Ladies and gentlemen, thank you for standing by and welcome to the Lockheed Martin, Third Quarter 2019 Earnings Results Conference Call.For the conference, all the participant lines will be in a listen-only mode. There will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions]. As a reminder, today’s call is being recorded.I’ll turn the call now to Mr. Greg Gardner, Vice President of Investor Relations. Please go ahead sir.

Thank you, John and good morning. I’d like to welcome everyone to our third quarter 2019 earnings conference call. Joining me today on the call are Marillyn Hewson, our Chairman, President and Chief Executive Officer and Ken Possenriede, 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 materially from those projected in the forward-looking statements. Please see today’s press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements.We have posted our charts on our website today 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 today on our third quarter 2019 earnings call as we review our quarterly results, our key accomplishments and discuss our preliminary outlook for 2020.As today's release illustrates, we had another quarter of strong results; financially, strategically and operationally. These results reflect the continued strength of our core legacy programs with recent strategic wins contributing additional growth.Our focus on program execution and investments in long term growth capabilities have our team well positioned for the future. Ken will discuss our financial results in more detail and provide preliminary trending data for 2020.First, I'd like to begin by highlighting a few of the elements that drove our strong third quarter performance. Sales this quarter exceeded last year's third quarter by 6%. Year-to-date we are nearly 12% over our 2018 results.Missiles and Fire Control have the highest overall growth this quarter as deliveries of tactical and strike weapons, development work on new hypersonic programs, and PAC-3 missile production grew from last year.Our Aeronautics business area also saw strong sales growth in the F-35 development, sustainment and production and we increased our joint strike fighter deliveries to 28 aircrafts this quarter compared to 20 in last year's third quarter.Our space team saw a continued growth from recent strategic wins in their Overhead Persistent Infrared or OPIR contract, the GPS III satellite production program and new hypersonic wins in their portfolio.This quarter we added over $600 million to our backlog, which now exceeds $137 billion and has reached a record level for the 5th consecutive quarter. Our segment profit grew by comparable amounts with the third quarter results improving 5% over the 2018 third quarter, and we had a strong quarter of cash generation achieving $2.5 billion of cash from operations. We now have…

Thanks Marillyn and good morning everyone. As I highlight our key financial accomplishments, please follow along with the web charts that we have included with our earnings release today.Let’s begin with chart three and an overview of our results for the quarter.Sales segment operating profit, cash from operations and earning per share continued to be strong. We generated $2.5 billion of cash from operations and we continued our cash deployment actions in the quarter, returning nearly $830 million of cash to our shareholders through a combination of dividends and share repurchases, and we grew our backlog to $137.4 billion representing the 5th consecutive quarter in a row of record backlog.Based on the strength of our third quarter performance, we've updated our financial metrics for 2019. In addition, we’ll be discussing how our performance this year is carrying over into 2020 with our preliminary financial trends.Turning to chart four, we compare our sales and segment operating profit in the third quarter of this year with last year's results. As I mentioned earlier this year, for comparison purposes the third quarter of this year had 13 weeks in the accounting period, while last year’s third quarter had 14 weeks in the accounting period. Even without the extra week in the quarter, our results exceeded last year.Sale grew 6% compared with the same quarter last year to $15.2 billion continuing the strength we had in the first two quarters, while segment operating profit increased 5% over last year's levels to nearly $1.7 billion. Year-to-date all four business areas contributed to the significant increases in both sales and operating profits.On chart five we’ll discuss our earnings per share in the quarter. Our EPS of $5.66 was $0.52 or 10% higher than our results last year driven by operational performance.Moving on to chart six, we…

Thank you [Operator Instructions]. And first from the line of Rich Safran with Buckingham Research. Please go ahead.

Marillyn, Ken, Greg, good morning! How are you?

Good morning.

Good morning.

So either Marillyn or Ken, a question on your 2020 guide with a few parts to it. You know you are guiding to 5% growth. You just covered that next year. Now, always to the best you can, could you discuss the segments you expect to see the most growth from next year? What the primary drivers are, the 5% growth and where you see some possible upside? And on margins, I just wanted to ask. Your guide for next year just seems a little bit light relative to where expectations were and I thought maybe you could discuss what's driving that? Thanks.

You bet, thanks Rich. It’s probably best I take that question and if you don’t mind Rich, I’ll give you some color and you can go across all business areas.So I'll start with Aero. You know next year we see mid-single digit growth across the business areas for Aeronautics. F-35 – we see growth on F-35 similar to the Aero growth, that mid-single digits.Development and sustainment, we see that growing faster than production. We see strong growth at IFG and that’s specifically F-16. You heard Marillyn mention we’ve got the Slovak Republic order behind us, we are now starting to build [indiscernible] Jets that we’ll start delivering out in late 2021 and we’ve got strong [mod] [ph] work there.And we also see strong growth at Skunk Works. If you recall, we talked about the classified program we won. The Skunk should grow double digit sales next year.And finally for Aeronautics, at AMMM, no surprise. We see sales decline in 2020 compared to 2019. If you recall we are going to deliver 28 C-130s this year, forecasting around 25 next year and a reduction in 2021 to about 23. So you’ll see mid-single digits decline in sales there, so just to summarize again for Aeronautics, mid-single digit growth.At Missiles and Fire Control, it will be our fastest growing business area again. We see low mid-digit growth. We see strong growth at strike weapons specifically in precision fires and JASSM we also see strong growth in integrated Air and Missile Defense and that would THAAD and PAC-3.At RMS we see low single digit growth. We're finally starting to see some strong growth at Sikorsky. Think of that as MH-60 combat search and rescue and the presidential helicopters VH-92 programs. That will more than offset. We see declines in our IWSS business. Think…

Next we’ll go to Myles Walton with UBS. Please go ahead.

Great, thanks. Good morning! Marillyn I was hoping you could talk about the F-35 and in the context of any risk you are managing around Turkey. Obviously, you've excluded it from the guidance, but Ellen Lord I think this week mentioned that Lockheed is actually the agent for reassigning the work that might be or is being sourced outside of what's being done instead of Turkey to other players. Can you clarify for us if that means that Lockheed is just the agent for resourcing network or if there's any risk that you are carrying in that transition as well?

Thanks for the question Myles and I think probably the broader answer beyond just F-35, I’ll ask you Ken maybe to weigh in on the balance of the portfolio, because we’ve had some questions from others about it. This might be a good time to cover Turkey all up.But as you know, back in July the Department of Defense announced the exclusion of Turkey from the F-35 program and that included the in-country suppliers, with the target date of March of 2020. So we’ve been working closely with the U.S. government for several months for quite some time on establishing alternate sources of supply in the United States to be able to quickly take the place of the current contributions that Turkey is providing to the program in terms of components and parts, etcetera, and all throughout that we continue to evaluate our supply chain.We are you know or as the prime contractor for those sources of supply, we are doing that work, yes. I mean if that’s – if I’ve understood you question, do we have the responsibility? We do, and we're working with, of course we have some major contractors that have work in country as those Pratt & Whitney which we don't oversee. Pratt & Whitney has their own responsibility for that.So we are the agents reassigning the work and we've been working on it for some time. But in terms of the risk associated with it, we have a contract modification from the U.S. government that covers all that risk. Because this is a decision by the U.S. government to take Turkey out of the program and so for that purpose, even though we are the ones that are reassigning the work, we have coverage from the contract at the same point.Ken, I think it might be helpful also to kind of give some color on the rest of the work that we have in Turkey at this point.

You bet. Good morning Myles. You know we had the disclaimer in our earnings release talking about you know 2020 no impact to our related to Turkey. Let me just give you some color and I’ll take about four areas.So the first one is and this is, one of it is related to F-35 so its exports and so this is the delivery of aircraft to Turkey for the F-35 program and that's by far the largest item here. And I think you know our F-35 contract with Turkey is a partner agreement, so you know they are one of the partner countries through the U.S. government.We have - the U.S. government has documented that Lockheed Martin will not absorb any impact from planes we’ve built or are currently building for Turkey. So we believe we are covered here, and I’m sure you saw on our balance sheet some growth in our contract assets. Part of that growth is because we're still working through with the U.S. government to get a contract mark from them for this work, so we can bill and collect for that. Other exports to Turkey from the other business areas really are not material, so there's really no impact to us there.The second item is we have a few Turkish military programs that would be impacted by any continuing imposition of the sanctions and work returns, currently reviewing them to determine the financial impact; and one of which is we have a – it could potentially have to get back a cash advance, an advance payment that's not material in nature and we do know that any inability to perform due to U.S. government sanctions, we would have a backlog adjustment. Think of that as about $900 million you know ball park, that’s in $1…

Next we’ll go to Sheila Kahyaoglu with Jefferies; please go ahead.

Good morning Marillyn and Ken! Thank you very much.

Good morning.

In the past you've talked about a three year cash flow target and with operating cash flow bought in 2020 expansion contribution. How do we think about the longer term drivers of free cash flow and the off-set in ‘21 given a pension step-up and just moving pieces on CapEx and working capital. I’m asking you to build a model Ken, so.

Okay, thanks Sheila. You know so if you go back, I think Bruce [ph] teased us up about a year ago and what he saw you know based on what we did on our long range plan, about $7 billion – he said $7 billion in 2020, 2021 and you know right now as we see $7.2 billion with inclusive of the $500 million pension contribution. I’ll remind everybody, that’s up about $300 million.The pension contribution is up about $300 million due to the returns we had in 2018. So we've done a nice job working our way through working capital and I mentioned you know six months ago, seven months ago that that’s a priority of ours this year.You know the best we could see this year right now for 2021 and 2022, we will be north of $7 billion. Not sure how much north of $7 billion, but we’ll be north of $7 billion and right now it looks like our pension contribution is out in 2021 and 2022 based on you know the assumptions we’ve made would be about $2 billion in pensions.So again, I think we've done a nice job of continuing to grow our cash and you know we'll refine that over the next couple of months and when we give you guidance in January.

Next we’ll go to Noah Poponak with Goldman Sachs. Please go ahead.

Hey, good morning everyone.

Good morning.

So just coming back to the 2020 revenue outlook, you know it's a company that grew revenue in a lot of years in the past; five to seven or outlay growth was negative. You know you had this type of growth where you were projecting a 5% type growth rate, 2016, 2017 when outlays were still declining. You know you did something closer to 10, 2018, 2019 when the bookings really started to ratchet up and you've now got the trailing 12 month book-to-bill and the recent backlog growth basically is as good as it's ever been in history the company, trailing 12 month Book-to-bill at 1.5.So unless it is a longer dated backlog than ever or if there's just a handful of specific programs that come out of the P&L completely in 2020 that were already out of the backlog, you gave a pretty extensive list of new wins recently in the prepared remarks. I'm just struggling mightily to match up this backlog change with this revenue growth projection.

Well Noah, its Ken. I think I'll take this and I'll try to relieve your struggling the best I can. So you know we talked about backlog. We see back log into this year. Probably it's going to continue to grow based on the orders we believe we're going to receive in the fourth quarter, the biggest one being into the block by once we get that definite size and we're very close, so we’ll be…

So it is going to grow again in the fourth quarter?

Yeah, so $140 billion – we’ll be up to about $140 billion and you look at the increase we had this year over what our plan was, think of that as about $17 billion. Think of the $17 billion, about $7.5 billion of that were pull-in’s from 2020 into 2019; think of that as the advance AWE.We got three years’ worth of quarters this year rather than the one, so that piece is longer. Think of the block by, which is overall $35 billion give or take. That'll be over a three year period. We're going to get to multi-year three in the fourth quarter for the C-130. That is over a longer period of time.If I go back to the $17 billion, the remainder is about $9.5 billion. Those are just pure upsides that we did not plan for. So we have guided from the start of the year to now, increased our guidance by $2.6 billion. Think of that $2.6 billion came from the $9.5 billion of upside of orders that we had and back to your comment, in the $140 billion, the gestation period if I could call it that, is a longer period than we have historically seen.

Our next question is from Jon Raviv with Citi; please go ahead.

Hey, thanks everyone and good morning.

Hi Jon.

Marillyn, what is your – kind of a broad question here, but what's your perspective on your position in the industry. I get the sense that there's always some shifts in terms of industrial structure, in terms of who is the platform provider, a platform integrator and technology enabler. Any perspectives on that kind of dynamic and what that means for your – you know when you say long term growth, you know what is that, is that 22 or do we have a line of sight a little bit beyond that at this point. Thank you.

Thanks for the question Jon. I guess you know as I look at where we are today, I mean we have transitioned our portfolio over the last few years, several years, toward a more platform provider. We used as you would call, IS & GS, which was a very strong services component of the portfolio. At the time that we divested that element, we brought in Sikorsky, a platform based program. You know in addition to that, of course we got our sensors, our tactical missiles even though sometimes a lot of components that go on those platforms, but if you just look at it from that standpoint you could even argue to some extent that those are the platforms.When you look at the growth for the company, F-35 of course is going to be a major element of growth for the next five to 10 years. We know that from ramping up production for the payment of the aircraft. But in addition to that, when you look at Sikorsky, the CH-53K, the combat rescue helicopter, even the presidential helicopter are all programs that'll be into production and our platforms for us going forward. We've got – we're looking forward to downstream from hypersonics production that we hope will ramp up. You know we got a lot of developmental wins that we’ve had and we expect to be moving more into production there.Future of Vertical Lift is another area. When you look at the light and medium lift helicopters that we're competing for on Future of Vertical Lift platform based, our F-16 resurgence, as you heard from Ken, you know we were able to get a handshake agreement on our multiyear three for the C-130J in the last month or so; Orion, which again is another important platform in the Space exploration arena.So you know that to us, that is where the elements of growth are and certainly on those platforms we do more than just the frames with our systems and sensors and weapon systems, etcetera that are part of our overall; that's pretty important.When you look at just the area of missile defense side, what we’re doing on PAC-3, on THAAD, all of the growth that we see in those arenas, as well as you know Aegis Systems and so I would just argue that you know for us that’s the growth. They all come with autonomy and AI and you know software development elements of them. So those are important and I just – I don't – I want to put stomp again. It’s a big win we just had on the Sentinel A4 radar. I mean that was a great win for us as a company to go along with several other radars that we have. So hopefully that answers your question Jon.

Next we’ll go to David Strauss with Barclays; please go ahead.David Strauss, your line is open. If you’re on mute possibly?

Hi, can you hear me?

We can, yes. Hi David!

Okay, great, great, thanks for thanks for taking the question. So I wanted to ask you about your guidance for the full year for ‘19 since it implies a pretty big margin step down in the fourth quarter. It looks like somewhat close to you know kind of high 9% to 10% for the segments. Can you touch on that?And then also on your operating cash flow outlook, as we think about ‘20 and ’21, can you talk a little bit about working capital? The best I can tell, it seems to imply not much of a working capital improvement in – you know there’s a fairly big working capital burn in ‘20 again also, but you know also the working capital build in ’19. Thanks.

You bet! Okay David, its Ken, I'll take that. So I’ll go around the business areas for the fourth quarter on margins. So at aeronautics, we’re seeing similar margins that we’ve basically had for the rest of the year, so I think that aeronautics is in line with the rest of the year.Missiles and Fire Control, your right, it is down, and if you recall what we talked about in the first and the second quarter, we had step-ups of risk retirement planned in the third and the fourth quarter and based on where we were in the production cycle of those products, it made sense for us to do those risk retirements earlier in the year than later in the year. And if you compare that to last year from a timing standpoint, we had more step-ups in the fourth quarter than we’re going to have this year. So it’s just basically timing of you know the production cycle on missiles and Fire Control.RMS is like aeronautics. Its similar sales growth, similar profit growth, so that's in line with pretty much with what we've done in previous years. And then lastly Space, it’s similar to missiles and Fire Control and I’ll give a plug to our Advanced EHF program. They are having an absolute tremendous year. They had enormous risk retirements in the year and we're just not going to replicate that out in the fourth. Also ULA earnings will be lower in the fourth quarter this year compared to earlier and last year.And then on cash, so you know I think I have a different view David. We are going to reduce working capital significantly in fourth quarter. We had to build-up in the first half of the year and in the third quarter we only grew working capital by $30 million and line of site for 2020 right now with the 5% growth, we're only see growing working capital by about a $100 million and most of that will be in contract assets and in inventory.So as we continue to focus on working capital, we are seeing the improvements here and that’s why we too our trend data from $7 billion to $7.2 billion and when Sheila asked the question for the out years, we see a line of site of doing better than what we forecasted in 2021 and 2022 on cash basis, relative to what we disclosed last year.

Next we’ll go to Cai von Rumohr with Cowen & Company; please go ahead.

Yes, thank you very much. So you’ve had a lot of good growth in terms of wins and hypersonics; you mentioned Skunk Works. Can you give us some numbers in terms of what percentage is classified work of your sales today and the expected growth rate next year and then kind of tied into this whole issue, some of us has felt that the sales growth number would be a little bit higher for next year. If you were going to have an opportunity in sales next year where would it be? Thanks so much.

You bet Cai. Yeah, unfortunately our customer frowns upon us, spiking at our classified. But what I can say is you know just based on what we're seeing and what I described earlier, you know because of the Skunk’s and because of the classified program at Missiles and Fire Control, they are growing faster than the corporation and I would say that is one of the opportunities that we do have.I'd say the other opportunity and again I think I gave color on the last call in terms of hypertonic sales. So we see sales this year in hypertonic around $600 million. Best of what we see today, best of our ability to what we see today is for next year hypersonic round numbers, it's about $1 billion. But just for everybody's benefit, these are not for the most part program of record.As Marillyn mentioned, we are still in the prototype phase and we’ll start doing first launches starting next year out into it 2022. It is possible that you know because of the investments we've made in strike’s hypersonics and in counter hypertonics, which really haven't been any program yet on counter hypersonics.There is some likelihood we may see some opportunities there in counter hypertonics as well. So it could be in classified and it could be in counter hypertonics.

I would just add, you know when you look at growth, I mean this year we are planning to deliver 131 F-35. It’s going to ramp up to over 140 and so that still continues to be our big growth area and then as mentioned earlier the Sikorsky program was CH-53K and CRH and the combat rescue helicopter and our missile defense was PAC-3 and THAAD. Those are the key growth areas as we look at them and continue to grow in F-16, C-130, as well as the hypertonics growth.So we got a lot of solid growth programs. I think you know strong 5% growth is you know as I look over the history of our corporation over the last 10 years, I feel really good about the growth that we are seeing as we go into 2020.

Our next question is from Peter Arment with Baird. Please go ahead.

Yeah! Good morning Marillyn and Ken. Ken, I guess this question is for you. We're really testing your long-term forecasting here. But I guess when I look at Aeronautical margins, if we look back at the last cycle you know, the segment kind of peak around with F-22 production, and you know does the same apply here when we're thinking about F-35 deliveries or is this now changing just given the growth you're highlighting with Skunks and some of the sustainment work that's ramping. Just maybe, just a profile of how you think about margin profiles in the improvements that we kind of evolve in the forecasting? Thanks.

You bet. So Peter, thanks for the question. Yeah, I'll start with 2020. Again, it just summarized that we're seeing similar margins at Aeronautics next year than we saw this year. I'd say you got the sustainment which as we've mentioned, and you probably seen in the press, will continue to grow, but for the most part of annual buys, and we put a proposal, an unsolicited proposal on the table for a 5 year PBL. So think of that as performance-based logistics.There is some interest in the government; we're working through that now, socializing that now. That would give us an opportunity for sustainment and not be dilutive to margins, and so think of that as we're putting more risk on industry, so industry would invest, industry would commit to the metrics and with that there should be additional rewards.So I think the opportunity also in Aeronautics would be as once these classified program in the Skunk’s starts getting multiple customers and it starts going into production. There should be some margin improvement there that could be similar to margins on the rest of Aeronautics that would help with some margin expansion there.And as I've mentioned earlier on the F-35 production deals, we feel good with the deals we're getting with the customer. We think they're fair and reasonable, they're balanced and we're now going through some housekeeping on the Block buy and hopefully we have that definitized in the next week or two, and we'll start performing on that. And if we perform, there is opportunity for margin expansion there as well.

Next we'll go to Carter Copeland with Melius Research; [lease go ahead.

Hey, thanks for the time. Just a couple, just quick ones here in the interest of time. One, Ken, on the program charge you called out in the release on MFC, was that related to the same program you guys have disclosed before or was that something new?And then secondly on the F-16 pipeline, what – you know from a production rate standpoint or I guess aggregate volume standpoint, what do you see beyond what you've talked about here and the 30 aircraft and potentially going to other customers? Thanks.

Thanks Carter. I'll hit the second one first and then I'll do the charge, because that will be probably a less of a long-winded answer.So F-16, you know right now in backlog as Marillyn mentioned, we have 30 aircraft. First one gets delivered, Bahrain gets delivered. I had to be in the same country by last day of the year of 2021. We see production build of roughly one month. Right behind that we're hopeful – you've probably seen in the press, Bulgaria. Bulgaria once – it looks like they won eight aircraft, so we're in the process of working through that.In our plan we see countries like Morocco and other countries out in the Far East that in aggregate could grow our backlog by another 60 aircraft, and if you think through that, that will start ramping up that production line to three a month.There is other interest out there, the countries in the Middle East. There is discussion about another country in the Far East that could want as many as 66, and we'll see where that goes, but all those aircraft would be built in Greenville and right now we think we have capacity to build four a month, and like I said, we'll start with one a month and that would be frankly good problem to have.The other wild card is, we've announced our Indian variant that we're going to propose, which is the F-21. We're going to build that airplane in India if we're fortunate enough to win that program, but that program would be worth $10 billion to $15 billion, so great opportunity out there. There is other mod work out there as well, that there are customers that will elect to keep their current aircraft and will modify those aircraft, so we see a great future for F-16.Regarding the charge we took at Missiles and Fire Control, it actually is – it is actually a different program than what we had. It was a modest charge and we think from a performance standpoint with balance sheet reserves and the charge we took, we think we won't be talking about that program anymore.

Our next question is from Joe DeNardi with Stifel; please go ahead.

Yeah, thanks, good afternoon. Maybe Marillyn or Ken, I think it seems like international demand for F-35 has maybe pleased you guys positively or had been a positive surprise of late as the prices come down there. Can you just talk about what the pipeline looks there?And then what the conversations are with the DoD in terms of what peak production would be? I think at one point there were some discussion about taking it to 182 to 185, just a little more color there. Thank you.

Sure, I'll take that Joe. So yeah, we are very happy with where the F-35 program is going internationally. You saw Japan announced an additional 105 aircraft, on top of the aircraft they originally committed to. Singapore has announced an interest in buying the aircraft. It will be for a modest amount to start, but that's a great start.And Japan actually said they want to buy some Bs [ph]. It's likely Singapore who will buy some Bs. We're pleased with the award we got for Belgium for 34 aircraft. We are in a competition now for Finland and Switzerland, will continue to shape those and you're exactly right we got to the $80 million aircraft earlier than we thought. It's in lot 13 which will certainly help with those opportunities.We're in the competition with Canada, which could buy up to 100 aircraft. We're feeling good about that. We don't think we're out of the German competition yet, so we're still continuing to shape that. We heard about Poland. Poland wants to buy 32 aircraft, so we think there is a strong pipeline out there for the F-35.Regarding capacity, you got it, right. So if you look at the FACO the final assembly and checkout at Fort Worth, the one in Italy and the one in Japan, we see capacity right now as we continue to build that out in Fort Worth to be about 180, 185 aircraft. So we got ways to go.

Hey John, this is Greg. I think we’ve come up on the top of the hour here, so I'll turn it back over to Marillyn for some final thoughts.

Thanks Greg. Well, let me just end by restating that we really completed another strong quarter of financial and operational performance, and as you heard we have a record backlog, we are focused on program execution and with a strong demand for our portfolio of products and services. We believe we're well positioned for a successful closure of 2019 and continued growth in 2020.So we appreciate you all joining us on the call today and we look forward to speaking with you at our next earnings call in January. John, that concludes our call today.

Thank you. And ladies and gentlemen, you may now disconnect.