Good day. And welcome, everyone, to the Lockheed Martin Fourth Quarter and Full Year 2016 Earnings Results Conference 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. Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Stephanie, and good morning. I'd like to welcome everyone to our fourth quarter 2016 earnings conference call. Please join me today on the call -- joining me today on the call are Marillyn Hewson, 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 fact are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law. Actual results may differ. Please see today's news release, our SEC filings and chart two on the webcharts for a description of some of the factors that may cause actual results to vary materially from anticipated results. As noted, we have posted charts on our website today that are -- that we plan to address during the call to supplement our comments. Please access our website at www.lockheedmartin.com and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Marillyn.

Thanks, Greg. Good morning, everyone. And thank you for joining us on the call today. All of here, hope your New Year is off to a good start. Let me begin by saying that I am extraordinarily proud of our Lockheed Martin team. Their dedication and focus enabled us to achieve outstanding program and financial performance during a dynamic year of transition and I want to thank them for their efforts. Our performance as a corporation allowed us to exceed all of our full year goals and has positioned us for future growth and to continue to deliver value to customers and stockholders in 2017. While Bruce will cover the financial results in detail a little later, I want to highlight a few noteworthy 2016 financial accomplishments from my perspective. 2016 was an exceptional year of achievement, with all of our financial metrics exceeding our expectations and in the case of sales, earnings per share and cash from operations exceeding our previous historical high watermarks. I was especially pleased with our performance in maintaining our focus on new business wins and building backlog. We received almost $19 billion in order bookings in the fourth quarter, which resulted in our achieving a quarterly book-to-bill ratio of 1.4 and a year-end backlog of over $96 billion. This represents over $1 billion increase from 2015 year-end level and reflects the broad demand for our products from both domestic and international customers. Significant awards included $7.2 billion for our F-35 LRIP 10 and definitized contract action agreement, a $1.5 billion award for PAC-3 missiles defense capabilities for United States and allied military forces and $1.2 billion from the Republic of Korea Air Force to upgrade 134 of their F-16 aircraft. Our strong and growing backlog has positioned us [Technical Difficulty]. Sorry for the interruption…

Thanks, Marillyn. Good morning, everyone. As I highlight our key financial accomplishments, please follow along with the webchart we included with our earnings release today. My remarks begin on chart four and an overview of our financial results for the year. Before discussing our 2016 financial results, I want to provide an understanding of the material weakness and internal controls that we described in our earnings release. This materially weakness relates to a number of deficiencies in internal control over financial reporting that is limited to Sikorsky only. While we have not discovered any material errors in the financial results included in our earnings release today, our reviews of the internal control processes and IT-related controls over financial reporting at Sikorsky indicated a reasonable possibility that a material misstatement could have occurred that would not have been prevented or detected on a timely basis, which is enough to determine that a material weakness in those internal controls exists. That finding in turn triggered a more thorough review of Sikorsky's financial statements to determine whether or not that potential for misstatement led to an actual material misstatement in our consolidated financial statements and at this time we have not found that to be the case. We expect to have completed our analysis of Sikorsky's financial statements when we file our Form 10-K in February. Thereafter, the remediation process will continue as we’ll have to correct and then test the remediated controls over several reporting cycles. We will provide updates on our progress as we file our Form 10-Qs in 2017 and we expect that the remediation will be completed prior to the end of fiscal year 2017. Moving on now to our 2016 results. Overall, we finish the year a little stronger than the outlook we provided to you in the…

Thank you. [Operator Instructions] Our first question comes from Cai von Rumohr with Cowen & Company. Your line is open.

Could you basically update us in terms of where you are in your negotiations on LRIP 10 and whether you intend to basically take any legal action in terms of the way the [inaudible] (27:07) of LRIP 9 was determined?

Thanks for the question Cai. I will take that on and Bruce do you have anything to add you’re certainly welcome. On LRIP 10 we are very close to a deal as some of may have seen in the media I expressed that after my discussions with President Trump recently. We are very close to a deal that would allow us to close LRIP 10 in the near-term and so I expect that will be very soon. On LRIP 9, basically we are not under any pressure to do anything further on LRIP 9 at this point. We are just going to continue to look at our options on LRIP 9. Anything do you want to add Bruce?

No, no. I think that capture it, Marillyn.

Thank you.

Our next question comes from Ron Epstein with Bank of America. Your line is open.

Yeah. Hey. Hey, good morning, guys.

Hi.

When we perhaps think about modeling the program, the F-35 program as we go out over the next several years, I mean, one question I get a lot from investors is, I mean, how should we think about the margin profile? I guess what I am asking is one of the fears is on Lot 10 pricing, I mean, are we going to see a margin step-down or I mean, can you give us a broad way to think about the margin progression of that program?

Hey, Ron, I will take a shot at that. So the way I think of it, Ron, we have given, I think, a very consistent speech for a number of years about our expectation that the F-35 program will have sort of sequential year-over-year margin improvement up to the point that probably we reach full rate production at which point it ought to look a lot like other production programs at that sort of thing stage of their lifecycle. And at least as I look with the expectation of where I think the agreement on LRIP 10 is going to come out. I don't think we would deviate from that discussion at this point in time, just to put in some perspective, I think, if F-35 from 2016 to 2017 the margins that we are expecting in between those two years is probably growing 90 basis points not quite 100 basis points year-over-year. I think that’s going to happen with the results that we expect to obtain on the LRIP 10 negotiation. And thereafter, I would expect that we would continue to have some margin improvement maybe not as at higher rate as we experienced from sub 2016 to 2017, but still have sequential increase in margin after the full rate production programs as we have talked about in the past.

Our next question comes from Rich Safran with Buckingham Research. Your line is open.

Marillyn, Bruce, Greg, good morning. I have a question on Brexit and international, so one fallout, potential fallout from Brexit is the impact on the U.K. defense spending. I was wondering if you have had any discussions with the British Government on this topic, if you expect much of an impact. And on the topic of international, can you give us an update on the discussions you are having with international customers, for example, how they are viewing the change in administration, are you expecting a continued step-up in international demand, is there any change in emphasis on direct versus FMS, that sort of thing?

Thanks for your question Rich. I will just start with Brexit question and in terms of U.K. defense spending, I haven't had any impact and input from the U.K. MOD that they're going to move off of their strategic defense plan, they have a strategy and their normal review that they will continue to spend on their defense spending. So we haven't seen any impact from that. No indication that that’s going to change. I think just like most countries their national security is first and foremost for them and so they are going to continue to focus on that. In terms of other international customers and any reaction to the change administration. I frankly haven’t had any dialogue back from that as well. We -- as we bring in -- as we have an orderly transition of power in the United States of America, we have new leaders in the administration, they each -- they have different policies they might put forward, but it hasn’t impacted our demand for our international products, a lot of our growth on international -- in the international marketplaces in the F-35, it’s in missile defense, it’s an opportunity for F-16 and C-130J, opportunities for C4ISR, Space awareness, things of that nature and that continue -- there continues to be a demand for those. And I -- as I -- as we continue to move forward in dealing with our international customers we’re not seeing any retrenchment at all.

Rich, you asked about the FMS and our direct commercial sale whether there was any discussions about potentially changing that are not. My suspicion is that’s not high on anyone's agenda list at this point in time and I wouldn’t expect to see any sort of policy changes towards that. Just to put it in some perspective as we’ve talked about in the past, we would expect our FMS percentage of our international sales to grow and our direct commercial sale percentage of our international business to shrink over time, primarily simply because of the F-35 program and that program is a long way from ever having the ability to sell any aircraft on a direct commercial basis and essentially all the international customers and all the growth that you're going to see from international customers and the program going forward is going to be on the FMS side of the house. And the same thing, frankly, is happening with our THAAD program, which is another large international grower. So that sort of squeezing out if you will the actual direct commercial sale business, actually direct commercial sales business isn’t shrinking in absolute terms of all that much, but the percentage is reduced because of what I just described.

Our next question comes from Robert Stallard with Vertical Research. Your line is open.

Thanks so much. Good morning.

Hi Rob.

Good morning.

Marillyn and Bruce, your comments on the F-35 program essentially seemed to suggest that nothing is really changing. But in the press we seem to see the DOD and the President taking a more aggressive stance. Is there a chance you are being too optimistic on this and the actual pricing on Lot 10 and beyond, and the margin could be lower than you expect?

Let me take that on since I have been a lot of discussions with President Trump. I only just going to frame it for you, I tried to express after those meetings, some overview of the meetings themselves, but I’ll just give you a little bit more color on it. Basically President Trump recognizes that the F-35 is a very large program, its largest program in the Department of Defense. He wants to make sure that that the American taxpayer is getting the lowest possible costs on the program and we share, we understand his concerns about affordability, we certainly share that. The meetings that we've had have been very productive, with very good dialogue. He asked excellent questions and he is really focused on making sure that that the cost comes down on the program and it is not about slashing our profit, it's not about our margins when we have those discussions about how we get the cost of the aircraft down today and in the future. So I have welcome the opportunity to talk to him, because it gives me an opportunity to share with him what we have been doing in terms of bringing the cost down as you saw on the chart that we put in our deck today that we have been driving the cost down on the program that we have invested as ourselves and our industry partners in what’s called blueprint for affordability and we're moving forward on sustainment cost reduction initiatives, so that we can continue to take cost out of the supply chain, to take cost out of our manufacturing and produce ability and materials we use as we’ve moved along on this program. And as we've done that we’ve -- I’ve also have the opportunity to share with him things that the Department of Defense can do and how they might buy the aircraft differently in the future that would help continue to drive the cost down, he open that discussion. The other thing is very important that I'm happy to have the opportunity to chat with him about is the capabilities of the F-35 brings to our minimum and uniform, I mean, it’s basically a game changer, it brings for our country, for our military, as well as for our allies around the world unmatched capability, absolutely unmatched. And recognizing that his focus is on how do we drive the cost down aggressively and we -- I think we are -- us along with our industry partners are right in line with him on doing that, we’ve got a lot of ideas on how we can do that in the future. In the meantime, we will continue on the current negotiations to come down that curve that you saw on the chart that we shared with you to continue to drive the cost down.

Our next question comes from Hunter Keay with Wolfe Research. Your line is open.

Thank you. Marillyn, just a follow-up to that last statement you made on the sustainment cost, are you talking about an incremental initiative here to reduce maybe some of the sustainment spending or is there may be an opposite way to think about that that as you manage this program for the next 10 years to 15 years for Lockheed that you can lower the unit cost, but perhaps, maybe recoup some of those upfront unit cost savings for DOD with actually higher sustainment revenues for you guys further down the road? How are you thinking about that balance?

Well, first of all, what I was discussing was the sustainment cost reduction initiatives, just like on blueprint for affordability which was focused on production costs, we along with Northrop Grumman and BAE committed some investment up front to help with getting projects underway that will continue to drive the cost down and production. We have similarly invested upfront to support the U.S. Government in driving sustainment costs down in the near-term over the next five years to drive that cost down. So that was what I was referring to. Now your question about sustainment itself, I mean, we do look at these programs in terms of their overall lifecycle costs, which is not just the development and production but it’s also sustainment and our goal is that the overall cost for the program would continue to come down.

Hunter, maybe just to add one thing from my perspective and just to make sure that we are all clear on this. Sustainment is going to grow in the future. It has grown very significantly last few years as the aircraft is being based at various locations around the U.S. and soon to be internationally as well. So there is no doubt that sustainment will grow and the Lockheed Martin contribution towards that sustainment will grow into the future. This is about just doing sustainment smartly and doing it as economically as we can, but even if we do it is economically as we can we are still going to see some pretty significant sustainment growth in the future.

Our next question comes from Sam Pearlstein with Wells Fargo. Your line is open.

Good morning.

Good morning, Sam.

You just talk a little bit about the backlog being $96 billion. I was wondering if you could talk a little bit about what your expectations are for 2017 year-end backlog and maybe highlight some of the key orders you are looking at, there was some international THAAD that didn't happen in ‘16 and just if you can talk a little bit about some of the key orders to watch?

Yeah. So, thanks, Sam, there is, as we look at 2017 in all likelihood we are probably going to see a little bit of degradation in backlog. I would think maybe a couple million bucks or so for the year. Some of that is obviously dependent on, there is a couple of fairly good size competitive awards in 2017 that may or may not happen or may or may, at least may or may not happen in the year and in fact we may or may not win some of the proposals if you will. The biggest drivers we have got in terms of orders and sort of keeping the backlog level as to where it is today are a little bit less than where it is today. You should think of that the ongoing advanced funding for the F-35 program. So very early in the first half of this year we should start receiving advanced funding for the LRIP 12 aircraft which will be a pretty good size increase in terms of absolute numbers of aircraft over LRIP 11. As we just talked about with Hunter the sustainment and spares funding to support the bases around the country and the global is going to be increased in the first half of the year. We should start seeing additional GPS III satellite orders first half of the year and probably finalize the Hellfire order that didn't quite get finished last year and I expect that will take place early this year. The really big orders in the year are the LRIP 11, definitization for F-35 that's -- we are assuming in numbers that we are going to get both LRIP 10 negotiated and definitized and LRIP 11 negotiated and definitized in 2017. We have already recognized a pretty good portion of the LRIP 10 contract via the [ph] U.K. (41:30) that Marillyn talked about, but not so much on the LRIP 11, so a big, big chunk of our orders in 2017 is associated with that definitization. You mentioned the international missile defense programs I believe the largest one we’re looking and again the second half of year is the THAAD Qatar program, so the first five of THAAD battery for the Government of Qatar is also a fairly large order in the second half. And then lastly, and I believe this is actually the second largest order for the corporation in 2017, but we do expect to close on the multiyear nine Black Hawk order in the second half of this year as well.

Our next question comes from Howard Rubel with Jefferies. Your line is open.

Thank you very much. Marillyn, you’ve gone through a number of significant changes in the last 12 months. And you indicated you and Bruce are going to be back to living a little bit more with normal. But could you for a moment step back and kind of talk a little bit about where are some of the competitive advantages you see and how you'd like to shape the company going forward, I mean, 25% of the company is F-35, but you do have a lot of other programs and a lot of other technology opportunities?

Thanks for the question, Howard. As I said in my prepared remarks on the front end, I think, we're extremely well-positioned for long-term success. Yes, last year was a challenging year in terms of transitioning the divestiture of IS&GS and really moving very far along in our integration with Sikorsky and that I would say a great tribute to the team is that despite those major efforts that we had going on in the business we exceeded all of our financial commitments, as well as actually hit some new records, I mean, I think, that's a true measure and our operational performance was outstanding in terms of how we are performing for our customer, so I'm extremely pleased with that. In terms of strategically as we look forward, having Sikorsky as part of our company now, it opens up a lot of opportunities for us, we are currently in the development phase for a number of helicopter program, so we are going to move into production, so as you look at the CH-53K at the Presidential Helicopter, the work we've been doing on the Canadian Maritime Helicopter program, the combat rescue helicopter that we’re working, all of those programs, as well as what Bruce mentioned, we continuing on with the Black Hawk and getting into the next year multiyear Black Hawk is excellent growth area for us that will continue to bring good cash generation and continued growth for us as the company. And then we do expect at some point the commercial business will come back, we are at a lull right now with the oil and gas prices, but it’s another opportunity for growth for us and one of the elements of the company that we’ll look forward to continuing to grow. And so, Sikorsky has been a…

Our next question comes from Myles Walton with Deutsche Bank. Your line is open.

Thanks. Marillyn, it sounds like border taxation was discussed during your meeting yesterday with other business leaders and I'm just curious as it applies to your own business and to the defense landscape, do you have a sense as to -- a clear sense as to how this is going to impact your business in the sector, does it sound like the President is a supporter of no tax on exports and could you just describe how it would impact Lockheed the way you see it? Thanks.

Thanks for the question, Myles. And I guess, I would step back from his yesterday and what you’ve heard from him in his campaign is that his focus is on not having work go offshore to be produced and then brought back into the United States that are -- and have the company have the advantage of producing it elsewhere. So if you take the Lockheed Martin, I mean, we are not, we produce our products in the U.S., predominantly of our roughly [ph] 98,000 (48:04) employees over 90,000 are here in the U.S. This is where we produce our products and then we deliver them around the world. And those that are producing another parts of the world whether it’s in the U.K. or in Canada or Australia, the work that we might be doing there is not being imported back into the U.S. So I don't see that this border taxation issue affects us as a company and I think it’s more geared toward commercial companies that might decide to do the production offshore and then sell their products back into the U.S.

Yeah. May be Myles just to add it from my perspective, so anytime you're talking about reducing taxes on exports, we’re -- we have a fairly good amount of exports and we don't frankly import a whole lot, so we would probably be a net benefiter from a tax perspective relative to that were to happen. I think if you look at either one of the tax proposal as sort of being tossed around. The current one you just discussed, as well as the one that the house put forward later or earlier, excuse me, middle part of last year or so. In virtually either one of those scenarios the statutory rate drops pretty significantly and for Lockheed Martin the U.S. domiciled company with most of our income, as Marilyn said, coming from U.S. locations. We don't have the sort of offshore issues that a lot of the global companies would and so we would be a benefiter or benefactor probably either one of those tax policies going forward.

Our next question comes from Noah Poponak with Goldman Sachs. Your line is open.

Hey. Good morning, everyone.

Good morning.

Hi, Noah.

Marillyn, I wanted to ask if you could maybe provide a little more detail or I guess thought around the total U.S. defense budget commentary you touched on briefly in your prepared remarks. I mean, I guess, where would [ph] Japan (50:16) the actual likelihood that sequestration is removed from DOD versus the need to have some kind of compromise where they, I guess, still, I guess, I'm not as sure, but still seemingly still deficit focused Congress and if this is happening will we see it in the ‘18 request or does the administration need another year and half to have it be fully their own and be prepared to do that?

Thanks for the question, Noah. I guess, I will just give you my opinion because that's really all I can do at this point is pretty unpredictable as we go forward and as you indicated. My opinion is though that there's appears to be bipartisan support for eliminating sequestration. As I’ve said in the past, we have a lot of independent dialogues with various members of Congress, every one I've ever spoken to [Technical Difficulty] they don't think it's good policy and they want to get rid of it. So I think now with the current Congress and the new administration that it probably opens up the opportunity for really getting that done and I'm very encouraged that the dialogue has been around eliminating the defense sequester, just removing it altogether and there's also a strong discussion around increasing defense spending, because we have for the last few years allowed our -- with that budget caps et cetera, we have not been investing like we need to in recapitalization and then and readiness and a lot of things that you hit directly from our customers, our services telling Congress and telling the new administration that they need. So we are very supportive of our defense customers and being a voice around that, because we do think it's important to eliminate the sequester and the budget caps associated with it to allow them to do, to address the national security strategies and to provide a right capability for minimum and uniform. In terms of where it might come into play, I mean, I -- again, I'm encouraged by the fact that there is some discussions around supplemental to the FY17 budget, there's some discussions around getting after this whole issue of sequester and eliminating the budget caps. So whether it’s in ’18 request or in the early ’17, it’s hard for me to predict, but I think it will be near-term and longer term, because everyone that I speak to has recognized and certainly President Trump has recognized that it's something that needs to go away and we need to get on with spending the appropriate amount, having adequate budgets to support our national security.

Our next question comes from Jason Gursky with Citi. Your line is open.

Good morning, everyone. Bruce, Marillyn, I was wondering if you wouldn't do us a favor and walk through each of the segments and maybe provide a little bit of color on the risks and opportunities this year relative to your official outlook?

Thanks, Jason. Let -- Bruce why don’t you walk through and then if I have anything to add on.

Yeah. Let me do that and Jason, if I don’t quite capture what you are looking for get back and shout out at me there. But maybe just starting with Aeronautics, largest business, obviously, portfolio. So on the sales side we’re expecting sequential growth quarter-over-quarter, so fourth quarter will be the highest quarter of the year first quarter as is typical in Aeronautics will be the lowest quarter of the year. From sort of the comparison to 2016, I would expect sort of the rate of growth or the percentage of growth over ‘16 to sort of diminish a little bit as we go through the year even though the numbers will get bigger and that's in part because we are going to see a little bit albeit the F-16 program comes to an end in the late second quarter or early third quarter, if this is the last eight aircraft deliveries that we have in backlog right now and until we get another country to buy the F-16 that will be the last those production aircraft, so that’s going to be a little bit lower in the second half of the year than the first half, but still pretty significant growth quarter-over-quarter for Aeronautics and obviously most of that driven by the F-35 program. I think EBIT during the year probably follows the sales volume as we look at least right now pretty consistent margins quarter-over-quarter, that obviously, it is dependent upon when we have the timing of risk retirements occurring throughout the year, but with the planned risk retirements we have in the outlook right now it says that the margins are fairly consistent going throughout the year. May be jumping to missiles and fire control, expect the first quarter to be maybe a little bit lower than…

Stephanie, I believe we have time for one more question.

Our final question comes from Robert Spingarn with Credit Suisse. Your line is open.

Good morning. Thanks for squeezing me in. Just a couple of cleanup things on F-35, Marillyn, if we go back to the sustainment discussion, in your discussion, in your negotiations with DOD on LRIP 10 and on anything else, has there been any consideration to defer future competition for either F-35 sustainment or for the Block 4 subsystem upgrade work? And Bruce, how is this potential competition contemplated in your long-term outlook for the aircraft? And then the last thing I wanted to ask you is how important is the 450 unit international block buy to the margin growth cadence that you described to Ron earlier?

Thanks for the question, Rob. I guess, the first question on sustainment, sustainment is a separate contract from the LRIP 10, so it isn’t part of the discussion at all in LRIP 10 negotiations nor would be the upgrade work for Block 4 going forward…

But might they factor into any horse trading or anything that you all are talking about?

Actually no we treat them separately as separate contracts, we look at what the sustainment contract is versus the LRIP 10, I mean, there are just, the separate LRIP 10 is pretty straightforward, as we look at our assessment of the costs associated with LRIP 10 and offer that we put forward based on the cost of the aircraft and the terms and conditions associated with that contract. It doesn't include sustainment.

Rob, let me try, I jotted down your questions. Hopefully, I captured them well. But as far as the future competition for sustainment block, if that happens and look competition is the buzzword that everyone talks about these days. We are not afraid of competition. We think the legacy of performance that we have both with the software development on the program, as well as what we've done so far in sustainment and we -- what we plan to do with as Marillyn said, some of the cost reduction initiatives on sustainment. We think we are incredibly well-positioned in both of those if in fact they are competed and our assumption would be that we would win those competitions and that is embedded in our planning if you will. I think you also asked about the block buy and the importance of the 450 aircrafts, potential block buy relative to margins. Not so much benefit on the margins that we are contemplating, Rob, as much as helping secure long-term commitments from suppliers, long-term planning for our own work inside our own factory such that can hopefully get and with the benefits are sort of an economic order quantity associated with that block buy that we can get the price of the aircraft or the cost of the aircraft down just as what Marillyn’s talked about relative to her conversations with the President. I mean that is one of the items that was addressed in those conversations is what can we and the government do to get the cost of the aircraft down and that is clearly one of the things that can do that. You get -- if you look at any sort of multiyear or block buy or economic order quantity, there are always savings associated with that, the only question is how much are those savings and we think we have a very good plan in place relative to the block buy to bring the cost down going forward. But I wouldn’t expect that that expectation on our part of lower cost would be sort of priced in to that block buy if you will. So I wouldn’t expect to see necessarily margin spike associate with that.

So with that -- with our last question let me conclude the call today. I want to end up the call by just reiterating that 2016 was truly an extraordinary year of transition and success, and our team performed exceptionally well in all phases, strategically, operationally and financially. As we look into 2017, our strong backlog and solid portfolio have the corporation positioned for bright future of topline growth and increasing cash flows. Thank you again for joining us on the call today. We look forward to speaking you at our next earnings call in April. Stephanie, that concludes our call today.

Thank you. Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and everyone have a great day.