洛克希德·馬丁 (LMT) 2009 Q3 法說會逐字稿

Good day and welcome everyone to the Lockheed Martin Corporation third quarter 2009 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 Kirchner, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Elizabeth.

And good morning, everyone.

I would like to welcome you to our third quarter 2009 earnings conference call.

Joining me today on the call are Bob Stevens, our Chairman, President and Chief Executive Officer, and Bruce Tanner, our Executive Vice President and Chief Financial Officer.

Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the Safe Harbor provisions of federal securities law.

Actual results may differ.

Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to vary materially from anticipated results.

Please also note that we have posted charts on our website today which supplement our comments.

With that, I would like to turn the call over to Bruce to provide a closer examination of our third quarter results and financial outlook, followed then by Bob with his perspectives on the Corporation.

Thanks, Jerry.

And good morning, everyone.

I hope you all had an opportunity to read today's earnings release, with our third quarter results, updated 2009 guidance, and initial 2010 guidance.

As the release outlined, 2009 performance continued at a solid level with numerous operational and financial highlights achieved through continued focus on quality and execution.

Financial highlights included our aeronautics business continuing its upward revenue growth.

Electronic systems continuing its margin generation above 13%.

And the Corporation generating near record third quarter cash from operations in excess of $1.4 billion.

This performance solidly positions us to achieve our increased 2009 earnings per share and return on invested capital projections.

Turning to our third quarter results, the Corporation achieved solid financial performance, completed significant operational milestones, and won key new business awards.

Sales growth consistent with our expectations, and strong cash generation were noteworthy achievements in the quarter.

With third quarter activities generating robust cash from operations, we were able to continue implementation of our cash deployment strategy for generation of shareholder value.

During the quarter, we continued to repurchase our stock, bringing the year to date share repurchase total to over 18 million shares.

In September, our Board of Directors approved a share repurchase authority for an additional 20 million shares increasing the total remaining authority to approximately 35 million shares at the end of the third quarter.

Our strong cash flow performance also enabled us to increase our quarterly dividend rate by 10.5% extending our double digit dividend rate increase to seven consecutive years.

Let me now turn to a review of key events and performance in our business areas.

Starting with Aeronautics, our team continued to achieve operational milestones across their programs while winning new business awards.

Our largest program, the F35 Joint Strike Fighter program, on our largest program, the F35 Joint Strike Fighter, we continue to retire risks from a development program.

The conventional and short takeoff and vertical landing aircraft are flying and continue to achieve objectives of the flight test program with 123 test flights completed to date.

In demonstration of the exceptional design maturity of the aircraft, 80% of the jets have returned from their test sorties code one, with no issues and are ready to fly again.

The carrier version aircraft was rolled out in July at the formal unveiling ceremony with the US Navy, and is moving forward through development towards first flight.

In addition to the ongoing progress on the three aircraft variants, integration and verification of the mission systems suite continues on a cooperative avionics test bed.

Other F35 milestones successfully completed this summer included the first aerial refueling test and software development on schedule with more than 70% complete.

Our C-130J program remains on track to ramp up production to 16 aircraft deliveries and continues to attract new customers through its position as the most proven and cost effective air lifter of choice.

New international aircraft awards this quarter included an additional order from Iraq, for two aircraft, and an FMS authorization to provide eight aircraft to Kuwait.

With proven performance, value and versatility, we believe future new business prospects remain bright for the C-130J and will result in higher production levels in the future.

Turning to Electronic Systems, a critical program milestone was accomplished this quarter with the commencement of construction of our second Littoral Combat Ship, the USS Fort Worth.

The laying of the keel marks the start of the module erection process and reflects the ship coming to life.

The Littoral Combat Ship is the most cost effective ship the US Navy has ever produced.

Radio requiring only a 40 person crew it can flight in the blue water and in the Littoral environment with unprecedented situational awareness.

It can cover a wide range of operational from anti-piracy, to search and rescue, to support of special forces through utilization of modular mission packages.

We are excited to build upon the lessons learned and success of our previously delivered ship, the USS Freedom as we work to provide our Navy customer these revolutionary naval vessels an help satisfy the 55 ship fleet requirements.

Moving to our Space Systems business, significant operational successes were achieved this quarter for domestic and international customers.

Domestic successes included the deployment and on orbit operation of the PAN next generation satellite for our government customer.

This program consists of a novel and robust turnkey commercial based satellite ground and launch system to meet the government's future needs.

This deployment demonstrated the delivery of a high quality, low cost solution, with reduced cycle times for our customer.

As noted in our press release, operational success was also achieved for our international customers this quarter, through the successful delivery and deployment of the JCSAT 12 satellite for a commercial communications provider in Japan.

This delivery marks the deployment of our 38th A2100 SAT spacecraft to international and domestic customers.

Finally, in space, we were pleased that the government accountability office dismissed a competitor's protest of our GOES-R satellite system award received earlier this year from NASA.

This resolution allows our team to move forward with work on this program to construct two satellites with options for two more spacecraft.

Moving to Information Systems and Global Services, financial results this quarter were mixed.

Operating segment margin was consistent with our expectations and remains on track to achieve the 8.5% full-year projection outlined in our July conference call.

Sales growth was limited this quarter, and continues to be constrained due to delays in new business awards, customer funding, and protest resolutions.

Despite these constraints, IS&GS was able to book over $3 billion in new orders this quarter, and we expect strong sales performance next quarter, and mid single digit revenue growth next year.

In the area of new business, IS&GS won new awards ranging from providing engineering and technical services support to the US Air Force, to secure information sharing system work for the US Navy.

The largest award in the quarter was a seven-year contract from the Environmental Protection Agency, for its information technology solutions agreement.

This $955 million contract will fund IT work to identify environmental danger zones, climate change modeling, and geographic information systems database management.

These highlights across all our business areas demonstrate our continuing operational execution and strong win rates as we work to deliver increased value to customers and shareholders.

Turning to a review of our financial outlook, I would like to start by reminding everyone that we provided a detailed overview of 2010 expectations, in both our press release and webcast presentation.

I would now like to spend some time discussing our longer term views on expected pension plan impacts, cash from operations, top line growth, and segment operating margins.

As you saw in today's press release, we intend to make at least a $1 billion discretionary contribution to our pension trust during the fourth quarter of 2009.

An additional contribution of approximately $1.4 billion during 2010.

Our webcast presentation includes a tabular display of our projected annual pension funding and recovery values.

For planning purposes, we are assuming that Pension Protection Act funding requirements and related cash harmonization will be effective in 2011.

Based on our best judgment as to what the final harmonization approach will entail we project that our PPA funding requirements will be higher than the pension costs we will be able to recover under cash rules for at least the next several years.

However, we still expect that cash from operations in those years will be comparable to or better than the 2009 to 2010 levels.

The impact of the FAS/CAS adjustment on our 2010 income statement is also displayed in our webcast presentation.

Rather than speculating where discount rates and actual returns will be at year end our earnings release include sensitivity values for these variables to assist you in your modeling.

Looking ahead if we had discount rates and actual return assumptions consistent with those used in our 2010 forecast, we would expect the FAS/CAS adjustment to deteriorate in 2011 and improve significantly in 2012.

I hope this discussion has provided some macro level insight into our future pension related projections.

We will obviously update our outlook and provide you final 2010 values during our January earnings call.

Turning now to out year revenue projections, we expect growth in excess of 5% in both 2011 and 2012, led by strong expansion on the F35 Joint Strike Fighter program.

Growth in this program will also tend to put downward pressure on consolidated segment operating margins during this period.

However, we still anticipate our margin will remain in the mid to upper 10% range.

I would now like to turn the call over to Bob.

He will provide his perspective on the global environment and how our diverse portfolio of programs and capabilities has us well positioned to succeed in this environment.

Thanks, Bruce.

And good morning, everyone.

Thanks very much for joining us on the call today.

Four years ago, we were very direct in communicating to you our strategy to become the world's premiere global security company.

This strategy was based on the central premise that the world's security environment represents an expanding portfolio of demands that will not recede, but only grow in number and complexity, at a time when the velocity of change around each one of us is accelerating daily.

Examples reinforcing this premise are now many.

Concerns over conventional military threats remain.

The development of nuclear materials, and the testing of ballistic missiles continue to accelerate.

Acts of piracy and terrorism are on the rise.

And coordinated cyber attacks are increasing in scale, and consequence.

Governments around the world are straining to cover a broader horizon, as the very definition of security for their citizens expands, from missions that are familiar, like assuring national sovereignty through the maintenance of combat capability, or participating in humanitarian, peace-keeping, and stability operations, or delivering more efficient and effective government services, to missions that are now new, and evolving, like better planning for responses to natural disasters, or pandemics like the H1N1 virus.

More effective use of the energy we have, and access to new forms of reliable affordable, renewable resources.

The building and maintenance of critical infrastructure, now importantly to include information networks and databases, and determining the best way to assure high quality affordable health care for families.

Our strategic approach to meeting these growing demands has been to refine a disciplined growth portfolio model built on three principle actions; making start internal investments and leveraging our broad corporate experience to stimulate organic growth, forming high quality global partnerships that can advance the cost effective advanced for our customers and selectively pursuing targeted acquisitions that directly add to our competencies and capabilities.

I believe this model is sound and continues to be effective in enabling us to build our core business portfolio to advance into adjacent markets, and to explore horizon market opportunities.

Now, today, as we see evidence of mounting economic pressure, we know our customers must, out of necessity, fundamentally re-evaluate their priorities and examine how they spend money, to meet expanding needs, with limited resources.

This re-evaluation has created a considerable amount of uncertainty across the industry as to which programs would be continued, and which would not, particularly with the transition to a new administration.

Our job is to listen to our customers.

Make the adaptations that are necessary to position our Company for future growth, and to deliver consistently on the commitments that we make.

Our largest customer, the Department of Defense, recently announced the results of their re-evaluation of priorities, that has had several effects.

It has added more clarity and certainty to our planning horizon, it has created some near-term challenges, as we must rebalance our portfolio to address program discontinuities.

And it is also offered significant longer term opportunities for our Company.

Let me take a moment and describe these impacts, starting with the near-term challenges.

I think you all know that in our long-term planning, we were anticipating delivering at least 243 F-22 Raptor aircraft, based on United States Air Force statements of need that were consistent over a long period of time, and historical Congressional support.

This environment has changed.

Even as we sit here today, we're beginning to see the impact of the program winding down, as we discontinue production of the F-22 in early 2012, after delivering 187 aircraft.

We were also not only planning on following through with the delivery of 23 VH-71 helicopters for the presidential mission but felt confident that we had excellent prospects to compete for and win a follow-on effort for 141 combat search and rescue helicopters.

With a contract termination for the convenience of the government, and a program cancellation, work has abruptly stopped, resulting in layoffs of our work force, and those prospects are no longer possible.

With a strong overall performance record in our space systems business, we look forward to participating in the next generation satellite communications system known as TSAT and we've been making excellent progress on the related ground station program already awarded to us, known as TMOS.

Here again, with a cancellation and a termination for convenience, work has stopped.

A similar case surrounds the termination of the multiple kill vehicle, or MKV system.

These customer actions have resulted in a loss of revenue and profitability that cannot be made up in the near term.

As you might expect, we find these circumstances to be very disappointing.

But other customer reprioritization actions offer significant future opportunities.

The administration's strong support for acquiring more than 2,400 Joint Strike Fighters, and its commitment to maintain the near-term ramp rate, which enjoys Congressional support, solidly anchors the F-35.

International interest remains strong among partner countries with quantities now projected to be about 750 aircraft, and with FMS potential, that quantity will very likely grow.

The C-130J Air Lifter enjoys strong domestic and international support as it delivers great service at a competitive price.

And the global demand for this airplane has enabled us to increase our production rate from 12 airplanes in 2008 to 16 in 2009, to projected deliveries of 26 aircraft in 2010.

The recent United States Air Force $827 million contract action, or 11 aircraft, is reflective of this support.

Continuing customer support for aircraft programs is also evident in the recent notifications to Congress of Egypt's desire to purchase up to 24 new F-16 fighters to modernize its aging Air Force, and enhance its intraoperability with the United States.

This award will further extend the F-16 production line beyond 2012 as we compete for 126 aircraft opportunity in India.

With the new acquisition strategy on the Littoral Combat Ship and the performance of our first ship, the United States Freedom, we're looking forward to the down select decision in 2010, and the prospects of increasing production through-put, on a program that also enjoys international interest.

We find the United States Navy's recent decision to deploy freedom two years ahead of schedule to be very gratifying and a clear expression of value and the need for this ship.

Our missile defense programs PAC-3, THAAD, and Aegis, are delivering great value and performance to customers and given the proliferation of threats, I believe demand for those systems will remain strong over time.

You will note that the Aegis system plays prominently in the Administration's recent evolution of the European missile defense strategy.

I have a similar view of the potential for future space systems including additional classified and unclassified satellites.

Opportunities for long-term growth are represented by the potential for our customer to expand Advanced EHF satellite work from three satellites to six, and to expand our work on the GPS-3 system from two satellites currently under contract to as many as 32 over the next decade.

In the information technology area, I see potential growth of federal IT and other government agencies outside DOD, as new policy implementations are enacted, that will require new systems solutions to be performed, by our IS&GS segments.

I look forward to IS&GS expanding their role as the number one provider of information technology services to the federal government, a distinction that has been earned over the last 15 consecutive years.

There is also potential in adjacent and in horizon markets.

We're currently participating in the joint life tactical veal competition and look forward to the selection of a winning design after completion of the vehicle evaluation phase.

We're also working with our customers to improve logistics and supply chain management, determining how to use energy resources more wisely, and addressing the growing concern about cyber security.

So despite the near term challenges associated with portfolio rebalancing, I remain very optimistic about the long-term growth prospects for our Corporation.

A key to our realizing this great potential lies in our ability to consistently execute with excellence.

As we listen our customers, and to the Congressional leaders who oversee our industry, they clearly recognize that the global security environment is getting more complicated, while fiscal resources are becoming more constrained.

As their partners, we need to improve our focus and step up our game.

To that end, I re-establish the position of President and Chief Operating Officer, and ask Chris Kubasik to serve in that capacity effective January 1, 2010.

Many of you already know Chris from his services, our Chief Financial Officer for the past seven years and past two years as Executive Vice President of our largest and one of our most complex business area, Electronic Systems.

In his 10 years with Lockheed Martin, Chris has demonstrated an ability to build effective relationships with all of our constituencies, both inside and outside our Company, establish a clear vision and set expectations, and get results.

Those of you who have followed Lockheed Martin know that Chris and I work very well together.

I'm confident that his oversight of the operations of our business areas and the execution of more than 3,000 programs our customers have entrusted to us will reinforce Lockheed Martin's position as the go to team, for the most difficult global security challenges.

Additionally, as we deal with our near-term portfolio rebalancing, I have spoken to our leaders about longer-term goals.

We will look for efficiencies in all that we do.

Ways to reduce costs, and shorten cycle times, while improving quality and predictability for our customers.

While Bruce has already outlined our revenue growth for the next couple of years, as I look out further, I expect to see revenue growth greater than the rate of growth in the defense budget, probably in the mid single digit, or slightly greater range, and I expect international interest in our programs to remain strong.

I believe that margin expansion will prove difficult, as backlog realigns from higher to lower margin work, but as sales grow, I expect segment operating profit to grow as well.

I believe future margin expansion opportunities will exist, as more of our backlog flows from maturing domestic and international production programs.

We will continue to focus on and incentivize cash generation, and return on invested capital, as significant measures of value creation.

Careful cash allocation will include assuring smart internal investments, competitive dividends, opportunistic share repurchases, appropriate funding of our pension plans, and acquisitions that meet our tests for value and fit.

So in summary, we have a sound strategy, great technology, and a highly motivated and committed work force.

We will grow the top line over the next several years, and see economic EPS growth, while continuing our cash generation.

Pensions will remain a head wind for EPS and cash, and we will focus on performance and execution in all that we do.

Elizabeth, Bruce and Jerry and I would like you to open the lines now and let's take the first question please.

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

Good morning.

Bruce, I would like you to go through in the projection for aeronautics margin --

Yes.

I mean you got it down in the 11s and this year is probably going to be 12, 9, give or take a little bit.

It almost seems to me that to get the margin that low you must have been making 20% or so margins on the F-22 program which is a lot higher than what I thought or let me turn it over to you to get further explanation.

Thanks, George.

Let me say, by introduction, there is going to be a lot of moving pieces here so I am going to walk you through this slowly if I could.

Starting with sales, the sales, we are expected to be pretty strong next year, as 7% to 9% in the range that we provided to you in the guidance.

Think of that as greater than 25% growth year-over-year on the F-35 program.

In excess of $1.2 billion growth from 2009 to 2010.

The F-22, because of the draw-down that the production program in 2012 are already starting to see some early indications of that.

And so F-22 volume is probably down nearly $400 million from 2009 to 2010.

F16 is -- aircraft quantities are going from 31 in 2009 to 20 in 2010.

Think of that being in excess of $500 million or so of sales, and think of those sales coming from aircraft that are the highest margin aircraft in our portfolio within the Aeronautics business area.

And then lastly, the C130, we're actually growing the aircraft there, obviously, as Bob mentioned in his remarks, from 16 to 26.

Think of that as adding about $600 million on the C-130 program.

So if you take a look at the EBIT side of that, just again, to tie this together, EBIT does show us going down, think of EBIT in about the -- I think at the midpoint, it is like in the the 11.2% range, from a ross perspective, probably down over 1.5, 1.6 percentage points compared to what we expect to run in 2009.

The contributors there again, think of the F-35, although the absolute EBIT dollars on the F-35 are up about 60%.

Think of that as driven by the sales growth but also planned improvements on the margins, on that program, think of it being a little less than 5% in the 2009 time frame, to a little more than 6% on average for the year 2010.

F-22 sales are -- or F-22 EBIT, excuse me, is just going to follow the sales, as very similar rosses to what we experienced in 2009.

F-16 EBIT for the most part follows sales also, although the ross is obviously slightly down, primarily because of the mix, or exclusively because of the mix of the aircraft from 2009 to 2010.

And the C-130 sales EBIT, excuse me, again, also follows sales, and ross down slightly again because of the mix of aircraft in 2010 compared to 2009.

So from an overall big picture viewpoint, think of the F-35 being about a little less than 35% or so of the total sales of Aeronautics business area, growing to where it is now almost 45% of the aeronautics portfolio.

The rest of the portfolio, if I was just to take a look at the rosses in both those years, they average in about the mid teens, so there is not a change from a profitability perspective in total from the rest of the portfolio.

I characterize this as JSF algebra, just because of the greater contribution at a lower margin level.

It still seems though, Bruce, that the margin on the F-22 must have been higher than what I thought, because I factored in the growth in the F-35 and the potential margin increases that you alluded, to and I don't get the margin down as much as -- I don't get the margin down much, versus what your guidance is, so I mean is there something I'm missing there?

I can just go back and re-do the numbers and maybe I'm missing something.

I don't think I've got a different explanation than what I gave to you, George.

I mean the F-22 has had some step-ups, risk retirements in 2009, but again, as I look at it going forward into 2010, I expect a fairly similar level from a ross perspective, still strong, but not the drop-off that you're thinking of there.

Okay.

I will stick with my one question guideline and get back in the queue.

Thanks.

Thank you, George.

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

Good morning.

Thanks.

I wanted to just ask you first, on a couple of Aeronautics programs, so on the F-16, okay, you're taking the rates down, but in deference to Bob's comment, I also noted that you're anticipating the Egyptian sale of the F-16s and I noticed that on the FMS's, notified Congress of the sale to Egypt, so I was wondering if you could tell me what is going to happen with the F-16 rates, should we anticipate that you're going to continue to decline?

Or does it come back?

I mean what happens to the production rates?

Yes, thanks for the question, Rich.

We're going to hold fairly consistently.

I think it is the 20, 21 aircraft level, in 2010 and 2011.

And as we look out, say in the 2012 timeframe, we see at least a doubling probably of that build rate to somewhere in the 40s range of F-16s.

Think of that as most of the aircraft that are already in the backlog, the Turkish aircraft, I think it is the Moroccan aircraft, and we would likely expect some of the Egyptian aircraft to take place in the calendar year 2012 as well.

So fairly steady production.

And then a pretty good-sized spike expected in 2012 and beyond that, it is dependent upon what happens with the Indian competition and some of the smaller competitions we're pursuing.

Okay.

And then on a program you don't do a lot of talking about, the C-5 modernization, first thing, am I right, you have -- you delivered three development airplanes, and I think you have a contract for 49 to 50.

When do you start delivering the nondevelopment airplanes and also if you could tell me, can you tell me what we should look for for the ramp rate for that program?

Happy to do so.

We don't talk about that program a whole lot.

But it is a very exciting program.

I hope you saw in the quarter that one of the three aircraft we delivered into the test program was taken by the Air Force, and broke some 41, at least they're pending records, for -- think of this as payload, range, and getting to an altitude at certain climb rates, if you will.

This is after we've done the reengining and the modernization of the aircraft so we're very pleased with the performance of the aircraft first off.

You're also right.

We are under contract for the early lots of what is envisioned right now to be a 49 aircraft modernization program.

Think of this as the B models and the C models, out of the fleet of C-5s.

Again, a total of 49 aircraft.

You should think of that being at the end of the day, in excess of a $5 billion worth of business for those C-5 aircraft.

The build rate, I think we have our first delivery in 2010.

And that's followed I believe in 2011 with three aircraft, and then five, seven, it peaks in a few years out there, beyond that, at about 11 per year, Rich.

And Rich, this is Bob Stevens speaking.

I just want to add a note to Bruce's comment, because I think you highlighted in your question a point we don't often cover because we talk so frequently about F-22, F-35, C-130, C-5, and we haven't really talked about the F-16.

We have a highly focused program and international team here, and when we talk about future opportunities, we don't think we see at present the end of the F-16 line at all.

And there are in fact opportunities, the biggest being, as you've already cited the 126 airplanes in India.

But there are the government to government discussions today about the prospect of airplanes in Iraq.

We find replacement cycle airplanes coming up from time to time.

That could certainly be the case in Greece.

Maybe expressions of interest from countries in the Middle East, like Qatar and Oman and others.

So the horizon for the F-16 program, even though we're going to see a build-down in the quantities, as Bruce has described them to you, in our judgment, is one that still has real potential and possibilities and one that we are going to work hard to focus and concentrate on.

Again, even though it gets crowded out a little bit in the discussion about other aircraft programs.

We will take our next question from Joseph Nadol with JPMorgan.

Thanks.

Good morning.

Bruce, it might be helpful, just diving down into the F-35, and thank you for all of the detail you gave us on the Aeronautics segment overall, but you expect margins to get to over 6% in 2010.

LRIP, I would imagine your opportunity there is getting higher, considerably higher than that, and that is becoming a much, much bigger part of the pie, of the F-35 pie, so could you maybe outline the opportunities to that rate, both in 2010, and as you think out a couple more years?

Yes, thanks, Joe.

We look at the F-35, the EMD contract, is on the winding down phase.

I think we probably peaked in volume on the program, probably in the 2007 time frame, if I'm not mistaken, so we're a little bit on the back end side of that program if you will.

We had some step-ups, on the contract, in 2008, and that's what allowed us to get to the 5% I referenced earlier.

And we have some plan adjustments, already included in our guidance for 2010, as well.

And upside, beyond that, depends on how successful the flight test program is, in 2010, and our outlook for beyond that period of time.

Because that's really the crux of what the remaining work is on the EMD contract.

You're absolutely right, that the LRIP volume is starting to overtake the lower initial production volume, it is starting to overtake the EMD volume.

We would expect those contracts to be more profitable than the EMD contract.

Given we haven't yet delivered an aircraft out of LRIP, you might expect that we would be typically a little more conservative with our starting booking rate adjustments on those contracts.

But at the end of the day, we do think that they are going to be more profitable than the EMD contract, and you should think of the model, you should probably think of as not a whole lot different than if you look at the F-22 program in its early phases of aircraft delivery and how we stepped up the booking rates ultimately to get to where we are today on the program, it is a very similar model to what we expect to happen on the F-35.

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

Overall, for the program, or --

The F-35 program overall.

I'm not sure I want to target that.

And any particular year, Joe.

But I would say that is clearly our expectation, and our expectation is that we will do greater than that.

Very similar to what we did on the F-16, on the F-22 and the C-130s once they get into production.

I think we will likely hit the 10% level, likely before we get into the full rate production level, which would be about the 2015 time frame.

If that helps.

Okay.

Thank you.

Thank you, Joe.

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

Good morning.

Good morning.

On IS&GS, this is a unit that you all have looked at as growing in a 10% rate this year, a 10% type of a rate top line next year, and now if I look at your Q2 guidance, and if I then take that, we're only looking at about a 4% top line growth in the next year.

What is happening here?

Are you seeing significant changes in the markets for IS&GS?

Doug, I will take a shot at that.

I think if you look at the range we've given you, we were in the 4% to 6% range which is definitely lower than what we've outlooked before.

I see a couple things going on there and first let me give you a little bit of color on the individual lines of business that we see there.

It might surprise you somewhat to learn that our Defense line of business there, we actually expect to have kind of high single digit growth, within our Civil line of business, think of that as kind of the mid single digit level, and think of our Intelligence line of business as being in the low single digit growth.

So it is not a uniform level of growth across the three business areas.

Or across the three lines of business, excuse me.

I will say we probably, given the experience that we had in 2009, with a number of the protests, a number of the delays, a number of the program startups and funding concerns that occurred, we probably put -- recognize that fact, and probably turned that into our outlook for 2010 as well.

So for instance, we saw the bigger things that impacted us.

TMOS cancellation was in IS&GS.

And so while there were some sales activities in 2009, again, as Bob mentioned in his remarks, that burden was terminated, so there is nothing in 2010 for that.

A couple of the larger contracts, I mentioned the second quarter, the [SASTA] contract, and the fact that that was planned, actually the 2009 start, today it is a 2010 competition, with a date uncertain as to when that will take place.

So we have taken what you would probably assume to be the appropriate action resulting from that.

Some of our larger contracts, some of the IDIQ contracts we're expecting to have in 2009 have just come into fruition.

For instance, the GSA [fame] contract, and the [Afri-cat] contract which you may recall in 2008 was a significant contributor to our overall growth levels in 2008.

That contract actually was just recently awarded for its 2009 activity.

And think of this as being delayed primarily because of the administration changeover.

So given that backdrop of what we've seen happen in 2009, I think we've just tried to reflect -- you could call it a more conservative view but I will say a more realistic view of what our expectations are in 2010.

When I look at this, and the mix change, the mix shift that you're describing and I also think about margins here, we're looking at margins in 2010 based on your guidance roughly the same as you're talking about for '09.

These are significantly below what we've seen from this business for some time before.

Can you explain why that, why you would continue to expect that to go on?

Yes, I think it is a couple of things.

I think one is this is reflective of the awards that we've had a significant number of awards recently and I think this is reflective of some of the margins that are coming on those new awards.

And secondly, we had I will say a fairly aggressive approach in 2009, relative to I will say profit adjustments, and claims settlements and the like that were taking a little less aggressive approach in 2010 given what we experienced in 2009.

I think those are the two biggest drivers of what is going on.

This is--I will remind you this is a business that we always kind of viewed as much more of an ROIC focused business and not much capital intensity that has good cash terms with it, and so this is a business where somewhat lower margins than some of the more capital intensive businesses that we have is probably what we should be expecting.

Okay.

Thank you.

Thank you, Doug.

(Operator Instructions) We will take our next question from Peter Arment with Broadpoint.

Good morning.

Good morning.

Actually you've hit upon most of my questions.

You could, Bruce, walk us through a little bit again on Aeronautics on 2010?

I guess I'm a little confused.

Did you say that C-130 EBIT is not going to be, you know, you're not getting any benefit from that?

Or did I just misinterpret that?

No, I said -- or at least I think I said, C-130, we're seeing the 10 aircraft addition there, between 2009 and 2006, and I think what I said is that EBIT would likely follow the sales at proportionate levels, actually ross might be slightly down, primarily just because of the blix of aircraft.

I think there is -- mix of aircraft.

I think there is -- there is not uniformity, there is not a single contract for all of the aircraft that are delivered in any given year and that mix changes from year to year.

As we look at 2010, versus 2009, it is slightly lower, but literally, it is still something you can be very proud of, I will say that.

Right.

Okay.

I understand.

And you have hit on all my other questions and also on your guidance, you don't assume any stock buyback, correct?

Basically if you look at where we are at the end of the third quarter, we are at 385 million shares and basically what we assumed for the guidance for 2010 is flat line at that level for the year.

Okay.

Thanks very much.

Thank you.

We will take our next question from Myles Walton from Oppenheimer & Co.

Thanks, good morning.

Bruce, a question for you on the cash flow.

You mentioned the 2011 picture improving versus the 2009, 2012 levels, and I guess two questions here, first, what is your anticipation for burnoff of advances in 2010?

And then what is the moving parts into 2011 that are really causing the improvement on the cash side?

We're actually expecting in 2010 a little bit of improvement on the advances.

Think of that as some of the international contracts we're getting, most likely on the C-130.

It would probably be the FMS deals we announced previously, think of this the Iraqi aircraft orders or the Kuwaiti aircraft orders so that will likely bring with them some advanced payments that will likely contribute positively towards that.

Inventory, we expect a little bit of turn on inventory going the other way in 2010, as we ramp up the build rate within the aeronautics portfolio.

And then beyond that, we expect again strong continued cash flow from each of the four business areas, and there is a little bit of tax benefit, actually going into 2011 and 2012, in terms of payments that will contribute to better cash flow, but again, as I said in the prepared remarks, I think we're looking even with the pension funding, cash to be at least as strong as what we've seen in 2009 and 2010, if not a little stronger than that.

And one quick follow-up.

Is it fair to say that the 500 million CAS increase in the P&L is having about a 50 basis points hit on margins in 2010 versus '09.

I looked at that a little differently Myles.

It is a good question, because CAS did increase fairly significantly from 2009 to 2010, probably closer to about $400 million, maybe I got my numbers a little wrong, I think it is $400 million, increase, yeah $580 million to $990 million.

Think of that, it is a little difficult because some of this gets spread over contracts that cross multiple periods but think in probably 20% to 25% of that CAS increase is falling to the bottom line, on fixed price contracts that are in our backlog.

And think of most of those fixed price contracts residing in the Aeronautics business area, and in the Electronics Systems business area, so it is as we looked at the impact of that, we think overall, that's probably had a two or three-tenths percent.

Two or three-tenths percent impact from a ross perspective relative to the CAS hitting on our price business from fixed price contracts.

Obviously that eventually begins to wither away as you start to price those new contracts and price that CAS impact into that.

So that's a little bit of a timing issue that we expect to recover in the out years.

That's helpful.

Thank you.

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

Thanks, Bob, I'm wondering if you could talk a little bit about the programs that you said were challenges, VH-71, TSAT, MKV, and F-22 rolling off, do you think there are still others at risk here or do you feel you have already taking your lumps on most of your major programs?

And can you see CEV in there as a potential at rest program?

I think it would be fair to say not only we at Lockheed Martin but probably all of the companies in the industry, recognizing two factors, a change in administration, and the demand in the global security environment then separately, the changes that we're all seeing in the global economic environment and how those economics are affecting domestic policy here.

We expected to see a change in priority.

We just didn't know exactly where it would fall and how it would roll through our backlog and our future horizon.

So in one sense, Troy, I thought we got a great level of insight.

Much more clarity.

I don't know that I can tell you today, it's 100% so, but I think -- I think it is pretty well established, going into the quadrennial defense review, as to what program priorities have been established.

And I find that when we look at our backlog and our future horizon again, some of the statements of what will be highly valued and most desired, like the Secretary of Defense's comment about needing, quote, 75% solution soon, rather than a 99% elegant solution that I have to wait years for, and costs a lot of money, favors companies who have effective backlog, where you are executing and meeting your expectation.

Because you can derive, and spiral development from those capabilities into a broader range of 75% solution.

So I think we pretty much heard the majority of the repriorization effect on our backlog and I think that is what Bruce has been so thorough in trying to describe to you relative to the near term guidance and portfolio rebalancing and we really do look at it as rebalancing of a portfolio at this time

You mentioned the crew exploration vehicle or the ORION program.

We have real confidence of the program.

We believe we are doing a very good job in developing an adaptable system that can not only go and perform well in low earth orbit, but can satisfy mission aspirations that may go beyond low earth orbit if it was a lunar objective or a martian objective or beyond.

So we're doing well.

I think we've got a tight design.

You know there are studies and appraisals under way now about what the overall strategy should be.

And that final determination has not been made.

But I believe the ORION program will demonstrate value across a variety of strategic alternatives with respect to human space flight.

I think the one thing probably most people could agree on is that the shuttle won't fly forever.

And that a human space flight program has value in many aspects of American life.

So we will probably hear more about that.

And we may hear some fine-tuning.

But I think the net reinforcement of the investments that we've made, the way we have oriented the business over time, far outweighs the short-term challenges and portfolio rebalancing.

Okay.

That's great.

Thank you.

You're very welcome.

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

Bruce just wanted to get back to the 2011, 2012 margin comment.

I think you mentioned to think about it in the mid to upper 10% range.

It looks like we will be in the upper 10% range in 2010.

Just wanted to ask, is there anything structurally that gets us lower than that in 2011 and back up in 2012 or is that just the range to think about going forward in that range?

Why would it maybe be below upper 10% in 2011, 2012?

As I said on the -- in the description of the Aeronautics business area, it is most significantly driven by just the infusion and the tremendous growth rate of the F-35 program, over that period of time.

We've talked about in the past the fact that we thought Aeronautics could be a $20 billion a year business by the year 2015 and probably 75% plus of that coming from the F-35, that's still the case in our estimation.

If not greater than that.

So if you put any kind of compound annual growth rate on the F-35, and as I said earlier, it grows greater than 25% year-over-year in 2010, it grows at a tremendous clip, and when you -- which is all goodness, frankly, but it does bring with it the margins that you would expect on the early phases of this firm that will last for the next 30, 40 years.

As I look forward,the pressure is going to come in [TARO] just from the growth of the F-35 program.

I think Electronic Systems stays fairly consistent at the 13%.

Some upside potential as we see some of the international, particularly missile defense applications coming to fruition.

We have some upside there.

Space, space has been 11% now, for -- or higher for two consecutive years.

We've got the demise of the shuttle program, and with that, our support contract, United Space Alliance, USA contract, in the 2011 time frame likely that will bring with it some diminished equity earnings that we would ordinarily get from that contract.

But as we sit here today, we think we have opportunities to essentially keep that margin fairly consistent with what we're doing in 2009 and 2010.

And then IS&GS just for planning purposes, and obviously we're going to try to have opportunity greater than that, but we still think that is going to be somewhere in the 8% to 9% range during this period of time.

Okay.

That's very helpful.

Thanks, Bruce.

Thank you.

We will go next to Noah Poponak with Goldman Sachs.

Hi, good morning.

Good morning.

Guys, on the comment that the top -- the total top line can grow in mid single digits for a couple of years beyond the end of the decade, I think it is clear that you expect the Aeronautics business to grow.

Can you quantify what you think the business excluding Aeronautics can grow at in the two to three years after the end of the decade?

We still think -- I will let Bob just in here in a second, I'm sorry but we still think Aeronautics is obviously the fastest-growing, it could approach near double digit growth rates by the 2012 time frame, year-over-year.

We think electronic systems still, but for the 2010 situation, with the rebalancing of the portfolio, the impacts of the presidential helicopter, and the like, we still think that is probably in the mid single digit level.

Maybe slightly lower than that.

4% to 5% level.

Think of that.

Space, we see some prospects of growth.

We've kind of described that as a flattish business.

But we're getting -- I will say from some of this -- that Bob described the rebalancing of the portfolio, we're seeing in the not too distant future, some significant potential classified satellite activity for the US government that at some point will bring some lift to the Space business area.

Maybe not in the time frames we're talking about.

But we could see some significant orders in that latter time frame that I discussed earlier.

And then in the IS&GS, we still think that is -- think of that as mid to double levels of growth rate on an annual basis.

Still outstripping the market in general, and still outstripping the DOD marketplace as well.

Could you potentially -- could you categorize what kind of investment account growth is imbedded in those assumptions?

From a DOD perspective, we think it is probably in the 2%, maybe 2% to 3% range per year.

I'll turn it over to0 Bob just for a little more color there --

Noah, thanks.

And of course, you would appreciate, we've thought a lot about what circumstances we would be facing in the broader market relative to -- let me start with deficits.

So the Defense Secretary said he would really like to see a budget that has modest real growth.

And we appreciate that as a sound aspirational goal.

He also said I don't want to see a lot of cuts and then a lot of reacceleration.

So think of that boom/bust cycle.

And certainly, we like every part of that phrase.

If we can get stability in the budget over time, absenting the boom/bust cycle, I think there will be some head winds on the aspiration for modest 2%, 3% real growth.

I think it might actually be tighter than that.

And our growth estimates assume some downward pressure on that real growth.

And the reason we offer this growth prospect to you with confidence is we've already gone through some of the first screening on priorities, and we know we have to focus on affordability and cycle time, good cost estimating and delivering what is expected on schedule, and we're working hard to strengthen those aspects of our portfolio.

So we think we've got a number of the right programs in the right place at the right time.

Many of which have had a really good start, so there is a foundation underneath them.

And I think even with a little head wind, we should be able to sustain these growth expectations.

I think the unknown for so many is, as we look at deficits, expanding, we need to see a restoration of GDP expansion as well.

The health of the economy has to come back, we have to see the recovery, not necessarily over the next couple of quarters, but we've got to see a resurgence in the economy that will generate revenues that will help liquidate the debt that the nation is assuming.

And if that weren't to happen over the next say few years, then we will be having different kinds of conversations with you and others, and we will probably all having these kinds of conversations.

So there is still an uncertainty out there, but we have tried to look very carefully at the portfolio and the things that we have to do to consistently be evaluated as adding value to US government missionaries, even during times of increased fiscal stress.

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

Is possible.

And as a share of the total, and it is possible that there will be pressure on some of the other agencies beyond the Department of Defense.

But again, we think we have the program portfolio that positions us well to essential government services.

I mean I would also just add that everywhere we go, and I'm going to guess that for many on the call, there is some sense of this as well, the global security environment really just is not settling down.

It is getting more interesting and more complicated.

And it means that our government and the governments of friends and allies with whom we participate in building partner capacity, meaning they're going need programs, and they're going to need capabilities, then they're going to have to address more things.

And that's why we're putting such an increased emphasis here.

Redoubling our efforts, really, on affordability, cost reduction, cycle time management, for scheduled delivery and so forth.

It is the right action for us to take, because we do sense that it is going to be increasingly difficult to hold a modest real growth defense budget or other budgets in this environment.

So that is certainly true.

Elizabeth, this is Jerry.

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

Yes sir.

We'll take our next questions from Sam Pearlstein with Wells Fargo Securities.

Good morning, or good afternoon.

I know that, or since the last quarterly conference call, some of the budgets have worked their way further through Congress.

I'm trying to understand, within your backlog, has anything additional changed in terms of any backlog that you have taken away from programs that have been canceled?

Because I know some of them like the VH-71 happened already but in terms of the sequential $3 billion decline we've seen in the backlog.

No, I think you've probably seen the full expression of all the reprioritization actions as they've affected our background as we've seen them.

I'll jump in, Sam.

Third quarter was light, but we knew it was going to be like going into it.

There just weren't a lot of competitions there.

We expect a much better fourth quarter.

That is where a lot of the follow on contracts will be as well as some of the orders we've already talked bout including the C-130J aircraft, that Bob mentioned in his remarks.

And Bob, if you don't mind me asking a follow-up question.

There was been a lot of question about organizational conflicts of interest and that is potentially causing some possible divestitures in other contractors.

Any sense at Lockheed Martin if that would cause you to have to think about changing some of the business mix?

Yes, not as we see it today.

We're certainly mindful of conflicts of interest.

We run our business with great awareness as to where they exist, and what mitigation strategies are available.

We don't think -- actually, I must be candid with you.

I think some of the conversations that I've been exposed to may give the appearance of a situation more acute than the ones that we see, particularly working closely with our customers.

So where it is necessary for us to have a certain provision in place, whether it is a fire wall or some other mechanism, we certainly have them, and we police them, it is not a broad consideration across our business.

We're not being asked or it has not been suggested to us that we divest segments of our business.

We're not planning to divest segments of our business.

We're planning to rigorously adhere to all expectations about not only conflicts of interest, but all the other expectations about propriety and the business conduct issues that we face, and we want to improve our execution and performance in those areas that we do have.

So I'm not anticipating it.

We're not planning for it.

The discussion that Bruce has led you and the other participants in the call today, through today, don't have that as any of our planning assumptions strategically or operationally.

Okay.

Thank you.

You're welcome.

Our next question comes from Rob Spingarn with Credit Suisse.

Good afternoon.

Good morning.

Hey, Rob.

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

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

If I think about that, and I think about the absence of the effect of a share buyback, and you've got a fairly recent authorization increase, I think about 20 million shares --

Right.

And then if we were to look at pension and market, where rates and returns are today, how might that affect, or at least the pension part, how might that affect the costs that you're expecting next year, if we were to mark things as of the quarter?

Looking at the quarter, we gave you the guidance that basically said it was 8.5% for the year, on the asset side, and six and one-eighth on the discount rate.

Looking at it today, we are doing much better than that, as we sit here, what is today, October 20, and we're doing much better than that, from an asset return perspective.

The discount rate, just in the last week or so, we have seen about 20 basis points improvement there, but think of the asset return in the mid to upper teens, as we sit here today, and think of the discount rate, if we were to pick it today, likely in the high fives.

And the kind of interesting math that goes along with that, is if we were to make 2010 based on those current assumptions, although they're different than the asset return, and the discount rate we have in our guidance, the absolute FAS/CAS is just about the same exact number.

If you walk through the sensitivity analysis that I've given to you, and the press release, and use the differences that I just talked about, I think you will see that that works out to be just about the same FAS/CAS.

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

I think R&D tax credit, I think the -- we obviously asked for share repurchase authority with the intention of continuing to do that, which we historically do not put in our guidance going forward.

And frankly we will see what happens.

The biggest swinger obviously is the discount rate between that and the end of the year if business rates go up.

Thank you very much.

Rob, let me just add a little note on guidance.

Because this question that you posed gets posed from time to time, and it is not our desire to necessarily appear conservative, but I will tell you I think we construct guidance in a fashion that is just consistent with the way we approach all the interactions we have with our customers, and on all of our programs, our customers hold a standard that say you don't take credit for something until you earn it.

Until you demonstrate it.

I mean it is a very rigorous process and very healthy for our business when we approach all subjects like that.

So on the R&D tax credit it may occur, it may not occur.

It has occurred in the past.

What we try to do is just be absolutely transparent and clear to you about what is or is not in that guidance, but I personally rather like the standard here that says go earn it and achieve it and demonstrate it before you record it, or include it in your expectations.

So I trust that we're being sufficiently clear to you and transparent, so you all know what is and is not in the projections that we give you.

But that's the philosophy around which some of these projections are formulated.

Bob, and I certainly agree.

I think that is the right approach.

Of course, this early in the guidance cycle, but of course, you know, from where we sit, we think about trends, and what has happened before so we can consider the possibilities out there.

Great.

I'm glad it works for you, Rob.

Thank you again for the question.

Thanks, Bob.

We will take our next question from Cai von Rumohr with Cowen and Company.

Yes, thank you.

Could we have some more comment on the F-16 bathtub?

I mean it looked like it was going at 30 a year and now it is going down to 20.

I mean who are the guys who moved out?

Are they Pakistan, Morocco?

Is this the result of normal bureaucratic inertia, is this the result of a change in foreign arms sales policy under the Obama administration?

And what is the chance that that 20 number in 2011 could be 30 or could be 10?

Cai, there is nothing magical or mystical.

No one has moved forward, no one has put a step in there.

This is simply playing out the bag log.

Think of an F-16, from contract to award to contract delivery, and taking about three years so what we see happening in the year 2010, are awards that we received in 2007.

And think of what is happening in 2011 as the awards we received in 2008 and so on.

And I won't say set in stone, but it is pretty close to that and it is just a function of what orders we had on a given year basis and three years later we will deliver those orders.

And yet, you've got potential for Egypt, you've got the potential for Iraq, and so those all are what, 2013?

There is a chance some of those will slide -- that's what I made the comment earlier, that we expect the build rate to get into the 40-ish level, in 2012, that's because we think some of those, we can probably slide into the later part of 2012, but the bulk of those will likely be in 2013 and beyond.

And should we think of any margin impact from going from 20 to 40?

Or is that covered in the contract pricing?

We've got -- we have a customer who is a very intelligent customer who would expect, when volume goes up, that they would expect to see reductions from things like overhead absorption and the like and you wouldn't expect to get windfall profits from there, but I would expect to get similar margins going forward to those experienced on the F-16 behind it.

These are all international sales.

I wouldn't expect to see necessarily significant uptick to where we are, but I wouldn't expect it to go down either going forward, out that far.

But I mean so when they go down to 20, we shouldn't expect the margins to suffer, as a result of that?

I would not.

Thank you.

Thank you.

Our next question comes Joe Campbell with Barclays Capital.

Yes, good morning.

I have a question for Bruce about the PPA and CAS in 2010 and 2011.

You said before that something like 25% of CAS might fall through to the bottom line and hurt earnings.

And the other 75 would be recovered I gather.

How much is the PPA higher than CAS in 2010 and 2011, and why is that it goes back down?

What is happening with the government changes?

Is there going to be something different for the FY2011 budget?

Or you know the FAS/CAS harmonisation or whatever?

What is happening there?

Let me give you a little background.

We were a little unclear going into this year exactly when the CAS harmonisation was effective.

Did we lose you?

No, I'm here.

Sorry, Joe.

Maybe it was on this end.

We were a little unclear when the CAS harmonisation would take place.

I think the final rule making has not yet been disclosed in 2010 yet.

But all indications are that it will happen sometime prior to the end of the year, with the effectivity being January 1, 2011.

And I will remind you that CAS harmonisation, essentially all that does is accelerate CAS expenditures or CAS recovery to more closely align with the PPA.

So those will both take effect again in the 2011 time frame.

As I look at 2010, the PPA or the ERISA funding requirement is not too different, purely by coincidence, than the FAS numbers in 2010.

I think it is the 1.4 billion that I teed up as the contribution in 2010, that is the PPA value in 2010 if you will.

And we would expect that the CAS number will go up slightly above that in 2011.

And that the PPA funding will go higher than that.

Again, for a couple of years.

Until such time beyond 2012, 2013, where those two will reverse.

If you recall, we gave a chart I think it was in the second quarter, the second quarter Jerry or further than that, where we showed the FAS/CAS trend line since the beginning of Lockheed Martin's history in 1995, it says eventually these two curves between the FAS and the CAS and the ERISA they all tend to equate to the same number.

And while we have a little short fall in the near term, we think that gets up made up in the longer term and will be generating cash, if you will, as a result of the CAS exceeding ERISA requirements.

I gave you a whole mouth full there, Joe.

Hopefully that made sense to you.

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

Or are those amounts gone forever?

No, we definitely get the ability to bill it under our CAS.

It is strictly the timing.

Even with CAS harmonization, ERISA, which is -- the PPA is the new ERISA or ERISA is the new PPA if you will.

That has accelerated even with CAS harmonisation in advance of CAS.

But eventually CAS catches up, no doubt.

And just so I'm straight, is the CAS going to be aligned so that it can't be lower than the minimum ERISA or is CAS going to be aligned with FAS, so that what if FAS is high, CAS will also be high, so that we can expect from a regulatory point of view that CAS and FAS will be the same?

Or is it only that PPA, which is minimum funding, is going to be aligned with CAS?

You're always going to have -- excuse me, even with your PPA, you're always going to have a difference between CAS versus ERISA, which is PPA, and versus FAS.

Think of the FAS and the CAS, again, you're going to have different levels of amortization of gains and losses, different periods of time.

I've always said, the CAS, a little longer to enable -- think of the appropriators have have to fund to be able to pay for CAS, you need some time to actually get that in the appropriations in the five-year plans and the like, so that is typically a longer amortization, or spread period than is the FAS.

ERISA is different still.

It is typically more front-end loaded than is CAS for the reasons I just described.

But those three will still move somewhat independently of each other.

Okay.

Great.

Bruce, thank you very much.

Thank you, Joe.

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

Let me first thank you all for tuning in on the call today.

Let me also reiterate for each of you that we intend to perform at a very high operational level throughout this Company.

We have a strong portfolio of long-term work.

Rock solid balance sheet.

Excellent cash flows.

And sound credit ratings.

We have an outstanding work force that knows how to meet challenges and I want to end the call today by thanking our 140,000 employees.

This team has enabled Lockheed Martin to achieve operational and financial performance while providing mission critical products and serves to our customers.

It is through their dedication and talent that we continue to generate value to customers, and to our shareholders.

I do appreciate your interest in the call today.

And we're all looking forward to talking to you again in January.

Elizabeth we will sign off the call and thank you for your help.

Thank you.

Once again, that does conclude today's conference call.

And we thank you you for your participation.