Lockheed Martin Earnings Call Nuggets: Non-Defense Side and Sequester Discussion

Lockheed Martin Corporation (NYSE:LMT) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Non-Defense Side

Joseph Nadol III – JPMorgan: Marylyn I actually had a question for you on the extensive comments you gave on the non-defense portion of your business which is small, but seems like you’re targeting quite a bit for growth and really just from two angles, one, because as you know this has been a tough thing for defense companies to do in the past to diversify during the downturn. So, the two questions are; one, in your approach to the market how are you orienting the Company to really impact commercial markets, which is really a bit of difficult thing for companies to do? I just mean in the difference in the customer base relative to the government did some – I guess comments there would be good. Then secondly from a risk standpoint, what kind of capital, are you putting at risk and how are you considering that going forward?

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Marillyn A. Hewson – CEO and President: Thanks for the questions, Joe. First off, I’d say that the things that you’re saying coming forward are things that we’ve been investing in for a number of years. As a Company, we’re a technology leader. We often talk about saying that we do hard stuff. We do difficult things and try to work on big things that are affecting the global security environment. So, we’re always investing in the future in that regard and we have 50,000 scientists and engineers that are working on things not only on our core products and services today, but also at looking at ways to give our advisories an advantage or look at new areas that we can help in global security needs. So, even as our customer budgets decline we’re going to continue to invest in these new technologies, because we think that it’s really important that we do that. In terms of orienting as to commercial markets, I’d say that the things that we’re doing right now are things that are as I’ve said, we’ve been investing in for some time and well it is a different customer base they are large projects much like we do large projects across the Corporation. In terms of the risk, these are not big needle movers in the near term. We continue – we are not looking at a large cash investment. We have been investing in for example, the Perforene and the nanotechnologies for the past seven years. We have been investing in the Ocean Thermal Energy Conversion. We have been working since the 70s. We increased our investment in past five years, but it’s measured and disciplined investment that we make in R&D just as we do across the business. So from that standpoint it’s a matter of not putting any capital at risk, but we do expect these to be fully funded. In fact if you look at OTEC that is – that pilot plant will be fully funded by our partner as we bring our intellectual property forward in that arena. In terms of the Perforene we got a patent but we are now looking for opportunities to partner on taking that one forward. So we have partnered with companies in the commercial market, that’s what gives us the capability to go into those new markets. That’s how we will grow ourselves.

Sequester Discussion

Robert Spingarn – Credit Suisse: If I could just go back to the sequester discussion for a moment. I was going to ask Bruce if you could give us a little bit more color on, why we don’t see more of an earnings or margin impact from the lower sales or is it simply that’s already embedded in the range? Then more specifically Bruce on your modeling discussion you talked about peanut buttering the G-FY ’13 funding that, impacts this year but what percentage of G-FY funding for Lockheed is beyond 2013? I would imagine with the long cycle nature of your product lines, it could be a large percentage.

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Bruce L. Tanner – EVP and CFO: Yes. So let me try to address both of those questions Rob. So why profit and cash are not necessarily impacted or why we didn’t change the guidance for those developments; first is what we did do for sales. A lot of this because of the first quarter, quite honestly, and obviously we were higher in the first quarter for sales as well, but we had good results pretty much across the board. All five business areas beat our plan for them in terms of both sales and operating profit. I think as we look forward for the next three quarters we do expect to see some pressures for the reasons that I described from sequestration, as I said early, but not played out at this point, but we do expect them to happen in the next three quarters. As we look out for the planned risk retirements and what we accomplished in the first quarter, we think those are stronger as we sit here today, than maybe we thought they’d be at the start of this year and that’s the reason we didn’t change the profit guidance. Cash flow, obviously $2.1 billion in the first quarter. Very strong, stronger than we had expected honestly and that’s the other reason why – we think that’s going to carry on through the rest of this year as well. That’s the reason we didn’t come down off of our cash as well. I think your second question was, so how much of the FY ’13 carries over into next year? I made the comment, Rob, that the sales that, we got from our backlog at the end of the 2012 was about 77%. So think of that as new – our calendar year ’13 sales originating 77% of which come from the 2012 backlog, that’s not an unusual pattern for us at all. I’ll say next year we would expect it to look very similar to that. So, you should think of that as probably 25%-ish, maybe a little less than that percent of our sales in 2014 will need to come from orders received in 2014 and manifested into sales in 2014. So that pattern as I look back over time has been a fairly consistent one not at all unusual for what we are experiencing in 2013.

A Closer Look: Lockheed Martin Earnings Cheat Sheet>>