Lockheed Martin Earnings Call INSIGHTS: Foresees Continuing Resolution, FAS/CAS Harmonization

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On Tuesday, Lockheed Martin Corporation (NYSE:LMT) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Foresees Continuing Resolution

Heidi Wood – Morgan Stanley: Bob, actually a tactical near-term question and a second strategic question for you if you don’t mind. Any decisions you add precludes the government from spending more than Congress authorized and many contracts are incrementally funded, which means once it start affecting 3Q and 4Q results. To what extent does the 2012 guidance reflect this, and can you help us understand your key assumptions, will you pay employees out of profits and assume retroactive authorization or does your guidance presume stoppage in many of your large contracts and can you touch on which large contracts are most at risk under one?

A Closer Look: Lockheed Martin Earnings Cheat Sheet>>

Robert J. Stevens – Chairman and CEO: That’s a comprehensive question. I think the details of your question highlight many of the specific details that have gone into our requests for additional guidance, because there is considerable uncertainty in understanding exactly how sequestration would be implemented and how for example unobligated balances might be affected, how those unobligated balances might be applied contract line item by contract line item. Whether or not military personnel accounts will be excluded or included in the total amount to be sequestered because that has a fairly significant impact on the percentage reductions. So I think your question is front running a little bit of the detail we have. I’m sure that our government customers are thinking about their responsibilities under the anti-deficiency provisions. I think they understand that pretty well. I think the final part of your question was which contracts particularly the significant ones might be most affected. Here again I think the devil lies a little bit in the details of understanding exactly how the across-the-board reductions, perhaps net of funds flowing from unobligated balances versus new obligational authority subject sequestration will impact our individual contract. So of course we have significant portfolio areas. Chris mentioned – this was defense, Chris mentioned to our (tactical) aircraft portfolio, our airlift capability, our space systems programs. We think some of our classified activity likely will all be subject to sequester and which programs will absorb what percent of cost reduction is not yet clear to us.

Christopher E. Kubasik – President and COO: Just get on one comment. As Bob, said in his opening remarks we have contemplated or we are contemplating the continuing resolution in the fourth quarter of this year and I’ll say that affects our business areas differently depending on sort of where they are in the lifecycle. The one is the most impacted is IS&GS, typically because it’s a shorter cycle business that we have. So, I would say we’re probably being a little cautious perhaps in the guidance that we’re giving considering the fact that we do believe that continuing resolution is likely going to happen in that fourth quarter.

FAS/CAS Harmonization

Jason Gursky – Citi: Bruce, I just was wondering, if we could talk a little bit about cash and may be start off with some comments around the FAS/CAS and the harmonization of that system. I know that starting back in February you were able to begin raising their rates and then the cruise in FAS/CAS harmonization going forward. I was just wondering how that processes is going and whether the outlook that you’ve talked about in the past and the impacts of FAS/CAS will have for you going forward, what that kind of looks like? Then just on the cash topic, the use this quarter on the share repurchase still has you pacing below the $1 billion that you’ve talked about targeting for the repurchases, again just give us an update on that as well?

Bruce L. Tanner – EVP and CFO: Sure, Jason. So, as far as on the current status of how FAS/CAS was going and is it tracking to as we talked about in the past, I would say yes it is. That law I think was signed February 27th of this year. We have already negotiated across the Corporation a number what we call our forward pricing rate agreements that have the effects of cash harmonization included in them. So, I’ll say that’s sort of a business as usual at this point right now. You’ve seen, as we’ve all seen, the effects of lower interest rate through the first half of this year. They are definitely lower probably than where we were at the end of last year. Of course we don’t set those rates until the end of this year, but if we were to set them today, they’d be lower than where we were last year. Our asset returns I think are doing actually fairly comparable to what our expectations were. So one thing I think that’s changed, Jason, that’s important to consider not necessarily this year but in the future years is the transportation – the highway bill that was passed recently, which had a consideration for reducing some of the funding required by ERISA and that has the effect of lowering the requirements for our ERISA contributions beginning next year. So, the modeling of that is a little complicated, I won’t get into it, but basically think about a band of around sort of 25 year average of interest rates, and if you’re outside that – if your current interest rate or discount rate is outside of that band and you used the 25 year average, we’re definitely outside of that band as we go into 2013, and so we’ll use that 25-year average which is a much higher rate than what we are currently experiencing. That has the effect of – I think I tried to tip on the call in the first quarter that we had ERISA required contributions of more than $2 billion going into next year compared to $1.1 billion this year. that change and the funding consideration change included in the highway transportation bill, would lower the required contribution to about the level comparable to what we’re seeing this year, so somewhere in 1.1-ish range or maybe a little flexibility there because we haven’t quite seen the final rates come out of that yet, so there may be a little bit of play but not much I would guess. So, just as we get bigger, it is sort of for negative events due to the size of our pension plan. We also get bigger benefits when there are positive events as well. I’ll remind you also that the pension, reduced pension brings with it a reduced tax deduction as well. So, you shouldn’t think of $1 billion as being a pure cash because there will be less tax deduction associated with that $1 billion less. You also asked about share repurchases and we are a little bit – like in the first half of the year, we have made no change in our commitment to the $1 billion outlook and I won’t expect to make a change between now and at the year end on that.

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