洛克希德·馬丁 (LMT) 2008 Q3 法說會逐字稿

Good day.

Welcome everyone to the Lockheed Martin Corporation third quarter 2008 earnings 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.

Jerry Kircher, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Teresa.

Good morning, everyone.

I would like to welcome you to our third quarter 2008 earnings conference call.

Joining me today on the call is Bruce Tanner, our Chief Financial Officer and Executive Vice President.

I would like to remind you that 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.

We have posted charts on our website which supplement our comments today including details of the financial outlooks by business area for both calendar years 2008 and 2009.

With that, I would like to turn the call over to Bruce.

Thanks, Jerry.

Good morning, everyone.

Welcome to the call.

In this period of market turbulence, I appreciate your support and interest in Lockheed Martin as we continue to execute on our strong portfolio of programs.

I would like to begin by stating that we had a solid third quarter with strong operational and financial contributions from each of our core business areas.

Our results reflect excellent performance across the Corporation and are enabling us to continue our momentum as we work to provide value to shareholders and customers.

Before I move into specific details of the third quarter accomplishments and performance, I want to offer a brief perspective on how the Corporation is positioned within the financial environment as well as an assessment of the recently-approved FY '09 defense budget.

At an operational level, we continue to see minimal effects to our activities from the current financial environment.

With the vast majority of our revenues being funded by the US Government, we're fortunate to have a relatively insulated market position.

Support from our subcontractor and supplier base remains solid and we continue to have access to required raw materials to enable execution on programs.

Our liquidity position remains strong with $2.5 billion of available cash on the balance sheet at the end of the third quarter.

Our cash and short-term investments provide excellent liquidity for the Corporation and we have also focused on safety and liquidity over yield in our deployment of assets.

We remain on track to generate cash consistent with net earnings further demonstrating our long-established excellence in cash generation.

In the area of debt, we have no commercial paper outstanding or required.

Our $3.8 billion in outstanding debt consists entirely of fixed rate instruments and represents a low capital leverage ratio of 28%.

Looking forward, we have less than $250 million in scheduled debt retirements from now through 2012 and we continue to have adequate access to both short and long-term debt markets.

On a nonoperational level, the difficult market conditions have resulted in 2008 returns on invested assets under performing expectations.

Reductions in market returns have resulted in recognition of unrealized losses by marketable securities held to fund certain nonqualified employee benefit obligations.

Despite these nonoperational headwinds, our excellent cash generation, low debt level and solid financial results have enabled our financial foundation to remain strong in this market environment.

We will continue to remain alert, agile and opportunist in response to changing financial and market conditions as we navigate through this dynamic period and satisfy our commitments to customers, shareholders and employees.

Moving to the defense budget, the FY '09 DoD appropriations bill was recently signed into law by President Bush at $512 billion.

This core defense budget reflects growth of approximately 6% above 2008 levels and provides solid support for our products, including funds for extensions and growth on a number of key programs.

Our portfolio of programs is expected to grow consistent with the DoD core budget, driven primarily by strong future growth on the F-35 joint Striker program.

Specific items approved in the new budget includes funds for the third contract on the F-35 joint Strike fighter, eight C130J aircraft, $523 million for Lot 10 long-lead procurement activities on the F-22 Raptor, two Littoral combat ships and $735 million for increment one work on the VH-71 presidential helicopter.

This budget reflects the bipartisan recognition of the need to replace critical aging assets through recapitalization activities.

With FY '09 appropriations being expended over the next few years, this budget provides a solid foundation and visibility at work in calendar years 2009 and 2010.

The new core budget will also add to our existing $76 billion backlog and further position us to grow revenues in 2009 and beyond.

Looking at the FY '09 supplemental budget, an initial place over of $62 billion was approved to continue to fund activities in Iraq and Afghanistan on an interim basis.

Determination of the final level of the 2009 supplemental budget will be made in the upcoming administration next year after evaluation of in theatre requirements.

Supplemental budgets have declined from their peak in FY '08 and are likely to be reduced as resources will be deployed for spending requirements.

We do not see material impacts in our business portfolio from supplemental budgets.

Turning to our third quarter results, the Corporation had strong operational performance with segment operating margins of 11.8%, cash generation of over $1 billion, growing backlog by $1.5 billion, continuing our share repurchase activity and increasing our quarterly dividend by 36% to $0.57 per share.

Based on year-to-date performance, we're increasing 2008 full year financial guidance for segment operating profit, earnings per share and return on invested capital.

Details of the new increased guidance are outlined in the webcast charts and in today's press release.

Let me now highlight the recent new business awards and operational achievements in each of the business areas.

Starting with Aeronautics segment, key international and domestic new business awards were won this quarter that enabled expansion of Aeronautics backlog by approximately $900 million.

International awards include the receipt of a $394 million contract from Qatar to purchase four C-130Js plus spares and training support.

Qatar became the -- becomes the ninth nation to purchase the C-130J aircraft and joins the rapidly growing number of nations utilizing C-130Js in their fleets.

Operationally, Aeronautics continues to excel in multiple areas.

The F-35 Joint Strike Fighter achieved the 50th flight at the conventional takeoff and landing aircraft and successfully completed a three-hour cross-country flight to Edwards Air Force Base., landing code one with no problems.

The short takeoff vertical landing aircraft continued preparation for receipt of the new redesigned engine from the government in January 2009 in the first STOVL flight planned in early 2009.

The F-22 Raptor program accomplished two key events this quarter with achievement of over 50,000 flight hours for the fleet and receipt of the prestigious Department of Defense Performance-based Logistics Service System Level Award.

This annual award is presented by the Office of the Secretary of Defense to the best PBL contractor.

The F-22 program was recognized as exemplary for their achievement in providing higher aircraft readiness routes to war fighters and lower cost to taxpayers.

Additionally, the Aeronautics Skunk Works unit received the National Medal of Technology and Innovation from President Bush at a recent White House ceremony.

This award conveys the nation's highest honor to corporations or individuals for their outstanding contributions to the United States through their technological innovation and as an affirmation of the leadership the Corporation and designing critical new technologies and solutions for the nation.

In electronic systems, we continue to win key new business awards and achieve operational milestones for customers.

New business wins included the Defense Logistics Agency award of the fleet automotive support initiative global contract.

This contract will leverage the Corporation's expertise and performance-based logistics and global supply chain management by providing sustainment work for all of the US military's land-based vehicles over the next 10 years.

The sole source IDIQ contract has a potential value of up to $5.6 billion.

Electronic systems was also notified of their selection by Canada for two contracts totaling approximately $2 billion.

The first contract valued at $1.4 billion will modernize the commanding control system on 12 Halifax Class Navy frigates.

The second contract for $600 million will provide long-term in service support of the ship's combat systems.

These contracts will enhance cooperation with Canada and expand the growing international revenues within the electronic systems segment.

Key operational accomplishments were also achieved this quarter by electronic systems.

In our ship building area, the Littoral Combat Ship program successfully conducted acceptance sea trials of our inaugural ship, Freedom, with a demonstration of the ship's speed, maneuverability and unique capabilities.

This success resulted in the delivery and acceptance of this innovative vessel to the US Navy and provides the first Littoral Combat Ship to the nation.

With the FY '09 defense budget containing approved funds for two new ships, we look forward to placement of new ship orders by the Navy as soon as possible so we can help support their need to construct a 55 ship fleet of this new class of warships.

The VH-71 presidential helicopter program achieved a major milestone this quarter with completion of the maiden flight of the first operational pilot production aircraft.

This program continues to gain momentum on increment one activities as we move towards delivery of these much-needed aircraft to the Marine Corps and White House.

I'll move next to our information systems and global services segment.

IS&GS continue to leverage their portfolio of total systems offering as shown by their success in securing new business awards.

This quarter, IS&GS was awarded a $300 million contract to support the 2011 census for England, Wales and northern Ireland.

This award builds upon their legacy expertise in providing census support to the US, Canada and the United Kingdom.

Additionally, the US Air Force selected IS&GS to compete for contracts under their future flexible acquisition and sustainment tool program.

This selection allows IS&GS to compete for development, modification, and maintenance work past quarters under a ten-year IDIQ contract program with the potential value up to $6.9 billion.

IS&GS continued their expansion of business with other government agencies with the selection by the Department of Energy to provide a broad range of site services to the DOE Hanford site.

The program has a potential value of $3 billion over a 10-year period.

Although this program has been placed under protests by a competitor, we look forward to successful protest resolutions so work can proceed.

While we did not recognize the Hanford order this quarter due to the open protests, IS&GS still achieved a record backlog level in excess of $12 billion.

The record backlog has IS&GS well positioned to achieve their double digit revenue growth goal.

We expect IS&GS to continue to have the highest revenue growth rate of all of our business areas.

Finally, the space systems segment also continued to win new awards and demonstrate operational excellence.

NASA selected space systems to design, build and operate the spacecraft for the Mars Atmosphere and Volatile Evolution Program.

This $485 million project will analyze the upper atmosphere and past climate change on Mars.

The maiden mission builds upon the long history of successful interplanetary expertise of the space segment and expands upon their position as the largest space company.

Operationally, the Trident Fleet Ballistic Missile for the US Navy achieved its 124th consecutive test launch, extending a record of success back to 1989.

These operational accomplishments and important new business wins across all of our business segments have us well-positioned for future financial growth.

Before turning to your questions, I would like to provide a little color on our 2008 and 2009 guidance.

As you have seen in our press release, the revised 2008 guidance reflects increases in our segment operating profit, earnings per share and return on vested capital.

These increases were partially offset by the recognition of unrealized losses on marketable securities held to fund certain nonqualified employee benefit obligations.

Consistent with our expectations and goals, the 2009 guidance projects top line revenue returning to a more robust growth rate or approximately 6% at the range mid points.

Our guidance also projects achievement of our previously stated goals to accelerate the generation of $5 billion in segment operating profit into 2009, achieving a one-year acceleration from our prior goal date of 2010.

Cash from operations in 2009 is projected to be at least $4 billion and reflects continued strong cash generation.

Finally, we expect to remain an industry leader in 2009 with return on vested capital projected to be greater than 20%.

Regarding assumptions for our fast cash adjustments to earnings, our 2009 outlook is based on a projected discount rate of 7.5% and 2008 return on pension assets of negative 25%.

Recent volatility in the financial markets has intensified the challenge of trying to accurately estimate the discount rate we'll use at the end of 2008 or the return on our benefit plan assets.

We have included a schedule in today's web charts that provide sensitivity ranges of the various changes and returns on plan assets for your reference.

The data table represents the results of these various assumptions on the 2009 projected fast cash pension adjustment and associated cash contributions.

Consistent with our historical practice, we will establish final assumptions on the discount rate and our final actual 2008 asset return value after the close of the year and provide any updated guidance in our January earnings call.

In summary, our financial performance, operational accomplishments and new business wins across all of our business segments this quarter have us well-positioned for increased financial growth in 2009 and beyond.

Our diversified portfolio and solid financial foundation will serve us well as we move forward in creating value for customers and shareholders.

I would now like to open up the line for your questions.

Teresa, would you please open the line?

Thank you, ladies and gentlemen.

(OPERATOR INSTRUCTIONS.) We ask that you limit yourself to one question and one follow-up today.

We'll pause to give everyone an opportunity to signal.

We'll go to Troy Lahr with Stifel Nicolaus.

Thanks.

Just wondering if you can highlight the moving pieces in '09 for the space systems segment with the flat sales that you're going for and how that's impacted by TSAP?

Sure.

Thanks, Troy.

Taking a look at space, you said space sales are fairly flat going from '08 to '09.

That's probably a pretty accurate depiction.

There are a couple of things going on there.

One, we have one less commercial satellite in 2009.

We have none in 2009 whereas we did have one in 2008.

Second, we have one commercial launch in 2008.

We have zero commercial launches in 2009.

That's partially offset by higher activity in our government satellite business.

A lot of that coming from our increased effort in the GPS three effort as well as our [ADHF] activities.

You asked about TSAT.

TSAT, I read the press on that contract, but there's been no official word at least that we've received yet from the US government relative to TSAT's continuing forward or not.

We do have TSAT, on a prorated basis or a derated basis in our outlook that will create probably some pressure on our overall sales level in space in fact if that activity or that contract was not awarded.

If TSAT goes away, does that mean you could benefit from a more advanced EHF?

Expectation, let's talk about what TSAT is.

TSAT is the follow on to secure communications and we started this business with the Milstar contract years ago.

ADH is the current version of that.

TSAT was the next laser based secure communications system.

We were the incumbent with the ADH satellites.

The expectation would be that we would continue to sell those and perhaps spiral those assets if in fact TSAT did not materialize.

Okay.

Thanks.

Thank you, Troy.

Our next question comes from Robert Spingarn, Credit Suisse.

Let's talk about Aeronautics for a minute.

If you could walk us through the moving pieces in Aeronautics.

And in the fourth quarter, it looks like you have fewer F-22s than F-16s.

If you could talk about that a little bit and then maybe move into F-35 outlook for the next couple of years in terms of timing on the L-rips from a revenue and margin perspective.

Let's talk -- you asked about aircraft in the fourth quarter.

We keyed up the notion that we expect it to have some reduced aircraft, primarily F-16s in 2008 compared to 2007.

I think on previous calls, I've described a drop from 41 in the year down to 28.

Most of that 13 aircraft drop occurs in the second half of the year.

We saw reduction of four aircraft in the third quarter and we're going to see another reduction of four aircraft in the fourth quarter going from nine aircraft deliveries in 2007 to five aircraft in the fourth quarter of 2008.

That's driving a piece of it.

I think you mentioned F-22.

Actually, F-22 is fairly flat.

There may be timing within the quarters there, but deliveries -- between 2007 and 2008, deliveries did drop from 24 to likely about 21 or so.

That will stay fairly constant as we look into 2009.

I think you asked about the F-35 revenue growth and margin.

Interesting thing that's going on with F-35.

We literally are expecting to see -- when we break it into pieces, the STD contract, the development on the F-35 program, has hit its peak.

We're seeing that starting to wind down now.

From '08 to '09, we see about $1billion of reduced development effort on that contract.

Conversely, we're seeing the ramp up on the early L-rip contracts, the low rate initial production contracts.

We expect to see close to $2 billion of the growth from 2008 to 2009 on the L-rip contracts.

Between the two of those events, we're expecting to see that F-35 grow at about a 25% clip year over year from 2009 to 2008, comparing those two years.

We do expect to have some slight margin improvement in 2009 on the F-35 contract.

We do expect to have some risk retirements that allow us to take the booking rate on the developmental contract up.

We're also seeing the activity of the production contracts which are starting to be booked at about a level comparable to what we're seeing on the development contract.

I was going to ask if you could give us a little trajectory on F-35 revenue growth end [to tent] based on what you talked about -- the 25% number in '09 based on what the current schedules are.

I don't have the number off the top of my head to be honest with you.

We expect to see very similar levels of growth going from '09 into '10 at the current rates.

We're still on track.

I think we've talked about within the Aeronautics setting -- Aeronautics about a $20 billion a year business area by 2015.

F-35 is probably $15 billion, $16 billion at that timeframe.

We'll be on a glide path to reach those between 2010 and 2015.

Okay.

Then just my follow-up question is on share buy back cash deployment.

Your guidance for '09 contemplates what kind of share count and can we assume that -- well, why don't I ask you that question first and then, does that contemplate share repurchase?

We expect to continue our standard practice at least as we outlook of 50% of return of free cash flow before dividends or share repurchases.

If you just walk that through with our assumption for 2009, that would result in about a 403 million shares outstanding is what we're considering with the guidance for next year.

Thanks very much.

Thank you.

We'll go next to David Strauss of UBS.

Good morning.

Good morning.

Bruce, can you give the breakout in terms of your assumptions for FAS and CAS, what exactly you're assuming for FAS and CAS.

Also, if you assume in 2009 that you hit your assumed rate return and the discount rate doesn't change in '09, given the smoothing mechanism you use, would you anticipate that pension expense in 2010 would be higher again than in 2009?

Let me give you the pieces.

By the way, I hope the table that we provided on both the web charts and in our discussions, I hope those were helpful as far as helping to understand that there is a lot of volatility, more so than years past, especially just in the last 45 days with returns on the assets in our pension plan as everyone else has experienced during the same period of time.

I think the pieces -- I'll walk through the pieces first.

Our CAS expense in 2008 is about $590 million.

That stays fairly flat as we look into 2009.

The FAS expense as we sit here today in 2008 is about $460 plus million.

We expect that to grow somewhere in the $640 million, $650 million range for 2009.

And again, I'm a little hesitant, David, to talk about what happens in 2010 only because we haven't settled 2008 yet.

But it is a current levels, you would expect to see some increased expenditures of 2008 as we sit here in the middle of October.

Okay.

Fair enough.

Looking at electronic systems, could you talk about --in the quarter, missiles and fire control sales were up, but profit was down.

What was going on there?

And as well, the outlook by business within ES for 2009?

You read that right.

Missile and fire control sales are up.

Revenue -- or excuse me, profit was a little bit down, not for any sort of operational reasons whatsoever.

We just had some higher growth on some lower margin programs.

I think the name, too, we have the JASSM program, some of the sniper activity that was higher in the third quarter of '08 compared to the third quarter of '07.

Those are a little lower than the outstanding returns that missile and fire control typically generate.

But again, nothing operational.

It is just a mix of business going forward.

And then you asked about -- I'm sorry, going into next year?

Yes.

The outlook by business within ES.

Within ES, we see continued growth really driven the biggest growth component -- let me back up.

The overall growth of electronics, we still expect to be in the mid single digits.

Have a steady 85% like we always get.

It is driven predominantly growthwise next year by our PC & E line of the business, the platform, train and energy piece of the business.

And a large part of that is we expect to have -- because of the funding I mentioned in the prepared comments, we expect to have higher sales values on the VH-71 program -- the increment one piece.

And we're also seeing higher growth on our other rotary platforms, including the MA60 F work we see.

PTE grows a little faster than the overall electronics system average.

MS2, maritime systems and sensors, and missiles and fire control were a little bit slightly behind the average growth rate of electronic systems, but both fairly consistent to each other.

Great.

Thanks, Bruce.

You bet.

Our next comes from Cai von Rumohr, Cowen & Company.

Thank you very much.

It looks like your advances went up in the third quarter.

Can you give us any update?

Anymore more optimism that that could continue up given your perform sales prospects?

Yes.

Actually, Cai, we see probably a little bit of deterioration in the advances toward the end of this year.

And as look into next year, it is always hard to predict when the international customers will get signed under contract and what exactly we can arrange from terms and conditions that would allow those advanced payments.

I would think our activity going into 2000 will be consistent with what we saw in 2008.

Okay.

And it looks like your DSOs went up ra little bit.

Is that anything?

What's the reason for that?

Is that expected to reverse as you go into the fourth quarter?

No.

We actually expect -- I think I keyed up in the second quarter, we thought the working capital was going to grow some toward the end of the year.

That's what we're seeing.

I expect we'll see in 2009, some further working capital growth about consistent with what we saw in 2008.

Not a great surprise there.

Okay.

And then the last one, any change in your thoughts on capital deployment given the credit situation like you have in your profile?

What you might do in terms of the pension plan?

Any thoughts on maybe putting more money than that in and what would the tax implications of that be?

More money in the pension plan tax?

Yes.

I think the bottom line is -- viewpoint that we have as far as cash and cash deployment is wherever we have opportunities, If we see opportunities to either make acquisitions or if we think there is a better benefit to deploying that cash early into the pension plan, we'll make that call.

But at this point in time, I don't necessarily have a strong inkling for one of the other.

It will be opportunistic as we go forward.

I think our cash deployment practice have been fairly transparent in the past.

We'll make sure they are going forward.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS.) We'll go next to Joe Nadol of JP Morgan.

Thanks.

Good morning.

Hi, Joe.

Just a couple of questions.

Well, one two-part question on the sales outlook for next year.

In Aeronautics, why is the rest of the business shrinking X F-35, particularly when C-130 should be ramping up?

And secondly, it looks like your organic growth rate in IS and GS is in the single digits.

We had expected that to be more like in the low double digits.

Is there a change in expectation there?

Okay.

Let me talk -- you mentioned Aeronautics first and the the sales next year and why that's not up more.

I think that I teed up with it in an earlier question about the F-35 growth we're expecting next year.

F-16, we're actually seeing -- I'm sure someone will ask the question, how many F-16s are we seeing in 2009 compared to 2008.

We're actually expecting about 31F-16s in 2009.

That's up slightly from the 28 we're expecting in 2008.

That will generate some sales increase.

That is being offset -- almost to a flat point by the reductions in the F117 wind down.

We talked about that program going out of the fleet in the middle part of this year.

Because we did add about a half year's worth of activity there that we won't have in 2009, you're seeing some of that reduction there.

You mentioned C-130.

C-130s, we actually are seeing growth.

We're expecting 16 C-130 aircraft in 2009 compared to 12 in 2008.

You will see some growth there.

And then last I guess is maybe a little bit of down activity in some of the other Aeronautics R&D, those sorts of activities but fairly minor from that point.

Next, you talked about IS&GS and the organic growth rate.

We go midpoint -- I think we've given range guidance as the top line of the 9% to 11%.

I think that's very consistent with what we've talked about -- I'm sorry, about 8% to 11%.

I think that's very consistent with the -- with our expectation of double-digit growth.

I think there's still a great opportunity to achieve that.

If we take a look at what we've been able to do with IS&GS over this year as we look forward to next year, we're practically generating $1billion of organic growth year-over-year.

That's something we take great pride in.

I think the percentages will work out as we continue to win new business in the latter part of this year, we've had a great string and a great record this year of wins in IS&GS.

If we can continue that going forward, I think that will position us well for 2009 as well.

Okay.

Thanks for that, Bruce.

As a follow-up, looking at the fourth quarter of '08, it seems like -- is it fair to say that we should be looking for the upper end of the range for operating profit specifically?

If you take the middle and you look at what you've done so far this year, you've done more than 3/4 of it.

Typically, your fourth quarter is a higher quarter than the other three.

Is it fair to say upper end of the range there?

I'll try to - internet question -- I'll try to give you some pretty specific guidance.

I think we try to do that at the end of the second quarter as far as what we expected to see in the third quarter.

As we look at the fourth quarter -- I think fourth quarter is going to be slightly higher than third, but maybe not quite as high as fourth quarter of 2008.

Again, I think we're going to see some downturn in the Aeronautics business that will mitigate some of that a little bit, relatively to what you might be expecting there.

Numbers in the 10.7, 10.8 range is what I'm expecting there.

Marginwise, I think operating margin, we're seeing strong performance and we expect to still see strong performance in the fourth quarter for all core business areas.

I think space will be down somewhat because of the mix of ULA -- the equity earnings that we received from ULA in the fourth quarter will be probably a little less than what we're seeing for the first three quarters simply because of the mix of activities in that quarter.

The last thing that will put pressure on our overall margin in that period of time is -- we had teed up --I think if you looked at the web charts and some of our press release information, we keyed up the fact that we have some nonqualified employee benefits that are mark-to-market.

These are consolidated activities that do flow through the P&L account.

And we had about a $30 million item in the third quarter.

We're actually expecting about an $80 million -- as we sit here today.

These funds are invested similarly to how we invest our pension returns.

If you put the same extrapolation on those funds in the fourth quarter, it says we've got about an $80 million headwind on those assets in the fourth quarter.

That's also included in our guidance for the rest of this year, Joe.

Okay.

Thanks, Bruce.

Thank you.

We'll go next to Robert Stallard with Macquarie.

Good morning.

Hi, Rob.

Bruce, first of all, on LTS, you mentioned of having a couple of boats put into the FY '09 budget.

Have you had any clarity on the award contractual terms -- the DoD is expecting to award those contracts?

We've had discussions.

I think that's still an open item, Rob, to be honest with you.

Because in the past, you said you wouldn't accept fixed price development.

In fact, something that you're maybe still looking at?

I don't think -- I think that's still would be our position, Rob.

We would not like that fixed price development.

I think maybe a better question is so would there be development on the next LTS or not.

That's the point that we're having discussions with the Navy on.

As a follow-up, on the pension, wondering if you could clarify what is in the pension in the moment, in terms of the waiting of equities debt.

We've got -- I guess what you might expect most portfolios of this size to have in terms of wings.

We've got both US equity and international equity.

That's probably in the 55%, 60% range or so.

We're probably between bonds and some other alternative investment to cash.

Some commodity types of things.

Bonds is probably in the 30%, 35%, 40% range and the difference is in the alternative investments.

Fairly, I would think, standard for most portfolios with pensions.

Has there been any exception in the pension fund this year?

No.

Okay.

Thank you.

Thank you.

Our next question comes from Heidi Wood, Morgan Stanley.

Good morning.

Hi, Heidi.

I wanted to touch on space in a little bit more detail.

Bruce, can you talk about the profitability in space this quarter?

Break out a little bit of the -- you said the drivers were ULA, higher Orion volumes then negotiation on a commercial contract -- on change in the contract terms.

Can you talk to us about how those led to the 12.8% margins?

You're looking at third quarter, Heidi?

Yes.

Yes.

We had strong ULA earnings in the quarter.

Again, that's a mix of the launch vehicles that occurs in ULA as well as some good performance that occurred in the third quarter on ULA.

We got our share of that in the third quarter.

On top of that, we had good performance in our government satellite business.

We actually had some performance there as well.

And we didn't -- I'm a little puzzled.

We didn't have any of the terminated launch -- I'm not sure I follow that honestly.

That was not a third quarter event.

There was a commercial item -- the termination of a commercial launch that occurred in the first quarter.

That might be where some of the confusion is.

There's nothing in the third quarter.

Oh, I'm sorry.

Okay.

I'm reading the results of a successful negotiation of a terminated contract launch service.

Oh, that's the first quarter.

First quarter.

All right.

What I'm trying to get a better handle on is the puts and takes -- as to the sustainability of this -- the 12.8% margins as we go forward into 2009.

You talked before about revenues earlier.

But I would like to get more clarity about the profitability for next year.

I think the guidance we're providing for 2008, that's probably fairly close to -- let me back up.

I'm not sure the 12.8% is sustainable.

I think third quarter was high for the reasons I've given you relative to ULA and some profit step-ups we did on our government satellite business.

As we look in at 2009, I think it is going to be comparable to what we've seen in 2008.

Maybe the one wild card there is that 2008 did have the terminated satellite event you talked about in the first quarter which actually might be an upper in 2008 that we do not see in 2009.

Okay.

Secondly, can you talk a little bit about your thoughts on M&A?

There hasn't been a lot of activity for you guys.

It has been fairly selective and nichey but now that we've got odds on the equity side, so many properties beaten up.

One would imagine on the private side, we're seeing something like that as well.

Do you see yourself getting more active strategically in 2009?

Heidi, we've done four acquisitions so far this year.

We did several small in the third quarter on a couple of items.

We did an acquisition of [Aculate].

And then, [Antero] and a couple of acquisitions that might not have gotten a lot of press.

We also bought out the other half of our RLM stake in the Australian business down there.

I do see the portfolios as we're looking at it; it is a very good pipeline of opportunities going forward.

We're very selective in the process we use.

I think we've got to -- hopefully recognize the disciplined approach for how we approach this.

I do think the valuations have been helped here recently by the recent events.

I'm optimistic that that will create some better opportunities than we've seen here in the last year or so.

Great.

Thanks very much.

Yes.

Thank you.

We'll go next to Richard Safran, Goldman Sachs.

Hi.

Good morning.

Hi, Rich.

How are you?

Very good, thanks.

This year, we've seen a number of competitions really sliding to the right, delayed for one reason or another.

Just from what you're seeing, is this any indication of the government having difficult funding or do you think there's some other factor at work?

I don't know if the government is having any difficult funding per se.

I think there are other matters at works including the change in administration and not wanting to put something new on the plate the day the new secretary walks into the job.

I think it is a bit of a mixed bag as we look at the current environment.

There is a number that we're interested in -- of new start activity.

I think we see, for instance, the JLTV, we believe that one will take place this year.

We're pretty confident that that will take place.

Conversely, the [Cesar] activity seems to be pushing forward to the right.

I had mentioned earlier the T-set seems to be in a state of flux as we speak here.

Overall, new starts will be difficult in today's environment, particularly the closer we get to the change of administration.

I don't see it necessarily because of funding situations you described.

Okay.

And next thing, one issue that has been getting some indications of is that small aerospace and defense suppliers have been having trouble obtaining financing -- just what they need to run their business on a day-to-day basis.

This is just obviously as a result of current marketing conditions.

I just wanted to know if there is an issue where Lockheed and even some other large cap defense firms will be required to use cash to help the supplier base.

That's a good question, Rich.

We've been monitoring this for at least the last -- I don't know, three, four months pretty heavily.

And we're going to continue to monitor that very, very closely.

Frankly, we've not seen impacts to our supply base.

Without the type and nature you've described there.

We've been very pleased with the lack of finding those situations in our supply base.

We'll going to continue to watch that very closely and as far as the latter part of your question -- as far as would we use cash nets.

Since I don't have that situation right now, it is pure speculation.

I'm not sure I want to get into at this point, because we don't have that situation.

Thanks a lot.

Thank you.

We'll go next to Joe Campbell, Barclays Capital.

Actually, it is Carter Copeland.

Good morning, Carter.

Just a few points here -- questions for clarification.

On Aeronautics, I hate to beat a dead horse here.

If we walk through the moving pieces, it sounded like F-16 is roughly offset by F-117 sustainment losses.

I think you said $1 billion of growth on F-35.

Seems like C-130 should be another couple million dollars, yet the guidance implies $750 million of growth.

I'm just wondering what that gap is.

You said there are some other aerospace R&D going down.

Presumably, sustainment should be up on programs like F-22.

I'm just trying to -- wonder if you can help bridge the gap here.

It seems like a pretty big one.

I don't know that it is all that big a gap.

One of the things that might be missing there is we're still seeing -- we're seeing a little bit of reduction in F-22 cost volume.

I think most f that is for all of the right reasons as we've experienced performance improvements on that [firm].

That's some of the reduction.

Then the rest of the Aeronautics business, the nonplatform -- but the nonmajor four programs if you will -- F-16, F-32, F-35, C-130s.

That part of the business is down a little bit year over year as well.

Just to name one firm that's in that mix of the phrase is the U2 program for instance.

We don't talk about a lot of those smaller pieces, but that's what's driving some of that next year.

Okay.

Then another one here for clarification on David's question, missiles and fire control.

I read the release to take it that the actual amount of profit was down, yet the comment that you had higher growth in lower margin programs seemed to suggest that the margin was down.

Was there, in fact, something that declined here to give us less profit, not less margin?

I'm looking at it.

Actually profit is down but it is in part because we had such a tremendous level of profit in third quarter of 2007.

Very, very high margins.

As I look at the margin in the third quarter of '08, it is still in line with the overall electronic systems profit rates.

Again, I don't think there's any issue there.

Other than it was a mix issue between the programs that happened in third quarter 2007 versus third quarter 2008.

Basically, just comps.

It was just comps.

That's a good way to describe it.

Missile and fire control is still having a tremendous year.

No performance issues there to describe whatsoever.

Okay.

And last one on pension, the table you provided is very helpful.

But I wondered if you had done any sensitivity analysis around the discount rate if we didn't, in fact, keep spreads wide for the back portion of this year and in fact, the discount rate was not 7.5 but 7.

How that might change your table.

Any insights there would be really helpful.

We've looked at it.

Honestly, we thought about adding some of those in the table.

We thought it might just get too much, too quickly.

There's less sensitivity in the discount rate, obviously.

I think of every 25 basis points on the discount rate, there's probably worth $20 million or $30 million.

Something along those lines.

Nowhere near what the asset value change is worth.

Okay.

Thank you.

Yes.

Our next question comes from Ronald Epstein, Merrill Lynch.

Good morning.

Weren't you guys a beneficiary of the 2006 Pension Reform Act?

And if you were, when did that roll off?

When do you have to start taking some action that possibly got delayed because of that?

I think the defense contractors in general were treated a little differently in the BPA in that we have more time to get the full funding than does most of the rest of the industry.

Our is -- I don't have the number off the top of my head.

It is 2010 or 2011.

And in large part, that's because we have -- one of the reasons we have the fast cash adjustment is because there is this difference of methodology between the way we recognize expenses on our cost accounting standards versus the way we recognize expenses under the financial accounting standards.

What's called harmonization between the CAS and FAS has yet to take place.

That's what the industry is waiting on before we can make that decision.

You would have to be -- it is funded by 2010 or 2011 is what you're thinking?

Actually, you hit the requirement to fit full funding, but you actually have a period of time and I believe the period of time is like seven or eight years to reach full funding post that date.

It is not as if you have to have full funding as of that date if that makes sense to you.

Yes, that makes sense.

Then, just one quick follow on.

Maybe this is related to Richard's question.

If you look at the cancellation of ARH and the push out of TSAT if that's eventually what happens, what do you think that means for C5 reengineering, the VH-71?

Why do you think the DoD seemed to be a little more scrutinous now over programs lately?

I can't talk to the ARH.

I've read what I've read on the ARH.

I don't have a comment on that.

TSAT is clearly a question of whether or not the customer needs that sort of additional capability or whether or not they can spiral current activity to provide that -- as a gap bridger if you will.

I think on our C5 program, I feel good about that because we've just gotten out of development for that contract.

We have three fliers as we sit here today that were part of that development of program.

The program absolutely went perfectly.

Our flight test program finished early.

It demonstrated the kinds of savings in terms of fuel costs in terms of our liability that we had predicted on the program.

And I still think there is a need for those aircraft -- those strategic airlift aircraft going forward.

I feel pretty good about that.

I think the fact that we got that here recently awarded is a good indication of that.

You asked about the VH-71 -- a similar situation.

Again, as we sit here today, we are meeting every single key performance parameter on those aircraft.

Think of that in terms of weight range, payload, those sorts of things.

I mentioned in the prepared remarks, we have our first pilot production vehicle flying.

That program is doing well.

The programs we ought to be concerned are new start programs, those that are not performing well.

I don't think either one of the programs you mentioned there, are in neither one of those categories.

Great.

Thanks a lot.

You bet.

We'll go to Doug Harned, Sanford Bernstein.

Hi, Doug.

Hi.

On IS&GS, as you said, you're right on the edge of double-digit revenue growth going into '09 with your guidance.

Could you talk about first have you seen a change in your outlook for IT expenditures from the Federal government?

And then second, if you look at the three different units there, information systems, global services and admissions solutions, how do you see those relative to each other in terms of growth next year?

Good questions.

Let me just reiterate, I don't see a slowdown in IS&GS growth.

I appreciate what we're saying about the range that we've provided -- the guidance there.

But our expectation is still -- if I had Linda Goodman here, I'm sure she would echo the fact that she wants to achieve double-digit growth year-over-year in her business area.

Having said that, if I look at the three pieces and I'll remind you again, the three pieces that make up IS&GS, the information systems piece.

There's the global services piece and there's the mission solutions piece.

As we look at -- those pieces are not growing consistently from '08 into '09.

The fastest-growing piece is our global services piece.

And that's growing at a rate faster than double digit.

The other two lines of business -- with the information system, admission solutions are growing slightly less than 10%.

They're growing consistent with each other.

Strong -- higher single-digit growth rates in both of those and strong double-digit growth rates in the global services piece of it.

Again, I don't see any particular cause of concern from my perspective.

When you look at foreign military sales, how are you looking at -- given the global economic environment, how are you looking at some of the upcoming awards you're hoping for, things like UAE missile defense?

And how firm do you feel that some of the ones you already have -- say some of the C-130 contracts are, given the outlook right now?

Okay.

Let me answer your second question first.

I don't see any of the international sales, particularly C-130 sales we've done here recently impacted by any of the current or most recent financial events I think those are pretty solid as I set here and look at it today.

You asked about the other missile defense awards and so forth.

I think our expectation is that those will track very nicely into our plan.

I don't see those coming out either from the sequence or the schedule that we've laid on the table from when we expect those to happen.

The short answer is question to both those is we don't see a huge push to the right on the international or any of the things you mentioned there

No real change when you're talking with your foreign customers?

None.

None whatsoever.

Okay.

Thank you.

We'll go to Howard Rubel, Jefferies and Company.

Thank you very much.

Follow up on two things.

One on Aeronautics, the P3 mod, you had an issue with the P3 mod contract.

Can you tell us how you beat it to death so there won't be more of this?

The guys in Marietta were bullish on the opportunity when we were down there not long ago.

Maybe I'll put -- Howard, if I could, I'll split it into two pieces.

There's -- this is a contract we've had since 2005.

This is really to do heavy maintenance on the existing fleet of P3 aircraft out in the field.

Those aircraft have experienced some pretty tough conditions, tough environments to operate in.

They've been doing a lot of mission work in Iraq and Afghanistan.

They were already subjected to the sea, air phenomenon associated with salt there Again, we've had this contract since 2005.

The contract runs out through 2010.

It is a five-year contract.

What we're seeing is as these aircraft get inducted into the program, they're in worse shape than we had expected.

It is just taking us more time to modify and overhaul these aircraft than we expected.

This provision that you talked about that we took in the third quarter, we believe takes us out through the end of the contract -- through the 2010 timeframe.

I think we're okay there.

I'll separate that from I think what you saw down in Marietta on the investor tour which is really the [we ring] business.

That's a little bit of a separate business there where we're trying to re wing aircraft, not do the sustainment or the modification of aircraft that are in the fleet and the overhaul of that.

This is rewinging, putting -- stripping out the old, putting the new ones on if you will.

That activity is still going very well for us.

We're still seeing lots of interest both domestically and internationally from both US Navy as well as custom border patrol aircraft; Norway, Canada and others as well who have an interest in there.

I'll make a distinction between those two and say I think we've got the P3 overhaul effort contained within the write-off we took in the third quarter and the rest of the business is not part of that.

Bruce, wouldn't you have a plan if the customer offered you an airplane that was different from the condition you agreed to at the time that you had received it?

I'll tell you, Howard, we've been having ongoing discussions with our customers about that very matter.

And the provision we put in place right now, assumes basically the same contractual arrangement as we have today going forward.

Nothing better.

We're in constant discussions as we are literally today with a customer over the very subject that you raised in your question.

And then 3.7 million shares is what you purchased in the quarter.

That seems relatively low versus the run rate.

Was there any event that prevented you from buying more in the period?

No.

Nothing extraordinary.

I think if you look at the pattern we've done in the last couple of years, that's tended to be our pattern going forward.

I don't think it is anything conscious.

Through the year-to-date third quarter, we have had the highest ever share repurchase activity.

Through the three quarters, we've done more than we have in any single year previous to this.

We've done 98% of free cash flow to shareholders.

I'm not apologetic about that.

I think we're doing fine there.

I hear you loud and clear.

Thank you.

Thank you, Howard.

We go to Myles Walton, Oppenheimer and Company.

Good morning.

Can I ask you about space for a second, particularly in the launch services with respect to equity accounting.

U.S.A.

used to account for $60 million of equity earnings through the P&L.

Is that about what it still is and also as the shuttle winds down, how quickly does that tail off?

I think your recollection is pretty accurate, Myles.

It's scheduled to wind down.

It stays at the current levels at least through 2010.

And then the question is will there be a shuttle extension or not?

That's the what if for beyond 2010.

Think of it being similar levels to what you described through the 2010 timeframe.

Likewise, what -- is ULA two times that amount?

Yes.

Maybe a little more than that.

That stays fairly consistent between the 2008, 2009 timeframe.

Then it is dependent upon the number of launch vehicles that will be exercised starting beyond the 2009 timeframe.

It is probably a little more than the level you described.

Last one, clarification on the 25% assumption for the pension plan.

Is that where it is currently?

Or is that just a place holder?

Or can you just give us where it is currently?

That's pretty close to where we are literally as I sit here and talk to you today.

If I was to pick a number, that would be as good a number as I could pick today.

Thanks.

I should make one comment.

I think I misspoke earlier to one of the questions about the commercial satellites when I was talking to space volume.

I think I said there were no commercial stats in 2009 and there was one in 2008.

The right answer there is we actually did have two commercial stats in 2008 and we're expecting to have one commercial stat in 2009.

My apologies for the misspeak there.

Teresa, this is Jerry.

We have time for one last one.

Thank you.

We'll go to Harry Nourse, Bank of America.

Good morning.

Hi, Harry.

You mentioned the LCS addition in 2009.

Were there any other moving parts that went in or out of the appropriations bill?

No.

I think we were -- we did -- we were happy to see -- beyond what I talked about in terms of additional advanced procurement money for the F-22 program.

For instance, we did have the AC-130s.

I think you'll see additional C-130s in the '09 budget at higher levels than we saw in '08.

We saw the VH-71 increments.

We saw the L-rip three advance funding for the F-35 program.

For most of the programs that you watch closely, I think they were well supported in the current budget outlook.

My apologies if you said that earlier.

I was late in joining.

Okay.

That was it, actually.

Okay.

Thank you, Harry.

Well, looking forward, we continue to focus our efforts on cost efficiency and performance on programs.

Delivering the best value to our customers in the future budget environment will demand increasingly improved levels of performance and our 140,000 employees have us uniquely positioned to deliver on this requirement and differentiate Lockheed Martin in the eyes of shareholders and customers.

I would like to close by thanking you for your questions and for joining the call today.

We look forward to talking to you again in January when Bob Stevens will be joining us on the call.

Bob will review our 2008 results and provide an update of our strategy and 2009 financial outlook.

Teresa, that concludes our call.

Ladies and gentlemen, that does conclude today's conference.

Thank you for your participation.

You may now disconnect.