Good day and welcome everyone to the Lockheed Martin Corporation third quarter 2009 Earnings Call. Today's call is being recorded. 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.

Thank you, Elizabeth, and good morning, everyone. I would like to welcome you to our third quarter 2009 earnings conference call. Joining me today on the call are Bob Stevens, our Chairman, President 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 facts 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. Please also note that we have posted charts on our website today which supplement our comments. With that, I would like to turn the call over to Bruce to provide a closer examination of our third quarter results and financial outlook, followed then by Bob with his perspectives on the corporation.

Thanks, Jerry, and good morning, everyone. I hope you all had an opportunity to read today's earnings release with our third quarter results, updated 2009 guidance and initial 2010 guidance. As the release outlined, 2009 performance continued at a solid level with numerous operational and financial highlights achieved through continued focus on quality and execution. Financial highlights included our Aeronautics business continuing its upward revenue growth, Electronic Systems continuing its margin generation above 13%, and the Corporation generating near record third quarter cash from operations in excess of $1.4 billion. This performance solidly positions us to achieve our increased 2009 earnings per share and return on invested capital projections. Turning to our third quarter results; the Corporation achieved solid financial performance, completed significant operational milestones, and won key new business awards. Sales growth consistent with our expectations and strong cash generation were noteworthy achievements in the quarter. With third quarter activities generating robust cash from operations, we were able to continue implementation of our cash deployment strategy for generation of shareholder value. During the quarter, we continued to repurchase our stock, bringing the year-to-date share repurchase total to over 18 million shares. In September, our Board of Directors approved a share repurchase authority for an additional 20 million shares, increasing the total remaining authority to approximately 35 million shares at the end of the third quarter. Our strong cash flow performance also enabled us to increase our quarterly dividend rate by 10.5%, extending our double-digit dividend rate increase to seven consecutive years. Let me now turn to a review of key events and performance in our business areas. Starting with Aeronautics, our team continued to achieve operational milestones across their programs while winning new business awards. On our largest program, the F-35 Joint Strike Fighter, we continue to retire risks…

Thanks, Bruce, and good morning, everyone. Thanks very much for joining us on the call today. Four years ago, we were very direct in communicating to you our strategy to become the world's premiere global security company. This strategy was based on the central premise that the world's security environment represents an expanding portfolio of demands that will not recede, but only grow in number and complexity, at a time when the velocity of change around each one of us is accelerating daily. Examples reinforcing this premise are now many. Concerns over conventional military threats remain. The development of nuclear materials and the testing of ballistic missiles continue to accelerate. Acts of piracy and terrorism are on the rise and coordinated cyber attacks are increasing in scale and consequence. Governments around the world are straining to cover a broader horizon, as the very definition of security for their citizens expands from missions that are familiar, like assuring national sovereignty through the maintenance of combat capabilities or participating in humanitarian, peacekeeping, and stability operations, or delivering more efficient and effective government services, to missions that are now new and evolving, like better planning for responses to natural disasters or pandemics, like the H1N1 virus, more effective use of the energy we have and access to new forms of reliable affordable, renewable resources, the building and maintenance of critical infrastructure now importantly to include information networks and databases, and determining the best way to assure high quality affordable healthcare for families. Our strategic approach to meeting these growing demands has been to refine a disciplined growth portfolio model built on three principle actions, making start internal investments and leveraging our broad corporate experience to stimulate organic growth, forming high quality global partnerships that can advance the cost effective, best performing solutions for…

(Operator Instructions). We will take our first question from George Shapiro with Access 342.

Bruce, I would like you to go through in the projection for aeronautics margin? I mean you got it down in the low 11s and this year is probably going to be 12, 9, give or take a little bit. It almost seems to me that to get the margin that low, you must have been making 20% margins or so on the F-22 program, which was a lot higher than I thought or let me turn it over to you to get further explanation.

Let me say by introduction, there is going to be a lot of moving pieces here. So, I am going to walk you through this kind of slowly if I could. Starting with sales, the sales, we are expected to be pretty strong next year, 7 to 9% in the range that we provided to you in the guidance. Think of that as greater than 25% growth year-over-year on the F-35 program, in excess of $1.2 billion growth from 2009 to 2010. The F-22, because of the drawdown that the production program in 2012 are already starting to see some early indications of that, and so F-22 volume is probably down nearly $400 million from 2009 to 2010. F16, aircraft quantities are going from 31 in 2009 to 20 in 2010. Think of that being in excess of $500 million or so of sales, and think of those sales coming from aircraft that are the highest margin aircraft in our portfolio within the Aeronautics business area. Then lastly, the C-130, we're actually growing the aircraft there, obviously, as Bob mentioned in his remarks from 16 to 26. Think of that as adding about $600 million on the C-130 program. So if you take a look at the EBIT side of that, just again to tie this together, EBIT does show us going down, think of EBIT, I think at the midpoint, it is like in the 11.2% range, from a ROSS perspective, probably down over 1.5, 1.6 percentage points compared to what we expect to run in 2009. The contributors there again, think of the F-35, although the absolute EBIT dollars on the F-35 are up about 60%. Think of that as driven by the sales growth but also planned improvements on the margins, on that program. Think of it…

It still seems though, Bruce, that the margin on the F-22 must have been higher than what I thought, because I kind of factored in the growth in the F-35 and the potential margin increases that you alluded to and I don't get the margin down much, versus what your guidance. So I mean is there something I'm missing there? I can just go back and redo the numbers and maybe I'm missing something.

I don't think I've got a different explanation than what I gave to you, George. I mean the F-22 has had some step-ups for risk retirements in 2009, but again as I look at it going forward into 2010, I expect a fairly similar level from a ROSS perspective, still strong, but not the drop-off that you're thinking out there.

We'll take our next question from Richard Safran with Buckingham Research.

I wanted to just ask you first on a couple of aeronautics programs, so on the F-16, okay, you're taking the rates down, but in deference to Bob's comment, I also noticed that you're anticipating the Egyptian sale of the F-16s and I noticed that on the FMS has notified Congress of the sale to Egypt. So, I was wondering if you could tell me just what’s going to happen with the F-16 rates. Should we anticipate that you're going to continue to decline or does it come back? I mean what happens to the production rates?

We're going to hold fairly consistently. I think at the 20, 21 aircraft level in 2010 and 2011. As we look out, say in the 2012 timeframe, we see at least a doubling probably of that build rate to somewhere in the 40s range of F-16s. Think of that as mostly aircraft that are already in the backlog, the Turkish aircraft, I think it is the Moroccan aircraft and we would likely expect some of the Egyptian aircraft to take place in the calendar year 2012 as well. So, fairly steady production and then a pretty good sized spike expected in 2012 and beyond that it's kind of dependent upon what happens with the.

Indian.

The Indian competition and some of the smaller competitions we're pursuing.

Then on a program you don't do a lot of talking about the C-5 modernization. First thing, am I right, you delivered three development airplanes; I think you have a contract for 49 to 50. When do you start delivering the non-development airplanes and also can you tell me what we should look for the ramp rate for that program?

Yeah. Happy to do so. We don't talk about that program a whole lot and but it's a very exciting program. I hope you saw in the quarter that one of the three aircrafts we delivered into the test program was taken by the Air Force and broke some 41 at least their pending records, for, think of this as payload, range and getting to altitude as certain climb rates, if you will. This is after we've done the re-engineering and the modernization of the aircraft, so we're very pleased with the performance of the aircraft first off. You're also right. We are under contract for the early lots of what's envisioned right now to be a 49 aircraft modernization program think of this as the B models and the C models, out of the fleet of C-5s. Again, a total of 49 aircraft, you should think of that being at the end of the day in excess of $5 billion worth of business for those C-5 aircraft. The build rate, I think we have our first delivery in 2010 and that's followed I believe in 2011 with three aircraft and then five, seven, it kind of peaks in a few years out there, beyond that at about 11 per year, Rich.

I just want to add a note to Bruce's comment because I think you've highlighted in your question a point we don't often cover because we talk so frequently about F-22, F-35, C-130 now C-5, we haven't really talked about the F-16. We have a highly focused program and international team here and when we talk about future opportunities. We don't think we see at present the end of the F-16 line at all and there are in fact opportunities. The biggest thing is you've already cited the 126 airplanes in India, but there are government-to-government discussions today about the prospect of airplanes in Iraq. We find replacement cycle airplanes coming up from time-to-time that could certainly be the case in Greece. Maybe Expressions of Interest from countries in the Middle-East like Qatar and Oman and others. So, the horizon for the F-16 program, even though we're going to see a build down in the quantities as Bruce has described them to you, in our judgment is one that still has real potential and possibilities and one that we're going to work hard to focus and concentrate on again even though it gets crowded out a little bit in the discussion about other aircraft programs.

We'll take our next question from Joe Nadol with JPMorgan.

Bruce, it might be helpful just diving down into the F-35 and thanks for all the detail you gave us on the segment overall, the aeronautics segment overall. But you expect margins to get to over 6% in 2010. LRIP, I would imagine your opportunity there is considerably higher than that and that's becoming a much, much bigger part of the pie, of the F-35 pie. So, could you maybe outline the opportunities to that sort of rate, both in 2010 and as you think out a couple more years?

We look at the F-35, the EMD contract is on the winding down phase. I think we probably peaked in volume on the program, probably in the 2007 timeframe, if I'm not mistaken. So, we're a little bit on the backend side of that program if you will. We had some step-ups on the contract in 2008, that's what allowed us to get to the 5% I referenced earlier. We have some planned adjustments, already included in our guidance for 2010, as well. Upside beyond that depends on how successful the flight test program is in 2010, and our outlook for beyond that period of time, because that's really the crux of what the remaining work is on the EMD contract. You're absolutely right, that the LRIP volume is starting to overtake the lower initial production volume is starting to overtake the EMD volume. We would expect those contracts to be more profitable than the EMD contract. Given we haven't yet delivered an aircraft out of LRIP, you might expect that we would be typically a little more conservative with our starting booking rate adjustments on those contracts. At the end of the day, we do think that they are going to be more profitable than the EMD contract, and not, you should think of the model, you should probably think of as not a whole lot different than if you look at the F-22 program and it’s early phases of aircraft delivery and how we stepped up the booking rates ultimately to get to where we are today on that program, it’s a very similar model to what we expect to happen on the F-35.

That's a good model, because you had a very, very quick step-up on F-22, over a two or three-year period after a long time at kind of a flattish mid single-digit level, if I remember correctly. So is there, just to put you on the spot a little bit, do you think you can identify a year where you're targeting 10% for the program?

Overall, for the program or?

The F-35 program overall?

I'm not sure I want to target that, but take any particular year, Joe. I would say that is clearly our expectation, and our expectation is that we will do greater than that. Very similar to what we did on the F-16, on the F-22 and the C-130s once they get into production. I think we will likely hit the 10% level, likely before we get into the forward production level, which look about the 2015 timeframe, if that helps.

We will take our next question from Doug Harned with Sanford Bernstein.

On IS&GS, this was a unit that you all have looked at as growing at a 10% rate this year, 10% type of a rate top line next year. Now, if I look at your Q2 guidance and if I then take that, we're only looking at about a 4% top-line growth in the next year. What's happening here? Are you seeing significant changes in the markets for IS&GS?

Doug, I will take a shot at that. I think if you look at the range we've given you, we were in the 4% to 6% range which is definitely lower than what we've out looked before. I see a couple things going on there and first let me give you a little bit of color on the individual lines of business that we see there. It might surprise you somewhat to learn that our defense line of business there, we actually expect to have kind of high single-digit growth, within our civil line of business, think of that as kind of the mid single-digit level, and think of our intelligence line of business as being in the low single-digit growth. So it's not a uniform level of growth across the three business areas or across the three lines of business. I'll say we probably, given the experience that we had in 2009 with a number of the protests, a number of the delays, a number of the program start-ups and funding concerns that occurred, we probably recognize that fact, and probably turned that into our outlook for 2010 as well. So for instance, we saw the bigger things that impacted us. The TMOS cancelation was in IS&GS. So while there were some sales activities in 2009, again, as Bob mentioned in his remarks, that burden was terminated, so there is nothing in 2010 for that. A couple of the larger contracts, I mentioned in the second quarter, the [FASTeR] contract, and the fact that that was planned, actually the 2009 start, today it is a 2010 competition, with a date uncertain as to when that will take place. So we have taken what you would probably assume to be the appropriate action resulting from that. Some of our larger contracts, some of the IDIQ contracts approximately we're expecting to have in 2009 have just come into fruition. For instance, the GSA Fame contract and the AFRICAP contract which you may recall in 2008 was a significant contributor to our overall growth levels in 2008. That contract actually was just recently awarded for its 2009 activity, and think of this as being delayed primarily because of the administration changeover. So given that backdrop of what we've seen happened in 2009, I think we've just tried to reflect, you could call it a more conservative view but I will say a more realistic view as to what our expectations are in 2010.

When I look at this, and then the mix shift that you're describing, then I also think about margins here. We're looking at margins in 2010 based on your guidance that are roughly the same as you're talking about for '09. These are significantly below what we've seen from this business for some time before. Can you explain why you would continue to expect that to go on?

Yes. I think it’s a couple of things. I think one is; this is reflective of the awards that we've had a significant number of awards recently and I think this is reflective of some of the margins that are coming on those new awards. Secondly, we had I'll say a fairly aggressive approach in 2009, relative to assume, I’ll say profit adjustments and claims settlements and the like that we’re taking a little less aggressive approach in 2010 given what we experienced in 2009. I think those are the two biggest drivers of what is going on. I will remind you this is a business that we always kind of viewed as much more of an ROIC focused business, there is not much capital intensity there that has good cash terms with it, and so this is a business where somewhat lower margins than some of the more capital intensive businesses that we have is probably what we should be expecting.

As a reminder, ladies and gentlemen, in the interest of saving time, please limit yourself to one question, and return to the queue. We'll take our next question from Peter Arment with Broadpoint.

Yes. Actually you've hit upon most of my questions. I guess could you, Bruce walk us through a little bit again on aeronautics on 2010? I guess I'm a little confused. Did you say that C-130 EBIT is not going to be, you're not getting any benefit from that or did I just misinterpret that?

No, I said, I think I said, C-130, we are seeing the 10 aircraft addition there between 2009 and 2006. I think what I said is that EBIT would likely follow the sales at proportionate levels of actually ROSS might be slightly down, primarily just because of the mix of aircraft. I mean there is not uniformity, there is not a single contract for all of the aircraft that are delivered in any given year and that mix changes from year to year. As we look at 2010 versus 2009, it's slightly lower but literally it's still something you can be very proud of, I'll say that.

Right. Okay. I understand. You have hit on all my other questions but and you also on your guidance, you don't assume any stock buyback, correct?

Basically if you take a look at where we are at the end of the third quarter, I think we're at some 385 million shares and basically what we had assumed in the guidance for 2010 is kind of flat line at that level for the year.

We will take our next question from Myles Walton from Oppenheimer & Company. Myles Walton - Oppenheimer & Company: Bruce, a question for you on the cash flow, you mentioned the 2011 picture improving versus the 2009, 2012 levels and I guess two questions here, first is what is your anticipation for burn off advances in 2010? Then what is the moving parts into 2011 that are really causing the improvement on the cash side?

We're actually expecting in 2010 a little bit of improvement on the advances. Think of that as some of the international contracts we're getting, most likely on the C-130, as far as the FMS deals we announced previously, think of this as the Iraqi aircraft orders or the Kuwaiti aircraft orders, so that will likely bring with them some advanced payments that will likely contribute positively towards that. Inventory, we expect a little bit of turn on inventory going the other way in 2010, as we ramp up the build rate within the aeronautics portfolio. Then beyond that, we expect again strong continued cash flow from each of the four business areas. There is a little bit of tax benefit actually going into 2011 and 2012, in terms of payments that will contribute to better cash flow, but again as I said in the prepared remarks, I think we're looking even with the pension funding cash to be at least as strong as what we've seen in 2009 and 2010, if not a little stronger than that. Myles Walton - Oppenheimer & Company: One quick follow-up; is it fair to say that the 500 million CAS increase in the P&L is having about a 50 basis points hit on margins in 2010 versus '09?

I looked at that FY a little differently Myles. Think of that, it’s a good question because CAS did increase fairly significantly from 2009 to 2010 probably close to about $400 million. Maybe I got my numbers a little wrong, I think it is $400 million increase, yes 580 to 990. Think of that, it's a little difficult because some of this gets spread over contracts that cross multiple periods but think of probably 20% to 25% of that CAS increase is falling to the bottom line on fixed price contracts that are in our backlog. Think of most of those fixed price contracts residing in the aeronautics business area and in the electronics systems business area, so it is kind of as we looked at the impact of that. We think overall, that's probably had a two or three tenth impact from a ROSS perspective relative to the CAS hitting on our price business on fixed price contracts. Obviously, that eventually starts to wither away as you start to price those new contracts and price that CAS impact into that. So that's a little bit of a timing issue that we expect to recover in the out years.

We will take our next question from Troy Lahr with Stifel Nicolaus.

Bob, I'm wondering if you could talk a little bit about some of the programs that you said where challenge is VH-71, TSAT, MKV and then F-22 rolling off. I mean, do you think there are still at risk here? Or do you feel that you've already taken your lumps on most of your major programs and can you throw CEV in there as a potential [at-risk] program?

I think that it would be fair to say not only we at Lockheed Martin, but probably all the companies in the industry, recognizing two factors the change in administration and the demands in the global security environment, then separately the changes where I'll see it in the global economic environment how those economics are affecting domestic policy. We expected to see the change in priority. We just didn't know exactly where it would fall and how it would roll through our backlog and our future horizon. So in one sense, Troy, I thought we got a great level of insight, much more clarity. I don't know that I can tell you today it's 100% so, but I think it's pretty well established going into the quite [plenty] of defense review as to what program priorities have been established. I find that when we look at our backlog and our future horizon, again, some of the statements of what will be highly valued and most desired like the Secretary of Defense's comments about needing "75%" solution soon rather than a 99% elegant solution that I have to wait years for and cost a lot of money favors companies who have effective backlog, where you are executing and meeting your expectations because you can derive it in spiral development from those capabilities into a broader range of 75% solution. So I think we pretty much heard the majority of the reprioritization effect on our backlog and that’s what Bruce I think has been so thorough in trying to describe to you relative to the near-term guidance and portfolio rebalancing, and we really do look at it as rebalancing of the portfolio at this time. Now you mentioned the crew acceleration vehicle or the Orion program. We have real confidence in that program, believe we are doing a very good job in developing an adaptable system that can not only go and perform well in low-earth orbit but can satisfy mission aspirations that they go beyond low-earth orbit if it was a Lunar objective or Martian objective or beyond. So we’re doing well. I think we’ve got a tight design. You know there are studies and appraisals underway now about what the overall strategy should be and that final determination has not been made, but I believe the Orion program will demonstrate value across a variety of strategic alternatives with respect to human space flight. The one thing probably most people could agree on is that shuttle won’t fly forever and that human space flight program has value in many aspects of American lives. So we’ll probably hear more about that and we may hear some fine tuning, but I think the net reinforcements of the investments that we have made and the way we oriented the business over time far outweigh the short-term challenges of portfolio rebalancing.

We will take our next question from Itay Michaeli with Citi.

Bruce, just wanted to get back to the 2011-2012 margin comment, I think you mentioned to think about in a mid to upper 10% range. It looks like we will be in the upper 10% range in 2010. Just wanted to ask, I mean is there anything structurally that gets us lower than that in 2011 and back up to 2012, or is that just kind of the range to think about going forward in that range? Why would it maybe be below upper 10% in 2011-2012?

As I said in the description of the Aeronautics business area, it is most significantly driven by just the infusion and the tremendous growth rate of the F-35 program over that period of time. We've talked about in the past the fact that we thought Aeronautics could be a $20 billion a year business by 2015 and probably 75 plus percent of that coming from the F-35, that's still the case in our estimation, it’s not greater than that. So if you put any kind of compound annual growth rate on the F-35, and as I said earlier, it grows greater than 25% year-over-year in 2010. It grows at a tremendous clip, which is all goodness, frankly, but it does bring with it the margins that you would expect on the early phases of this program that’s going to last for the next 30, 40 years. So as I look forward, the pressure is going to come in here just from the growth of the F-35 program. I think Electronic Systems probably stays, fairly consistent at the 13%. Some upside potential as we see some of the international, particularly missile defense applications coming to fruition. We have some upside there. Space; space has been 11% now or higher for two consecutive years. We've got the demise of the shuttle program and with that our support contract, United Space Alliance, the USA contract in the 2011 timeframe likely that will bring with it some diminished equity earnings that we would ordinarily get from that contract, but as we sit here today, we think we have opportunities to essentially keep that margin fairly consistent with what we're doing in 2009 and 2010. Then IS&GS just for planning purposes and obviously we're going to try to have opportunity greater than that, we still think that’s going to be somewhere in the 8% to 9% range during this period of time.

We'll go next to Noah Poponak with Goldman Sachs.

Guys, on the comment that the total top line can grow in mid-single digits for a couple of years beyond the end of the decade, I think it’s clear that you expect the aeronautics business to grow. Can you quantify what you think the business excluding aeronautics can grow at in the two to three years after the end of the decade?

Yes. We still think, let’s, I will let Bob jump in here in a second, I'm sorry, but we still think aeronautics is obviously the fastest growing, it could approach, near double-digit growth rates by the 2012 timeframe year-over-year. We think electronic systems still, but for the 2010 situation, with the rebalancing the portfolio, the impacts of the presidential helicopter, and the like, we still think that’s probably in the mid-single digit level, maybe slightly lower than that, 4% to 5% level. Think of that. Space, we see some prospects of growth. We've kind of described that as a flattish business, but we're getting I'll say from some of this that Bob described the rebalancing of the portfolio. We are seeing in the not too distant future, some significant potential classified satellite activity for the US government that at some point will bring some lift to the Space business area. Maybe not in the time frames we're talking about, but we could see some significant orders in that latter timeframe that I discussed earlier. Then in the IS&GS, we still think of that as between mid to double levels of growth rate on an annual basis still outstripping the market in general and still outstripping the DoD marketplace as well.

Could you categorize what kind of investment account growth is embedded in those assumptions?

From a DoD perspective, we think it is probably in the 2, maybe 2% to 3% range per year. I'll turn just for a little more color there.

Of course, you would appreciate we've thought a lot about what circumstances we'd be facing in the broader market relative to let me start with deficits. So the Defense Secretary has said he would really like to see a budget that has modest to real growth, and we appreciate that as a sound aspirational goal. He also said I don't want to see a lot of cuts and then a lot of reacceleration. So, think of that boom/bust cycle and certainly, we like every part of that phrase. If we can get stability in the budget over time, absenting the boom/bust cycle, I think there will still be some headwinds on the aspiration for modest 2% to 3% real growth. I think it might actually be tighter than that, and our growth estimates assume some downward pressure on that real growth. The reason we offer this growth prospect to you with confidence is we've already gone through some of the first screening on priorities and we know we have to focus on affordability and cycle time, good cost estimating and delivering what's expected on schedule, and we're working hard to strengthen those aspects of our portfolio. So, we think we've got a number of the right programs in the right place at the right time, many of which have had a really good start. So, there is a foundation underneath them and I think even with a little head wind, we should be able to sustain these growth expectations. I think the unknown for so many is as we look at deficits expanding, we need to see a restoration of GDP expansion as well. The health of the economy has to come back. We have to see the recovery, not necessarily over the next couple of quarters, but we've got to see resurgence in the economy that will generate revenues that will help liquidate the debt that the nation is assuming. If that weren't to happen over the next, say few years, then we will be having different kinds of conversations with you and others and we'll probably all having these kinds of conversations. So, there is still an uncertainty out there, but we’ve tried to look very carefully at the portfolio and the things that we have to do to consistently be evaluated and adding value to US government missionaries, even during times of increased fiscal stress.

So I guess, just to square away the addressable market part, you've talked about Secretary Gates discussing low single digit growth in the total budget, but it sounds like you're also recognizing that given where the deficit is, given that there are other priorities, given that the economy may recover slowly, that there may be a share shift from investment towards other areas that declines in investment accounts beyond the end of the decade is certainly possible.

It is possible, and it's as a share of the total and it's possible that there will be pressure on some of the other agencies beyond the Department of Defense, but again we think we have the program portfolio that positions us well to essential government services. I would also just add that everywhere we go and I'm going to guess that for many on the call, there are some sense of this as well. The global security environment really just is not settling down. It's getting more interesting and more complicated, and it means that our government and the governments of friends and allies with whom we participate in building partner capacity, meaning they are going to need programs and they are going to need capabilities. Then you have to address more things and that's why we are putting such an increased emphasis here, redoubling our effort really on affordability, cost reduction, cycle time management for scheduled delivery and so forth. It is the right action for us to take, because we do sense that it's going to be increasingly difficult to hold a modest real growth defense budget or other budgets in this environment. So that is certainly true.

Elizabeth, this is Jerry. While we've come up on the hour, we had some longer earlier comments here. So, I think we can extend this a little bit longer if there are still some people in the queue that want to ask some questions. So why don't we take this to 12:15, if there are some people wanting to ask questions.

We will take our next question from Sam Pearlstein with Wells Fargo Securities.

I know that I guess since the last quarterly conference call, some of the budgets have worked their way further through Congress. I'm trying to understand within your backlog, has anything additional changed in terms of any backlog that you have taken away from programs that have been canceled, because I know some of them like the VH-71 happened already, but in terms of the sequential $3 billion decline we’ve seen in the backlog?

I think you probably seen the full expression of all the reprioritization actions, as they have affected our backlog as we’ve seen them.

I’ll jump in Sam, third quarter was light but we kind of knew it was going to be light going into it. They just wanted a lot of competitions there. We expect a much better fourth quarter that’s where lot of the follow-on contracts will be as well, some of the orders that we’ve already talked about including the C-130J for 11 aircraft that Bob mentioned in his remarks.

Then Bob, if you don’t mind me asking a follow-up question. There has been a lot of discussion about organizational conflicts of interest and that potentially causing some divestitures as some of the other contractors. Any sense within Lockheed Martin if that would cause you to have to think about changing some of the business mix?

Yes. Not as we see it today. We are certainly mindful of conflicts of interest. We run our business with great awareness as to where they exist and what mitigation strategies are available. We don’t think there, actually I must be candid with you, I think some of the conversations that I have been exposed to may give the appearance of situation more acute than the ones that we see particularly are working closely with our customers. So where it’s necessary for us to have a certain provision in place whether it’s a firewall or some other mechanism, we certainly have them and we polish them. It’s not a broad consideration across our business. We are not being asked or it’s not being suggested to us that we divest. Segments of our business, we are not planning to divest segments of our business. We are planning to rigorously adhere to all expectations of us. Not only conflict of interest but all the other expectations about propriety and the business conduct issues that we face and we want to improve our execution and performance in those areas that we do have. So I'm not anticipating it. We're not planning for it. The discussion that Bruce has led you and the other participants in the call today through today don't have that as any of our planning assumptions strategically or operationally.

Our next question comes from Robert Spingarn with Credit Suisse.

Bruce, if I understand correctly, I look at your 2010 guidance and a few of the pieces there, you have not built in an R&D tax credit, which I think you said is worth about a dime or so this year?

We have not done that, Rob, and it is something that has happened with great consistency in the past, but it is not yet passed the Congress, and just as we did last year by the way, we didn't put it in the initial guidance last year, either.

If I think about that, and I think about the absence of the effect of a share buyback, and you've got a fairly recent authorization increase, I think about 20 million shares. Then if we were to look at pension and market, where rates and returns are today, how might that affect or at least the pension part, how might that affect the costs that you're expecting next year, if we were to mark things as of the quarter?

Looking at the quarter, we gave you the guidance that basically said it was 8.5% for the year on the asset side, and the 6 and 8 on the discount rate. Looking at it today, we are doing much better than that, as we sit here, what's today, October 20. We're doing much better than that from an asset return perspective. The discount rate, just in the last week or so, we have seen about 20 basis points improvement there, but think of the asset return in the mid to upper teens, as we sit here today, think of the discount rate, if we were to pick it today, likely in the high fives. The kind of interesting math that goes along with that, is if, if we were to make 2010 based on those current assumptions, although they're different than the asset return and the discount rate we have in our guidance, the absolute FAS/CAS is just about the same exact number. If you walk through the sensitivity analysis that I've given to you in the press release, and use the differences that I just talked about I think you will see that that works out to be just about the same FAS/CAS.

Okay. So in a sense the intention is not really a source of conservatism in the guidance but share buybacks certainly could be as well as the R&D tax credit?

Yes. I think R&D tax credit, I think, we obviously asked for share repurchase authority with the intention of continuing to do that, which we historically did not put in our guidance going forward, and frankly we'll see what happens. The biggest swinger obviously is the discount rate between that and the end of the year if business rates go up.

Thank you very much.

Yes. Rob, let me just add a little note on guidance because this question that you posed gets posed from time to time, and it’s not our desire to necessarily appear conservative, but I will tell you, I think we construct guidance in a fashion that’s just consistent with the way we approach all the interactions we have with our customers and on all of our programs, our customers hold a standard that say, you don't take credit for something until you earn it, until you demonstrate it. I mean it’s a very rigorous process and it’s really healthy for our business when we approach all subjects like that. So, on the R&D tax credit, it may occur, it may not occur. It has occurred in the past. What we try to do is just be absolutely transparent and clear to you about what is or is not in that guidance, but I personally rather like the standard here that says, go earn it and achieve it and demonstrate it before you record it or include it in your expectations. So, I trust that we're being sufficiently clear to you and transparent, so you all know what is and is not in the projections that we give you, but that's the philosophy around which some of these projections are formulated.

Bob and I certainly agree. I think that is the right approach. Of course, this early in the guidance cycle but of course, from where we sit, we think about trends and what has happened before so we can consider the possibilities out there.

We will take our next question from Cai von Rumohr with Cowen & Company. Cai von Rumohr - Cowen & Company: Yes, thank you. Could we have some more comment on the F-16 bathtub? I mean it looked like it was going at 30 a year and now it is going down to 20. I mean who are the guys who moved out? Are they Pakistan, Morocco? Is this the result of normal bureaucratic inertia? Is this the result of a change in Foreign Arms Sales policy under the Obama administration, and what's the chance that that 20 number in 2011 could be 30 or could be 10?

Yeah Cai there is nothing magical or mystical. No one has moved forward, no one has put a step in there. This is simply playing out the backlog. I mean think of an F-16, from contract award to contract delivery taking about three years, so what we see happening in the year 2010 are awards that we received in 2007. Think of what's happening in 2011 as the awards we received in 2008 and so on. That's I won't say set in stone, but it is pretty close to that and that's just the function of what orders we had on a given year basis and three years later we will deliver those orders. Cai von Rumohr - Cowen & Company: Yet, you've got potential for Egypt, you've got potential for Iraq, so those all are kind of what, 2013?

There is a chance some of those will slide, that's what I made the comment earlier that we expect the build rate to get into the 40ish level in 2012. That's because we think some of those, we can probably slide in the later part of 2012, but the bulk of those will likely be in 2013 and beyond. Cai von Rumohr - Cowen & Company: Should we think of any margin impact from going from 20 to 40? Or is that covered in the contract pricing?

We have a customer who is a very intelligent customer who would expect when volume goes up, that they would expect to see reductions from things like overhead absorption and the like, and you wouldn't expect to get windfall profits from there, but I would expect to get similar margins going forward to what we've experienced on the F-16 behind it. These are all international sales. I wouldn't expect to see necessarily significant uptick to where we are but I wouldn't expect it to go down either going forward out that far. Cai von Rumohr - Cowen & Company: So when they go down to 20, we shouldn't expect the margins to suffer as a result of that?

I would not. Cai von Rumohr - Cowen & Company: Thank you.

Our next question comes from Joe Campbell with Barclays Capital.

Yes, good morning. I have a question for Bruce about the PPA and CAS in 2010 and ‘11. You said before that something like 25% of CAS might fall through to the bottom line and hurt earnings and the other 75 would be recovered I gather. How much is the PPA higher than CAS in 2010 and '11and why is that it goes back down? What's happening with the government changes? Is there going to be something different for the FY2011 budget? Or you know the FAS/CAS harmonization or whatever. What is happening there?

Yes, let me give you a little background. We were unclear going into this year exactly when the CAS harmonization was effective. We were a little unclear as to when the CAS harmonization would take place. I fact, I think the final rule making has not yet been disclosed in 2010 yet, but all indications are that it will happen some time prior to the end of the year with the effectivity being January 1, 2011. I'll remind you whenever that CAS harmonization, essentially all that does is accelerate CAS expenditures or CAS recovery to more closely align with the PPA. So those will both take effect again in the 2011 timeframe. As I look at 2010, the PPA or the ERISA funding requirement is not too different purely by coincidence than the FAS numbers in 2010. Think of it about the 1.4 billion that I keyed up as the contribution in 2010, that is the PPA value in 2010 if you will, and we would expect that the CAS number will go up slightly above that in 2011 and that the PPA funding will go higher than that again, for a couple of years, until such time beyond 2012, 2013, where those two will reverse. If you recall, we gave a chart, I think it was in the second quarter, the second quarter Jerry or further than that, where we showed the FAS/CAS trend line since the beginning of Lockheed Martin's history in 1995. It says eventually these two curves between the FAS, the CAS and the ERISA they all tend to equate to the same number. While we have a little short fall in the near-term, we think that gets made up in the longer term and will be generating cash, if you will, as a result of the CAS exceeding ERISA requirements. I gave you a whole mouth full there, Joe. Hopefully, that made sense to you.

Let me just ask, do you think that the amounts that you’ll have to put in '10 and '11, that is where PPA causes to you put more in than you can get back on CAS. When you get out there, will you be able to bill the government for the amounts that you put in, but weren't at that time eligible to collect on CAS, or are those amounts gone forever?

No, we definitely get the ability to bill it under our CAS. It is strictly the timing. Even with CAS harmonization, ERISA, which is, the PPA is the new ERISA or ERISA is the new PPA if you will. That’s accelerated even with CAS harmonization in advance of CAS, but eventually CAS catches up, no doubt.

Just so I'm straight, is the CAS going to be aligned so that it can't be lower than the minimum ERISA or is CAS going to be aligned with FAS? So that what if FAS was high, CAS will also be high so that we could expect kind of from a regulatory point of view that CAS and FAS will be the same? Or is it only that PPA which is minimum funding is going to be aligned with CAS?

Even with PPA, you're always going to have a difference between CAS versus ERISA, which is PPA and versus FAS. Think of the FAS and the CAS, again, you're going to have different levels of amortization of gains and losses, different periods of time. I've always kind of said, the CAS, a little longer to enable. Think of the appropriators who have to fund to be able to pay for CAS, you need some time to actually get that in the appropriations in the five-year plans and the like. So, that’s typically a longer amortization or a spread period than is the FAS. ERISA is different still. It's typically more front-end loaded than is CAS for the reasons I just described, but those three will still move somewhat independently of each other.

Elizabeth, I think I need to turn it back over to Bob for final comments as we've run over a little bit here but if I could give it back to Bob, please.

Well, let me first thank you all for tuning in on the call today. Let me also reiterate for each of you that we intend to perform at a very high operational level throughout this company. We have a strong portfolio of long-term work, rock solid balance sheet, excellent cash flows and sound credit ratings and we have an outstanding work force that knows how to meet challenges and I want to end the call today by thanking our 140,000 employees. This team has enabled Lockheed Martin to achieve operational and financial performance while providing mission critical products and services to our customers. It's through their dedication and talent that we continue to generate value to customers and to our shareholders. I do appreciate your interest in the call today, and we're all looking forward to talking to you again in January. Elizabeth, we are going to sign off the call and thank you for your help.

Thank you. Once again, that does conclude today's conference call. We thank you for your participation.