Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Lockheed Martin first quarter 2020 earnings results Conference call at this point all the participant lines Arnaud listen only mode. However, there will be an opportunity to ask questions you make queue up at any time simply by pressing one.
Then girl.
If you need any assistance during the call. Please press Star then zero and operate will assist you offline as a reminder, today's call is being recorded I'll turn the call now Mr., Greg Gardner Vice President Investor Relations. Please go ahead Sir.
Thank you Johnny Good morning, I'd like to welcome everyone to our first quarter 2020, <unk> earnings Conference call. Joining me today on the call or Maryland, Hewson, Our chairman, President and Chief Executive Officer, and Ken Posner, <unk>, Our executive Vice President and Chief Financial Officer.
Safety and caution in mind during these unusual times, where we are using a more virtual approach and exercising social this thing well conducting this call.
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 materially from those projected in the forward looking statements. Please see todays press release that our SEC filings for a description of some of the factors that may cause actual results to differ material.
Lee 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 linked to view and follow the charts.
With that I'd like to turn the call over to Maryland.
Good morning, everyone and thank you for joining us today I Hope this call finds hearing your family safe and healthy as we collectively work to address the many issues brought on by the around a virus outbreak.
Our nation and the global community has seen the dramatic effects and the covet 19 crisis.
We are all saddened by the rise in illness, and the tragic loss of life.
Has resulted from it.
And our Lockheed Martin family has not been spared from this endemic.
The World continues to battle this disease with experts predicting improvements will be seen in the coming weeks and months and while this is certainly encouraging we must remain bill vigilant to ensure progress is achieved.
The corporation is taking necessary steps to help combat this virus and keep our employees safe well assuring our customers can achieve their important readiness and mission requirements.
We are beginning to experience some issues in each of our business areas related to the current environment.
Primarily in access to some location and delays of supplier deliveries, which has caused us to adjust our full year sales outlook and we will discuss that later in the call.
Our teams are successfully addressing many of the risk that have arisen due to the opened 19 impacts.
Our manufacturing facilities are open and our workforce is engaged.
Situation will evolve and we will continue to monitor our business environment for areas of concern.
The corporation remains committed to delivering the products and services needed for our customers and to maintaining a safe and healthy workplace for our employees.
In recognition of this unprecedented situation U.S. government has taken several actions that continue to reinforce the importance of our nation's defense industry.
The department of Homeland Security team the defense industrial base to be part of the nations essential critical infrastructure.
And the Department of Defense has issued guidance that confirms the expectation that companies providing products and services in support of National security continue to maintain staffing and work schedules to perform their crucial functions.
The Diodati also published a deviation on progress payments memo issuing a blanket increase to progress payment rate for both large and small businesses.
Stable and reliable cash inflows provide needed visibility for all businesses and will be especially important to many small and medium sized suppliers.
These actions underscore the country's commitment to our industry and importantly to our supply chain, which provides tremendous innovation and strength to our national security products.
The International community is also deeply affected by this crisis and our custom our company is committed to perform with excellence for our global customers and to support the health and wellbeing of our employees around the world.
The corporation is taking steps to aid our employees teammates and others.
In a few moments I will discuss some of the actions we have taken to help provide support to those affected by this crisis.
I will touch briefly now on the department of defense budgets and the recent presidential budget submission.
This quarter the President's submitted the fiscal year 2021 budget recommendation to Congress consistent with the bipartisan budget Act of 2019 enacted values with a total national defense request equally approximately $741 billion.
Notably the deal with the reiterated their commitment to the National defense strategy in their submission with the space domain Air and missile defense and hypersonic programs.
Pillars in their strategy and our portfolio all receiving increases from the previous submissions.
Congress Congress will continue the process with the authorization and appropriations phases.
Our programs remain well supported in our portfolio is broad and expanding we look forward to the finalization of the process and supporting our war fighters needs.
Tim will review, our first quarter financials, and updated full year outlook outlook in more detail in a few minutes.
I would like to begin by noting that the disruptions introduced by this virus have caused us to reduce our 2020 sales expectation as production and supply chain activities have recently slowed in our aeronautics business area.
The changes in our outlook represent impacts we anticipate being recognized over the remainder of the year, we're not projecting any changes to our expected full year operating profit earnings per share and cash from operations outlooks that we set forth in January.
Our results this quarter were very strong.
Sales in the quarter exceeded last year's first quarter by more than 9% led by our Aeronautics team as Aeronautics business area grew 14% from the first quarter of 2019.
Our segment profit came in just above the first quarter 2019 amount as risk retirements and all business areas allowed us to exceed our expectations in this quarter.
And we had a strong quarter of cash generation, bringing in over $2.3 billion of cash from operations.
As we look to achieve our full year target of greater than or equal to $7.6 billion.
Moving to orders and backlog, we received more than $15 billion in orders this quarter, maintaining our backlog at approximately $144 billion, our all time high.
RMS garnered the largest set of awards with the total exceeding $7 billion.
Led by our Sikorsky organization, which booked over $4 billion of orders, including over $2 billion for performance based logistics contract for the US Navy to provide Sustainment services on our MH 60 Seahawk platform.
And award of $500 million for the second low rate initial production or L. Rip contract for 12 combat rescue helicopters and $470 million Award a million dollars award for element to the presidential helicopter contract.
AG six aircraft to the program and bringing the total order to 12 rotary aircraft out of a total program of record of 23 aircraft.
Aeronautics also had a strong quarter with aggregate F 35 orders approaching $900 million.
Other awards, including a new classified order brought the aeronautics business area total to $3.6 billion for the quarter.
Missiles and fire control, we see the pair of sizable awards. This quarter led by precision fires, which booked a 1.1 billion dollar order to supply guided multiple launch rocket systems to the us Army and international customers.
He must see also received an order for over $900 million to provide that interceptors and equipment to the US army in the kingdom of Saudi Arabia.
And our space business area received the fleet ballistic missile order of $600 million for continued Trident II production.
Our performance to date and resilient portfolio have positioned us to achieve strong results. So far this year.
The effects of the Coven 19 outbreak outbreak are being felt by our teams that we remain committed to delivering the vital solutions that our customers require.
This pending has caused dramatic impacts to our employees and their families our customers our supply chain and the communities in which we work and live.
Our corporation is committed to use our know how resources leadership.
To assist during this global crisis.
Lockheed Martin is implementing multiple actions to help support effected groups, including accelerating payments of over $150 million to our small and medium sized supply chain partners.
And we have already flowed the first $50 million of an additional $450 million and accelerated payments to our global supply base as a result of the actions taken by the department of defense and changing the progress payment policies that I mentioned a moment ago.
We have also donate donated $10 million to nonprofit organizations involved included 19 related relief and assistance with emphasis on veterans and military families.
And we have activated at 6.5 million dollar employee disaster relief fund to assist Lockheed Martin employees and retirees impacted by Kobin 19.
In addition to supporting our global customers through our ongoing contract activity performance, we recognize the providing jobs. During this period of economic downturn is also critically important.
We are committed to continued hiring during this crisis and have added close to 1000, new employees over the past few weeks. In addition to advertising for 5000 open positions.
The journey to full recovery will be one, which we will all share together Lockheed Martin is committed to performing with excellence for our stakeholders as we navigate through this crisis in the weeks and months ahead.
Moving on I would like to highlight several significant events that occurred across the corporation during the past quarter.
Beginning with Aeronautics we are excited by two significant milestones for the F 35 that show the programs continued maturation and ongoing demand.
In February the F 35 teams celebrated surpassing 250000 flight hours for the program.
Including developmental test Jets training and operational us and international aircraft.
The program has now trained more than 1000 pilots and in excess of 9000 Maintainers as of this unrivaled step stealth fighter progresses towards full rate production.
In March the F 35 team delivered the 500 production joint strike fighter aircraft, a conventional takeoff and landing variant for the Air National Guard.
Production continues to ramp as we progress towards the joint government and industry plan of record for delivery of more than 3300 aircraft.
Moving to RMS This quarter, our Sikorsky line of business was down selected in two key rotary wing competitions for the future vertical lift program.
The Sikorsky Boeing team was awarded one of two future long range assault aircraft contracts to continue design and risk reduction efforts on the next generation medium lift helicopter for us forces.
Our SB one defiant offering uses our Collier award winning X two technology, providing enhanced maneuverability and speed.
We look forward to working with our army customer as we collectively define the next generation assault aircraft for our war fighter.
We were also excited to be down selected in the future attack reconnaissance aircraft phase two competition.
The Sikorsky Rader ex rotorcraft uses the same unique technology as the SP defiant that's the one defiant and provides the same speed and maneuverability advantages.
Each of these competitions represent long term growth opportunities and our Sikorsky organization has been investing four years in pursuit of innovative technologies and design to fulfill the war fighters objectives.
Our space business area celebrated a pair of milestones this quarter as well as the first two GPS three spacecraft, where each separately accepted into operations by the US Air Force base command as healthy and active.
Officially joining the current GPS constellation of 31 satellites.
These are the first two of 10 modernize GPS three space vehicles that will be deployed to enhance navigation and positioning capabilities for millions of users.
The next generation GPS three program will deliver signals three times more accurate in the current satellites with approved improved availability reliability and anti jamming capabilities for our military users.
And we are proud to continue this legacy of innovation for our war fighters.
In missiles and fire control you may recall last quarter, we commented that missiles and fire control have passed an important milestone on us armies precision strike missile or prism competition.
This quarter, our tactical missiles organization performed its second consecutive successful flight test of this next generation long range precision missile.
Our team demonstrated the missiles flight trajectory range and accuracy and overall missile performance from launch to the conclusion of emission.
We look forward to building on our long running army tactical missile system legacy in preparation for our third prism flight test in the coming weeks as we continue to pursue this potential franchise opportunity.
And with that I'll turn the call over to Ken.
Thanks, Marilyn and good morning, everyone.
As I highlight our key financial accomplishments. Please follow along with the web charts that we've included with our earnings release today.
Let's begin with two or three and an overview of our results for the quarter.
We saw strong real results in sales segment operating profit cash from operations and earnings per share this quarter.
We generated $2.3 billion of cash from operations and we continued our balance cash deployment actions returning $1.4 billion to our shareholders.
Our backlog closed just above $144 billion exceeding our all time high for the Corporation.
And we have updated our outlook to include impact for Covance, 19, which we will discuss in greater detail in a moment.
Overall, it was still a strong quarter for the business during uncertain and unique times.
Turning to chart for we compare our sales and segment operating profit this year with last year's results.
Sales grew 9% compared with last year to $15.7 billion.
Continuing the consistent growth of the business while segment operating profit was $1.7 billion.
The resulting segment operation Mark operating margin was a strong 11% ahead of our expectations.
Chart five shows our earnings per share for the first quarter of 2020.
Our EPS of $6, an eight cents was up nine cents over our results last year, driven by fast casual income and favorable operational performance.
Our chart six we will discuss in more detail the cash returned to our shareholders this quarter.
Subtracting our capital expenditures from approximately $2.3 billion of cash from operations, our free cash flow was greater than $2 billion.
We maintained our dividend to $2.40 per share and we repurchased $756 million worth of shares.
This brought our total cash returned to shareholders to $1.4 billion for the quarter or 72% or free cash flow.
And we see no change to the $1 billion share repurchase outlook for 2020 that we first communicated during our call last October.
Chart, seven chose our backlog balance through first quarter 2020.
While delivering our while delivering our highest first quarter sales ever we increased our backlog balance for the seventh consecutive quarter.
Driven by bookings at Sikorsky and missile programs at missiles and fire control.
Moving onto chart eight.
Based on a review of Cobot 19 related potential impacts as Maryland noted, we are lowering the midpoint of our guidance range on sales by $375 million, while holding our guidance for segment operating profit earnings per share and cash from operations.
And as we disclosed in the earnings release, our joint venture Am rock in the UAE loss. The key contract award. After the ended the quarter and we're still working the assessment upward potential noncash impairment that could be recorded as early as a second quarter. Once our review is finalized.
On chart nine we have shown the adjustment adjustments to our sales guidance range.
Likely cobot 19 impacts on our supply chain and related potential delivery delays have caused us to reduce our full year outlook for aeronautics.
Our expectations for 2020 sales in all other business areas remain consistent with what we discussed in January.
On chart 10, we show our outlook for segment operating profit by business area.
While the guidance for profit has been lowered for aeronautics falling sales, we have raised our guidance range from missiles and fire control in space holding our total segment operating profit consistent constant from january's outlook.
On chart 11, we outlined some specific assumptions were using in our 2020 guidance related to the current impacts of posted nine team.
We continue to monitor situation daily as it remains the dynamic environment.
And as Maryland highlighted we are proactively taking steps to help support our suppliers and teammates during this difficult time.
Our current expectation is that this next few months will be the peak of disruption as the country and the rest of the world looks to successfully flattened the curve move forward.
The department of Defense in United States Government have also taken action to support our industry through policy changes and the care Zac and our outlook has taken into consideration these benefits.
Together these actions have allowed us to update the outlook, we provided in January with minimal impacts.
And to conclude on chart 12, we have our summary.
We believe that the first quarter of 2020 has laid the foundation for a strong year.
We have a robust backlog to sustain our growth our sales outlook is growing year over year and represents an approximately 6% increase from 2019.
Along with consistent profit and positive cash flow. This allows us to project strong results for 2020 for shareholders as we continue to support our employees customers and supply chain during these difficult times.
So before we move to today I.
I would like to take a moment to grow congratulate Maryland on her upcoming transition and thank her for the outstanding leadership. She has provided Lockheed Martin over the last seven and a half years.
As chairman President and CEO. The Corporation has reached new Heights and delivered remarkable results from our customers and shareholders.
Maryland during your 37 years with the company, we have all employees customers teammates and shareholders benefit benefited from your dedication inspiration envision.
You and I have worked together for 20 years in on a personal note I would like to add that our will also miss your friendship and partnership.
Although your presence will certainly be missed on a day to day basis, we look forward to continuing to work with you as executive chairman of the board.
And I'd also like to welcome Jim Taiclet as our incoming president and CEO, who begins on June 15th.
I have worked with Jim as a board member for more than a year, while I've been in my current role and I believe you will be an outstanding leader for our company.
And with that I'd like to wish, Maryland, the best of luck and I look forward to welcoming Jim in June.
John we are ready to begin the QNX.
Thank you and ladies and gentlemen, if you wish to ask your question. Please press one than zero on your telephone keypad you may withdraw your question at any time.
The ones command, if you're using the speakerphone. Please pick up the handset before press in the numbers. Once again. If you haven't question you May press, one then zero and at this time.
And first of all the line of Joe Denardi with Stifel. Please go ahead.
Okay. Good morning.
Ken that Theres language in the release, you kind of alluded to in your prepared remarks regarding the guidance kind of reflects your current view on on Pilger 19 can you talked about how sensitive the guidance is to duration, maybe help us a little bit more kind of what you're assuming for what a return to normalcy looks like do you see the effects of this.
In terms of fixed price contract costs, increasing your ability to recover that just trying to understand your perspective on.
How this impacts kind of earnings power and cash flow power longer term. Thank you you bet. Thanks, Joe So it's probably helpful. We start with once the started what our processes were.
Think of this is our battle rhythm.
So once this began we started a weekly covance 19 impact tracking process, we put together a template and this was generally across the board included all the business areas. We had data that we collected that supported various internal and external reporting in fact.
We're now in a rhythm where Maryland is now sending a memo.
The essay ease think of those as the service acquisition executives and this is done on a weekly basis that basically delays lays out all the impacts that we see all the actions that we're taking to minimize those impacts and think of these inputs as at the contract program level. So across the corporation, it's about 600.
Line items, and it's tracking real and potential Lockheed Martin supplier and government driven impacts.
The covert impacts that we're seeing our reflected within this weekly template and you know unfortunately, they are predominantly risk related no think of them as travel restrictions in sight access that are most most likely the common cited driver been impact we're seeing increases in a supplier shortages and in our sites.
We're seeing some Apis absenteeism impacts there are some opportunities that we do see that exists Joe from a cash flow standpoint, the customer.
Altered the progress payment rate from 80% to 90% and also a small nuance, but important they changed some.
Conditions regarding progress payments.
Rates, which will be advantageous to us and we're now flowing this is merrell and mentioned we're flowing this fall down to our supply base starting with our.
Small suppliers and are vulnerable supplier, we have a process, where we work with supply chain. They tell us who those will suppliers are we work with treasury to determine on a weekly basis. The cash flow that we have that we're flowing that down.
Contract actions that working with our customer it's accelerated timing of a pending awards undefinitized contract action through Yukos.
Funding et cetera, what we're also seeing internally is.
There are we're capturing cost avoidance, so think of a lack of travel lack of.
Business trips that we're making lack of sponsorships lack of.
Air shows that we're going to when we're capturing that and collecting that.
Probably not to take to the bottom line foot to help with impacts disruptions to our business you talked about the recovery of cost.
With the cares act so one of the conditions in there is we will work work with the.
PCL.
And demonstrate to them for our return by requests for equitable adjustments that those costs are those idle costs should be deemed the allowable and we'll work through that in fact, we have a path forward on the F. 35 program to do just that so we think we're in a good position the plan is.
At least the way we see it is we're hoping that.
The curve starts flattening in the second quarter end of second quarter, and we can get to some kind of semblance of business as usual whatever that is starting in the third quarter. You asked about Cashel, Joe we feel really good about our cash and I'll, let somebody else I'll give some more color on cash.
For somebody else to ask the question, but we feel really good about our cash flow. This year, we started the year strong.
End of the first quarter strong and we see going forward strong. So thanks, Joe stay safe.
And next we'll go to a Hunter Keay with Wolfe Research. Please go ahead.
Thanks, I guess I'm tempted to ask that cash question, but I'll, let somebody else to it I also is going to ask before can you talk about the F 16, I'd like to talk about how that moves to Greenville is going for want it and how you think about the F 35 in the context of the F 16 sort of a growth versus replacement.
Type situation, both near and medium and long term. Thank you.
800 will give the Marilyn and break census, or last.
Earnings call, so I'll take that so.
It's going well so as everybody is aware I believe we moved the F 16 program out of Fort worth a couple of years ago, frankly, no home because we didnt have any orders of record and.
Bahrain was our first.
Our first customer who moved aligned to greensville going very well right now we have Bahrain.
What you saw we just announced the Bulgaria.
We have Slovakia.
We're in the throws of working with the United States government in Taiwan for them to by 66 aircraft. There is a African country that is interested interested in.
F 16 saw so we're hopeful that'll happen South American country on the north some.
South East Asian countries that are interested in F 16, as well. So we think the program is doing very well the mot programs are doing very well just in the spirit of coated we're not seeing many impacts at all on the F. 16 program. So I think this is a good fortune.
Duration aircraft.
For those customers that can't afford.
Can afford the F F 35, or frankly can't.
At this time by the F 35, and it might be a good into mirror intermediary step for customers to go from the F 16 to F. 35, So we see a frankly, it's complementary and not.
On competing against themselves.
Our next questions from Doug Garnett with Bernstein. Please go ahead.
Thank you and first Maryland, it's been great working with you over the years. So just wanted to wish you all the best in the transition.
Thank you Bob.
Hi, I wanted I wanted to ask about international sales and particularly when you look at the Middle East I thought it was encouraging that you.
You got this so this award from from Saudi Arabia, but when you look at oil prices, where they are today in the past we have seen budgets contract when oil prices can come down.
How are you thinking about the middle East right now given the oil price environment I'd, even expand that to say with.
Grown a virus issues in other markets and budgets that maybe are under pressure.
What are you seeing internationally.
And your export sales.
Well first of all deck. Thank you for the question and I would say and you know at the outset that regardless of what's happening with oil prices and other things the threats continued to accelerate around the world. So we still have that challenge in.
Anywhere in the World I mean, it's the first order of any country that they have to protect their citizens. So a lot of the systems, we sell into the middle East are clearly defensive systems and and more than ever that's more complex volatile and unpredictable and it's ever been before so that's a necessary condition that they have that national security and expect that will continue.
New.
We will continue on our side too to drive affordability across all of our product lines to make sure that what we do offer is the best value do those countries and but we aren't we aren't seeing a pull back from the needs that they have today in the middle East.
Next we'll go to a Sheila hi, Alan with Jefferies. Please go ahead.
Hi, Good morning, Marilyn and Ken, Maryland, you've had an amazing career and its apparent and Lockheed success and at the top line and operations I guess as you exit on top how do you think about the challenges for chairman area. As you would have like to spend more time with on Lockheed and position better for the next five years, how does Lockheed continue to grow over the next decade.
Well. Thank you Sheila for your kind comments are registered first start by saying that I think this is the right time for a transition in our company because our company is very strong and stable. We've got solid performance. We've got to a very strong robust growth strategy, even again this year continuing to grow.
We finished out last year with a record year and we've had a series of a very strong record for the past few years, and we're set up well with a $144 billion backlog, which I think outlines that's booked work that we have and a strong financial position I think as as Jim steps into the role.
He's been onboard for over two years is as Ken said and he has a.
Our military background. He has worked in industry and Pratt and Whitney and Honeywell He's.
Got a lot of strong experience around our industry, our markets or business until he brings that plus the insights gained on our board for the last couple of years and in our strategy. Our long range plan. So I think you will see that he will continue to.
To drive the success that we would that we've had over the last few years it fits very well into our culture and we're really looking forward to he brings a strong acumen business ackman because of course east and South Bend CEO for the past 17 years in terms of priorities. We will continue to strengthen our focus on our customer that has what's driven the success of this bill.
Business.
Aligning with their priorities and listening to them and understanding what they need and then driving sustained profitable growth around that and delivering them. The performance that they expect because they do depend on us.
<unk> said earlier, where an essential.
Industry sector and that is clearly because of the national security.
Products and capabilities Roop produce and so we know that performance in innovation for our customers is got to be continued and then lastly, I would just say keeping a focus on it on the people in this company. We have a strong culture of innovative culture of people that make the difference and I know that as Jim comes in with.
Style is a value based leader as he is in a collaborative leader that he will continue that forward. So I think you could you can just look at as being very well positioned for the future as we as I turn over the reins to Jim in mid June.
Okay.
Our next question from Pete Skibitski with Columbia, I want to be global Advisors. Please go ahead Sir.
Hi, Good morning, guys and congratulations, Maryland on a great career.
On the covert related sales reduction the aerospace I just want make sure I understand.
What does the guidance lowered their.
International F 35 sites, Italy in Japan sites, and and why we are the other side with no impact does.
Sure, Hey, PV 10, I'll take that so.
You know, but let's talk Aeronautics and then I'll go around the around the other business areas. So you know aeronautics we looked at we started seeing.
It is likely there is going to be and I'd say, it's probable that theres going to be some supply chain.
Disruption.
What we're seeing answers local distancing requirements.
Our.
Our being more stringently applied across the globe Theres workforce disruption there are likely impacts that are happening throughout their supply.
Tier hierarchy their shifty constraints were actually have had some issues with shipping constraints. We're also finding their.
There is likely going to be some production impacts at at our at our site and based on that the analysis to date has given US concern. So we reduced our guidance that aeronautics and specifically its F 35 production Theres more analysis that we're going to do over the next couple of weeks Award.
Working with our supply chain and our Fort worth production line in our customers to set to determine if any impact to what extent it will be on the program including deliveries.
In fact last night I got.
Some feedback from the supply chain team. Then this is specific to F 35, and specific to production, we're seeing some pressure our regarding supplier performance based payment invoices. So this is these are invoices that they have they could deliver to us after they completed a milestone.
There are couple suppliers that are going to be delinquent in April some of them are for administrator administrative reasons, we'll work through that.
So that's just timing, but some of them and some are domestic us based in some of them are international that it is.
It is due to them not achieving their milestone some of it is going to be cobot related probably most of it as cold related were off we're looking at that so we then did or did an analysis a bunch of sensitivity analysis with the aeronautics team and if you look at F 35, we're seeing <unk>.
Little to no impact to development, we're able to continue to work on follow on modernization that is what typically is happening on the development program Sustainment generally speaking the team does not see any impact and if they do see impact back to Joe's question about the recovery.
Ability the cost we feel comfortable due to the cares act if we have somebody who can't get on base to do say a repair if you will or to stand up a base.
And they are sent home and they're not able to do productive work at home. We are fully keep those costs a record level. It. So it's all down to production we have seen historic in the past some impact that the Japanese FICO, they're up and running now and that the top Italian FICO, but on the.
Whole, they're up and running as well.
So it was our determination based on what we're seeing that it was prudent for us to take a prudent our production sales down hopefully this is a you know a conservative number but based on.
So we're seeing we think this is a good number you asked about the other business areas and why we're not seeing impacts there right now so I'll start with space.
So think of their production cycle.
It's long.
It's a long production cycle and generally speaking what any any issues that they would see in the supply chain or at our facilities. They feel they could they could contain so it is low as low volume certainly relative to F 35 production line.
They have a engineering workforce. They were one of the first ones to be they were the first one's frankly in our company to be impacted by this there now staggering other shifts are staggering the days that people come into the office.
The it is impacting some of their classified programs, but we seem to be doing a nice job working around that so we feel good with their guidance right now RMS. They don't have the volume so talk the manufacturing for they don't have the volume of Fort worth think of their volume more like Marietta and I did our was remiss not to.
Talk about Marietta. So there are some suppliers, where we are impacted that we're doing workarounds and we do think we have a containment plan. So we do see some modest impact at Mariana, but it's not material so why would.
State that RMS is more like Marietta.
So there there are some issues there, but they're not material in nature their engineering team. So the folks that are doing engineering work at RMS are still productive there are some basin range.
Closures that are impacting RMS, but we seem to have workarounds.
And so we don't see any impact there.
The next.
Concern, we would have is that missiles and fire control and it's just based on the vote. The it's a high volume business.
[music].
They have done a nice job of looking through their supply chain. They have made contact with 100% of their suppliers.
And before it last week I would have told you, 6% or forecasting impacts in Maryland staff meeting we found out yesterday, it's up to 10, so they actually have a very robust process of talking through their supply base so supply base.
They had to suppliers that had a closed operations one of them, we're still working through and working through a.
Second sources and also containment plants for them and another one had a operation in Mexico, we work through that and got that one open. So we feel good right now where missiles and fire control as well, whereas where they are as well from a guidance standpoint, but that would be our next worry bead would be missiles and.
Our control so net net we're good with the guidance at the other three we think we've thought through the Aeronautics one.
Aeronautics issues and we feel good about that.
And you know look just we've looked across the portfolio and not just covance related risks, but we've looked at call. It business as usual operation opportunity and risks and we think we box balanced everything and up we feel good about our guidance as it stands today.
Next we'll go to David Strauss with Barclays. Please go ahead.
Congrats and well done Marilyn.
Thank you.
I'll take the debate Ken on on cash.
I think you were talking about a.
A little bit more than $700 or working capital headwind or increase this year. How are you thinking about that now on the back of cold in 19, and you know maybe comment on Q1, you saw a big increase in in your payables balance thanks to bet. Thanks, David So yeah, we like I said, we feel.
Good about cash flow this year and I'll say it again.
It wasn't for Covance 19, we were very comfortable with taken our cash from operations up our cash from operations number of greater than $7.6 billion. So yes going into a going into the first quarter. We did increase payables, we did pay down payables in the fourth.
Quarter.
Part of the reason why aeronautics in a couple other business areas did so well was frankly, we got invoices from a timing standpoint, we got invoices in late in the quarter that ended up being payables. So we had abnormally high payables.
That also then flowed into inventory or into contract assets, which we do think as an opportunity going for forward for us so even with the covert impacts.
We do see over time, a working capital increases specifically in contract assets most of them in F 35, and we're working with the F. 35, we think there's an opportunity there for us to reduce our contract assets. The other thing I would state is.
As why we have the high payables in the first quarter is.
These cobot actions that Maryland described of us flowing money down.
To the supply chain really didnt start happening for the most part on until we got into the second quarter. So we'll continue to flow down that committed $450 million that we got certainly through the second quarter, but David it's likely we're going to flow that down in the third and fourth quarter as well and we will pay.
Probably take our what I'll call, our normal payables number down in the fourth quarter and accelerate payments to the small business space and are in our vulnerable suppliers.
And before we go the next question, ladies and gentlemen, a quick reminder, if you do have a question. Please press one then zero and that will go to Rob stellar with vertical research. Please go ahead.
Thanks, so much good morning, good morning.
Matt and all the best in the future, but I have a final question for you.
Thank you [laughter] and its little bit tricky I was wondering what's your gauge of the political environment at the moment to whether its.
I'd say politically acceptable for companies to be buying back stock given the the crisis the country's guys right.
Well. Thank you. Thank you for your comments Robyn and thanks for the question the political environment today, I know is very difficult, particularly for companies that it basically have no demand and you know when everything shut down and I'm I'm very.
Pleased to be part of the conversation on the Presidents task force and on on some other task forces. Our company is so that we can work with governors in the president on looking at how best to to get the economy back to work and Im very safe and effective way.
As I as you know as we've talked about we've been running all through this time and so we were in a position where.
It's it's matter of sharing our keeping our people say power keeping our operations renting out we're dealing with supply chain a lot of things that can spoke of here in terms of the political environment, where there are I think what you're referencing is where companies are going to get some kind of.
Support from the cares act and other ways.
To help their business and then as a result of that would it be appropriate for them to the stock buybacks and and I think you've heard all of them at least all that I've heard go publicly say no that's not their intention they really need.
Funding today in order to to address their business need to address their cash needs to dress getting their folks back to work because basically their demand went to zero I think very different than.
A normal company like that that sets out the year with a a plan on on cash deployment, which would be through dividends through stock buybacks through capital investment through the range of things that we all do with cash and we in our case, we havent changed our AR.
Assets at all I mean, we've made a commitment in October that we were going to do about a billion dollars and and stock repurchases and that's that we still are holding to that for this year and.
So we're very different I think then than those who have experienced a very significant impact to their demand can I don't have you want to add anything on that front relative to our situation on you better yes, so that Rob I'll give you just a little color of of what we've done actually so.
Late last year.
We entered into a a tenbfive, one and think of that as a as an enhanced open market.
Repurchase program. So we essentially went to the banks.
Late last year for and said.
We want to buy.
For $500 million to $600 million of stock.
Back.
Starting in January through through July So we're in we're in this tenbfive one.
Through through June through July and in the first quarter of that we bought 256 million back up to 756 that you heard me state we bought back in the first quarter.
Early in the year, we thought it would be advantageous just to go on autopilot. If you will and we signed up this would be our second one we did one in the.
Fourth quarter of last year, and accelerated share repurchase program and as you know when you when you commit to that you put you put the money upfront.
Gives the bank then the discretion to buy it back when they want to buy back so we.
Fronted that money if you will in the first quarter and that plan goes through the end of April So think of that in nine days that program is over so thats why you saw the.
The amount we bought back was seven earmarked $756 million of.
Repos than in the in the quarter.
As I stated, we've reaffirmed in Merrill Lynch's foot stomp that we reaffirmed our billion dollar.
Commitment, which basically will be on autopilot that will go through July so think of us buying back another $244 million over the next couple next two months to to get us to to the to the to the to the $1 billion and.
What we have done in the past this frankly over the last couple of years. We've done this just to prevent dilution of our share count and that's what we're committed on now if we get out of this covance situation. We may look.
Look at this again and re address it and see if it makes sense to opportunistically buy our stock back if we think that makes sense, but in the meantime, while covance going on our commitment is we're going to.
Maximize our balance sheet to generate cash flow and we're going to send a as much down as we can.
And.
As much as we can down to our distressed vulnerable supply place and our NRC small supply base, while we're on capital deployment I'll talk about dividends. It is from a planning standpoint, our plan a subject to the boards approval for us still to declare and pay down.
Evidence so thats in our modeling for the rest of the year and I'll just remind you were still spending investing in our business or roughly 1 billion three and Erad for this year and as I stated earlier, we're still on a path.
From a capex standpoint to spend roughly $1.7 billion on capex. So we're not skirting our responsibilities to our supply chain nor to the investments we believe we need to make.
For us via fiber fiber business going forward.
Next questions from Peter Arment with Baird. Please go ahead.
Okay.
Marilyn congratulations on a same success.
Hi, Ken maybe just a backlog question as stable backlog and I think the expectation was for 2020, you see growth of $3 billion to $4 billion, whether that is that still intact and is there any kind of international awards that are key that we should be looking at that will impact that thanks again.
Yeah. Thanks, Peter Yes. The plan is we still think we're going to grow our backlog.
I mentioned earlier.
For one of the questions. We're working with the I'll talk United States first the United States customer working with them, where it makes sense for us too.
Accelerate.
Orders to get that into our backlog to get that.
Behind US you already saw F 35 lot 14 was in the second quarter, we got that order in behind Us and that does actually have some international customers think of 35, 40% of those airplanes will be go into international customers, but there are a bunch of.
International orders and all and I'll go through them that we generally feel pretty good about so Bulgaria is behind us for F. 16, we got those eight aircraft behind us.
We're working with a Indonesia on some see 130 aircraft, we feel good about that.
Working with India, you probably saw the announcement that the money so flowing from India to the United States. So well, we'll now work with the appropriate.
Government agencies to get that under contract that's for the M- 60, our multi roll helicopter program.
We have a Spain F 110 forget program, we feel good about.
F 16, Taiwan I mentioned, that's a third quarter.
Order, we're still feel good about that.
We also have.
A couple orders for F 16.
So we're working to try to shape.
There's a norway contract out in the fourth quarter. So I'd say on the whole we're feeling good about our our order book and in fact because of some acceleration, we actually think will over achieve our orders plan this year by.
Over $3 billion and Thats, mainly driven by a tacttthree that Jeff why 21, where I think we're in a good spot with the customer to accelerate those orders.
Next question from Carter Copeland Smelliest Research. Please go ahead.
Hey, Thanks and again.
Congratulations on all these accomplishments and the retirement.
It's been quite impressive so.
Just just wanted to.
A follow up a little bit on on the award.
Environment.
And I think look a little bit longer term you hinted at it American on the plus ups in areas of emphasis and things that are in the the NDS and I just wondered if you might give us some color on how you see that influencing the universe the opportunity pipeline that you've been talking about over the last several quarters not just in Hypersonics, but also at M.D.A. and.
Just a anywhere you think that that that that's unfolding.
In a way that's different as a result for the budget request.
Thanks for that question. Thanks, My comments and Carter I appreciate it.
Well you know as I as I talked in my opening remarks about the fight 21 budget.
President's budget request that came out in and.
Well the topline budget is not growing significantly theres, a little bit sold some slight growth and and so we're looking as we look at effect Congress really has yet to weigh in on what's in that budget for our programs right now, they're well supported but we often congress looks and in determines where.
Other than they want to do some ads and in certain areas as well. So for example last year you know they added 20 planes for the F 35, and we've seen some area other areas of support from Congress or the years. So we feel good about what's in the budget request right now.
As I mentioned it doesn't line up with the National Defense strategy, that's exactly the areas that are lined up with our particular.
Portfolio.
There's there's the budget submission has over $3 billion in it for Hypersonics, which as we've shown that we are a strong leader in that.
We continue to see as we look beyond that Theres also some upside for NASA for Orion and for some of the Mars missions I think theres over $3 billion that was put in increase for that and then.
We continue to look at not only continued growth through the U.S. budget side, but also on on the international side now these would be Fms sales, but at 35 as you know.
Poland is committed to 32 aircraft, we see opportunities with Finland, Switzerland, with Spain, potentially and other countries. We think that are starting to show interest continued interest in the F 35, as a potential to meet their fighter.
The placement needs and then on the missile defense Arena that Pac three aegis all continue to be growth opportunities for US do you look on around to the.
To the Sikorsky side of the business I mentioned that future vertical if that's a big upside for us as potential as we see opportunities for growth. There CH 50, Threek K that we do them for the Marine Corps with it 200 aircraft program of record. There is also strong interest in Germany in Israel and and then on.
Our space business, we continue to see upside there and a lot of space protection and a lot of the mission areas there for the National security space.
Opportunities for growth, so I feel really good about our our growth opportunities as we look at even beyond this year and and.
And into the future.
Space side, the next Gen, Opie, IR, and and GPS or other other contract opportunities that we continue to see growth. So as Ken said, we expect our backlog to grow we expect to continue to win at a good rate on these opportunities because we have it strong portfolio, we've been investing for many years and things like.
Hypersonics in other areas of our business.
Let's set us up well for risk.
Hey, John I think we have time for one more question.
And that will be from our Ron Epstein with Bank of America Securities. Please go ahead.
Hey, good morning, everyone point.
Maryland, if you could speak too.
Thank you Bob the impact that the overtime and on.
Some of your international customers, meaning you got F 30, fives potentially going different places in the world and how do we think about you'd be impacted that could have on on those deliveries of aircraft.
Well on the international front, I think Ken talked a little bit about the fact that we have a couple of final assembly in check out facilities in on the international seen so in Italy, and in Japan and early on they did have some impact where they shut down for a few days or for a week, but they're they're back running again.
We have suppliers around the world that support our at 35 program and other programs. So we watch how those suppliers or.
Working in their various countries with whatever constraints they might have or safety protocols that are put in place and and so thats as as Ken said, we do very deep dive on our supply base on a weekly basis to make sure we're monitoring that and we're addressing that so that could potentially have some disruption for us.
It's similarly, we and transportation is an area that we've been watching to make sure that we've got good transformation of the parts and components coming in.
But I think in terms of countries. It goes back to my earlier comment.
Countries are still.
Need to address their national security needs to I'm, not I'm not looking at it so much from an impact on what they will buy because they are staying on their procurement plans and.
Despite the fact that things like Covance 19, and.
We'll have some impact on their economic situation just as it has in the U.S.
I think it's more really around the international supply chain that we're going to keep a beat on that to make sure that those those suppliers around the world continued to operate we you know as we talk about cash deployment to our suppliers, we are getting to those international suppliers as well because they are part of our supply chain and so extend that.
We have an opportunity to flow through and accelerate payments, we accelerate them to them as well as to our domestic suppliers in the U.S. that will be continue to be the area for us. We you know they may face.
And they may face challenges of productivity or absenteeism, and or or other constraints and so well continue to watch that closely and and frankly.
That's that's the area that we watch the most closely and why we've been so focused on it every week.
Okay. So I guess, that's our last question. So let me just conclude the call today and before I do I know several of you starting with can noted that this is my last call as president and CEO and I. Appreciate your kind remarks, and I appreciate Ken what you said as my colleague and friend for so many years and I appreciate your comments, but.
I really wanted to take this time at the end of the call just to thank the entire Lockheed Martin family for their support and dedication that they've given as the company has grown in flourished over my now seven and a half years as CEO and and Moreover, over 37 years with this company. We are very strong corporation and we've got a leg.
Agassi as innovation and performance.
On a future promising growth and when I think back 37 years ago. When I first started as an industrial engineered supporting the production line and Marietta, Georgia.
I'm reminded of a lot of hardworking and dedicated people that I worked with over my career, including the people that I work with today that current employees that are are making a difference everyday in the work that we do because we do some of the most important work in the world. So it's been an honor for me to be a part of this team in this company.
I've, often said I consider Lockheed Martin and National asset because we perform an important mission in support of our nation's defense and its citizens and also our allies around the world.
I also want to thank you are our investment community and our shareholders for your participation in these calls and also for your thoughtful engagement that you've provided with our management team over the years, it's helped us as we understand what's important to you and how you look at our business in the questions that you asked and I said earlier I know that you will welcome.
Jim Taiclet to our team I'm certain that he's going to lead the company to continued success.
As a tremendous track record of achievement, that's outstanding in it anyways in as I said earlier. He he joins a company with a culture of performing with excellence for our customers our employees and our shareholders. So I assure you that Lockheed Martin will be in very good hands with Jim at the helm.
So thank you again for joining us on the call today, our team looks forward to speaking with you on our next earnings call in July.
John that concludes our call today.
Thank you ladies and gentlemen, you may now disconnect.