Lockheed Martin (LMT)

Q2 2010 Earnings Call

July 27, 2010 11:00 am ET

Executives

Bruce Tanner - Chief Financial Officer and Executive Vice President

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

Jerry Kircher - Vice President of Investor Relations

Analysts

Cai Von Rumohr - Cowen and Company, LLC

Douglas Harned - Bernstein Research

Howard Rubel - Jefferies & Company, Inc.

George Shapiro - Citi

Ronald Epstein - BofA Merrill Lynch

Joseph Nadol - JP Morgan Chase & Co

Heidi Wood - Morgan Stanley

Robert Spingarn - Crédit Suisse AG

Richard Safran - Buckingham Research Group, Inc.

Samuel Pearlstein - Wells Fargo Securities, LLC

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

Jason Gersky

Myles Walton - Deutsche Bank AG

Presentation

Operator

Good day, and welcome, everyone, to the Lockheed Martin Second Quarter 2010 Earnings Results Conference Call. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Jerry Kircher, Vice President of Investor Relations. Please go ahead, sir.

Jerry Kircher

Thank you, Devon, and good morning, everyone. I'd like to welcome you to our second quarter 2010 Earnings Conference Call. Joining me today on the call are Bob Stevens, our Chairman and Chief Executive Officer; and Bruce Tanner, our Executive Vice President and Chief Financial Officer.

Statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of Federal Securities law. Actual results may differ. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results. We have posted charts on our website today that we plan to address during the call to supplement our comments. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts.

With that, I'd like to turn the call over to Bob.

Bob Stevens

Thanks, Jerry. Good morning, everybody. Thanks for joining us today. I hope this call finds you well and maybe finding some ways to survive the heat of this summer. We have a lot to update you on today, and I would like to get right to it so I'll proceed on the basis that you’ve had a chance to read the earnings release and see our updated guidance. I'd like to start with an operational overview then I'll walk you through the highlights on a business area by business area basis.

In Aeronautics, there are three programs I want to cover, and I want to start with the F-35 program, as the Joint Strike Fighter remains our program of greatest opportunity and greatest challenge. And I want to spend a bit more time on some additional detail with you here so that you have a good feel for where we are in the program.

In the quarter, the government completed the Nunn-McCurdy recertification process, finding the F-35 to be essential to national security and a high priority. Extensive cost assessments and risk analyses were conducted and evaluated by DoD, highlighting areas requiring additional focus, adding resources to the development program and flight test and in software development while lowering the near-term production ramp rate by 122 airplanes.

The program executive officer, that's the senior-most government official on the program, that position was elevated from a two-star billet to a three-star billet, and Admiral Dave Venlet, a superbly qualified professional with lots of relevant experience, is now in this role. In recognizing that there are program uncertainties and risks remaining, DoD called for a series of what will be routine ongoing reviews to monitor performance and to make adjustments, and the first of these reviews under Admiral Venlet, known as a technical baseline review, is now underway and likely to be completed by the end of the year.

Let me look at the program now in two segments or phases. First, the System Development and Demonstration phase. The work here I regard as the front end of the program, where it's essential to get the design, the development of the aircraft and the test of the aircraft and its systems right. I think of this as the nonrecurring part of the program. It's important to get it right here to assure that our customers get systems that meet their needs, and I think it's critical here to focus on overall performance to assure we get it right.

And then I'll talk about the Production phase of the program, which includes long-term aircraft delivery profiles that we think on the Joint Strike Fighter are likely to extend over decades. In my mind, this is where the majority of the costs reside and this is where affordability will ultimately be determined, so here it's critical to focus on costs. We are now at a critical juncture on the program as I think you all know of transitioning from the development program more fully into the production program.

In the System Development and Demonstration segment of the program, we're about 80% complete. We have 15 of 19 test articles currently being evaluated, and the four remaining are in build. This 19 test article total excludes the prospect of an additional carrier variant that was discussed during the Nunn-McCurdy recertification process. Of the 19 aircraft, 13 are fliers in the flight test program and six are structural test articles, and all of those six structural test articles either are in test or have completed their test. And of the 13 fliers, nine have now flown.

In the quarter, we added the first carrier variant to the test fleet and the early reports from this airplane are that it’s flying very well. Also on the carrier variant, we completed a successful drop test of the ground test article, which simulates the intensity of carrier landings. Now here envision dropping the airframe from progressive heights that go up to about 12 feet. And in this test program, we noticed no failures or no load exceedances. So that's a very good set of results from this important test which is essential in demonstrating the structural integrity necessary for carrier operations.

In testing the conventional takeoff and landing variant, early flights already exceed the 7G loading conditions which is good. Static testing or measuring the ultimate strength of the airframe is complete with no structural failures, and we've begun durability testing to verify that the airframe will meet the plane’s 8,000-hour life.

We have two airplanes equipped with mission systems: one short takeoff and vertical landing and one conventional takeoff and landing. These mission systems aircraft give us early insight as to the performance of advanced avionics, like the Active Electronically Scanned Array Radar, the electronic warfare systems, the communications suite, the advanced targeting system and so forth. The goal here is to get some sense of sensor fusion or the ability to assemble information from different systems to generate greater levels of situational awareness, not just for the pilot, but for all those who would have information streams linked to the Joint Strike Fighter, and I think all are pleased with the early results of the test of the mission systems airplanes.

Let me give you some detail on the status of the flight test program. Year-to-date through June, we've flown 136 flights against the plan of 118 flights, so overall, we've had a good tempo and we're running ahead in total numbers. When I break down that total for you by variant, you will see that the conventional takeoff and landing airplane has flown 56x against the plan of 22, and the carrier variant has flown 6x against the plan of one. So we're getting solid early performance here, performance on flights that was better than planned. And we're getting good feedback from the airplanes, and all this is very positive.

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