomers.

IwillnowaskBrucetogothroughoursecond-quarterfinancialperformanceandourincreased2015guidanceandthenwewillopenupthelineforquestions.

BruceT anner (EVPandCFO):

Thanks,Marillyn.Goodmorning,everyone.Iwilltrytokeepmyremarksbriefthismorningsoastoallowmoretimeforquestionsduringoursession.Andmyremarksrelatetothewebchartsaddressingjustthefinancialresultsforthequarter.

Beginningwithchart14,wehaveanoverviewofoursecond-quarterresults.Salesforthequarterwere$11.6billionandwereaheadofourexpectations.Wewillprovidemorecoloronoursalesresultsonthenextchart.Oursegmentoperatingmarginwasalsobetterthanexpectedinthequarterat12%,andenabledustoachieveearningspershareof$2.94.Wegenerated$1.3billionincashfromoperations.Again,alittlebitbetterthanexpected.Andwe'llalsodiscussthisfurtherinafewcharts.

Ourcashdeploymentactionsincreasedoverthefirstquarterwith$1.4billionofcashreturnedtoshareholders,includingnearlyfivemillionsharesrepurchasedformorethan$900million.Andwithourstrongoperationalperformance,weareincreasingourfull-yearoutlookforbothoperatingprofitandearningspershare.So,wefeelgoodabouthowweendedthefirsthalfoftheyear,andthatpositionsuswellfortheremainderoftheyear.

Onchart15,wecompareoursecond-quartersalesresultsfor2015withourresultsin2014.Salesarehigherbyabout3%,comparedwiththesecondquarteroflastyear.Andwhilemostofthehighervolumeinthequarterwasduetoearlierthanplanneddeliveries,we'llbewatchingthiscloselyoverthenextfewmonthstoseeifthehighertrendcontinues.

Chart16comparesoursegmentoperatingmarginthisquarterwiththesecondquarterof2014.Segmentoperatingmarginwas40basispointslowerthisquartercomparedwiththesameperiodlastyear.ButasIsaidearlier,thiswashigherthanwehadplannedforthequarter,andenabledustoincreaseourmarginoutlookfortheyear.MissionsSystemsandTrainingdrovethehigher-than-expectedresults,withmarginimproving250basispointsoverthesecondquarteroflastyear.Betterperformancethisyear,combined




withtheabsenceofperformanceissueslastyear,ledtothisimprovement.

Turningtochart17,wewillcompareourearningspershareresultsthisquarterwithourresultsfromayearago.OurEPSof$2.94was7%higherthantheresultsfromlastyearandenabledustoincreaseourEPSfortheyear.

Chart18providesdetailintosharerepurchaseactivityduringthequarter.Aswepreviouslymentioned,wehadsignificantlyhighersharerepurchasesinthequartercomparedwiththesameperiodlastyear,with$937millionspent.Moreimportantly,we're$300millionaheadoftheyear-to-dateamountfromayearagoandhavereducedsharesoutstandingbymorethan5millionshares.Andwearewellonourwaytoachievingorexceedingthe$2billionrepurchasetargetweestablishedatthebeginningoftheyear.

Onchart19wediscussourtotalcashreturnedtostockholdersforboththequarterandyeartodate.Withthe$1.4billionincashreturnedtostockholdersinthesecondquarter,wehavereturnedjustover$2.5billiononayear-to-datebasis.Andinboththequarterandyeartodate,wehavereturned131%offreecashflowtoourstockholders.

Onchart20,weprovideourupdatedoutlookfortheyear.We'releavingbothordersandsalesunchangedatthistime.About65%ofourordersareplannedforthesecondhalfoftheyear.Andwhilewethinkthereisupsidepotentialinoursalesforthesecondhalfoftheyear,we'llhaveamuchbetterfeelforbothofthesemetricswhenwegettothethird-quartercall.Weareincreasingoursegmentoperatingprofitby$75millionduetoourstrongperformancethroughthefirsthalfoftheyear.Andasaresultofourincreaseinprofit,wealsoincreasingourearnings-per-shareguidanceby$0.15toanewoutlookofbetween$11and$11.30pershare.

Finally,wearekeepingourcashfromoperationsguidanceunchanged.Wementionedlastquarterthatourcashwouldbesignificantlyweightedtothesecondhalfoftheyear.Andwhilethatisstillthecase,ourstrongersecond-quarterresultshavereducedthatdifferencebetweenthefirstandsecondhalvesoftheyear.

Onchart21,wehaveoursalesoutlookbybusinessarea.Again,nochangeinouroutlookatthistime.

Chart22showsouroutlookforsegmentoperatingprofit.Wehaveahigherprofitoutlookintwoofourbusinessareasthisquarter,increasingSpaceSystemsby$45million,andMissionSystemsandTrainingby$30million,resultinginatotaloutlookofincreaseof$75million.

Finally,chart23providesoursummaryofthequarter.Wehadagoodquarter,buildinguponourresultsfromthefirstquarter,andpositioninguswellaswelookforwardtotherestoftheyear.Ourcashdeploymentactionsacceleratedinthequarter,andweremaincommittedtotheactionswediscussedearlierthisyear.Ourprogramexecutionwasverygoodinthequarterandwelookforwardtoaddingtoourportfoliowithsomestrategicwinsinthesecondhalfoftheyear.Andlastbutcertainlynotleast,ourdecisionstoacquireSikorksyAircraftandconductastrategicreviewofourgovernmentITandtechnicalservicesbusinessmakesthisquarterstrongfrombothatacticalandstrategicperspective.

Andwiththat,we'rereadyforyourquestions.Abigail?

QuestionsandAnswers

QUESTIONS&ANSWERS

DavidStrauss,UBS.

DavidStrauss (Analyst-UBS):




Goodmorningandcongratulations.Bruce,canyoupotentiallygiveussomemoremetricsthatyouarethinkingaboutaroundSikorksy,potentialleveragethatyousee,thedeleveraging,andthenhowyouarethinkingaboutintangibleamortizationandaccretionfromthedealasyoulookout?Thankyou.


Yes,sure,David.Aswelooktofinancethisdeal,asMarillynsaidweexpecttousesomecashoffofthebalancesheet,butalsodothevastmajorityofitintheformofdebt.Currently,wearethinkingthatlookssomewherearound$1billionoffofthebalancesheetintermsofcashused,and$8billionworthofdebt.

Wethink,justtogiveyoualotofmetricsmaybeatoncehere,wethinkthatthedebt,theaveragecouponforthemultiplematuritythatwewoulddo,includingpotentiallyalittlebitofcommercialpaperinthemix,wouldbea3.5%coupon.So,youshouldthinkofthatassomewhereintheorderof$280million-ishayearofinterest,andonanafter-taxbasissomethinglike$180millionayear,rounding.

Intangibleamortization,Ithink,wasyourotherquestion.Aswelookatthisrightnow,we'reprobablylookingatabout$3.5billionworthofintangiblecosts.Thinkofthatastradename,customerrelationshipsasthebiggestdriversofthatintangiblelevel.Andthatwouldequatetoabout$250millionofexpenseayear.Again,thinkofthe$180millionafter-taxinterestintangibleamortization,around$215millionayear.

Andthenonthepositiveside,obviously,the338(h)(10),asMarillynsaid,almost$2billionworthofpresentvalue.Youshouldthinkofthatasbeingabouta$450millionayeartaxdeductionassociatedwiththestepupinassetsthatequatestoabout$160millionbenefitgoingforward.Andthen,asMarillynsaidalso,weareexpectingsomewhereinasteady-staterunrateofabout$150millionayearinadditionalearnings.

So,ifyouaddallthoseuptogether,alotofmovingpiecesthere,Irealizethat,yourfinalquestionwasaccretion,whendoesthathappen.Ourintentistointegratethisbusinessasquicklyaspossible.Marillynsaidweexpecttoclosesomewhereendof2015,early2016.So,wewouldexpecttohavetheintegrationcostsspentinlargepartin2016.Wewanttogettheintegrationdoneasquicklyaspossibleinordertogeneratethesynergiesthatcomefromthat.

So,wewouldbeGAAPdilutive,ifyouwill,in2016.WeexpecttobemarginallyGAAPaccretivefromanearningsperspectivestartingin2017andthentogrowfromthatpointforward.Justonemaybelastcommentonthe--that'sokay,nevermind,Iwillleaveitthereandseeifthere'sanotherquestiononit.

Operator :

DougHarned,Bernstein.

FinbarSheehy(Analyst-SanfordC.Bernstein):

Goodmorning.Andit'sFinbarSheehyforDoug.TurningtotheothersideofyourstrategicannouncementthismorningontheservicesandITbusinesses,canyoutalkalittlemoreaboutthecriteriayouwillusetodecidewhichonesyouwillkeepandwhichonesyouwilldivest?And,asyoutalkaboutthat,youmentionedthatyouhavetheopportunitytoacquireSikorksyatthebottomofthecycle.AndsomeoftheseITandservicesbusinesseshavebeenhurtbytheBudgetControlActandsequestration.Howdoyouavoid,ifyoulike,divestingthesebusinessesatthebottomoftheirmarkets?


Justtospeaktotheportfolio,thewaythatwehavegone,wehavebeenlookingatourITinfrastructureservicesandtechnicalservicesbusinessforsometimenowandhavedonequiteabitofanalysis,trying




insidetheCorporationtofigureouthowwecanmakeitascompetitiveaswecan.There'salotmorecompetitorsthathavecomeintothemarketplace.Andourcustomers'prioritiesarechangingandwhattheyarelookingat.Theyaremuchmorepricesensitive.

So,theelementsofourbusinesspredominantlywillbeintheworkthatwearedoingforcivilagencies--IT,infrastructure-typeservices.IfyouthinkaboutenterpriseITservicesthataredoneforvariousagencies,thatisthetypeofworkthatwouldfallintothis.AndthenthetechnicalservicesworkthatisinourMissilesandFireControlbusiness.

Intermsof,wecertainlywanttocreatevaluethroughthisprocess.So,whatwebelieveisifwemoveitoutfromunderthebusinessstructureinLockheedMartin,thatthatwillallowittothriveandgrow.Itwillallowittohaveabusinessstructurethatallowsittothriveandgrow.And,so,wearewillingtoseparatethosebusinessestocreatethatvaluegoingforward.

Wethinkit'saverystrongbusiness.WehaveastronglegacyofbeingthetopITproviderfortheUSgovernmentforthepast21years.Andthisisabusinessthathasstrongperformanceandstrongprograms.Andwehavehadsomerecentwinsthisyear.Andwe'vehadsomeacquisitionsinthatbusiness.

So,wethinkwhatwehaveisapremierasset.Andwethinkifwecanstanditupasastandalonecompany,orifit'sattractivetoabuyerandwecangettherightpriceforit,thatisthebestforthatbusinesstogoforward.

Operator :

RichardSafran,BuckinghamResearch.

RichardSaf ran (Analyst-BuckinghamResearchGroup):

Hello,goodmorning.Marillyn,Bruce,IwantedtoknowifyouthinkyoucouldbeabetterownerandoperatorofSIkorskythanUnitedTechnologieswas.Ifpossible,IwouldliketoknowhowyoumightbelookingatoperatingthebusinessdifferentlythanUTXdid,howyoumightthinkthatmightbeabenefit.


Iwillstartoutfirstandthen,Bruce,youcanaddtomycomments.Ithinkifyoulookatwhatisourcorebusiness,ourcorebusinessisdoingbusinesswithgovernmentsinitsplatformandsystemsintegration.Thatisthepredominanceofourbusiness.AndIthinkinthatsensebringingSikorksyintoourbusinessisjustanaturalfitforus.Andit'sabilityforustobringourstrengthinrunningprogramsandourgovernmentcontractingandallofthatexpertisetotheSikorksybusiness.

Wealsolookforwardtotheopportunitytocreatevalueontheinternationalsideofourbusinessfromtheirfootprintthattheyhavearoundtheworldandtheworkthattheyaredoinginanumberofcountries.So,Ithinkifyoulookatthepotentialsynergies,wedothinkweareanexcellentownerandabetterownerforthisbusinessbecausenotonlydowebringourexpertisebutbringingintheirfootprintandtheircapabilityaroundtheworldisvaluethatwecancreate,aswell.Bruce,doyouwanttoaddsomething?


Justathought,Rich.Intermsofaddingvaluegreaterthantheparent,thisisabusinessthathasbeensuccessfulforhoweverlongit'sbeeninbusiness,90-something-plusyears.So,theyobviouslyareanationaliconintermsofthecapabilitiesthattheybringtotherotarymarketplace.Theydoalotofthingswellalready.




WhereIthinkwecancreatevalue,firstoff,wethinkthisdealhasprettylowexecutionriskfromus.Iliketothinkofthisaswearebuyingaportfolioofprogramsversusanewbusinessmodelandnewmarketplacesandnewcustomersthatwe'veneverdealtwithbefore.Thisisallveryfamiliarwithus.AndIliketothinkofthisashavingthepowerandbackingofa$45billionbusinessfocusedongovernmentcontractingversusonewhichwaslessfocused,perhaps,intotalthanjustonthepieceoftheSikorksybusiness.

Idothinkthereareareaswecanimprovethebusiness,particularlyonthecontractingside,andmaybetofocusalittlebitonthecashflowside.Ithink,inparticular,theinternationalsalesmarketisaninterestingoneforus,wherewe,throughthecombinationofourportfolios,cominginandhavingadiscussionaboutthesecurityneedsofourinternationalcustomers,whetheritisF-35littoralcombatships,nowSikorksyhelicopters,isamuchmorepowerfuldiscussionthanwhatIbelievethecurrentparentcouldhaveintermsofbundlingproductsandservicestogethertogointotheinternationalmarketplace.

Ithinkallofthosereallyaddtoourabilitytohelpbetterpositionthisbusinessgoingforward.And,look,wearehappytohavethisbusiness.Wethinkitfitswellintoourportfolio.Thisiswhatwedo.Thisisourcoreknitting.

Operator :

MylesWalton,DeutscheBank.

MylesWalton (Analyst-DeutscheBank):

Thanks,goodmorning.Marillyn,haveyouhadachancetogetinitialfeedbackfromtheDoDontheproposedacquisition,particularlyasitappliestobroaderconsolidationoftheindustrialbase,realizingtheArmyisnotahugecustomerproportionallytoLockheedMartin.Maybethat'snotasmuchbutattheDoDleveltheremaybesomeissue.


Aswewoulddoonanyacquisition,wecontactedourcustomers.So,I'vehadanopportunitytospeaktoseniorlevelsintheDepartmentofDefenseandhaveofferedtothemtoprovidewhateveradditionalinformationtheyneediftheyassessit.Theyhavebeenconsistentthroughanyacquisitionofthistypetosaythattheywillassessandasktheirquestionsandgiveadetailedreview.So,westandreadytosupportthemthroughthatprocess.

Idothinkifyoulookatthisacquisition,wearenotreducingthenumberofcompetitorsatallinthissegment,inthehelicoptersegment,andthereshouldn'tbeaconcern.Ourportfoliosareverycomplementary.There'sverylittleoverlapbetweenourtwoportfolios.So,inthatsense,Iwouldexpectthatwouldnotbeaconcernoftheirsgoingforward.

Intermsoftheservicesbusiness,therearemanycompetitorsoutintheITservicesarena.So,thefactthatwearetryingtopositionthisbusinesswhereitcanbemorecompetitiveinthatarena,Ithinktheywouldviewitpositively.So,betweenthosetwoelements,itisverypositive.

TheotherthingthatIwouldargueisthereissomeconcernaboutconsolidationmakingoneentitybiggerthananother.Whenyoulookatthesetwostrategicactionsthatwearetaking,UTChasreportedthattheyseethesalesforSikorksytobeabout$6.5billionthisyear,in2015,andthepieceofbusinessthatwearelookingatdoingthestrategicreviewtospinorsellisabout$6billion.So,wemayfindattheendofthedaythatweareroughlythesamesize,maybeevenalittlesmaller,maybealittlebitbigger,butbasicallyroughlythesamesizewithbothofthesestrategicactions.SoIdon'tthinkthereismore




concentrationatLockheedMartininthatsense.

Operator :

RobSpingarn,CreditSuisse.

RobSpingarn (Analyst-CreditSuisse):

Goodmorning.Congratulations.Justtoquickclarificationquestions,oneonwhatMarillynjustspokeof.ButwithregardtothestrategicevaluationatIT,thequestionthereis,youaretalkingaboutthisasasingle$6billionbusiness,oratleastthat'smyinterpretation.Butmightyouconsiderdoingdifferentthingswithdifferentpieces,sellingsomeandspinningtheother?AndthenforBruce,isthe$150millioninsynergiesnetofthingslikeprofitonprofit?Thanks.


Toyourquestion,firstofall,there'sanumberofpossiblescenarios.That'swhywewanttogothroughthisprocessbetweennowandtheendoftheyeartoreallygiveastrategicreviewonwhatarethebeststrategicoptionsfortheseelementsofthebusiness.

Toyourpoint,itcouldresultinoneormoretransactions.Ourkeyishowdowedelivermorevaluetoourcustomers,howdowedelivermorevaluetoourshareholdersthroughthisprocess.Thestrategicreviewisgoingtodeterminewhattheultimateoutcomeis.Anditcouldbemorethanonetransaction.


Rob,thesecondpartofyourquestion,the$150millionsteady-stategoingforward,thatisconsideredtobenetoffeeonfeeorprofitonprofit,ifyouwill.Andnottoconfuseyou,perhaps,butjusttogiveyousomeinsight,thelevelofsalesthatwesee,theoverlapthatwouldneedtobeadjustedout,ifyouwill,onceSikorksybecomespartoftheportfolioforourbusinessthat'sbeingconductedwithinMissionSystems&Training,youshouldthinkofthatasbeingabout$150millionayear.

Thereisobviouslypricedbusinessrightnowthatcarriesonforsomeperiodoftimeforthingslikeourworkonthecombatrescuehelicopterorthepresidentialhelicopter.Thatwouldn'thaveanegativeprofitimpactinthenearterm,butwewouldeliminatethesalesof,obviously,ofthatgoingforward.So,thinkofwhenwegettothesteadystate,thatisnet,ifyouwill,ofthatconsiderationoffeeonfee.

Operator :

PeteSkibitski,DrexelHamilton.

PeterSkibitski(Analyst-DrexelHamilton):

Congrats,guys,onsomeboldmoves.HowdoyouthinkaboutthestrategicfitofSikorksy'scommercialhelicopterbusiness?


Ithinkforusit'sanicefitinthesensethat,asImentionedinmyremarksattheoutset,it'spredominantlyintheoilandgasside,whichisnotanareathatwearein.Andwhilewe'vegotsomenear-termpressuretherejustbecauseofwhathashappenedwithoilprices,weseeanopportunityinafewyearsforthattoturn,andsoarealopportunityforgrowththereaswemoveforward.

Andthentheothersideonthecommercialsidewouldbeonthesustainment.There'scommercialaircraftthatarealreadyinthebaseamongthese40countriesthatImentioned,havetobemaintainedand




sustained.So,that'sagood,strong,healthybusiness.

WhenyoulookatitfromaLockheedMartinstandpoint,wesellourproductsandservicestoheadsofcountries.Theybuybothmilitaryandcommercialplatformsandsystemsandsustainmentactivities.So,Ithinkthatisanicefitwherewebringallofthattogetherinourcustomerrelationshipsaroundtheworld.

Operator :

GeorgeShapiro,ShapiroResearch.

GeorgeShapiro (Analyst-ShapiroResearch):

Yes,Bruce,Ijustwantalittlemoreclarification.YouhavecommentedaboutSikorksy.You'resayingintermsoftheprofitonprofitthatyou'regoingtobegettingfortheprogramsthatyoursubcontractortoSikorksy,that'sabout$150millioncurrently?Orthat'swhatit'sgoingtobe?


No,George,thatwasrevenue.Profitisamuchsmallernumber.


Okay.Andthat'sbecausealotoftheirprogramsthatyou'reasubcontractedtoreallyhaven'tstartedtorampupyet.


That'scorrect,George,butIwilltellyou,theabsolutedollarsonoursidedon'tdeviateawholelotfromthatnumberfortheworkthatwe'redoingtodayandforthenearfuture.


Okay.And,then,similarsubject,Bruce,howmuchsubcontractworkdoyoudoforotherhelicoptermanufacturersthatmightbeatrisksincetheymaynotwanttodealwithacompetitor?


Wedoquiteabitofwork,George,actually,asweselldirecttotheUSgovernment.Alotoftheworkisnotdirectlytothehelomanufacturersthemselves.So,alotofourintegrationactivitiesisactuallydonedirecttothegovernmentasopposedtodirecttotheotherhelomanufacturers,ifyouwill.

Wehaverelationshipswitheveryonedomesticallyandinternationallyinthehelomarketplace.Ourintentionistomaintainthoserelationshipsgoingforward.That'ssomethingthatwewouldobviouslyhavetoconsiderrelativetoourdiscussionswiththeDoDasfarasgoingforwardwiththisincorporationofthebusiness.Andthat'ssomethingthatwewouldintendtodojustoutofapureeconomicsperspective,isnothingelse.Butthat'sjusttherightthingforustodogoingforward.

Operator :

HowardRubel,Jefferies.

HowardRubel(Analyst-Jefferies&Co.):

Hi,thankyou.I'mgoingtoturntotheboringthingsoftalkingaboutthebusinessforamoment,Marillyn.Youhadacoupleofnicepositivedevelopmentsintermsofoperations.Weretheresomethingsthatyoucouldaddressbothinspaceand,frankly,inaircraftthateitheryoubroughttobeartochangetheprofit




trajectory?


Justtospeaktoourmajorprogram,theF-35wehavemadereallygoodprogressoverthepastquarteronthatprogram.IhadtheopportunitytoattendtheCEOconferenceinNorwayfortheF-35programwherealltheinternationalpartnersparticipate.It'schairedbyUnderSecretaryKendall.Wehadverystrongsupportfortheprogramitself.AndthefactthatSecretaryKendallwouldcomeoutafterthattodiscussapotentialblockbuyfortheprogram,whichwouldbeforatleast450tomaybe500aircraft,fromFY18toFY20,Ithinkwasaverystrongstatementaboutthestabilityoftheprogramandtheoutlookfortheprogramgoingforward.

Thesecondthingonthatis,ifyou'vebeentrackingtheperformanceoftheprogramandmovingtowardtheMarineCorpsinitialoperatingcapability,theMarineshavefinishedtheiroperationalreadiness.Theyarenowinthemidstoftheirassessmentoftheiroperationalreadiness,andisontrack,theyappeartobeontrack,toannouncetheirIOCthismonth.Andwelookforwardtothat.That'sahugemilestoneinthisprogram.Theyarethefirstservicetocomeouttodeclarethataircraftcombatready.Ithinksendsastrongmessagetoeveryonethatitsprogramisontrack.

Wehavedelivered11aircraftinthesecondquarterandweareontracktodeliver45in2015.Andwe'vealreadygottenourlongleadsforLRIP10.That'sfor94aircraft.So,theprogramisrampingupinthatsense.Ithinkit'swellsupportedinthebudgetproposalsthatareoutthere.Inthatsense,productionisrampingup,thesoftwarecompletionandallofthosethingsareontrack.So,that'swhatIwouldsayonF-35.

Youmentionedthespaceprogram.We'reperformingwellonourgovernmentsatellites.MUOS,forexample.JustlaunchedthethirdMUOSsatellite.Andthatprogramismovingforward.AndthenonSBIRS,ifyou'veseenthereportsout,thatwehadputforthamorecost-effectiveapproachgoingforward,andwasgreatlyembracedbytheUSgovernmentonSBIRS.So,wewillcontinueourpathalongSBIRS.

Andtheninthemissiledefensearena,IhopeyousawthatGermanyhasannouncedtheirintentto--theyhaveselectedMEADSfortheirairdefensesystem.That'strulyastrategicwinforus.Theirlegacysystemsareaging,theyneedreplacement.TheywentthroughaverythoroughassessmentofwhatsystemwouldbestfittheirneedsandtheyselectedMEADS.AndIthinkitsetsthetoneforothercountrieswillbelookingatthisimportantselectionbyGermany,andweexpectothercountriestolookatMEADSastheirchoiceforthemostmodern,themostcapablemissiledefensesystemfortheircountries.

Operator :

JosephDeNardi,StifelNicolas.

JosephDeNardi(Analyst-StifelNicolaus):

Hey,thanks.Goodmorning.Bruce,I'mwonderingifyoucouldtalkabout--Iguessitmaybetoughtotalkabout--buttheproceedsfromthespinorthesaleatthispoint?Isthatadditivetoyourcapitaldeploymentplansorshouldwethinkaboutthatasgoingtowardsthebalancesheet?


You'reright,itishardtopredict.Thoseareobviouslytwocompletelydifferentscenariosintermsofthecashthatwewouldreceivefromthatversusaspinversusasale,spinobviouslybeingalotless,.We'vegotafairlylowtaxbasisinthatbusiness,atleastaswelookatit,notunlikewhatUTCwasprobablylookingatitwithSikorsky.You'vegotalowtaxbasissoyourabilitytogetcashoutonaspinbasisislimitedfromatax-freeperspectivetowhatthatisintermsofatax-freedividend.




Butwegetalotmorecashbackfromasalesperspective.Ihatetospeculatewhatthatcouldbe.Wewillgetintofurtherdetailaswegetintothelaterpartofthisyearandearlypartofnextyearasfaraswhenwecloseonourdecisionastowhichpathwegodown.

Iwouldsuspect,intermsofcashdeployment,thenear-termcashdeploymentwe'dprobablybepayingoffsomeofthat.ImentionedasfarassomeofthedebtthatwearedoingtodotheSikorksydealwouldlikelycomeintheformofcommercialpaper.We'dprobablypaythatoffprettyquicklyandbringthatdown.Andthentherest,Joseph,we'llwaitandseewhatwe'vegotandwhatneedswehaveatthattime.And,asusual,we'lltrytobeopportunisticinallourcostdeploymentactions,aswealwaysare.

Operator :

PeterArment,Sterne,AgeeCRT

PeterArment (Analyst-SterneAgeeCRT):

Yes,thankyou.Congratulations,MarillynandBruce.Iwantaclarification.Sikorksy--willthatbeanindependentsegmentorareyougoingtohaveitonastandalonebasisorwillitbefoldedinaspartofaeronauticsoroneoftheothersegments?Andthenifyoucouldalsogiveus,Bruce,justregardingthequarter,Marillynmentionedthatyou'regoingtobedelivering45F-35sthisyear.Canyougiveusarundownorjusttheplanningfordeliveriesforthisyearandmaybeasneakpeakonhowthatlooksfornextyear?Thanks.


IntermsofSikorksy,ourintentisforthatbusinesstoreportdirectlyintoMissionSystemsandTraining.That'sourbusinesswhereDaleBennettistheExecutiveVicePresident,soitwillbeadirectreport,alineofbusinessinthatbusiness.Andweintendtomaintainitsnameanditsbrand.So,we'llpreservethatbrandidentity.WethinkitisverystrongforSikorksysowewillcontinueforwardwiththat.SoitwillbeaSikorksy,aLockheedMartincompany,anditwillreportintoMissionSystemsandTraining,iswhatourplanistomoveforward.


Peter,wejusttalkedaboutdeliveries--asyousaid,the45thisyear.Thatisaboutwhatweareexpectingtohavefortheyear.Ithinkwe'vedelivered19onayear-to-datebasis.So,obviouslythatrampratepicksupinthesecondhalfoftheyear.

Justgoingdowntheentireportfolio,theC-130--again,we'vetalkedinthepastaboutthatbeingaverysteadybuildrateofabout24aircraftayear.Wehad10deliveriesinthefirsthalfoftheyearwhichwouldobviouslyimply14inthesecondhalf.Rightnowthosearemoreweighted,justforFYIpurposes,towardsthefourthquarterthantheyareforthethirdquarter.Iliketothinkthereissomepotentialtomovesomeofthoseaircraftintothethirdquarter,though.That'sactuallymakingoursales,ifwejustweretoprofileoursalesfortherestoftheyear,itmakesourfourthquarterlookalittlebiggerthanIthinkitactuallyisgoingtobeaswesitheretoday.

TheC-5deliveriesweexpectabout9fortheyear.Wehavehad5onayear-to-datebasis,so4fortherestoftheyearunlesswepullinonefornextyear.Theseaircraftaregettingtobeaverygoodpatternfromaperformanceperspective.Wewereactuallyearlieronthedeliveriesallthroughoutthefirsthalfofthisyear.Sowe'regoingtobewatchingthat.Butthat'snotwhatisinourcurrentplan,it'snotwhat'sinourcurrentguidance.

Nextyear,Idon'thavethenumbersoffthetopofmyhead,Peter,butdefinitelytheaircraftdeliveriesonF35aregoingup.I'msorry,letmebackupforasecond.Ididn'ttalkF-16,Iapologize.F-16--11,12




aircraftintheyear.Wedid6inthefirsthalfoftheyear,so5,6inthesecondhalf.

Letmestartwiththeeasyones.C-130J--24nextyear.F-16--similarlevelsofsalesintermsofquantitiesnextyear.F-35--greaterthanthe45now.Idon'thavethatnumberoffthetopofmyheadbutitisaprettygoodincrease,Peter,fromwhatI'vegotinmymemorythere.AndthenC-5isaverysimilarnumbertowhatwe'reseeingin2015foryou.Hopefullythathelpswiththequestionthere.

Operator :

RonEpstein,BankofAmericaMerrillLynch.

RonEpstein (Analyst-BofAMerrillLynch):

Hey,goodmorning,guys.Ifyoucouldjustquicklygothrough,ifpossible,inalittlemoredetailwhereyouexpecttopickupthe$150[sic--$150million]ofcostsynergies.Areyougoingtobemovingfacilities,isitjustbackofficetakeout?Howareyouthinkingaboutthat,Bruce?


It'sacombinationofprobablyallthethingsthatyouwouldthinkwouldhappeninthissortoftransaction.Someofthebiggerabilitiesto,webelieve,getsomelong-termsynergiesareinthesupplychain,particularlywiththeoverlapoftheprocurementactivities,especiallywithinouraeronauticsbusinessactivitiesbutalsowithinMST,aswell,intermsofsystemsoverlapthere.

Youshouldthinkofthesynergiescomingintheformofsupplychainsynergies,alittlebitoffacilities,perhaps,rationalization,andsomeheadcountrationalization,asyouwouldexpect,aswell.Collectivelythataddsuptomorethan$150million.Wethinkthe$150millioniswhatstickstothebottomlineafterconsiderationofpricebusinessanddisclosingundercostandpricingdatainourgovernmentbusiness.

Thethingthatinterestedme,orthatcaughtmyattentionwhenwelookedatthisbusinessismoreofitstayswithuslongerterm,IthinkbecausethisprobablyhasalongertailofpricebusinessthanIwouldhaveexpectedbeforewewentintothediligencephase.About$16billionworthofpricebusiness,soobviouslyyougettokeepitonthatpartofthebusiness.

Andalsothecommercialandthesustainment,particularlyonthesupplychainsavings,theheadcountsavingsandthelike,obviouslythosearelesscost-baseddrivenintermsofpricing.Andmoreofthesynergiesyougetfromacostsidetherestayforlonger,aswell.That'showIthinkofit,thosethreebuckets--facilities,supplychain,headcount--andforthereasonsIjustsaid--theystaywithusforlongerthanyoumightotherwisethink.

Operator :

HunterKeay,WolfeResearch.

HunterKeay(Analyst-WolfeResearch):

Hi,goodmorning,guys.Thanksfortakingmyquestion.AswethinkabouttheevolutionofLockheedhereoverthenext12months,howshouldwethinkabouthowIRADwillmaybemovearoundalittlebit,gettingridofsomeoftheshort-cyclestuff,andlayinginSikorksy.Alreadyinalittlebitofanupwardtrajectoryyearoveryear.ShouldwethinkaboutmaybeR&Dtrendingatorabovethe2%ofsaleslevelonceeverythinggetsdonewith?


Iwilltakethaton,Hunter.It'saninterestingswap.Marillyntalkedearlieraboutbigpictureperspective.




We'relosing$6billionworthofbusinessonourITtechservicesside,whichyoushouldthinkofbeingmuchsignificantlylowerIRADintensivethantherestofthebusiness.This,Ithink,justspeakstotheneedforthatbusinesstohaveascost-efficientastructureaspossibleinordertosurviveintheenvironmentthatwearecurrentlyoperatinginthere.

SikorksyoperatesinamuchmoreIRADintensiveenvironmentbutnotunlikewhattherestoftheportfolioofLockheedMartinlookslikewhenyouexcludetheIS&GSandthetechservicespiece.Iactuallytriedtodosomequickmathmyself,Hunter,andIthinkwegetcloseto2%orsoofR&D.Whenyougettothenewsaleslevelofthecombinedcompanyminusthatwhichisspunorsold,andyouaddintheIRADforalltheremainingbusinessesplusSikorskyit'sactuallyprobablyalittlebitnorthof2%.

Operator :

RobertStallard,RoyalBankofCanada.

RobertStallard (Analyst-RBCCapitalMarkets):

Thankssomuch.Goodmorning.Bruce,youmentionedtherewassomefranchisewinsyouwerelookingtoachieveinthesecondhalfofthisyear.Iwaswonderingifyoucouldgiveusanupdateonthose,andwhichonesyouthinkyourchancearebestat.


Sure,Rob.WhenItalkfranchisewinsinthesecondhalfoftheyearI'mreallytalkingthelong-rangestrikebomberandJLTV.Wearewatching,asareourpartners.I'mquitecertainBoeingiswatchingveryclosely.TheexpectationthatwillprobablybedecidedsometimeintheAugust/Septembertimeframe.

Westilllikeourofferingthereandwefeelgoodaboutthat.We'vehadlotsofdiscussions.Ithinkwe'regoodpartnersforeachother.Webringverycapable,collaborativeskillsetstothefray.So,that'sthefirstonethatwearelookingat,Rob.And,again,Ithinkwelikewherewesitthere.

JLTVistheotherone.JLTVis,maybeinsomepeople'sviews,alittlebittougherputtbecausetheydonotnecessarilyassociateLockheedMartinwithbeinginthecombatvehiclebusiness.ButIthinkwehaveatremendousofferingthere.AnditwouldputusintoanewsegmentwithintheDoDthatwedonothavealotofbusiness,otherthanputtingsomeofourweaponssystemontopofcombatvehicles.Thiswouldbeactuallybuildingthecombatvehicleitself.It'sexcitingtobeabletohavethatopportunity.Again,wethinkwehaveagreatoffering.

Theylookdifferentintermsoftheordersthisyear.Thebomberwouldbeabiggerorderinitially.TheJLTVwouldbeamuchsmallerorderinitiallyinthecurrentyear.Butbothofthemhaveaverylong--thinkofitasdecadeslong--productiontracksonceyougetpastthedevelopmentside.

Intermsofjustsheerdollarsthatwearelookingfor,notsomuchinthefranchisewins,butwe'vegotbigdollarsassociatedwithprimarilytwoaeronauticsprogramsthatweareneedingtocloseanddefinitizethosecontractsonfinally,theC-130Jmulti-yearandLRIP9fortheF-35program.Boththosearebigdollarsinthesecondhalfoftheyearintermsoforders.

AsIstilllookoutfortherestoftheyear,eventhoughwearelight--therewasanearlierquestionaboutwhereweareforordersfromayear-to-datebasis--butIstillthinkwearemarchingtowardsaboutthe$80billionthatwesaidatthestartoftheyear,givenalltheputsandtakesweseegoingforward.

Operator :

CaivonRumohr,CowenandCompany.




CaivonRumohr (Analyst-CowenandCompany):

Yesthankyou,andcongratulationsontheSikorksytransaction.Aquestion--Iwassurprisedthatyouonlyhave$150millionofinter-CompanysalesgivenyourparticipationonCRH,NavalHawk,presidentialandcombatandrescue.Couldyougiveusasenseastowherethatnumbergoesinthefuture?Andthenmaybegiveus--twonittyquestions--whatthecashflowofSikorksylookslikegiventheyhaveaveryheavynear-termdevelopmentmix,andwhetheryouexpecttousecontractliabilityamortizationforaccountingoftheCanadianmaritimehelicopter.Thankyou.


Whatamouthful,Cai.Youthrewalotinthere.Yougotyourmoney'sworth,tosaytheleast.Yes,we'retalkingbacktothe$150millionofinter-Company--it'snotquiteinter-Companyyet.Iwillremindyouofthat.Butthat'sprimarilyforthecombatrescuehelicopterandthepresidentialhelicopter.

Thatstays.Youshouldn'tthinkofthatasthisisstartingofflowandit'sgoingtogrowtosomelargernumber.That'safairlyconsistentnumber.I'mtryingtodothisfromrecall,butthat'saprettyconsistentnumbergoingoutforeveryyear,notjusttheneartermbutthelongterm,aswell.

Ithinkmaybewheresomeoftheconfusionis,isontheMH-60helo.That'stheRomeoworkthatwedothere.And,there,thinkofusasco-primesonthat.WedonotsubcontractunderSikorksyforthatwork.Thatisactuallytwoprimecontracts.Sothatmaybewheresomeoftheconfusionis.Thinkofthis,again,asCRHandthepresidentialhelicopterareVXXrelated.Andthosejustaren'taslarge,maybe,aspeoplethinktheyareintermsofoursizeofthebusinessthere.

CashflowforSikorksy,Ithinkyouhititright.Ithink,atleastforacoupleofyears,youshouldthinkofthemashavingsomeinventorybuildup.And,bytheway,Ishouldn'tgetintodisclosinggoingforwardSikorksy'sbusinessbutwhatI'mexpectingtoseeisinventorybuildups,someworkingcapitalbuildupsforsomeofthenewprogramsthatIjusttalkedabout,boththecombatrescuehelicopterandthepresidentialhelicopter.

Iknowthey'vealsogotalosscontractontheCanadianmaritimehelicoptercontract,whichobviouslycan'tbestrongforcashflow.So,Iwouldn'texpectnear-termcashtojustknockoursocksoff.Thisisalong-termbusiness.We'renotbuyingthisbusinessforthenextthreeyears,wearebuyingthisbusinessforthenextthreedecades,andthat'sverymuchthewaywelookatintermsofalong-termacquisitioncycleforus.

IthinkyourlastquestionwasyouaskedabouttheaccountingtreatmentontheCanadianhelicopter.WewillgowiththeconventionofLockheedMartin.Thiswillallgetsettledoutintheconformingaccountingandthepurchaseaccountingadjustments.Whateverlosswethinkistherewillbereflectedatthetimeoftheacquisition,andthatwillbereflectedbehindus,ifyouwill,andessentiallyzerogoingforwardfromanaccountingperspective.


Iwouldjustadd,thestructurethatwehaveis,asIsaid,wearegoingtointegratetheSikorksybusinessintoMissionSystemsandTraining,butitwillbeastandalonelineofbusiness.Welikethatmodel.Welikethatco-primemodel,likewehaveontheMH-60Romeo,asagoodapproachgoingforward.

Operator :

SamPearlstein,WellsFargoSecurities.

SamPearlstein (Analyst-WellsFargoSecurities):




Goodmorning.I'mgoingtoseeifIcansneaktwoinalso.Thefirstoneisjust,Bruce,canyoutalkaboutwhatthecostwillbetoextractthat$150millioninsavings,especiallyin2016?Andthen,secondly,ontheITside,Ijustwantedtounderstandwhat'schanged.Itseemslikesomeoftheareas,likecommercialcyber,youwerestillmakingacquisitionslastyear.YoumadehealthcareITSystemsMadeSimpleacquisitionlatelastyear.IsithavetodowithSikorksythatyouarenowlookingatotherpartsoftheportfolio,ordidsomethingelsechangeaboutthebusinessthatforcesitnow?


Sam,letmetrythefirstone.AndImaytakeashotatthesecondone,andletMarillyncorrectlylateron.Thecosttoextractin2016,ifweclosethedealattheendofthisyear,Iliketothinkofthecosthereastransactioncosts,integrationcosts,you'vegottheintangibleamortization,you'vegotinterestonnetdebt.IthinkI'vetalkedmostofthosebutIhaven'tnecessarilytalkedtheintegrationcosts.

Ifthedealgetsclosedbytheendofthisyear,obviously,hopefullymostofthetransactioncostswillbebehindusin2015.Wheneveritdoesclose,2015or2016,that'swhenthebulkofthetransactioncostswillhit.

AsIsaidearlier,weintendtorapidlyintegrateSikorksyintoourbusiness.Thatwouldrequiresomeaccelerationmaybefromwhatyou'rethinkingintermsoftheintegrationcosts.Idon'tknowthatwe'vegotthosetotallynaileddownatthispointintime,Sam,butyoushouldthinkofthose$80million,$100millionayearlevelsin2016astojusttheintegrationcoststhere.Again,hopefullythatgetsthatbehindus,getsthemintegratedandenablesustohavethesynergyimpactshappeningthatmuchquicker.

ThesecondquestionasfarastheITandwhatchanged,it'sfunny,Ithinkasyoucontinuallygothroughtheprocessofcompetingfornewbusiness,evenafterweacquiredsomeofthecompaniesweacquired--forinstance,SMS--someofthenewcompetitionsthatSMSwerecompetingfor,wesawsomedifferentactsonthebehalfofsomeofourcustomersthanwehadbeenexpecting.Thingslikesplittingoutpartsofthecontract,thingslikesplittingoutprocuredcostsfromthecontractthat,frankly,wereanothertwisttothatbusinessgoingforwardthatwasaculminationoveranumberofyearsofhowthatbusinessandthedynamicsofthatbusinesshaschanged.

WhenSikorksybecameavailable,welookedatthatandsaidthat'sabusinessthat'sprobablymoredownthemiddleofwhattherestoftheCorporationis.Frankly,wedidn'tthink--again,justtoreiteratewhatMarillynsaid--thatwecouldnecessarilycompeteintheenvironmentandwiththesortsofexpectationsthatcustomershadintheITandgovernmentservicesbusinesssuccessfullyandintheinterestofcreatingvaluefortheCorporationandactuallygivingouremployeesthegreatestchanceforgrowthinthebusinessthattheylove.That'sthereasonfortheseparation.So,Isayit'snotoneortheother,it'sprobablythecombinationofthetwothatledtothat.


TheotherthingthatIwouldaddtothat,whatwe'reputtingunderstrategicreviewwe'velookedatverycloselyrelativetotherestofwhat'sinIS&GS,forexample,andrecognizethatwhatwe'reputtingunderstrategicreviewisworkthatisjustincreasinglydifficultforustobecompetitivein,underourstandardbusiness.Theworkthattheyaredoingisgoodworkforcustomers,it'simportantworkthattheyaredoingeveryday,butjustourstandardbusinessmodelit'sdifficultforustocompete.

Andthecommercialcyberwouldbeanexampleinwhatareathatitoperatesin.WearenotexitingthecybersecuritybusinessthatwedofortheUSgovernmentandforgovernmentsaroundtheworld.That'sanimportantelementofbusiness.It'sanelementthatwebringavaluetowithourrobustmulti-layercyberdefensecapability.Weprovidesomeofthemostadvancedcybersecuritysolutions.




so,inthatregard,wearestayinginthosebusinessesthatwethinkreallyfitwellwithwhatisourcoremarket,andthatwecanbecompetitivein.Muchofthebusinessthatwearelookingat,orallofthebusinessthatwearelookingatputtingupforstrategicreviewhasbecomeextremelyprice-sensitive.Andourcustomerswill--wemaybeperformingatthetopoftheheapontheworkwe'redoingbutifsomebodycomesinwithalowerpriceinare-compete,theywillmovetoanewplayer,anewuntestedplayer.Andthat'sjusttheenvironmentweareoperatingin.

Operator :

SethSeifman,JPMorgan.

SethSeifman (Analyst-JPMorgan):

Thanksverymuch.Goodmorning.Asyouhavementioned,SikorksyisoneinanumberofkeyDoDprogramsthatshouldsupportsalesgrowthinthefuture.Butmaybe--andIknowthismightbealittledifficulttodo--butifyoucouldjustlayoutabackoftheenvelopetrajectorybecauseyoudohavethosenewprogramsbutatthesametimemaybeyouhavesomepressureonlegacyprogramsandanewmulti-yearcontractcominguponBlackHawk.Somaybethetrajectoryoverthenextfewyearsfromanearningsstandpoint,wherethingsbottomoutandthedriverscomeintopushthatupasweheadintotheendofthedecade.


Seth,welcometothecall,bytheway.Justacoupleofthoughtsthere.AndIwillprobablytalkmoretoplineandletyoufigureoutmaybewhat'shappeningonthebottomlinethere.Buttoplineintermsofevaluation,thewaywelookedatthisbusiness,andashasbeenmentionedbefore,thecommercialhelomarketassociatedwiththeoilandgasindustryhasreally,notjustforSikorksy'sbusinessbutforthemarketatlarge,hasreallygonedownquiteabit.

Fromwherethepeakin2014ofsalestowhereweexpectgoingforward,wethinkthatnumberisgoingtodropjustonthecommercialsales.Idon'thavethesenumbersexactlycommittedtomemorybutIthinktheydid$1.5billionorsoworthofcommercialheloworkin2014orso.AndIdon'tknowwhattheexpectationisin2015offthetopofmyhead.ButIdoknowintheevaluationthatweputgoingforward,wethinkthatnumbercomescloserto$0.75billionworthofbusiness.That'sourview.So,youshouldthinkofthatascreatingsometop-linepressure,atleastinourview,onthecurrentlevelofrevenuefrom2016goingforwardforcoupleofyears.

Andthecommercialmarketobviouslyisthemoreprofitablemarket,aswell,sothatputspressureonthebottomlinethere.Whereweseethatstartingtoturnaroundissometricklingofthecommercialmarketgettingbetterandtheoilandgasmarketgettingbetter,say,inthelate2018-2019timeframe.Andthat'salsocoincidentallywhenweseethetransitionfromalotofthesedevelopmentalprogramsintoproduction,particularlythe53-K.That'swhenwewouldexpecttoseeareboundontheotherside,bothfromatoplineaswellasabottomline.Themarginswillsortoutthewaytheywill,dependingonthecommercialmarket,butthat'sthewayweshouldviewthat,inourjudgment.

Operator :

(Operatorinstructions)

DavidStrauss,UBS.

DavidStrauss (Analyst-UBS):

Thanksfortakingmyquestionagain.BruceandMarillyn,you'vetalkedaboutthisSikorksydeal,seenas




relativelylowexecutionrisk.ButobviouslySikorksyhasrunintosomeproblemswithCMH,with53-K.Canyoujusttalkaboutyourcomfortwiththeexecutionriskthatyouaretakingonhere?Thanks.


Iwouldsay,asBrucecommentedearlier,werungovernmentprograms,werunplatformandsystemsprogramsacrossourentity.IhaveneverseenourCompanyperformingbetterintermsoftheprogramsthatweareoperatingontoday.Sointhatsense,similarlySikorksyhasalongtrackrecordofsuccess.Innewdevelopmentprograms,therearetimeswhenanycompany,thecomplexityofit,we'regoingtohavesomechallengesonthefrontend.

ButIthinkwebringthisstrongprogrammanagementexpertise.AndcouplingthatwithSikorksy'sperformanceandtheirinnovativetechnology,that'swherewethinkthisislowrisk.Itisrightinourcoremarket.Weknowhowtobuild.Webothdesignandbuildplatforms.So,itfitsrightinoursweetspot.Bruce,doyouwanttoaddanything?


TheonlythingIwouldadd,David,isthisisnothingnew.WhatIbelieve--andI'mnotthereontheground,obviously--butthereisnotechnicalshowstoppersthatwesaw.Thisisjustahard-corefactofgoingfromdevelopmentintoproduction.We,ofallcompanies,probablyempathizewiththatmorethananyoneelseontheplanetprobably.

Butyoulookatwhatwe'vedoneinourhistory,wherewearefinallyatontheF-35programgoingfromdevelopmenttoproduction,wherewe'vetakenthefadfromaninfantpositionoftryingtofigureoutthishit-to-killairmissiledefense,atthelevelswe'retalkingabout,actuallyworkornot,andtowhereit'snowaproduction-fieldedorapplication.JusttakingthePAC-3missiletoitsnextgenerationwiththeMSC,takingsatellites,MUOSadvancedDHF,SBIRSfromdevelopmenttoproduction,we'vegotthescars.Weknowwhatthisislike,sothisisnotasurprisetous.

And,look,wethinkwhenwegotSikorksyintothefold,wehavepeoplewhohavebeenthroughthisalotofdifferentwayswhocanhelpwiththatprocess.Andwehavereallygoodproductionpeople.AndnottosaythatSikorksydoesnot,becauseweareveryimpressedbytheproductionteamthere,butwethinkwehavesomesynergiescomingoutthere,aswell.

Operator :

MylesWalton,DeutscheBank.

MylesWalton (Analyst-DeutscheBank):

Thanks.Justafollow-upontheoveralllongterm.Youmentionedyou'rebuyingoverthreedecades.You'reonthejointmulti-roleheloefforttodaywithBell,andthenSikorksyisontheteamwithBoeing.Isthereanything,whenthecompaniesarecombined,that'sgoingtoprecludeyoufrombeingonbothteams,oristhiseffectivelyimprovingyourodds,obviously?


Ourintentionistocontinuetherelationshipsthatwehavetodayonthoseprograms.Wewanttobringthebestsolutiontoourcustomer.Wehavesomegoodpartnershipsthatwe'reworkingonandweintendtocontinuethosepartnershipsgoingforward.


Myles,theotherthingIwouldaddis,thatprogram,especiallythefutureverticallift,issofaroutinthe




future.Youtellmewhenit'sgoingtohappen,thequantitiesandsoforth.Thereisalotofchancebetweennowandthenforpeopletochangeideas,thoughtsrequirements,etcetera.So,whetherthatendsupbeingtheprogramthatwethinkitistodayornotisanyone'sguess.It'shardformetogetjusttooexcitedaboutwherewesittodaywithsomethingthat'sprobablynotgoingtocomeintofull-rateproductionfor15or20years

Operator :

GeorgeShapiro,ShapiroResearch.


Bruce,ontheF-35,wasthereamarginpickupthere?Becauseyoumentionedthatyouhad$30millionhigherprofitonabout$280millioninsales,whichobviouslywouldbeahighermarginthanwhatyou'recurrentlybookingonthatprogram.


Yes,George,therewas.ThisisthesecondstraightquarterwherewebroughtupthebookingratesonsomeofourLRIPcontracts.Ithinkthisisjustrecognizingtheprogressionwe'regoingthrough.Ibelievethisone--I'mtryingtorecallfrommemory,George--IbelievethiswasontheLRIP6andyoushouldthinkofthatasbeingassociatedwiththecompletionofdeliveriesoverthisperiodoftime.

We'restartingtogetacadencethere,Iliketothink.Ithink6isonanuptick,orwasonanuptick.Ithinklot7isalsoonanuptick.Weneedtoseethatcadencecontinuegoingforward.ButIfeelreallygoodaboutwhereweareontheproduction.Backtomyearliercomment,goingfromtransitioningfromdevelopmentprogramstoproduction,we'rerightthereandIthinkwe'redoingprettywellonthatrightnow.


AndontheC-5,Bruce,you'vebeenbookingnearzerowithyourcommentthatdeliveriesseemtoberunningalittlebetterthanexpected.What'stheoutlookforgettingbetterprofitabilityonthatprogram?


George,wehaveaplannedstepupinthesecondhalfoftheyearreflectingthegoodperformancethatwe'veseentoday.Ihopethat'ssomethingthatwecanactuallydobetterineventhanwhatwehaveplannedintheoutlookthere.AndIknowyouandIhavetalkedspecifically,George,aboutthepotentialityofaclaimassociatedwiththeoverandaboveworkwehaveontheC-5program.

Justtobeclear,that'sstillnotconsideredwithinanythingthatI'vetalkedaboutuptothispointintime.And,again,that'ssomethingthatwefeelverystronglyaboutintermsofentitlement,andwe'llseehowthatplaysoutdowntheroad.Butthat'snotafactorinanythingthatIjustsaidearlier.

Operator :

RonEpstein,BankofAmericaMerrillLynch.


Bruce,justarealquickaccountingquestionforyou.The$2billionintaxsavingsthatyouguysget,isthatjuststraightlineover15years?





Itis,Ron,andit'sahighdegreeofcertaintybecausethetaxbenefitscanbeusedfortheCombinedCompany.Thosearetakethemhome.ThosearebenefitsthataregoingtoaccruetotheCorporation.


Okay,great.Thanks.

Operator :

PeteSkibitski,DrexelHamilton.


I'mgoingtomissthis,guys,butwithalltheputsandtakesontheSikorksydeal,areyouexpectingittobefreecashflowaccretivein2016?


Ithinkit'sgoingtobealittlebitneutral,isprobablythewayIwoulddescribeit,2016,isourexpectation,Pete.Andthenweprobablygetplentyoftimetostarttalkingabouttheyearsthatareafter.ButIthinkfornear-termpurposes,obviouslysomeofthatdependsonwhetherithappensattheendofthisyearorearlynextyearoralittlebitlater,butIthinkifitwereforthewholeyearwewouldthinkofitasbeingfairlyneutralforusnextyear.


Okay,gotit.Thankyou.

Operator :

I'mshowingnofurtherquestionsatthistime.I'dliketoturnthecallbacktomanagementforfurtherremarks.


Thankyou.Letmejustconclude.Iappreciateallofyoubeingonthecalltoday.AndIwanttojustconcludebysayingwehadastrongquarteroffinancialresults,andthesestrategicactionsthatwe'veannouncedareexpectedtopositiontheCorporationtodeliverevenhighervaluetoourcustomersandstockholdersinthefuture.

So,thanks,againforjoiningusonthecalltoday.WelookforwardtospeakingwithyouinOctoberonournextearningscall.Abigail,thatconcludesourcalltoday.

Operator :

Ladiesandgentlemen,thankyouforparticipatingintoday'sconference.

Allrightsreserved(c)2014TheStreet,Inc.

Pleasefeelfreetoquoteupto200wordspertranscript.Anyquoteshouldbeaccompaniedby"ProvidedbyTheStreet"andalinktothecompletetranscriptandwww.thestreet.com.Anyotheruseormethodofdistributionisstrictlyprohibited.

THEINFORMATIONCONTAINEDINEACHWRITTENORAUDIOTRANSCRIPT(the"TRANSCRIPT")ISAREPRODUCTIONOFAPARTICULARCOMPANY'SCONFERENCECALL,CONFERENCEPRESENTATIONOROTHERAUDIOPRESENTATION.THETRANSCRIPTSAREPROVIDED"ASIS"AND"ASAVAILABLE"AND




THESTREETISNOTRESPONSIBLEINANYWAYNORDOESITMAKEANYREPRESENTATIONORWARRANTYREGARDINGTHEACCURACYORCOMPLETENESSOFTHETRANSCRIPTSASPRODUCED,NORTHESUBSTANCEOFAPARTICULARCOMPANY'SINFORMATION.

THETRANSCRIPTSAREPROVIDEDFORINFORMATIONALPURPOSESONLY.THESTREETISNOTPROVIDINGANYINVESTMENTADVICEORENDORSINGANYPARTICULARCOMPANY.

lockheed martin group (lmt) earnings report: q2,...

Documents