洛克希德·馬丁 (LMT) 2009 Q4 法說會逐字稿

Welcome to Lockheed Martin's fourth quarter earnings conference call.

Just a quick reminder, this call is being recorded.

At this time I will turn the call over to our host, Mr.

Jerry Kircher, Vice President of Investor Relations.

Please go ahead, sir.

Thank you Beau and good afternoon, everyone.

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

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

I would like to remind you the statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to the Safe Harbor Provisions of Federal Securities law.

Actual results may differ.

Please see today's 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 web site today, that we plan to address during the call to supplement our comments.

Please access our web site at www.lockheedmartin.com and click on the investor relations link to view and follow the charts.

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

Thanks Jerry.

Good afternoon everybody.

Thanks for joining the call today.

It's probably a little late in the year for this, but let me wish you all a happy knew year and hope that 2010 is off to a good start for you all.

As we entered 2009, we certainly had some expectations about the environmental circumstances that we would face during the year.

With a new administration, we expected some new priorities, although it was difficult at the outset to predict exactly how those new priorities would unfold.

Given the work that we do with our customers all around the world, we were absolutely certain that the global security environment had many growing challenges that we needed to face.

And like all of you, we watched as the global economy struggled, mindful of the potential pressure that might be applied to our Company, and certainly those that might be applied to our suppliers in the form of insufficient liquidity or other impacts that they might face.

By about mid-year 2009, we had a pretty good assessment of where the program priority shifts were likely to occur, as the new administration made some changes.

And several of our programs were terminated or canceled or capped.

Some with immediate effect.

Now, that certainly was a circumstance that we had not seen in prior years.

One that confronted us with some sizable near-term operational and financial challenges that required us to make -- take immediate action to rebalance our portfolio, and realign our operations.

We did by strengthening our executive focus on operations and reconstituting the Chief Operating Officer position, by reallocating talent and resources to different parts of the Company where we thought they would be best applied and by making the difficult, but necessary reductions in consolidations to emerge leaner and in good fighting shape.

Even with these additional challenges, we worked to maintain our momentum and our focus, and performance in 2009 continued at a high level, achieving record sales, record cash generation, a 20% return on invested capital, and achieving our $5 billion segment operating profit goal a year earlier than we had originally planned.

Maybe more than anything else, we recognized that we and our customers are facing a new reality.

As they confront expanding mission requirements and greater fiscal pressure that's simply not going to go away in the near term.

And as the industry leader, we're working now to contain costs, shorten cycle times, improve quality, and meet the commitments that we have made by redoubling our focus on operational excellence, which has been a strength of our Company with the recognition that we really should seize this moment to do a better job.

If this sounds a little bit like back to basics, it is just that.

Because in our judgment, the best way for us to move forward to reach our potential and to continue to grow, is to increase our focus on the basics of execution, because that's what our customers need most from us now.

We have very solid fundamentals in this company.

We have extraordinary talent and our access to people and ideas is unconstrained.

We have resources for investment.

We have a creative energy in this company that drives innovation and a competitive spirit that thrives on meeting big challenges and it's a dominant part of our culture And, we have the right long-term view.

Our global security strategy is sound.

Security needs aren't going away, even with fiscal pressures.

They will grow in volume and in diversity.

Security here at home and with our trading partners abroad is essential to our economic recovery and growth for the prosperity of our citizens and to the well-being of many others.

Security is so essential that Americans have always invested what was needed, even in times of economic stress, and we'll continue to do so.

So while some of our programs and operations were impacted by reprioritization decisions in 2009, our longer term business prospects have been strongly reinforced.

We have commitments to tactical aircraft, air lift, missile defense capabilities and space systems, intelligence, surveillance and recognizance systems that lead to situational awareness.

And the command and control systems that allow them to work effectively Sea power through Aegis and the lateral combat ship, precision guided weapons and a variety of other programs all of which having been strongly supported.

We saw evidence of this support in the recently enacted 2010 budget, which solidly funded our programs.

I believe we'll also see the support in the 2011 budget scheduled for release next week, February the 1st.

That budget will likely target some top-line growth and be accompanied by a request for additional overseas contingency operational funds.

And I believe we'll see the support sustained throughout the future year defense program, and in the quadrennial defense review that will also be released next month.

With the changes 2009 introduced into our portfolio, we are now in alignment with government priorities and needs and our back to basics approach that emphasizes tight processes that yield predictable results, flexible systems that are adaptable and responsive to the accelerating pace of change and those that can be used by multiple customers and services will position us well for revenue growth, greater than the defense budget while we drive to meet our goal of expanding our international sales to 20% of our total revenue by 2012.

There will be a continuing demand for global security solutions and that demand will favor those with a proven track record of execution which has been a hallmark of our success, and we're going to build upon that strength as we drive towards perfect performance.

Let me ask Bruce now to give you some further details on 2009, but I would like to come back in a few moments and give you some color on the Joint Strike Fighter before we open the lines for your questions.

Bruce?

Thanks, Bob.

I would like to build on Bob's earlier comments regarding our solid performance in 2009, and we have included some charts on our web site to help with my discussion.

I would encourage you to open those charts now and follow along with me as I make my comments.

Starting with the fourth quarter sales summary chart, chart two, overall the corporation grew 13% in the quarter, three of our four business areas grew at greater than 10% in the quarter, and if you take a look by the individual business areas, the aeronautics growth was driven by F-35 volume and the C-130 production ramp up.

I remind you that we had about 16 C-130.

Not about, we had exactly 16 C-130 deliveries in 2009 and we are looking to go to about 26 or so in 2010.

Electronic systems growth was driven by missile defense, tactical missiles.

and our simulation and training business.

Move over to space.

Space was driven by a classified satellite delivery in the quarter and we also had a commercial launch where we had no commercial launches in the fourth quarter of 2008.

IS&GS growth was driven mostly by the defense line of business with some continued delays in our civil line of business, lowering the overall growth compared to the prior year's fourth quarter.

If you now turn to the full year sales chart, chart three.

All of our four business areas grew at rates ranging between 4 and 8% and overall the corporation grew sales by 6% to a record $45.2 billion.

If you now look at chart four, you will see that the quarter's book-to-bill ratio and backlog for each business area.

Three of the four business areas had strong bookings with aeronautics, electronic systems and IS&GS all well above a 1.0 book-to-bill ratio.

Space was less than 1.0, but as you saw in the previous chart, it had 28% sales growth in the quarter and this is a business area that typically has orders that sort of come in a lumpy fashion.

Significant awards in the quarter included an almost $1 billion order for PAC-3 missile work for the US, Taiwan, and UAE.

11 C-130Js for the US government and the annual fleet ballistic missile award for around $0.75 billion fin space systems.

We ended the year with a backlog of $78 billion, an increase of $1.6 billion over third quarter, even with a 13% sales growth in the fourth quarter.

Turning to chart five, cash from operations, 2009 was exceptional for cash generation.

It represented our highest total cash generated ever, and it allowed us to make $1.5 billion discretionary contribution into our pension trust.

If you recall in the fourth quarter we gave guidance of $3.1 billion of operating cash and assumed a $1 billion pension funding.

What we actually did was we contributed $1.5 billion of pension funding and yet our operating cash grew from the 3.1 to the $3.2 billion level.

So $600 million improvement.

We ended the year with $2.7 billion of cash and short-term investments on the balance sheet and I will pause on this chart by saying we are very pleased with this cash performance that allowed us to continue cash deployment practices while making significant contributions to our employee pension trust.

We now move to chart six, our share repurchases summary.

I thought this was an interesting chart in that it shows net share count reduction rather than total share repurchases over time.

And what you see is 2009 is largest year for net share reduction at 5% of shares outstanding.

It also shows an impressive record of share reduction since 2005, increasing every year in total reductions of 15% of shares outstanding in 2005.

Updated guidance for share repurchase in 2010 includes $1 billion for repurchases, and I will remind you that we have 29 million shares with our repurchase authorization remaining at the end of 2009.

If you now look at chart seven, we will take a look at the earnings per share.

The left-hand side of the chart shows our quarter over quarter performance for the fourth quarter of 2009, versus the fourth quarter of 2008.

The right-hand side of the chart shows the same performance on an annual basis.

The quarter had strong EPS growth of 6%, but if you adjust for the FAS/CAS impact the resulting growth is a very strong 18%.

On annual basis, year-over-year GAAP EPS actually dropped by 1%, but I will remind you that the FAS/CAS change between 2009 and 2008 was almost $1 swing in earnings per share.

Eliminating FAS/CAS annual EPS grew by 11% to $8.54 per share.

Now looking at our guidance change charts beginning with chart eight, the FAS/CAS pension summary.

This reconciles our October guidance with the current guidance.

We had a robust 20% return on asset performance in 2009.

This greatly outperformed the 8.5% assumption in the guidance we provided in October, and it more than offset a 25 basis point reduction in the discount rate at year end.

For information purposes, the final rate at year end was 5.875% versus the prior year, at 6.125%.

Lastly an additional $500 million pension contribution benefited FAS/CAS in 2010 by some $40 million or so.

Net of all of these changes, 2010 EBIT is $55 million higher due to reduced FAS/CAS adjustment.

Finally if you will turn to chart nine, we will reconcile the revised 2010 EPS guidance with our October numbers.

Starting with the October guidance of $7.05 to $7.25 per share.

Our reduced share count was the $1 billion included in current guidance increased EPS by $0.15.

The reduced FAS pension expense or the $55 million improvement from the previous page added an additional $0.10, and then the higher interest expense from the additional $1.5 billion of debt we acquired in the fourth quarter reduced the EPS by $0.15.

So all told, that adds $0.10 to our new guidance of $7.15 to $7.35 per share.

With that, Bob will continue with his remarks.

Thanks very much, Bruce.

I do want to take a few minutes to update you on the F-35.

As there has been much activity and even more speculation about this program.

And I want to cover four subjects with you today.

Whether the airplane is needed, whether we have the right approach, and by that I mean whether we are going about the right way, whether we are emphasizing the right things.

How we -- how have we been doing on the program to date?

And importantly, where are we likely to be going in the future?

Let's start with the need for the airplane which has been repeatedly validated and reinforced by the Department of Defense, and will again will be validated in the 2011 budget submission and the quadrennial defense review.

Here's why.

Air power is key to a broad range of security challenges and missions.

That's been true historically.

It's true today and it will certainly be true for missions in the future.

The aircraft in service today that are meeting these responsibilities are aging because the operational tempo has remained very high.

So recapitalization of the tactical aircraft fleet is a very high priority.

The proliferation of antiaircraft radar and missile systems continues.

And this is an area we probably don't highlight or talk a lot about, but the sophistication of these systems does create a real threat for tactical aircraft, and this threat highlights the value of fifth generation stealth capabilities embedded in the F-35 and the F-35's ability to penetrate denied air space is superior.

So the F-35 is a high priority because it fills a very critical need.

Next, there's the approach we have been taking on the program, which directly aligned with Secretary Gate's principles for guiding what the Department of Defense will buy and what it will not buy.

The secretary wants to use proven technologies.

All the technologies on the F-35 are mature.

They are modern, and they are the best in class and all have been demonstrated.

The lift ban worked.

The low observability on the airplane is effective.

The data links and advanced communications provide unprecedented situational awareness.

Secretary Gates also wants to find programs that offer joint service solutions.

And the F-35 is the model joint program.

By design from day one.

And performance of the airplane has not been compromised to achieve a level of jointness.

In fact, the jointness of the F-35 extends beyond the three US services that will use the airplane, the Air Force, the Navy and the Marine Corps and includes partner countries.

So when you think about our overall US security policy on a large front, an essential element of that policy has been to build partner capacity so that we can act with partners together on missions where we have shared values and shared outcomes.

And that requires interoperability, not just in the performance of the airplane, but in sustainment and support and the Joint Strike Fighter offers all of those features.

The secretary wants the ability to incorporate combat experience into the systems and platforms.

In other words, be able to adapt and update the system quickly.

The architecture of the Joint Strike Fighter is designed to get more information to more people sooner.

It has ISR capability built in.

It has communications capability built in.

It has the flexibility to adapt real time to mission situations as they unfold.

The secretary has repeatedly said that we should not buy overly exquisite or unique solutions or ones where the costs or other factors will result in our ability to only buy limited quantities.

Well, we just had this policy debate with the F-22 and the F-35 acquisition decisions, where the F-22 was capped in production at 187 aircraft, while there was a full purchase commitment for the full compliment of F-35s.

And when I look at the volume the US government is likely to buy, along with the volume that foreign buyers are interested in procuring, that number is likely greater than 3,000 airplanes.

We think the principles that the secretary has laid out are spot on, given the circumstances that we together are facing.

And our acquisition approach on the F-35 is in complete alignment with the acquisition principles in the department, guiding what it will buy.

With a validated need and the right acquisition approach, the question is, how have we been doing.

The short version of this assessment is that we have made great progress in some areas and not as much progress as we had planned in others.

We know that the aircraft design is sound.

Structural load tests are providing really good information.

We know the propulsion system generates sufficient thrust and that's critical in the case of the STOVL airplane because we won't have any air speed and that thrust converts completely to lift.

In fact, the propulsion system that's on the airplane today is performing at a level superior to the prior engine that enabled us to already fly an earlier version not only in the STOVL configuration but perform at a supersonic level in the same flight and the same mission.

So the engine performance seems to be more than satisfactory.

We know that the signature on the airplane is effective and as we have tested the airplane so far, there are no significant or critical design issues.

We are coding software today.

That software coding is about 80% complete.

The stability and the reliability of the software is better than we have found it to be in predecessor aircraft but I think we all recognize there's more software work to go.

We are now delivering airplanes off our production line and flowing those aircraft into the test program.

15 of 19 development jets have been delivered.

But, we are behind in the projection that we made in 2005, relative to aircraft deliveries, and that -- that scheduled deficiency is about six months or so, and that's caused a shortfall in the overall flight test program but we have received some very positive data from the tests that we have flown in the flight test program, showing excellent aircraft maturity and airplanes that require minimal adjustment or corrective actions after they land..

There's independent assessments of our ability to produce the airplane.

One has been the independent manufacturing review team and that assessment has confirmed the readiness of the production line, and our supply chain to continue ramping up the production quantities, and our early learning curve data looks good.

That early data is important because of the affordability goal on the aircraft.

So today we're at a critical juncture in the program.

The transition from development to production, and this is a high consequence intersection.

It's essential to make good decisions now, because this is the point of maximum leverage that will determine the success of the program as we look to the future.

And that success will be measured by flowing mission capable, high quality jets into operations as quickly as possible at the lowest possible cost with the least amount of risk.

And risk here is an important concept.

There is complete agreement between our Company and the government that we must focus all energy on this critical program.

The only question is, based on progress to date, based on all that has been achieved and that which has not been achieved, based on all that we have learned and respecting all that we and others know about the development, the testing and the production challenges that are associated with airplanes, what adaptations and what investments should we make now to assure success?

We're answering this question even as we speak, and I mean literally in realtime in ongoing discussions with the Department of Defense.

In our discussions, there are different views about risks, different assumptions, different estimates, different projections.

Some brought forward by us.

Some brought forward by the joint estimating team from the Department of Defense, some from the cost analysis and performance evaluation group, some from the test community, some from the services and some come from other sources.

This is an entirely healthy process.

I have worked with each of these organizations and I have worked with the people who lead and work in these organizations, and I can tell you they are professional.

They have subject matter expertise.

Their intentions are good, and we all have exactly the same goal.

Recognizing that the Joint Strike Fighter is critical and needed.

What do we need to do to assure the success of the program?

I know we are still finalizing this approach in our discussions, but I thought I would try to give you my best sense in broad strokes as to the course of action we are pursuing.

We all agree that we need stable funding and I believe that we will see stable funding as we move forward.

We all agree that we should invest more resources in the development program to help reduce risk.

That means more resources probably in the software development area, probably in the test program, maybe more test assets and more resources there.

In conjunction with the discussions we've had about increased investment, I was asked directly if I would consider converting some of the unearned award fee in the development phase to partly cover the cost of these investments and I said that I would because I believe it's absolutely the right thing to do to assure the success of the program.

We have discovered the production ramp rate and we want to strike a balance here that recognizes the delivery pressure to date, respects the content of the jet analysis and other views, includes prudent risk management provisions, but also one that promotes an efficient acceleration of volume that supports overall affordability, and force structure goals.

One innovative approach that has been brought forward would be to set a more conservative lower limit to the program ramp rate, based on the jet estimate with a provision to buy more aircraft if performance on the program warrants the acquisition of more airplanes.

Let me try to give you an example here.

In the FY-11 budget, that would mean setting a lower limit for production of 42 airplanes.

That compares to the prior year's 32 airplanes, but setting a target of, say, 48 aircraft if performance and progress continues on the program.

In that flexible approach, there's a recognition of risk, but also the important incentive and expectation that our government team and our industry team need to try to do a better job here.

Also discussed in our conversations has been the use of fixed price contracting.

If the requirements are stable, and if progress continues on the program, we would certainly consider accelerating the use of a fixed price incentive-type contract by one full year, from lot six to lot five.

I want to create the conditions on this program where we can use fixed price contracts.

I want to get the Joint Strike Fighter under a fixed price contracting methodology.

I want to test this airplane thoroughly.

I want to have a successful development program, and I want to transition the production and build production volume over time, because it's critical that we get these jets into service.

I think it's also appropriate for me to take a moment and thank the Secretary of Defense, Deputy Secretary Lynn and Under Secretary of Defense Ash Carter for the time they have invested in the discussions associated with this program which has been significant, for their professionalism which has been complete, for a willingness to think creatively and innovatively about new and flexible ways to assure success, which they are doing.

For their willingness to assign the F-35 the high priority that I and others believe it deserves and for their commitment to the program and for their continuing the investment stream that the program needs as we move forward.

So Beau, I appreciate the time to offer those comments, but why don't we now go to the lines and check in with callers.

Thank you very much.

(Operator Instructions).

We go first this afternoon to Doug Harnett with Sanford Bernstein.

Yes, good afternoon.

Good afternoon, Doug.

On the F-35,as I followed this it seems like over the past year or so, it seemed like almost an adversarial relationship with the JPO and you all sort of taking one point of view, and then the jet team and others taking different points of view.

I mean, the program seems to have slipped, to roughly six months late at the end of the year.

Now, are you talking now about a fundamentally different way of working as you go forward with the customer?

Well, let me say it this way, I don't know that I would accept -- although I appreciate your comments, I wouldn't accept the notion of an adversarial relationship.

Let me tell you what I do see here.

We believe strongly and profoundly in our ability to deliver this airplane.

I don't want this to sound arrogant or filled with hubris.

We built a lot of airplanes.

We've actually compiled in our company all the experience that we've had, even reaching back to programs like the SR-71, the F-117, the F-16, the F-22, now leading to the Joint Strike Fighter.

We care deeply.

We care passionately about the commitments that we make and we are going to deliver this airplane.

There are those in the government who have reviewed lots of airplane programs over time.

They are smart.

They are dedicated and I think they are equally passionate about their convictions.

It is a good thing to bring people together, provided that we share the same set of objectives and outcomes and I assure you we do.

This nation needs to recapitalize the attack air fleet.

So there's been some energetic discussion that might from time to time appear to be contentious because of the strength of the beliefs, but what we have accomplished together over these last weeks and months, and these ensuing discussions is a recognition that we're going to drive to a position of accommodation, that we'll stop arguing the relative merits of individual points, and what we'll do is assemble a group of collective points that will create the architecture upon which a successful program will be built.

That means that we will go to a more conservative profile on the program because more conservativism here will reduce some of the risk moving forward, as I said.

We'll keep the same level of funding but we'll reallocate that funding slightly, moving some additional money into development to assure we're doing the right things in software development, the right things in test and I assure you, Doug, I'm open minded about any other suggestion that would be on the table as to how to get this program right, but we'll sustain a production ramp rate, and in this case, a floor of 42, and create the flexibility in the approach to look at the prospect of increasing that ramp rate over time.

Which I think is a wonderful approach to meeting both the near term apprehension that has been brought forward in good faith, recognizing where we've done well and where we've had challenges on the program, but also putting the program on the correct posture.

So I think there's an increasing and positive convergence of the views here and, again, I credit people like Secretary Ash Carter and others who as you probably know have worked with us, in some cases after long weeks of working in other mission areas that they concentrate on in the Pentagon, working through the weekends with us to get this right.

So it's very much appreciated.

And I don't think you will see a high level of -- in your phrase, adversarial behavior, as much as you will see cooperative behavior when we reestablish the kind of production ramp rate, the development baseline that we all agree upon is necessary for a successful program.

And we'll take our next question from Peter Arment with Broadpoint.

A question on the JSF again.

This is obviously an enormously complex program, and difficult for us to sit on the outside gauge, how you are doing and you gave us obviously a very good assessment of that in terms of the design and the propulsion and things that have yet to be completed, but how should we view it going forward for this year?

Is it cumulative flight tests?

What's the best way for us to assess how Lockheed's making that transition this year?

Yes, Peter, I can appreciate how this might be difficult to evaluate.

Let me tell you at least one reason why.

There have been occasions where we could have put a jet into the flight test program earlier, but we deliberately did not and, of course, we don't take that action without fully discussing the merits of the action with our government customer.

The reason we wouldn't put a jet in the flight test program would be a circumstance where we would know there's going to be a change made to that program.

Maybe an update to the software, maybe an update to the configuration, and it is part of the ordinary ebb and flow of any development program for systems like this.

And therefore, we would not have the asset in place.

We would not be able to fly a test mission, and the arithmetic scoring of that would say you were supposed to fly a test mission.

You didn't.

You are down one, you are down two.

And all of that arithmetic is fair game.

But we believe that we are in the long term optimizing the overall flight test profile because with the software upgrade, the airplane will fly a more proficient test program.

There's a risk that if you know there's an update necessary and you don't put it into the airplane, then you will have to refly the sortie, doubling the number of tests and delaying the test program.

You just pushed that delay farther our in time, where it's actually less rather than greater to the advantage of the program.

In that fashion, we and the joint program office and our government customers have been thinking about how you optimize the quality of the flight test program.

Have it thorough and make sure you're testing the right things in the right sequence.

I think one of the issues that arises is when we watched the day-to-day sausage making -- and I will certainly say this about this program, there will never be a program that's living life in high -- in HD more than the Joint Strike Fighter.

There is a huge microscope on this program.

Everything that we do is examined in such incredible granular detail, in every way, because it's a transparent program.

In once sense, it's a reflection of goodness, but then in induces a lot of discussion, of, oh, my God, you found this issue in the software development or there's this issue in the test program, or there's a structural modification necessary.

I don't, again, say this in any arrogant way in the life span and the experience of building airplanes and complex systems, this is not extraordinary.

It is not a crisis.

The sky is not falling, but when we're subjected to accounts or some views of this, and certainly I think there's some of the views that you are subjected to, it sounds at least alarming if not down right catastrophic.

It is not.

And one way to measure this, Peter, is there has not been a dime of funding taken off this program.

The funding has been strongly supported by the department.

The program has been strongly reinforced by the department.

I would submit you to objectively that there's enough evidence out there, including a couple of our programs that if the leadership of the Pentagon feels that the system is not needed, or that the approach is unwarranted, or that the execution is at a point where there's real question about the ability of the system to perform, they terminate the program.

And there's a recent history of program terminations and program cancellations, and program restructurings that don't have the support and don't have the funding.

And I think we're seeing the exact opposite here.

There's a great deal of support on the part of the government.

It is what brings to the forefront this energetic discussion that Doug on the prior question called adversarial that I think is more energetic and contentious at times but with the intention of being constructively contentious.

So I look at the process here and say we're making good progress.

There's a concern about risk.

What we want to do with the government and as I mentioned, the discussions are ongoing.

So we're a little limited today, but we won't be limited for very long.

We will get a program plan that the entire test community, all of the services, the joint program office, and the under secretary of defense for acquisition agree is the right program.

We will have milestones.

We will have inch stones for measurement.

We will share those milestones with you, and we will score our accomplishments objectively, accurately, carefully and transparently and we'll be able to measure the progress on the program as we go forward.

And I expect to do that and I want to do that, because I think that creates the circumstance where people know there's real value in this airplane.

We're making real progress in this airplane.

All of the things that we believe about the potential of the airplane are, in fact, true and can be made to become real and have these airplanes get into operational service.

That's exactly what we are doing in the process that I've described.

We take our next question now from Ron Epstein from Bank of America.

Yes, hey, Bob.

Hi, Ron, how are you?

Good.

I guess I just want to follow-up on the F.-35 question, maybe from a little bit of a different angle.

There's been a lot of discussion about acquisition reform, procurement reform.

How much has that influenced what's going on with the program and the government in terms of contracting changes and then -- so let me just leave it there?

Yes, actually, I don't see any of that.

I mean, first of all, the discussions that we have been having with the building about acquisition reform really have been mature and adult and I mean that.

For example, I think sometimes sources report in a discussion about fixed price contracting, uh-oh, every contract irrespective of maturity, irrespective of risk is going to be required to be assumed by contractors on a firm fixed price basis.

That's not at all the discussion that we've had with anybody in the Pentagon.

There's no view on their part that one size fits all.

There is a very clear appreciation that there are technology readiness levels.

There are degrees of complexity in systems.

There's the maturity of capabilities, and what we've all agreed to do is to have a constructive discussion that seeks to identify almost on a case-by-case basis when a system or program will have the maturity and have the characteristics where fixed price contracting methodology can be applied.

I must tell you, Ron, I'm all for that.

I like the stability and the visibility and the confidence you have in an environment where requirements are stable and funding is stable and bring the game into Lockheed Martin.

Make this our responsibility because I think we play a very good game when we have good definition like that.

And I like all features of it, as do they.

We have not been asked to undertake a contract type in any of our program areas and I'm talking well beyond the F-35 here and where we have taken fixed price contracts, like in the case of the Littoral Combat Ship, we had already built one.

We had already understood it.

The configuration was frozen.

The requirements were set and that's exactly the kind of environment we would expect to see here.

There haven't been any other discussions about, I think, the general elements that you would include in the definition of acquisition reform, that have found their way into our Joint Strike Fighter discussions.

You would all, on the call, and you particularly, Ron, I think, would be -- would feel very comfortable in these discussions because we are doing just what you do.

We ask, well, what were you supposed to have accomplished?

What did you accomplish?

How do you value and measure that?

And knowing if we are validating the need and validating the approach and, again, the approach of the program couldn't be more consistent with Department of Defense guidelines as to the kind of things the department ought to be investing in.

If there's good faith effort by people who know how to build airplanes, if the supply chain is cycling, if the industrial base is performing, but not at a level that assuages all the angst about the risk, then what's an appropriate level of risk to incorporate into the program?

One element that has arisen is associated with the most recent acquisition reform act because that act, that was a careful deliberation by the Congress, directed the Department of Defense to load programs into baselines at a more conservative level.

And I think I understand the reason for wanting to do that.

The discussions we're involved in now say let's agree on what that conservative level ought to be, and why.

What's expected of the government teams and what's expected of us?

But let's also see if we can craft some flexibility in the model.

So if the performance is better than the conservative assumptions in that baseline, the taxpayers and the services and the people who use and support the airplanes can get the benefit of that, because we ought to be able to build more airplanes for the same amount of money if the less than conservative assumptions can be met.

We are managers.

We're leaders.

We're -- we want to change the circumstances so that the outcomes that would be associated with the conservative principles aren't the ones that occur.

We want to put energy into this.

We want to put our experience into it.

And our government customers want to us do that too.

So I think we're now working through after -- as Bruce mentioned in his comments, after setting a baseline five years ago, with puts and takes against performance, we're going to get this realigned.

We're going to continue to invest the resources in it.

The government is and we are, our talent, our energy and our experience, and we're going to drive to a set of successful outcomes.

Going from 32 airplanes to 42 airplanes is not a bad lift from lot to lot.

We'd like to do more than that because we think that will meet mission responsibilities sooner.

We'll go next to Howard Rubel with Jefferies & Company.

Thank you very much.

I promise you I won't ask an F-35 question.

I'm not going to promise you, I won't give you an F-35 answer, though, Howard.

Well, thank you, Bob.

Your preamble sort of indicates that you took the eye off the ball this year a little bit in a couple of areas.

When we open up the proxy later in the year, will we find that the incentive compensation sort of reflected those misses and what are you going to do to sort of set up some incentive comp targets because you sort of talked about transparency, , and obviously you talked about bringing Chris on to sort of help you in a number of areas so that, we can see some either operational targets or some -- some -- what I call program objective

Yes, I can actually save you the wait.

You don't need to look at the proxy.

I will absolutely assure you that this is a pay for performance institution.

I and others are held accountable for our performance.

When we think our performance should have and could have been better, then I will tell you, Howard, speaking for me personally, I think my performance could have and should have been better.

I have been held accountable by our board.

We hold our management accountable for this performance.

Management holds one another accountable and you would see that reflected in compensation, all throughout this organization.

I don't think we necessarily took our eye off the ball.

I will say and others may have a different view of this.

When you have a couple of programs terminated in midstride, it does introduce into the operations an unusual turbulence.

It takes the momentum out of some of the focus areas that we have built, and I would submit to you if you look year-over-year in areas where that was not the case, where we didn't have terminations, I think we had more consistent operational performance.

That is not an excuse.

We are a full service house.

We're going to deal with any and every situation that comes our way.

It's appropriate for others to expect us to behave that way.

That's what we expect of ourselves.

I think in complex businesses of a portfolio nature, there are always parts of the portfolio that seem to perform a little better than other parts of the portfolio.

My job specifically, and you mentioned Chris Kubasik, and I'm delighted he's in place as the chief operating officer, my job, Chris' job.

Bruce's job and the job of others is to flow some of the prodigious resources we have in this company into those areas where they can make the maximum difference.

And that means encouraging every aspect of this business that had a really superb operational and performance year in 2009 to absolutely continue that beat in an uninterrupted way.

And for those parts of the business that didn't perform to expectation, that realistically, soberly, we're going to go address those issues, make the changes that have to be addressed and drive those businesses to higher levels of performance.

We have been able to do that in the past.

I expect to be able to do that again in 2010 and I assure you, I will be held account able for my ability to do that.

We go next now to Joe Nadol with JPMorgan.

Thanks.

Good afternoon.

Bob, just going to a different segment of the business, specifically the services business.

And you referenced this in your answer to the last question, but I think that was one of the areas that struggled this past year, clearly you lowered your guidance a couple of times and then here in the fourth quarter, you missed the number.

I guess -- I understand what went wrong because it's been a very difficult macro environment for services, but I'm wondering specifically within the company, what took you so long to realize it?

Because you had sort of this constant degradation of guidance and then looking forward into next year, you have it bouncing back now with high single digit growth and margins up a little bit.

I'm just wondering, how you can be confident in that.

Yeah, that's a fair question, Joe.

I had some expectations of performance.

I have been personally and substantially involved in looking at the services businesses components and actually, I will tell you that we did not treat that business any differently than we treat any other business relative to, let me say, time and attention for executive resources and so forth.

I will tell you that it is my sense that the business -- let's think in terms of time spans of discretion.

How much volatility, how much visibility do you have in the business?

How far can you look forward?

If you look at our airplane business or our space systems business, I think you get one range of visibility.

I think one of the observations I've had, Joe, and I think it's embedded in your question about , why didn't you move faster or why didn't you see more clearly.

My sense is it's just a little harder to look forward in a services business, where there is not that level of visibility, or the uncertainty sort of builds faster sooner.

And you have to make some assumptions about how you will perform internally, and how markets perform externally, and that was a good lesson, I think for me and us to see and we're trying to adapt and adjust to that now and get greater acuity and greater visibility and put some systems and people in place that will help that out a

Joe, this is Bruce.

I will add just my view of it.

You talked about the fourth quarter maybe not coming in quite as strongly as we had hoped for, and I would say that's a fair assessment.

I don't think we've seen the improvements occurring as we had hoped they would by now.

On the other hand, we haven't seen deteriorations either.

I characterized it as we have kind of stabilized the business at this point and I think we have made some pretty significant changes, particularly in people and processes.

I feel really good about what we have done on kind of front end of the business to make sure that we have the right contracts filters, if you will, to make sure that we are signing up to good deals.

I think we made real good strides there.

And as far as the confidence in 2010, as I look at 2010, there's much less reliance on large awards where we need to unseat incumbents as compared to what we did in 2009.

And that allowed for the opportunity for protests in 2009 as well.

So we look at 2010 -- first off, there are fewer large competitions in general and secondly, where there are, in fact, competitions, we tend to be the incumbent.

So assuming we do win those contracts, protests by the losing competitor would not reduce the revenue because of our incumbency.

And, you mentioned the margin, we do have a slight margin improvement year-over-year in IS&GS and I think that's within our ability to perform at that level.

We go next to Joe Campbell with Barclays Capital.

Good morning, Bob.

Or afternoon.

I'm too many reports today.

Can you -- can you help us out a little bit with -- and I don't really want to focus too much on all of this stuff about the Joint Strike Fighter, but what -- what is really being debated?

It sounds like you are -- we read all of this stuff in the rags about some changes that move money and lowered the rates.

Are there open issues that you are still fighting for, like the chance to get back that you would like to, have but Ash and Bill and others -- or maybe the Congress you want to approve this?

What's -- what is the open issue that you would like to see and who is it that needs to go along with it?

Yes, that's kind of a broad question.

I will do my best, Joe.

So there's not a lot of discussion, let me say, that has congressional impetus right now.

And I would just note that in prior budget submissions by the executive branch, the requests for funding for the Joint Strike Fighter have been honored, save for discussion about the second engine.

Let me just separate that because that's not really part of what I'm talking about.

Yes, I don't want to know about the second engine.

So what we are talking about inside the Pentagon today is -- let me use the term "reconciliation" between a number of sets of assumptions, projections, estimates, and let me say experience.

And I will use two positions that will maybe contrast this, although there are more than two.

The joint estimating team has done a careful analysis of the development of lots of aircraft programs, and they make a set of assumptions here about the things that can go wrong and might go wrong and it's all a probability assessment.

And we do the same thing, and others do that.

I think we don't have the same conclusion when we look at where we are on the program today, and of course, we're compelled to look five to ten years out about the kind of things that would happen.

We don't have the same conclusions.

The joint program office has a set of conclusions that are slightly different than ours.

Let's say more time and more cost and let me just assume more risk, and then the joint estimating team has even more -- a sense of more risk, and more exposure than the joint program office.

So we're all talking about essentially the same test program.

The question is well, what would be the right number of test assets to put into a test program?

How many flyers do you need to fly cards that have test points that it would allow us to test how many test points before you know with confidence the airplane will always do what you want it to do?

I will set up some purely theoretical boundaries.

You can't test everything that an airplane can do, because you will test the airplane forever.

Now, that's not one of the proposals on the table, but it sets the upper bound.

So if you are not going to test everything in perpetuity, what are you going to test?

And when are you going to test it?

There are different views about that.

There's different views about how much that costs and how much incremental value you might get from a new series of tests to learn what information.

As I said, this is not unhealthy.

When you bring subject matter experts together who care, who have deep knowledge and who understand what's going on here, it may take sometime to get agreement, but you will get agreement, and that's what we are driving for.

They are absolutely well intentioned.

They want -- we want to test this airplane.

We are not going to be associated with the system that doesn't work.

I personally believe the F-35 is going to find its way into the panoply of truly great airplanes.

Truly great airplanes.

I think in the future when we look back at this program, we will all be enormously proud of the work that we have done here, but to get to that point, we have got to do the right things now.

I think we saw a little microcosms of some of this discussion say on a system like JASSM.

We had a reliability challenge on JASSM.

Some, and I know you were exposed to some reports of this, would suggest maybe in a -- in a very alarming way, this will never work.

The program's out of control.

It can't be recovered.

We didn't have that belief, and I hope, Joe, I can convey you to, we don't have that belief because we think we just know better.

We didn't have that belief because we're steeped into the details of the program.

We have terrific subject matter experts here.

We have everything a company would need to do a great job in a technology program like this, and we said if we can bring this forward, if we can understand the phenomology, if we can do the analysis if we can get to the root cause, we can improve the system and here's our new prediction on how it will perform.

On the JASSM case, that worked out well and it worked with our customer.

It wasn't necessarily at every intersect straight and level and smooth, but we got the job done.

I'm absolutely confident we're going to get the job done on the Joint Strike Fighter.

I'm confident that the intentions of all the parties are very good.

That's been expressed to me in many ways and that's what we are getting agreement on now, and it -- and because the program has three US service variance, and it has international content, the field of play is bigger, but essentially that's the process we're on.

We'll go next to Rich Safran with Buckingham Research Group.

Hi, good afternoon.

Good afternoon.

I wanted to ask you, on your -- on cash deployment and your share buybacks, what you are anticipating and what you are including in guidance and what you are anticipating for buybacks just seems a little bit lighter than what I would have expected, especially when I look back at what have you done in the past.

Just was wondering, is there a -- is there an interest, for example, in doing a large acquisition in 2010 and I just wanted to know if you also just in general, what you are thinking about M&A activity in 2010.

Yes, I will ask Bruce to give you a little comment on the share repurchase, because I think that will be helpful.

Relative to a big acquisition in 2010, that's not in our planning.

We like the acquisition approach we've had.

It's been described as a string of pearls.

It's -- to me, it's a very clear, very precise, very measurable approach, relative to our ability to add value, provide important technology adjuncts to our portfolio, be able to serve customers better.

Actually, my feel at the beginning of the year is that there may not be as much M&A deal flow, I think just in a general sense.

I don't know if prices and valuations are going to come in line with the kind of capabilities that folks might be looking for.

In our case, we've never really set an objective to let's go buy something big.

We don't need that kind of action here, and frankly, I would rather focus our attention and our effort on initiatives like the Joint Strike Fighter and other operational improvements from which I think we can absolutely yield greater value.

And I ask Bruce to give you a comment on the share repurchases.

Yes, Rich, thanks for the question.

We historically had a policy that said we were going to give back 50% or more of free cash flow in the form of dividends or share repurchases.

At least as I went around and talked to a number of investors say in the latter half or the latter quarter of last year, a number of them expressed concern, particularly as we started talking about the funding requirements of our pension plan going forward, that would we be able to continue the sort of cash deployment activities as we have done in the past.

And so when we took the $1.5 billion out in the fourth quarter of last year, we obviously had a lot of cash on the balance sheet at that time with that infusion.

We made a large, significant contribution to the pension plan, but we wanted to demonstrate and the reason we came out with the guidance we did, that included $1 billion of share repurchases in 2010, was we wanted to send the message, frankly, that we are going to continue with the cash deployment practices that we have demonstrated in the past.

If you just take a look at the percent of free cash flow that we are giving back in 2010, at the levels we are talking about, it's already 89%.

And as we go throughout the year 2010, we have the fire power to do acquisitions, as Bob said, we are not looking for the big bang acquisition, but we do have the fire power to do some acquisitions, and if, in fact, we continue with the kind of cash performance that we have demonstrated amazingly well in 2009, we'll have the fire power to do even better share repurchases throughout the year.

Let me just check in with you, because I see that we've -- we've kind of gone an hour.

I'm -- let me ask, are there others still on the line?

You actually have 11 more questions.

Yes, if it's okay with everybody else, I know our narrative went a little long today.

I think we ought to just continue and extend the call and Bruce and I and Jerry are happy to go do that.

So if we could have the next question, please.

Sure thing, George Shapiro with Access 342.

Yes, I just wanted to clarify a couple of things.

Bruce, I assume that the JSF parent that you had articulated before would be going from around 5% to 6% is still intact, despite all of the discussions that we have been hearing?

No changes whatsoever, George.

Okay.

And then on the other side, I find it ironic that every sector, except ISG, you were well above your guidance, and the one I highlight or ask you to put some detail on, particularly in space, I mean, had you raised the guidance significantly from October to January and you are still well ahead of it, and yet I didn't see you raise the projection that you put out for '10.

So I was just wondering why not.

Yes, there was -- as I said in kind of my discussion going through the chart deck, there were two delivery events that happened in 2009.

One was a classified satellite delivery.

That one was frankly kind of on the bubble of whether we thought that was going to occur at the end of 2009, or 2010.

And we talked to in October, we thought it was more likely to happen in the 2010 time frame.

It turns out it happened sooner than that.

It happened very successfully.

So that event was close to $400 million item in and of itself.

On top of that, as I mentioned, we had one commercial launch vehicle that went off in the fourth quarter.

We had zero commercial launch vehicles in 2010 plan.

So, , if you just take a look at that Delta for those two particular items, we are down $500 million for two events that are likely not to occur again in 2010.

Helping to offset that in 2010, frankly, is we're seeing some growth in our advanced EHF, extreme high frequency satellite, as well as some classified space activities in 2010.

So that's helping to mitigate, if you will, the loss of those two

We'll go next to Heidi Wood with Morgan Stanley.

Good afternoon, gentlemen.

Thank you very much for taking my question.

Bob, a question for you at a higher level with respect to trends we are seeing from the Pentagon.

It seems like there's growing pressure on preventing the hardware (inaudible) from providing architecture and advisory services.

We saw Northrop sell task.

How are you thinking about the services work going forward?

Do do you forgo the services work and divest or do you resist?

Yes, Heidi, thanks for the question this afternoon.

That's obviously an area of keen interest for us and it's also an area that not only we, but I think others in the industry have advanced with regard to discussions to try to get some clarification here.

Because I will say a statement that hopefully sounds like something you would expect to hear from us.

We don't want to be in a conflict of interest position.

It doesn't ever work well for the business.

It doesn't serve long-term interests.

We don't want to find ourselves ever -- and I will use this as a hypothetical -- where we build a precision guided system and fly it down the range and we be on the other ones to evaluate the performance of that.

That's unhealthy.

We know that.

We avoid that.

That is the kind of conflict of interest that we would avoid.

Where there are any areas of sensitivity in the work that our company does, we set up firewalls and there are, I think, time tested means and mechanisms here that work really effectively for this type of discussion.

What our company, and I could say this, what the industry has asked for is could we get some clarification and some guidance out of the Department of Defense relative to what the rules of engage here will be?

What activities here would be prohibited?

What kinds of businesses?

What kinds of initiatives?

What kinds of task orders?

And then we'll go structure our business accordingly because we are going to play by the rules.

We just want to make sure we understand what those rules are.

So there is no intention or expectation on our part at the moment to divest any segment of our business.

If we learn something, when the draft guidance is released and my best recollection of the time line, Heidi, would be probably sometime, let me say, in February, we're likely to get some draft guidance outlined here for what a conflict of interest policy would look like, that will, if we have the opportunity, we'll make comments to that policy and whatever that policy is, we will certainly abide by it.

Next up is Myles Walton with Oppenheimer & Company.

Thanks, good afternoon.

Hopefully this will be a relatively discreet question.

The independent manufacturing team set up a number of discreet milestones for you to achieve before they would recommend your movements to higher levels.

Can you give us just a couple of those long poles in the recommendations and second, you had previously talked about $15 billion on JSF in 2015.

Given what you see today, what does it look like?

Yes, I'm going to defer on the second half, because a lot of that is going to depend on the ramp rate, and those assessments, Myles, that we provided were on the, let me say, existing baseline.

To the extent that we load conservative numbers into production, and are able to beat them, I think there will be a range of numbers.

I will commit this to you, when we get better visibility as to the discreet points and expectations about how we'll load a production baseline here, probably by the next time we talk, and next quarter on this call, we'll have some -- some more discreet detail there.

Relative to the independent manufacturing review team, I think they all look at how you do you get more maturity sooner into a production line?

Do you have the right level of tools?

Do you have the right level of training?

Do you have the right level of expertise?

That -- I will give you, like an interesting, I think, data point that applies to fiscal '11.

The independent manufacturing review team concluded that we would be in a position to produce about 48 airplanes in that fiscal '11 time period.

So when I look at the near term objectives for our desire to improve the ramp rate, I look at that floor moving from 32 airplanes to 42 airplanes on the conservative side, and our sense that if we can do better, we'd like to go to 48.

48 resides within the range of effective production capability that the line possesses now in accordance with the manufacturing review team's assessment.

What they also look at is that, think about five year to ten year out, how do you get to higher rates of production and we're working on those initiatives along with the government.

Next we go to David Strauss with UBS.

Good afternoon, Bob.

Hi, David.

Constellation is in the news a lot, potentially, the rumors out there that potentially the administration could look to cancel constellation with the budget on Monday.

Could you just talk about your exposure there and your take on the way forward?

I can but,I will say here again because the budget is coming out Monday, we don't have as complete a level of visibility here as certainly you would like us to have and quite frankly, we'd like to have.

We obviously break Project Constellation down into its component pieces.

The spacecraft component, which is our responsibility, and the launch vehicle segment of the program, which is not our responsibility.

On the Orion program, which has to do with the spacecraft, we're doing well.

I mean, we are executing a program plan.

We're accelerating the design.

We're testing components and configurations of that design.

We note that on the spacecraft side, we have incorporated the flexibility in the spacecraft for, let me say, a broader range of missions.

And by that, I mean the spacecraft is configured to be very effective for transit to low earth orbit, as well as in a slightly different configuration being able to complete a lunar mission, and even with more adaptations, being sufficiently flexible to look at beyond lunar mission, say to Mars.

Because those are based on aspirational goals.

If in the ensuing dialogue that you and we and others are looking forward to, as to how will the vision for human space flight be altered, if it's to be altered, and if that vision were to contract the profile of human space flight moving back from Mars to the moon or pushing the lunar mission off in time, this spacecraft we're working on still has the flexibility to -- to meet the responsibilities of the low earth orbit mission.

So in our human space flight portfolio, of course, we focus on flying out the shuttle, which we are doing, and we're just head down and focused on assuring we're meeting the criteria associated with the spacecraft segment.

And when we know more, again, we'll be able to update you without any delay, and -- and I guess the only other thing that I would add is there was a panel that was commissioned by the administration to look at the human space flight area.

They have made some recommendations, but those recommendations have not been incorporated into a new vision or a new program plan and I presume that's part of what the ongoing process is now.

Next we go to Cai von Rumohr with Cowen & Company.

Yes, thank you, Bob.

A quick one on the F-35.

You said you would be willing to sign a fixed price contract for lot five.

I believe that negotiation is this summer, and I guess you said that would depend on whether the design was sufficiently -- sufficiently firm and -- and well documented.

I mean, it sounds like you are going to -- you are under pressure to sign a fixed price document and you are likely to do so.

What are the terms, that you view as kind of critical for Lockheed Martin shareholders, ie., the type of ceiling and share pattern you would be looking for in that kind of a contract.

Yes, well, let me just clarify a couple of -- it won't be negotiated this summer.

It would be a year away from this summer.

We were anticipating a fixed price incentive contract, and I know your comments included that, but I want to be clear for everybody, it's not firm, fixed price.

It's fixed price incentive.

It would be a year out.

I don't want to commence the negotiation with you now on the telephone about points of total assumption and share lines.

We are very facile and familiar with the characteristics of fixed price incentive contracting methodology, but part of that share line in direct answer to your question and part of these terms and conditions features will be exactly based on how much we do know?

Did we achieve requirement stability?

Did we make the progress we thought we made?

When you think of us trying to align the risk profile that we'll undertake with shareholder interests, I would submit you to that we have made those decisions before.

We've been asked to take a fixed price contract once upon a time, earlier in the Littoral Combat Ship program.

We did not.

We felt we could not, even though there was a great desire on our part, quite obviously to get alignment with the customer on a critical mission area that we know today is critical and we believed then to be critical.

We could not find the pathway to meet an expectation about a contract type given the nature of the uncertainty that we perceived in that business.

That's the standard that we'll -- that we're going to maintain.

But I assure you, Cai, we are not, being, quote, pressured to go do anything.

There is a discussion that encourages the government and the industry to work hard on securing the conditions around fixed -- around when fixed price contracts can be used sooner rather than later.

But that is not a mandatory, you must do this, and I think quite honestly, I know I don't speak for everyone in the industry, but having come off a year in 2009, where I was chairman of the aerospace industry's association, the general sentiment of the members that I think is very well understood by the leaders in the Pentagon and the administration, is that it is unwise to take contracts of a fixed price nature before the environment warrants that.

And I would submit you to that if, fixed price contracting were the key to program success, I guess we would conclude that the A400M is the most successful airplane program in development today.

I, for one, cannot make that conclusion.

So we'll be very prudent.

We will keep our risk profile aligned with that of our shareholders and we will certainly do all we can do to work with our government customers to secure the conditions around which fixed price contracting makes sense.

Next we go to Troy Lahr with Stifel Nicolaus.

Thanks.

You talked about the software on the F-35 being 80% developed.

When do you expect that to be 100% and is that kind of a critical milestone that would allow you to feel more comfortable about the program?

Yes, well, there's developing the software, Troy, and then there's integrating and testing the software, and software development is going to be a process that unfolds over the next years.

We are on track today.

In other words, when you lay out these long-term plans that were put in place years ago and we projected expectations of if these things are done, we'd be about in this point.

We are in that zone, but I will tell you again, software development, the integration of the software, the full integration of all the mission systems on the aircraft is a key focus area for us.

It has been a key focus area on every program, not just our airplane program portfolio, but every program, and I would tell you honestly, it's a key area in the business of every company that does this.

We recognize it.

The government recognizes it, and that's why in the development phase of this program, we are talking about putting more software development resources in place to simply assure that if we're running a software load test, and there were features that were found in that load, that required a quick turn around or what are called trouble reports and so forth, we would be able to do that in an expeditious fashion, that we would have a system integration lab that would have the capacity to in parallel do multiple tests because we all know our goal is to accelerate the pace of the program.

When you accelerate the pace of the program, you need some resources and infrastructure in place to do that.

So I think it's very smart to talk more about software development.

And Troy, I will just add a little bit to that, in that the software is going to essentially track somewhat to the flight test program, and if you think of the incremental capabilities that the flight test program will open up in terms of the envelope of the aircraft, you will see software requirements similarly following that trend.

And so you should think of these as incremental capabilities of software drops as the flight test program shows that the aircraft is able to take those software drops and probably the last activities we'll do there concern the weapons integration.

And that's probably the last part of the flight test program itself.

And next we go to Rob Spingarn with Credit Suisse.

Good afternoon.

Good afternoon, Rob.

I guess this is a question for Bruce, but could you walk -- you already talked about margin on Joint Strike Fighter.

Perhaps you can talk about any changes, perhaps, in your assumptions in 2010 for topline on JSF, and then for the rest of the major programs in aeronautics.

Yes, thanks, Rob.

I was feeling rather lonely over here.

Bob is hogging the call from me.

As I look at the F-35 and 2010, I don't see a change.

I still think-- we've talked about probably some 25% growth year-over-year from 2009 to 2010.

Think of that in the billion dollars range.

I think that's where we are going to run.

Nothing has changed us from that perspective.

I will say --

Closer to $5 billion there or six?

Think of it, mid fives level.

Okay.

I will say the one thing I would like to point out -- maybe I will go around the business areas here.

Let's talk about the 2010 phasing and maybe first quarter specifically, because I think it's important that we do talk that.

We are probably going to see a slower ramp to the year in terms of the both sales and earnings than maybe our history would suggest and there are several reasons for that and really they hit each of the business areas and so if I start with aeronautics we talked about the ramp rate increase on the C-130 program from some 16 to some 26 or so, probably a 60% increase in there.

Because a lot of these aircraft in 2010 are for first-time buyers and a number of them are requiring special mission packages that go along with the aircraft for these first-time buyers, we'll -- think of this as rolling the aircraft out early and then they will kind of go into a mission mod package post production, if you will, such that will actual deliveries of those aircraft will be later in the year than our actual production rate.

So you should think of that as, the back half of the year being much more heavily loaded with C-130s than the first after and when I say much more heavily, I'm talking 25% of the deliveries in the first half of the year, maybe 30% and 70 to 75% of the deliveries in the second half.

And, again, that's just the phenomena of the first-time buyers and the special packages that are going on these particular aircraft.

If I look at space, I think earnings there are also going to be backloaded, particularly due to the equity earnings on the ULA, the United Launch Alliance, and the United Space Alliance joint ventures.

I expect to have a very large fourth quarter from an earnings perspective, primarily associated with the United Space Alliance operations as the shuttle operations come to a close at the end of 2010.

So fourth quarter is going to be an earnings spike compared to the rest of the year in space.

Electronic systems, if I just compare that to the first half of 2009, the first half of 2009 had the presidential helicopter in it.

We don't have that, obviously in 2010.

So we're going to have a slower compare to the first half of 2010 for that event.

If you just take a look at the 2010 plan in general, I think there are more deliveries or program events in the second half than in the first half of the year.

And then if I go to IS&GS, it's somewhat similar to the other business areas in that there's probably more back end loaded in the second half than there is in the first half.

Also in particular, earnings will be light in the first quarter of IS&GS.

I think they will be lighter than the overall margin level in 2009, and this is because of the phasing -- again, this is a business area that has probably the largest portion of its overall earnings in the form of award fees, and as we look at the award fee plan in 2010, it is pushed further to the right than it has been historically

In other I will call it margin improvement opportunities for programmatic events tend to also be shifted to the right as well.

So that first quarter we think is going to be a little lighter than the rest of the year.

And overall, just looking at the bottom line of the first quarter, and comparing that to what you might expect versus a -- versus a comparison of 2009, I think you are going to see sales growth in the -- the 1, 2% range compared to last year.

I think it's going to be the lowest margin quarter for the year, and, probably somewhere in the midteens would be my outlook as I sit here today.

Next we go to Sam Pearlstein with Wells Fargo.

Good afternoon.

Just a couple of follow-ups from earlier.

You talked about your use of cash and I guess I'm just thinking about you raised all the debt in the fourth quarter.

Debt-to-cap is now 29%.

Can you just talk about what is your ideal capital structure and what are you going to do with that cash to offset the $75 million in interest?

And then, Bruce, if you -- I'm assuming some of that is going into the pension plan, but can you just talk about if assumptions don't change, what is that FAS/CAS look like into 2011, versus 2010 right now?

Yes.

That's a good question, Sam.

Look, as far as the -- the optimal capital structure,there's -- frankly, we looked at that and we try to be, I will say opportunistic and we really look at the debt when it is opportunistic and needed.

So I don't know that we have a per se perfect capital structure.

I will say if you do any kind of analysis from a -- a weighted average cost of capital and the like, we are not quite to that point yet, and yet we are fine with that because we think that gives us some fire power if we need it going forward.

As far as the FAS/CAS and the pension impact, I took a look at that just recently, and I will remind the folks on the call, we had a 20% return on assets in 2009.

So much better performance than we did in previous years obviously, particularly 2008.

We also had a slight down tick in the discount rate.

We are much more sensitive to the discount rate than we are the asset return.

If you just take our performance at the end of 2009 and you assume going forward similar levels of asset return as we premised in the past, the 8.5% return, and we hold the discount rate flat, at the current 5 7/8, I think I said on the third quarter call that we thought we would see a fairly significant FAS/CAS increase compared to 2010.

It's still fairly significant, but it's -- but it's lower than it was and you might think of that in kind of the couple of hundred million dollars higher than the FAS/CAS impact in 2010.

And you didn't ask if, but I will throw out 2012 as well, since I have mentioned that on the third quarter call as well.

2012 kind of current course and speed, again, 8.5% discount rate -- or excuse me, 8.5% return on assets and flat discount rate would actually turn -- break even or actually a slight income item for us in 2012.

Next we go to Brian Ruttenbur with Morgan Keegan.

Yes, thank you very much.

You talked about weighting of revenue and earnings.

It's going to be light in the first quarter.

Is it going to ramp from there gradually?

Are there going to be any dips or swells?

And then can you repeat the 2011 pension adjustment again?

Yes I think we're going to see, ramp quarter over quarter as we go throughout the year 2010.

I mean, obviously, we tend to have strong fourth quarters.

I think this fourth quarter will be very strong, compared to history.

But, think of it as sequential growth quarter over quarter and where most of the growth year-over-year comparisonwise will actually occur in the fourth quarter.

Okay.

And sequential growth will also be sequential growth in terms of margins too?

The margins should go up sequentially?

Yes, I would think so.

Again, though, because of the space event, I think we're going to have a somewhat out-of-the-ordinary spike in our fourth quarter margins because of that.

And you asked about 2011, is that right?

Yes, just -- if you could repeat the pension adjust.

Yes, we are sitting at the end of -- as we look at 2010, at about the $440 million FAS/CAS drag.

That number likely grows to, think of it kind of a couple hundred million dollars higher than that.

So maybe the 640, 650 number, and then the -- as I said earlier again, the 2012 actually reverses itself completely to break even or maybe even a little -- a little tail wind, if you will.

We'll take our next question now from Itay Michaeli with Citigroup.

(inaudible) Good afternoon.

On the Q3 call you also touched upon 2011 and 2012 revenue or margin guidance or outlook.

Granted there's a lot of issues yet to be negotiated on the program side, maybe just touch upon how you are feeling about the mid to high 10% margin outlook for '11 and '12 and the 5% revenue growth in those two years as well.

(Inaudible) Everything we see right now still says that is -- that is what we are tracking to.

We still think we're going to grow faster in the years 2011 and 2012 than we are showing bottom line growth from a sales perspective in 2009.

We still think the margins are about right.

Obviously we are all going to get some information next week when the QDR comes out, the FY11 budget comes out and somewhere down the road the five-year defense plan comes out.

But everything we have seen, heard, rumored, et cetera, we still think that our product base going forward is well supported in the out years.

We think most of the transition for us occurs in the 2010 time frame.

That's what we were experiencing this year and then beyond that, we think we are well supported.

Thank you.

Thank you.

And Mr.

Kirchner, I at this time I would like to turn the conference back to you for any closing comments.

Terrific.

That's great.

First, let me thank everybody on the call for hanging in.

I know we went a little longer than 90 minutes.

But we appreciate your being on the call today.

Beau, let me thank you for your help.

If we don't get a chance to talk to you before then, Bruce and Jerry and I look forward to talking to you on the next quarter.

Be well and we hope to see you soon.

Bye, bye

Again, ladies and gentlemen, that will conclude today's conference call.

We thank you all for joining us and wish you all a great day.