Lockheed Martin Group (LMT) Earnings Report: Q2,...
Transcript of 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.
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
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
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
©2014TheStreet,Inc.Al l R ightsReserved Page3of21
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
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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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
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
©2014TheStreet,Inc.Al l R ightsReserved Page5of21
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):
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
©2014TheStreet,Inc.Al l R ightsReserved Page6of21
Goodmorningandcongratulations.Bruce,canyoupotentiallygiveussomemoremetricsthatyouarethinkingaboutaroundSikorksy,potentialleveragethatyousee,thedeleveraging,andthenhowyouarethinkingaboutintangibleamortizationandaccretionfromthedealasyoulookout?Thankyou.
BruceT anner (EVPandCFO):
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?
MarillynHewson (Chairman,PresidentandCEO):
Justtospeaktotheportfolio,thewaythatwehavegone,wehavebeenlookingatourITinfrastructureservicesandtechnicalservicesbusinessforsometimenowandhavedonequiteabitofanalysis,trying
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
©2014TheStreet,Inc.Al l R ightsReserved Page7of21
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.
MarillynHewson (Chairman,PresidentandCEO):
Iwillstartoutfirstandthen,Bruce,youcanaddtomycomments.Ithinkifyoulookatwhatisourcorebusiness,ourcorebusinessisdoingbusinesswithgovernmentsinitsplatformandsystemsintegration.Thatisthepredominanceofourbusiness.AndIthinkinthatsensebringingSikorksyintoourbusinessisjustanaturalfitforus.Andit'sabilityforustobringourstrengthinrunningprogramsandourgovernmentcontractingandallofthatexpertisetotheSikorksybusiness.
Wealsolookforwardtotheopportunitytocreatevalueontheinternationalsideofourbusinessfromtheirfootprintthattheyhavearoundtheworldandtheworkthattheyaredoinginanumberofcountries.So,Ithinkifyoulookatthepotentialsynergies,wedothinkweareanexcellentownerandabetterownerforthisbusinessbecausenotonlydowebringourexpertisebutbringingintheirfootprintandtheircapabilityaroundtheworldisvaluethatwecancreate,aswell.Bruce,doyouwanttoaddsomething?
BruceT anner (EVPandCFO):
Justathought,Rich.Intermsofaddingvaluegreaterthantheparent,thisisabusinessthathasbeensuccessfulforhoweverlongit'sbeeninbusiness,90-something-plusyears.So,theyobviouslyareanationaliconintermsofthecapabilitiesthattheybringtotherotarymarketplace.Theydoalotofthingswellalready.
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
©2014TheStreet,Inc.Al l R ightsReserved Page8of21
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.
MarillynHewson (Chairman,PresidentandCEO):
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
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
©2014TheStreet,Inc.Al l R ightsReserved Page9of21
concentrationatLockheedMartininthatsense.
Operator :
RobSpingarn,CreditSuisse.
RobSpingarn (Analyst-CreditSuisse):
Goodmorning.Congratulations.Justtoquickclarificationquestions,oneonwhatMarillynjustspokeof.ButwithregardtothestrategicevaluationatIT,thequestionthereis,youaretalkingaboutthisasasingle$6billionbusiness,oratleastthat'smyinterpretation.Butmightyouconsiderdoingdifferentthingswithdifferentpieces,sellingsomeandspinningtheother?AndthenforBruce,isthe$150millioninsynergiesnetofthingslikeprofitonprofit?Thanks.
MarillynHewson (Chairman,PresidentandCEO):
Toyourquestion,firstofall,there'sanumberofpossiblescenarios.That'swhywewanttogothroughthisprocessbetweennowandtheendoftheyeartoreallygiveastrategicreviewonwhatarethebeststrategicoptionsfortheseelementsofthebusiness.
Toyourpoint,itcouldresultinoneormoretransactions.Ourkeyishowdowedelivermorevaluetoourcustomers,howdowedelivermorevaluetoourshareholdersthroughthisprocess.Thestrategicreviewisgoingtodeterminewhattheultimateoutcomeis.Anditcouldbemorethanonetransaction.
BruceT anner (EVPandCFO):
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?
MarillynHewson (Chairman,PresidentandCEO):
Ithinkforusit'sanicefitinthesensethat,asImentionedinmyremarksattheoutset,it'spredominantlyintheoilandgasside,whichisnotanareathatwearein.Andwhilewe'vegotsomenear-termpressuretherejustbecauseofwhathashappenedwithoilprices,weseeanopportunityinafewyearsforthattoturn,andsoarealopportunityforgrowththereaswemoveforward.
Andthentheothersideonthecommercialsidewouldbeonthesustainment.There'scommercialaircraftthatarealreadyinthebaseamongthese40countriesthatImentioned,havetobemaintainedand
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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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?
BruceT anner (EVPandCFO):
No,George,thatwasrevenue.Profitisamuchsmallernumber.
GeorgeShapiro (Analyst-ShapiroResearch):
Okay.Andthat'sbecausealotoftheirprogramsthatyou'reasubcontractedtoreallyhaven'tstartedtorampupyet.
BruceT anner (EVPandCFO):
That'scorrect,George,butIwilltellyou,theabsolutedollarsonoursidedon'tdeviateawholelotfromthatnumberfortheworkthatwe'redoingtodayandforthenearfuture.
GeorgeShapiro (Analyst-ShapiroResearch):
Okay.And,then,similarsubject,Bruce,howmuchsubcontractworkdoyoudoforotherhelicoptermanufacturersthatmightbeatrisksincetheymaynotwanttodealwithacompetitor?
BruceT anner (EVPandCFO):
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
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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trajectory?
MarillynHewson (Chairman,PresidentandCEO):
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?
BruceT anner (EVPandCFO):
You'reright,itishardtopredict.Thoseareobviouslytwocompletelydifferentscenariosintermsofthecashthatwewouldreceivefromthatversusaspinversusasale,spinobviouslybeingalotless,.We'vegotafairlylowtaxbasisinthatbusiness,atleastaswelookatit,notunlikewhatUTCwasprobablylookingatitwithSikorsky.You'vegotalowtaxbasissoyourabilitytogetcashoutonaspinbasisislimitedfromatax-freeperspectivetowhatthatisintermsofatax-freedividend.
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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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.
MarillynHewson (Chairman,PresidentandCEO):
IntermsofSikorksy,ourintentisforthatbusinesstoreportdirectlyintoMissionSystemsandTraining.That'sourbusinesswhereDaleBennettistheExecutiveVicePresident,soitwillbeadirectreport,alineofbusinessinthatbusiness.Andweintendtomaintainitsnameanditsbrand.So,we'llpreservethatbrandidentity.WethinkitisverystrongforSikorksysowewillcontinueforwardwiththat.SoitwillbeaSikorksy,aLockheedMartincompany,anditwillreportintoMissionSystemsandTraining,iswhatourplanistomoveforward.
BruceT anner (EVPandCFO):
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
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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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?
BruceT anner (EVPandCFO):
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?
BruceT anner (EVPandCFO):
Iwilltakethaton,Hunter.It'saninterestingswap.Marillyntalkedearlieraboutbigpictureperspective.
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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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.
BruceT anner (EVPandCFO):
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.
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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CaivonRumohr (Analyst-CowenandCompany):
Yesthankyou,andcongratulationsontheSikorksytransaction.Aquestion--Iwassurprisedthatyouonlyhave$150millionofinter-CompanysalesgivenyourparticipationonCRH,NavalHawk,presidentialandcombatandrescue.Couldyougiveusasenseastowherethatnumbergoesinthefuture?Andthenmaybegiveus--twonittyquestions--whatthecashflowofSikorksylookslikegiventheyhaveaveryheavynear-termdevelopmentmix,andwhetheryouexpecttousecontractliabilityamortizationforaccountingoftheCanadianmaritimehelicopter.Thankyou.
BruceT anner (EVPandCFO):
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.
MarillynHewson (Chairman,PresidentandCEO):
Iwouldjustadd,thestructurethatwehaveis,asIsaid,wearegoingtointegratetheSikorksybusinessintoMissionSystemsandTraining,butitwillbeastandalonelineofbusiness.Welikethatmodel.Welikethatco-primemodel,likewehaveontheMH-60Romeo,asagoodapproachgoingforward.
Operator :
SamPearlstein,WellsFargoSecurities.
SamPearlstein (Analyst-WellsFargoSecurities):
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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Goodmorning.I'mgoingtoseeifIcansneaktwoinalso.Thefirstoneisjust,Bruce,canyoutalkaboutwhatthecostwillbetoextractthat$150millioninsavings,especiallyin2016?Andthen,secondly,ontheITside,Ijustwantedtounderstandwhat'schanged.Itseemslikesomeoftheareas,likecommercialcyber,youwerestillmakingacquisitionslastyear.YoumadehealthcareITSystemsMadeSimpleacquisitionlatelastyear.IsithavetodowithSikorksythatyouarenowlookingatotherpartsoftheportfolio,ordidsomethingelsechangeaboutthebusinessthatforcesitnow?
BruceT anner (EVPandCFO):
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.
MarillynHewson (Chairman,PresidentandCEO):
TheotherthingthatIwouldaddtothat,whatwe'reputtingunderstrategicreviewwe'velookedatverycloselyrelativetotherestofwhat'sinIS&GS,forexample,andrecognizethatwhatwe'reputtingunderstrategicreviewisworkthatisjustincreasinglydifficultforustobecompetitivein,underourstandardbusiness.Theworkthattheyaredoingisgoodworkforcustomers,it'simportantworkthattheyaredoingeveryday,butjustourstandardbusinessmodelit'sdifficultforustocompete.
Andthecommercialcyberwouldbeanexampleinwhatareathatitoperatesin.WearenotexitingthecybersecuritybusinessthatwedofortheUSgovernmentandforgovernmentsaroundtheworld.That'sanimportantelementofbusiness.It'sanelementthatwebringavaluetowithourrobustmulti-layercyberdefensecapability.Weprovidesomeofthemostadvancedcybersecuritysolutions.
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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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.
BruceT anner (EVPandCFO):
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
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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relativelylowexecutionrisk.ButobviouslySikorksyhasrunintosomeproblemswithCMH,with53-K.Canyoujusttalkaboutyourcomfortwiththeexecutionriskthatyouaretakingonhere?Thanks.
MarillynHewson (Chairman,PresidentandCEO):
Iwouldsay,asBrucecommentedearlier,werungovernmentprograms,werunplatformandsystemsprogramsacrossourentity.IhaveneverseenourCompanyperformingbetterintermsoftheprogramsthatweareoperatingontoday.Sointhatsense,similarlySikorksyhasalongtrackrecordofsuccess.Innewdevelopmentprograms,therearetimeswhenanycompany,thecomplexityofit,we'regoingtohavesomechallengesonthefrontend.
ButIthinkwebringthisstrongprogrammanagementexpertise.AndcouplingthatwithSikorksy'sperformanceandtheirinnovativetechnology,that'swherewethinkthisislowrisk.Itisrightinourcoremarket.Weknowhowtobuild.Webothdesignandbuildplatforms.So,itfitsrightinoursweetspot.Bruce,doyouwanttoaddanything?
BruceT anner (EVPandCFO):
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?
MarillynHewson (Chairman,PresidentandCEO):
Ourintentionistocontinuetherelationshipsthatwehavetodayonthoseprograms.Wewanttobringthebestsolutiontoourcustomer.Wehavesomegoodpartnershipsthatwe'reworkingonandweintendtocontinuethosepartnershipsgoingforward.
BruceT anner (EVPandCFO):
Myles,theotherthingIwouldaddis,thatprogram,especiallythefutureverticallift,issofaroutinthe
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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future.Youtellmewhenit'sgoingtohappen,thequantitiesandsoforth.Thereisalotofchancebetweennowandthenforpeopletochangeideas,thoughtsrequirements,etcetera.So,whetherthatendsupbeingtheprogramthatwethinkitistodayornotisanyone'sguess.It'shardformetogetjusttooexcitedaboutwherewesittodaywithsomethingthat'sprobablynotgoingtocomeintofull-rateproductionfor15or20years
Operator :
GeorgeShapiro,ShapiroResearch.
GeorgeShapiro (Analyst-ShapiroResearch):
Bruce,ontheF-35,wasthereamarginpickupthere?Becauseyoumentionedthatyouhad$30millionhigherprofitonabout$280millioninsales,whichobviouslywouldbeahighermarginthanwhatyou'recurrentlybookingonthatprogram.
BruceT anner (EVPandCFO):
Yes,George,therewas.ThisisthesecondstraightquarterwherewebroughtupthebookingratesonsomeofourLRIPcontracts.Ithinkthisisjustrecognizingtheprogressionwe'regoingthrough.Ibelievethisone--I'mtryingtorecallfrommemory,George--IbelievethiswasontheLRIP6andyoushouldthinkofthatasbeingassociatedwiththecompletionofdeliveriesoverthisperiodoftime.
We'restartingtogetacadencethere,Iliketothink.Ithink6isonanuptick,orwasonanuptick.Ithinklot7isalsoonanuptick.Weneedtoseethatcadencecontinuegoingforward.ButIfeelreallygoodaboutwhereweareontheproduction.Backtomyearliercomment,goingfromtransitioningfromdevelopmentprogramstoproduction,we'rerightthereandIthinkwe'redoingprettywellonthatrightnow.
GeorgeShapiro (Analyst-ShapiroResearch):
AndontheC-5,Bruce,you'vebeenbookingnearzerowithyourcommentthatdeliveriesseemtoberunningalittlebetterthanexpected.What'stheoutlookforgettingbetterprofitabilityonthatprogram?
BruceT anner (EVPandCFO):
George,wehaveaplannedstepupinthesecondhalfoftheyearreflectingthegoodperformancethatwe'veseentoday.Ihopethat'ssomethingthatwecanactuallydobetterineventhanwhatwehaveplannedintheoutlookthere.AndIknowyouandIhavetalkedspecifically,George,aboutthepotentialityofaclaimassociatedwiththeoverandaboveworkwehaveontheC-5program.
Justtobeclear,that'sstillnotconsideredwithinanythingthatI'vetalkedaboutuptothispointintime.And,again,that'ssomethingthatwefeelverystronglyaboutintermsofentitlement,andwe'llseehowthatplaysoutdowntheroad.Butthat'snotafactorinanythingthatIjustsaidearlier.
Operator :
RonEpstein,BankofAmericaMerrillLynch.
RonEpstein (Analyst-BofAMerrillLynch):
Bruce,justarealquickaccountingquestionforyou.The$2billionintaxsavingsthatyouguysget,isthatjuststraightlineover15years?
BruceT anner (EVPandCFO):
CompanyName:LockheedMart inCorpCompanyTicker:LMTSector:IndustrialGoodsIndustry:Aerospace/Defense
EventDescription:Q2,201EarningsCallMarketCapasofEventDate:63.46BPriceasofEventDate:205.13
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Itis,Ron,andit'sahighdegreeofcertaintybecausethetaxbenefitscanbeusedfortheCombinedCompany.Thosearetakethemhome.ThosearebenefitsthataregoingtoaccruetotheCorporation.
RonEpstein (Analyst-BofAMerrillLynch):
Okay,great.Thanks.
Operator :
PeteSkibitski,DrexelHamilton.
PeterSkibitski(Analyst-DrexelHamilton):
I'mgoingtomissthis,guys,butwithalltheputsandtakesontheSikorksydeal,areyouexpectingittobefreecashflowaccretivein2016?
BruceT anner (EVPandCFO):
Ithinkit'sgoingtobealittlebitneutral,isprobablythewayIwoulddescribeit,2016,isourexpectation,Pete.Andthenweprobablygetplentyoftimetostarttalkingabouttheyearsthatareafter.ButIthinkfornear-termpurposes,obviouslysomeofthatdependsonwhetherithappensattheendofthisyearorearlynextyearoralittlebitlater,butIthinkifitwereforthewholeyearwewouldthinkofitasbeingfairlyneutralforusnextyear.
PeterSkibitski(Analyst-DrexelHamilton):
Okay,gotit.Thankyou.
Operator :
I'mshowingnofurtherquestionsatthistime.I'dliketoturnthecallbacktomanagementforfurtherremarks.
MarillynHewson (Chairman,PresidentandCEO):
Thankyou.Letmejustconclude.Iappreciateallofyoubeingonthecalltoday.AndIwanttojustconcludebysayingwehadastrongquarteroffinancialresults,andthesestrategicactionsthatwe'veannouncedareexpectedtopositiontheCorporationtodeliverevenhighervaluetoourcustomersandstockholdersinthefuture.
So,thanks,againforjoiningusonthecalltoday.WelookforwardtospeakingwithyouinOctoberonournextearningscall.Abigail,thatconcludesourcalltoday.
Operator :
Ladiesandgentlemen,thankyouforparticipatingintoday'sconference.
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