Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Lockheed Martin fourth quarter in full year 2019 earnings results Conference call at this point all the participant lines Arnold listen only mode. There will be an opportunity for your questions instructions will be given at that time if you.
I would require any assistance during the call. Please press star zero and operating will assist you offline. As a reminder, today's call is being recorded I'll turn the conference now over to Mr., Greg Gardner Vice President Investor Relations. Please go ahead Sir.
Thank you John good morning.
Like to welcome everyone to our fourth quarter 2019 earnings Conference call. Joining me today on the call or Marilyn Houston, Our Chairman President and Chief Executive Officer, Ken Posner read our executive Vice President and Chief Financial Officer statements made in today's call that are not historical facts are considered forward looking statements are made pursuant to the.
Safe Harbor provisions of Federal Securities Law actual results may differ materially from those projected in the forward looking statements.
We see todays press release, and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward looking statements.
We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www Dot Lockheed Martin Dot com and click on the Investor Relations link to you and follow the charts.
With that I'd like to turn the call over the Merrill.
Thanks, Greg Good morning, everyone. I Hope you had a good start to many here.
Welcome to our fourth quarter 2019 earnings call as we review our result.
We're teaching new business activity key accomplishments and our outlook for 2020.
I will begin by expressing my gratitude to our entire Lockheed Martin team for a remarkable 2019.
Over the course of the year Corporation achieved extraordinary sales growth earnings performance strong cash generation and record backlog and it was through their dedication and commitment that we were able to deliver these results.
Ken will discuss our financials in more detail and provide our outlook for 2020, but I'd like to begin by discussing a few the highlights from 2019.
Drove our strong performance.
Notably for the second year in a row, all four of our business areas grew sales earnings and backlog with each contributing to our record cash from operations.
Sales in the fourth quarter exceeded last year's fourth quarter by 10% and pushed 2019 gross to 11% over our 2018 results.
Missiles and fire control had the highest overall growth in 2019.
Exceeding the prior year by 20%.
Deliveries of tactical and strike weapons development work on new hypersonic and classified programs and Pac three muscle production were the strongest contributors to the increase.
Aeronautics also saw strong sales growth in the quarter end year.
With 2019 annual sales, finishing 12% about 2018 led by our F 35 program, which grew 14% in 2019.
In Spain, the next generation overhead persistent infrared or next Gen Opie IR contract.
The GPS three satellite production program and recent hypersonic wins continued to provide increased sales volume as the business area exceeded their 2018 top line by 11%.
And rotary emission systems finished the year, 6% over 2018, driven by increases in shipbuilding radar and logistics programs.
Our segment profit grew nearly $700 million year over year, resulting in a segment profit margin of 11% and earnings per share of $21, a 95 cents, which was another high watermark for the corporation.
This quarter, our backlog increased $6.6 billion and is now approximately $144 billion, reaching a record level for the fifth consecutive year.
And we have a strong quarter cash flows, allowing us to use $1 billion to prefund are required 2020 pension contribution and a portion of our 2021 payment and still generate over $7.3 billion of cash from operations for the entire year.
Had we not made this discretionary payment to our pension trust, we would have delivered over $8.3 billion and operating cash.
Well in excess of are greater than $7.6 billion objective.
2019 was an extraordinary year across the corporation with our team achieving record results in sales earnings as cash from operations and backlog.
The strength of our portfolio has us well positioned to continue delivering mission success for our customers and outstanding value to our stockholders.
Before reviewing significant accomplishments from each business area I will start with an update on the F 35 program, which had an especially successful quarter end year.
During the fourth quarter, our F 35 team delivered 51 fighter Jets, bringing the total deliveries in 2019 to 134 aircraft.
Exceeding our joint government in industry target of 131 aircraft and nearly 50% improvement from last year.
The 200% increase from 2016.
Thats the program's inception, we have delivered 491 production aircraft with 347 jets being provided to us forces.
And the balance of 144 planes being delivered to our partner Nations and international foreign military sales customers.
Keeping with the F 35, myriad of pleased that we finalized our agreement Berlottes 12, and 13 this quarter.
Recognizing orders of approximately $5 billion, and adding 112 aircraft to our backlog.
Bringing our backlog of 374 point.
We anticipate finalizing lot 14 in early 2020.
Our joint industry and government team had established a longstanding objective of offering the F 35, a model at apply way cost $80 million.
In lot 14.
And we were able to improve on that target one year ahead of schedule.
Lot 14 unit prices now below $78 million, which allows us to offer this remarkable fifth generation fighter enterprise equal to or lower than legacy fourth generation aircraft.
Internationally, we were very excited to see Norway declare initial operational capability.
With that we'd have F 35, conventional takeoff and landing aircraft.
Since the first F 35 model arrived at Erland main Air station in 2017, the Norwegian Air Force has conducted a rigorous operational testing program in unique winter and northern environmental conditions.
As Dean get ready for combat.
Norway, the third European countries, and the fifth international customer to declare.
Ladies and gentlemen that we followed you guys from the inconvenience rule restarting the call in just a moment.
Thanks, John .
And your reconnected that please continue.
Ill isn't great Gardner apologies for the technical difficulties. Thank you for your patients were going to.
Commence again with the call pick it up with Maryland talking about the F 35. Thank you Merrell. Thanks, Craig So I'll just pick up again some of this I I'll just repeat it's very short, but I just want to cover all of that 35 update before I move into the operate other operational highlights.
So I'll start with an update on the F 35, which had an especially successful quarter and year during the fourth quarter. Our F. 35 team delivered 51 fighter jets, bringing the total deliveries in 2019 to 134 aircraft exceeding our joint government in industry target of 131 aircraft.
And nearly 50% improvement from last year, and a 200% increase from 2016.
Since the program's inception, we have delivered 491 production aircraft with 347 jets being provided to US forces and the balance of 144 planes being delivered to our partner Nations and international foreign military sales customers.
Keeping with the F. 35, we were pleased we finalized our agreement for lots 12, and 13 this quarter recognizing orders of approximately $5 billion and adding 112 aircraft to our backlog, bringing our backlog to 374 planes.
We anticipate finalizing lot 14 in early 2020.
Our joint industry and government team had established a longstanding objective of offering the F 30, Fivea model at a flyweight cost of $80 million and lot 14.
And we were able to improve on that target. One year ahead of schedule. The lot 14 unit price is now below $78 million, which allows us to offer this remarkable fifth generation fighter at a price equal to or lower than legacy fourth generation aircraft.
Internationally, we were very excited to see Norway declare initial operational capability with its fleet of F 35, conventional takeoff and landing aircraft.
Since the first F 35, a model arrived in Erland domain Air station in 2017, the Norwegian Air Force has conducted a rigorous operational testing program in unique water and northern environmental conditions and has deemed it ready for combat.
Norway's the third European country, and the fifth international customer to declare iOS see a critical milestone for Norway and the entire F 35 team.
Also this quarter the debt armed forces welcome the arrival of their first F 35 to sovereign soil in celebration attended by more than 4000 people at lower and lower than they were the sorry air base.
Lay award and lay award and airbase, the Netherlands has been a key partner and the F 35 program and including the eight aircraft still stations in the us for training and testing purposes has now taken delivery of nine feet tall jets in total.
The Netherlands program of record is currently to cure 37 F 30, fives, where the opportunity for an increased order as last October the Dutch government announced plans to purchase nine additional jets, bringing the total to potentially 46 aircraft.
Turning back to our business areas I'd like to highlight a few the notable new business wins and follow on awards that have helped position us for long term growth.
Rotary emission systems received an award of nearly $2 billion for the detailed design and construction of for multi mission surface combatant ships for the kingdom of Saudi Arabia.
This shift is a version of the freedom Varian littoral combat ship, we have been delivering to the US Navy and will provide the kingdom with the capabilities needed for both shallow water and open Ocean Naval operations.
We are honored to support the kingdom in their Saudi vision 2030 objectives.
In missiles and fire control view US Air Force announced the Finalization of the 1 billion dollar contract for the Air launched rapid response weapon effort. We were previously awarded.
Our hypersonics portfolio experienced tremendous growth during 2019 with the total potential value. The corporation has received now exceeding $4 billion.
Missiles and fire control also booked a $770 million order for Pac three missiles to provide additional interceptors and ground support equipment to the US army in the United Arab Emirates, continuing the growth in our air and missile defense line of business.
Moving on to Aeronautics our air mobility team was awarded their third multiyear contract for the Cdthirty Jay transport aircraft approving the delivery of 50, new planes over the next few years.
The Finalization of this contract added an incremental 35 aircraft and over $2 billion to our backlog in the fourth quarter with the overall value for all 50 planes expected to exceed $3.4 billion.
This award comes as the Arrow team celebrated the delivery of the 2600 Cdone hundred 30 airlifter since the program began over 60 years ago.
With over 450 planes being the current Jay model.
We are proud to be able to continue producing this interval aircraft for our war fighters and those are the 70 nations currently operating at around the World.
And in space, we were awarded a $3.3 billion 10 year III Q contract for the combined orbital operations logistics and resiliency or cooler program to provide support services on several military communications satellite constellations, including our advance.
Just extremely high frequency spacecraft.
These satellites provides nuclear hardened anti jam global communications to the White House, the state Department and military users supporting the nations nuclear command and control system.
And we are proud to be able to support the ongoing mission of this critical element of our national security.
These announcements reflect the strength of our legacy programs, both domestically and internationally as well as the impact our continued investments in forward looking technologies to drive long term growth.
Turning briefly to budgets the fiscal year 2020 Department of Defense Appropriations Act was signed into law last month, and finalize defense spending for the current fiscal year.
Total defense budgets have been approved for approximately $738 billion consistent with the levels passed earlier in the bipartisan budget Act of 2019 and over $20 billion above asked why 2019 enacted amounts.
Our programs garnered strong support across all business areas with the legislation, including nearly $3.5 billion of increased funding beyond the presidential budget request.
Including.
$2 billion for 20 additional F 35 fighter Jets for a total of 98 aircraft.
Over $800 million for nine additional Cdthirty, Jay transport aircraft for a total of 20 planes and increased funding for our long range hypersonic weapon.
Ryan and OPI, our contracts as well as increases for several rotary aircraft programs and other initiatives across the corporation.
We believe our portfolio is well positioned to address important security needs for a cut nation.
With the increasing defense budget and these additional appropriations actions supporting continued growth opportunities into the future.
Moving on I would like to highlight several key accomplishments from across the corporation that demonstrate our commitment to developing new technologies as well as expanding the reach of our heritage solutions.
I will start with missiles and fire control, who passed an important milestone on a prospective new business opportunity.
Our tactical missiles team successfully tested its next generation long range precision missile for the us armies precision strike missile or prism competition.
The missiles and fire control team launched presume from the Lockheed Martin Hymel too high mobility artillery rocket or Highmark system successfully demonstrating accuracy and range of flight.
Validating high Mars interfaces and testing system software performance.
We are excited by the prospects of this enhanced surface to surface system and look forward to building on our long running army tactical missile system legacy as we progress through the upcoming procurement decisions.
Moving to RMS, our integrated warfare systems and sensors line of business was selected by the Japanese Ministry of defense to produce two solid state radar intent of sets for their aegis ashore system.
Our spy seven radar offers enhanced detection range insensitivity from previous lit legacy radar systems and will provide continuous protection of Japan from ballistic missile threats.
Our RMS team has continued to invest in new technologies, while leveraging current solutions and this new radar is a direct derivative of our long range discrimination radar solution a missile defense agency program of record.
Variance of this five seven radar will also be incorporated into other use in international solutions.
And to date. This technology has been selected for 24 systems.
Ushering in the next generation of Maritime and ground based advanced radar technology.
Moving to Aaron.
This past November marked the official start of F 16 production and our Greenville, South Carolina location.
Fabrication activities began for components of the center fuselage, one of the first steps and building New F 16 aircraft for the growing demand from new international customers.
The first delivery for our Bahraini customer will roll off this line in late 2021.
And we look forward to increasing production as new orders are added to the backlog.
I will close with our space business area, which delivered the Mars 2020 Rover arrows shell to Kennedy Space Center in December .
The arrows shell will encapsulate the March 2020 Rover during its deep space mission to Mars and protected from the intense heat as the entry system descends through the margin atmosphere.
This aero shale March the latest.
Sheet ever used and we'll protect the vehicle from temperatures up to 3800 degrees Fahrenheit.
Lockheed Martin has built every arrows shale entry system for all of Nasa's 40 years of Mars explorations and we are proud to continue this legacy as we work towards that July 2020 launch.
Before I turn the call over to Kevin I'd like to reiterate my appreciation to the entire Lockheed Martin team for their contributions to an outstanding year and food, helping to build a differentiating portfolio Ken. Thank you, Maryland, and good morning, everyone as I highlighted our key financial.
Call participants please follow along with the web charts that we included with our earnings release today.
So let's begin with chart three and an overview of our results for the year.
Sales segment operating profit cash from operations and earnings per share closed ahead of our expectations with record highs.
We generated $7.3 billion of cash from operations after a $1 billion discretionary contribution to our pension trust this quarter.
And we continued our cash deployment actions returning $3.8 billion of cash to our shareholders through a combination of dividends and share repurchases.
We again grew our backlog to $144 billion, a new record high watermark.
In summary, there was an outstanding year for the business.
Turning to chart for we compare our sales and segment operating profit this year with last year's results.
Sales grew 11% or $6 billion compared with last year to $59.8 billion continuing the strong performance over the first three quarters, while segment operating profit increased 12% or $700 million over last year to nearly $6.6 billion.
On chart five we compare sales by business area will last year's results.
And as Marilyn mentioned, all four of our business areas experienced strong sales growth and 29 team.
Led by missiles and fire control at 20%, which was driven by production volume and tactical and strike missiles, and air and missile defense and for the first time, all four business areas delivered sales above $10 billion.
On chart six will discuss our segment operating profit by business area.
Following sales all four of our business areas also increased profit in 2019 in the corporation ended the year with total segment operating profit, 4% above 2018 levels.
Chart seven shows our earnings per share for 2019.
Our EPS of $21 than 95 cents was up $4 in 36 cents or 25% higher than our results last year, driven primarily by operational performance.
Moving onto chart eight and as previously noted by Maryland backlog has increased again to a record high for the fifth consecutive year.
All four business areas increased backlog in 2019 with the largest increases coming from space driven by strategic missiles and at missiles and fire control driven by air and missile defense.
We had a strong book to bill ratio of 1.4 for the quarter and 1.2 for the year.
On chart nine we will discuss the cash return to our shareholders in 2019.
Subtracting our capital expenditures from approximately $7.3 billion of cash from operations, our free cash flow is greater than $5.8 billion.
We increased our dividend by 9% and exceeded our share repurchase objective by $200 million in the fourth quarter.
This brought our total cash returned to shareholders to $3.8 billion for the year or 64% of free cash flow, providing strong returns consistent with our historical cash deployment actions.
Moving on to chart 10, we provide an update to our 2020 trending data with our revised outlook for the year ahead.
Our outlook for sales ranges from $62.75 billion, the $64.25 billion, which is an increase from the $62 billion. We first indicated last quarter.
The midpoint of this range represents a 6% increase over 2019 results.
The range of segment operating profit is estimated to be between $6.8 billion and $6.95 billion.
Our estimated Fas Cas pension adjustment is just above $2 billion.
Our estimated range for 2020 earnings per share grows to between $23.65 to $23.95 per share.
The midpoint of this range represents a 7.7% increase over 2019 results.
Cash from operations is now projected to meet or exceed $7.6 billion.
And I will discuss this in greater detail in the following chart.
Our chart 11, we will walk through our future cash expectations folding in the $1 billion discretionary pension payment we made last quarter.
Strong operational cash performance and a continued focus on working capital management allowed us to increase our cash outlook for 2020 to greater than or equal to $7.6 billion.
A 100 million dollar increase to the combined 2019 and 2020 outlooks we provided in October .
And we now see approximately $7.7 billion of cash flow from operations in 2021, a 700 million dollar increase bringing our three year expectation to 800 dial $800 million greater than our prior assessments.
On chart 12, we break down our sales and segment operating profit outlook by business area.
All four business areas are positioned for continued sales growth in 2020 led by missiles and fire control at 10%.
Segment operating profit growth is projected to grow at approximately 5% in the aggregate with our largest growth and aeronautics at 8%.
And finally on chart 13, we have our summary.
We believe 2019 was an exceptional year for Lockheed Martin.
Our key results exceeded previous highs and have positioned us well for continued growth and value creation in 2020.
And as we discussed earlier, our focus on innovation and investment as resulted in strategic new business opportunities and a robust legacy of programs.
And with that we're ready for your questions John .
Thank you, ladies and gentlemen, if you wish to ask your question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command.
You are using the speakerphone, please pick up the handset before press in the numbers. Once again, if you have a question you May press. One then zero at this time one moment. Please for our first question.
And we'll go to Rob stellar with vertical research. Please go ahead.
Thanks, So much good morning, good morning morning, Rob.
Quick question for Marilyn on the F. 35, you mentioned the released the Geo Guide has had a bit of a caveat regarding Turkey advisory if you give us an update on the progress and allocating those turkeys delivery slots and also realigning the supply chain.
Sure. Thanks for the question Rob.
I would just say we've been working with the US come government for several months on addressing how we're going to manage the eight aircraft that were flooded for Turkey that have been delivered for Turkey as well as looking at alternative suppliers for the Turkey suppliers and and so in terms of.
As a lot the upcoming lots.
We we have a lot of demand for the aircraft. As you are are well aware and and we've had the congressional adds that will will it will offset those those needs from Turkish.
The Turkish aircraft deliveries, so I think where we've got it well solution anything you want to add to that Ken just.
Rob just from a revenue side, Maryland, Merrell has got it right. So the United States government for the ones. We have delivered on himself to date, which would be the lot 10 lot 11 aircraft. There are earmarked for the United States government.
In lot 12 through 14, the blocked by each of those lots eight aircraft, where earmarked for Turkey for a total of 24 the congressional ads for the most part will take care of that so we're we're in good shape with the.
The blocked by will now work lot 15, we just got the RFP from a U.S. government. So I think from a revenue standpoint, we're in great shape, you have other customers that are coming into Japan as you recall.
Once the order an additional 105, we have Belgium, we're in a competition for Finland, Switzerland, and Canada, we feel good about those specially as Maryland mentioned the $80 million aircraft. We got there Europe you are at a time you probably saw in the press the pulp Poles and one of by 32 aircraft. So I think from.
Revenue side, it's well in hand from a supply standpoint.
Almost all sub ply out a Poland will excuse me out it.
Turkey will be removed by March of 2020, there'll be a handful of suppliers that we'll continue to.
To work with through December Twentyth, and as I mentioned, we got the lot 15.
RFP, so we'll swear sort all that out post 2020, as we go on but I think we're at a much better spot now than we were with with the Turkey situation.
That's great. Thank you very much.
And ladies and gentlemen, just a quick reminder, if you do have a question. Please press one zero at this time.
And then one moment for our next question.
And we will move to Myles Walton with CBS . Please go ahead.
Thanks, and good morning.
Can you will also include your cost outlook Lucky with $800 million incremental and just curious could you give us the the backbone on the net pension recovery in there and how much change and matching contributions came down but it also looks like your Cas recovery came down. So just trying to piece that will go up 800 million how much is from your operations.
You bet you bet miles so yes, I think I think we should start with a how we ended the year with cash that got us to.
Making the while voluntary pension contribution. So we ended you guys recall, we ended the third quarter up in working capital by 1 billion too.
Fourth quarter from third quarter, we actually reduced our working capital by 500 million dollar so for the year we were just.
South of growing our working capital by $700 million, so with that strong cash generation in the fourth quarter, we thought it was prudent to make.
The pension contribution of $1 billion.
And so if you go forward and look at.
2020, and beyond miles and also recall, our Lockheed Martin investment company. We are our returns were superior to what we assume back in October or frankly, what we assumed in the beginning of the year.
They ended the year at 20% returns on their assets. So with all that are kaz contributions.
Came down in 2020.
Just south of $2 billion, we do not we're not required to make a pension contribution this year so going forward.
Our kaz recoveries looked like they will be about $2 billion in 2021, our pension contribution recall the last time, we spoke regarding 2021, we thought our pension contribution would be $2 billion by making the billion dollar pension contribution not only eliminated the 2012.
Any.
Pension contribution it reduced the $2 billion pension contribution by half a billion dollars, but also because of the great returns. We made in the of last year. It looks like our pension contribution now in 2021 as we see is below a $1 billion.
And just going out 2022, and then then I'll stop.
Looks like pence, our kaz recoveries will be roughly $2.2 billion and that 2 billion dollar pension contribution in 2022 that we discussed in October looks like it's about a 1 billion 7 billion seven five so a lot of it is.
Improvement.
Volume improvement margin improvement throughout the business, but some of it also is due to the returns we made.
On our on our pension.
In the past.
Our next question from Rob Spingarn of Credit Suisse. Please go ahead.
Hi, good morning morning.
Marilyn can you both went through a lot of detail on the international success is on aircraft and ship platforms and Maryland.
You sort of previewed the question I want to ask when you talked about Japanese ages, but I wanted to talk about your recent modernization Windsor do their sizable you've had things like Hypersonics and aim to 16, MFC central radar and RMS and I wanted to see how these might translate to even greater longer term market share in.
Nationally or the two strategic to export.
Well, that's a great question, Rob I mean, we always working with the U.S. government really as we look at these systems were always looking at what wed systems could potentially be provided to our allies and to increase their defense capability and capacity. So.
Without hitting each one of these specifically that you outlined I mean, just I think the the aegis system is a good example, when you look and add some of our increases and things like Pac three and Fad and now with the radar and capabilities I mentioned.
The opportunities that we have on.
So long range discriminating radar.
It's it's all in our planning that when we work with US government that we make sure that we have an opportunity to consider not only the need to the U.S. government that on many of these systems what they can provide to the international community and as you can see with our very robust backlog of $144 billion. It gives us an opera.
Community to not only outperform on that work that we have a to continue to invest in new technologies in new capabilities and Thats, what weve been doing for a number of years, we've highlighted areas in the radar arena and Hypersonics in directed energy in.
Whole range of systems and capabilities that we recognize we've got a constantly provide our our customers with the advantages that they need over our adversaries and so we're always looking well ahead of now to to invest in and we think that with that it is with an eye towards being able to support our international customers as well.
Next question from Ron Epstein with Bank of America Merrill Lynch. Please go ahead.
Yes.
Good morning, good morning, everyone.
I was wondering if we could just walk through a little bit when we think about the F. 35 program as we go into 2020, Ben maybe even beyond.
How you think about the mix between are we.
Sustainment.
Yeah, there's been a lot of just press about the sustainment going from something like that but total flight hour pasta 35, K per hour going down to 25 per hour how's that impact the program and how should we think about as we model F 35 in the 20, twond and beyond the mix between OE and Sustainment.
Sure Hey, Ron as Ken I'll take that so yes in 2020, if you look just macro at F 35.
We see we actually see off pretty strong growth year over year sales are going to be up about 8%.
Think of that is a unit the lion's share is still production. So production year over year will be about 8%, but we still see development work, even with STD winding down with a follow on modernization. Another development activities, we will see development Ah this year growth from.
19 about 10%.
From a sustainment standpoint.
We're still on these annualized buys and we're still standing up bases and we've talked about the performance based logistics proposal that a white paper that we put in so we'll see I'm high single digit growth in Sustainment and if we continue on these annualized buys it will still continue to.
Grow you'll see Sustainment ER.
Over time become the fastest piece of our of the F 35 program it'll likely double and then size from a sales perspective in the not in the next five years.
Potentially throughout the next decade good could.
Double up from our triple from where it is today, but I think the PBL.
As an interesting concept and we're starting to have that conversation with the customer and it basically has to talk about what you. Just described is to accelerate to get the cost per flight hour of.
Maintaining the aircraft down to a what the customer would see as an affordable level, but also the availability of the aircraft to get that up to levels that.
Our more like fourth generation aircraft and the Otis then would be on industry. The risk would be on industry. We would do the investing for the for arc for our customer set we would have the infrastructure in place and assuming we performed we would sign up to these service levels. We would expect the A.A. a return that.
More in line with with that type of contract. We're hopeful we'll be able to get to the table with the customer in 2020 in shape. This thing and hopefully be able to to get a deal that's acceptable to both parties, but you're right in the future, you'll see sustainment grow faster than others.
The rest of Ah F 35 at least in the short term it will still be production until we get to capacity, which should be a.
Peak capacity, which should be 2023, 2024 that I would add theres continuing demand around the world and as we continue to we're now and I am very affordable unit price on the aircraft and.
And as long as we can offset the development costs that will come as we continue to upgrade the aircraft and then drive this sustainment cost down I think where we see an outlook of a great opportunities for the aircraft around the world.
Right.
Ladies and gentlemen, another quick reminder, if you do have a question. Please press one zero and next go to Noah Poponak with Goldman Sachs. Please go ahead.
Hello, everyone, Hey, how are you doing though.
Doing well how are your Tam okay. Thanks.
So wanted to stay on the multiyear cash flow discussion.
Yes, I could sort of see the investor question that was previously does it grow and 2021 because of the contribution step up moving to 22 with the contribution step up now there year over year. So one do you grow cash from ops and year over year in 2022.
And I think you have five your internal planning so maybe you could speak too.
Can you grow cash flow every year in the five year.
Right because that just remains a big investor question and then.
Having given the pension pieces I wondered if you could also speak to capital because that came in a little light for the year, yes.
And I'd be very helpful. Thank you bet. Thanks. Thanks, So just to clarify point are from a long range plans don't standpoint, we do current year plus three years out, but I will give you a little I'll try to give you a little color.
2023, and beyond but well I don't have the I don't have an absolute number for you. So I think you wanted to start with 2022 since I gave you call or a up to 2021 and Thats actually a timely point right now not just because of a pension funding capex, but.
Just from a cash generation dynamics, including the piece the the Prefunding looking at our growth our focus on working capital. It basically would all point to cash from operations out in 2022, frankly being north of Ah, Our 2021 number week see a path.
To greater than or equal to seven seven there is one issue that it's worth talking about now and it's the remnant from the tax Reform Act of 2017.
The law has a provision that kicks in and added a kicks in in 2022, which requires requires research and development expenses to be capitalize rather than being expensed.
Right now, though the law is it's still a little bit vague.
What the exact definition of R&D is and believe it or not I have actually read the legislation myself and I do see some vagueness in there but in the interest of transparency, it's probably good we talk about that now.
So if the IRS made the determination that the law applies to all R&D expenses.
It probably would take our cash number down. So this would be things. We're expensing now that we would have to amortize over five years. It would take our cash from ops in 2022, probably down to about $6.5 billion.
But I'll say this it doesn't seem logical to us that that was their intent and if it was just a subset of of the of the R&D, we still see a path to get getting north of $7 billion. So we're still working through this so you know just to summarize north.
Of.
North of seven seven.
If it's a so the way things have been operating in the past.
If this R&D tax bill kicks in.
Yeah.
It will be a you know probably in the mid range of six five and if it's a subset of that we still see north of 777 $7 billion, but operationally, we're still we're still going to generate a lot of cash we still have a focus on working capital.
You talked about Capex, you're right. It was a little light. This year. So we ended the year at roughly.
$1.5 billion because of the things we've discussed in the past the buildings that were building a in the in the business areas.
We'd see Capex in 2020 at about $1.7 billion next year probably.
Comparable by $1.7 billion, and then what we know today and we start tapering down it will be it will be below.
Below 107 last point you asked about was 23 and beyond just talking about Sikorsky, you'll start seeing a lot of those programs going into production you'll start seeing a F 35, we'll continue to.
Reduce contract assets. So we see though I don't have an absolute number four yet we see strong cash flow generation out in that time period as well.
Our next question from Jon Raviv with Citi. Please go ahead.
Hey, Thanks, everyone I won't ask about 2025 and beyond that so thats accounts for less than that for now.
I think but in the context of all that cash coming and what about cash going out in a leverages notice from the low you highlighted returning 64% of free cash to shareholders.
It's been higher in years past I know your stocks were lower in years past. So just how do you think about cap allocation going forward given all these dynamics sure. So let's let's start John let's start with 2020.
No were for planning purposes, we're assuming share repos of about $1 billion.
We're assuming we do increase the dividends you know for plant for planning purposes that would be 20 cents a quarter or a 80 cents similar to what we'd per share. What we did in 2019. So you will round numbers and you know a plus percent increasing the dividend we do have another tranche of debt.
That matures in 2020, it's a 1 billion to 50 I believe that's the second tranche of Sikorsky for planning purposes, we're assuming we we let that mature and pay it back.
Our Treasury organization is constantly looking at whether it makes sense to re fi or look at our entire.
Debt debt on the balance sheet, whether a debt exchange makes sense, where it will go through that through the year, we will be opportunistic like we were in the fourth quarter of last year, where it makes sense from a share repo standpoint that we did our first accelerated share repurchase program at went very well in.
The fourth quarter last year, and as you recall 2018, our with our stock price down nothing to do with our fundamentals, but with what was going on with the market. We were very opportunistic on into in terms of that.
And so we'll see going forward, where where it makes sense.
To do that you know what we didn't talk about is inorganic growth No Merit, Maryland has we meet at least eight times a year with the senior leadership team to look at it look at a pipeline in terms of things that make sense for us to invest in or frankly to divest.
Then and as you said, we do have the firepower on our balance sheet to go do that I'll remind you that we got a credit rating.
Increase by all three.
Agency, so with debt being achieved or if there is something out there from from an inorganic standpoint that fits within or where we think we need to go with our portfolio, we would be inclined to do that but I would just remind you that we really are happy with our current portfolio you don't really see any gaps right now but.
We will as Ken said constantly keep a screen on it as we always do.
Next we'll go to join Shapiro with Shapiro Research. Please go ahead.
Yes, good morning.
Good morning, Hi, George.
A couple of questions MFC and space backlog were up well north of 20% why isn't the growth rate greater in 2020, and then also if you just go through the balance sheet, a little bit there was a big increase in inventories, maybe partly offset by contract assets and likewise.
Yes.
Accounts payable were way down maybe offset a little bit some liabilities, maybe just walk through what's actually going on in a balance sheet as well. Thank you bet George its Ken will handle that so you asked about space and missiles and fire control and you're right. So are we.
We overachieved the orders plan this year by.
North of $20 billion and two of the big drivers were exactly that space in missiles and fire control, but I think what you need to do is look at.
The detail of what what some of those programs are so at missiles and fire control I'm a big driver of.
What went into backlog would be that K essay and Pac three Poland and those will be multi year up programs going forward. So you will not see a burned down.
Like some of the tactical strike weapons programs integrated air and missile defense.
Backlog will will take longer to convert to sales same with space space as a as a platform business and you have recall I talked about in the past the.
The multi year the three years of Ah ADW, we got so we will knock at an order this year on ADW. We we also got some big orders on a on Orion.
And OPI are.
Which would take longer to them so.
To convert to sales.
Regarding the balance sheet.
Youre right George we did have some inventory.
Growth in in 20 in 2019.
But the way we look at it I kind of look at contract assets in inventory and frankly put them together, so we actually had contract assets.
The decrease in 2019 by roughly $400 million inventory for the year roughly grew $600 million. So I would say from an asset standpoint, we had 11% sales growth think of think of that is a roughly $6 billion of sales growth.
From 19 to 20, we grew contracted assets in inventory by only $200 million.
Going forward.
We do see contract assets, increasing in 20, and 20 and 2021.
We see working capital in 2020 growing by rough numbers, it will be comparable little little bit more than this year.
But I'll remind you were growing sales by roughly three three and a half billion dollars. So that's in line with what we've had in the path and then 2021, we see a marked improvement from working capital standpoint, we will only grow working capital by say $200 million. This.
As our plan today, but we will will continue to.
Try to perform on that and with our focus on working capital one of the main places that we will.
Work is in contracted assets in 2020 and 2021.
Next we will to Cai von Rumohr with Cowen and company. Please go ahead.
Yes. Thanks, so much everybody is talked about cash flow.
More interested in kind of what you do with it because your net debt to cap is now 1.4, if you increase your dividend, 10%. If you buy a billion five and in stock every year, you're basically you're going to burn through like 4 billion and debt. So so where are we going here over the next couple of years do you want.
Net debt to cap ratio to go below one.
Or are you going to deploy the cash and if so what are your relative priorities. Thanks.
So pie as I mentioned earlier I think you know our priority is or from a plan standpoint.
The debt on the balance sheet as it matures our plan would be to pay it off.
We will certainly look at whether it makes sense to refine these low this low interest rate environment. We certainly will look at a you know talking to.
The owners of our stock you know as we go around Oh, this year to talk to our shareholders what.
What type of dividend increase is acceptable to them for them to continue to be interested in our in our stock. The last couple years, though we've planned for $1 billion of share repos, we have over achieved weve opportunistically in the last two years.
We have bought back more stock that we plan on there is some.
Likelihood, we would do that as a as well and Ah.
That.
Well, we'll we'll decide on that we talked about a you know in the past about our portfolio is Maryland mentioned, we're very pleased with our portfolio, but if something out there.
Makes sense for us to acquire we have the firepower to do that.
You look at the composition, who owns our stock you know, it's almost 50% is our our yield investor. So we will certainly pay attention to our yield.
Even with the high appreciation of.
Even with a high appreciation of our stock we still have a very strong.
Dividend yield relative to our share price, but I think the net is we're not going to let cash we've demonstrated this over the last couple of years, we're not we're not going to let cash.
Sit on our balance sheet, we will use we will use it.
And next question from Doug Harned, It with some Bernstein. Please go ahead.
Thank you good morning, good morning, Doug.
I wanted to go back to the F 35, Sustainment because I wanted to make sure I am just stood how the math works out here because.
If I think of.
In a broad sense and I'll put PBL aside for the moment that for I think in a broad sense about.
Sustainment activity being somewhat proportional to the fleet size.
And if right now youre.
I still building out depots. So there's I would think of surgeon and Sustainment work at the current time for that.
And then if you have to bring down.
Dollars per flight hour over the next few years how does this.
How do you get to a doubling or tripling of Sustainment revenues from the next five years I'm just trying to figure out how this all flows.
Okay, you bet Doug so.
Yeah, a lot going on so you know just for completeness. This year, we see sustainment growing.
Not not quite double digits, but close to double digits.
So there are roughly.
21 basis, the our stood up we still have a quite a few to stand up or we have.
You know a large number of 491 aircraft out in the fleet through through year end, we're going to deliver a 140 aircraft. This year rough numbers 160 next year or 20, 265, and then we'll start getting up to the hundred 70, 170 580 aircraft delivered.
Will continue as you said drive down the price per flight hour from roughly 35000 to 25000, what I'd like to remind you though is half of that is the United is the government cost after that as is our cost, but you will still continue to.
Indeed, sparing, Maryland mentioned the modernization work that is continue you will start to see from a sales or revenue standpoint, more modernization sales and sustain at once we have these depth goes up and sparing rather than the cost of but.
Standing up the Depo, so going forward you will see a sizable ramp in modernization costs, where the customer working with us deems, which aircraft. It makes sense to modernize and then to spare the spare the fleet.
Next we'll go to Seth Seifman with Jpmorgan. Please go ahead.
Great. Thanks, very much and good morning.
Okay.
Okay can you mentioned the I'm the outperformance on the orders this year.
I guess first of all where do you expect to.
Exit the year in terms of backlog relative to last December 31, and then in our missiles and fire control.
When do you anticipate that the margin rate there would stabilize and then maybe start to move any other direction.
Okay. So we actually see what we what we know today, we see our backlog this year growing.
Roughly $3 billion for $4 billion, you know if you think about ER. Our orders orders this year will not probably not be as strong as they were in 19, but you do have some notable orders.
This year. So you know this year you know we have three F 16 production orders in 2020, Bulgaria, Taiwan in Morocco.
We will defend it ties a F 35 lot 14 this year in the fourth quarter. We have F 35 lot 15, there is.
A variety of Hypersonics awards that that will come out this year, we have the Indian Navy may six you are that'll occur the seahawk PBL. So our book to Bill the way we see it this year is a little bit over one you know it's 1.06, so we will grow backlog this year to roughly 147 or what.
One 148 regarding missiles and fire control.
We've talked about this in the past the you do have the development program the classified development program that.
Is kicking in it will continue to grow off for the next couple of years, a we've talked about some of the risk retirements that we've had in the past some of those will not occur this year, but it's probably next year or the year after that we would see.
The are.
Our margins start to stabilize on ER on missiles and fire control there will be other new prototype program. So if you think about hypersonics, especially in missiles and fire control. It is strike Hypersonics, we really were investing in the counter hypersonics, but we really haven't seen any orders there.
Yet we're not surprise us if were put under contract this year and going forward for counter and those will be dilutive to margins as well.
Hey, John This is Greg we're at the top of the hour. So I think I'll turn it back over to Maryland for some final thoughts. Thanks, Let me wrap it up and conclude the call today again by thanking our 110000, Lockheed Martin employees for their remarkable efforts.
Over the course of 2019, because it was a year that we delivered outstanding strategic operational and financial performance. Our Corporation continues to excel and attributes, we most value and thats, providing critical solutions to our customers and returning value to stockholders. So thank you again for joining us on the call today, we look forward to speak.
Thank you with you at our next earnings call in April John that concludes our call today.
Thank you and ladies and gentlemen, you may now disconnect at this time.
We're sorry your conference is ending now please hang up.