Lockheed Martin (NYSE:LMT) slipped Tuesday morning after reporting a 28% drop in third-quarter profit as the company continues to shrink amid declining US demand for defense weaponry, topped by contract delays and cancellations.

The Bethesda, Md.-based company posted net earnings of $571 million, or $1.57 a share, compared with $797 million, or $2.07 a share, in the same quarter last year, just beating average analyst estimates polled by Thomson Reuters of $1.56.

Earnings were impacted by $1.05 billion in contributions to the company’s pension fund and a voluntary buyout program for 600 executives valued at $178 million.

The costs paid for early separation are related to the company's decision to downsize amid ailing demand. This year, the fighter jet maker decided to divest most of its Enterprise Integration Group, Pacific Architects and Engineers, as well as two businesses within Information Systems & Global Solutions. 

Revenue for the defense contractor was $11.4 billion, up 6% from $10.8 billion a year ago, though missing the Street’s view of $11.62 billion.

Sales were driven across three of its business segments, hardly offset by a slight drop in space systems.

Lockheed CEO Robert J. Stevens, who has fallen under Pentagon criticism for the contractor's F-35 fighter jet, the most expensive weapons system in the government, still called the quarter “solid.”

The company finalized actions last quarter that will improve affordability, he said, including its recent decision to sell EIG for $815 million and its eighth consecutive year of a quarterly dividend increase.

Given the weaker results and the government’s waning defense budget however, the company revised lower its full-year outlook, now expecting sales in the range of $44.9 billion to $45.9 billion, down from its July view of $45.5 million to $46.5 million.

Lockheed also expects to report lower fiscal 2010 earnings on contract delays and cancellations, now anticipating $6.75 to $6.95 a share, from its earlier guidance of $7.15 to $7.35.