Q2 2020 Lockheed Martin Corp Earnings Call
Good day, everyone and welcome to the Lockheed Martin's second quarter 2020 earnings results Conference call. Today's call is being recorded at this time for opening remarks and introductions I would like.
On the call over to Mr., Greg Gardner Vice President head of Investor Relations. Please go ahead Sir.
Thank you John good morning.
I'd like to welcome everyone to our second quarter 2020 earnings Conference call. Joining me today on the call or Jim take what our President and Chief Executive Officer, and Ken Posner read our Chief Financial Officer.
Statements made in today's call that are not historical fact are considered forward looking statements that 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 enter FCC 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.
He's access our website at Www Dot Lockheed Martin Dot com and click on the Investor relations like to view and follow the charts.
With that I'd like to turn the call over to Jim.
Good morning, everyone and thank you for joining us today, it's a pleasure to be here on my first Lockheed Martin's, earning call and I look forward to working with all of you.
I hope this call find you and your family Safe and healthy a world continues to combat the Corona virus outbreak, what's driving to recover and sustained economic activity.
Our primary objective at Lockheed Martin is to ensure the health and welfare of our employees and their families our teammates customers in communities.
We remain vigilant, taking the necessary steps to help protect our workforce, while producing the products and solutions our customers need to achieve their important readiness objective.
Our business areas have taken actions, including implementing alternative work schedules health and safety checks out our facilities and telework wherever possible.
Most recently, our Aeronautics team established a rotational facility plan for F 35 production line, allowing us to continue to manufacture the aircraft, while practicing social dispensing and completing regular deep cleaning.
The Corporation also continues to support our critical industrial base suppliers frontline medical workers and our local communities with Cobot 19 relief and response.
In March the Department of Defense announced it would increase progress payment rates to large businesses from 80% 90%.
Accelerating payments for the completion of work in recognition of the challenges posed by covert 19.
Video these expectation was that prime contractors would flow these accelerated payments to the supply chain.
Through the second quarter Lockheed Martin has flowed all of the accelerated payments. The corporation has received from the department of defense.
$1.3 billion in total to our supply chain.
In this process, we've given priority to small and vulnerable suppliers as we continue our efforts to promote a healthy and sustainable defense industrial base.
We've also continued to support our local communities and today that made substantial donations to nonprofit organizations involved in covert 19 related belief and assistance with emphasis on veterans and military families.
And as a global organization employing thousands across the world, we are supporting related initiatives and 15 different countries.
Including donations to food bags health care facilities distance learning and research efforts to help combat this disease.
As Corporation has hired more than 9000, new employees across United States since the crisis began.
It is advertising for another 3000.
And the higher approximately 12000 employees during 2020.
And across the country, we produced more than 65000 protective gallons and 32000 based fields and Weve donated P.E. at 174 locations, where frontline medical workers are carrying for covert 19 patients and others at risk.
Through all these initiatives like the Martin remains committed to supporting our employees, our suppliers and communities in which our company operated through the course of this ongoing and them.
Okay, I'll review, our first quarter financials, and updated full year outlook in more detail on a few minutes as you've seen from our press release, we had a very strong quarter financially. Despite the effects of the krona virus.
Mitigation plans put in place by each of our business areas, they're teammates and supply chain the international community as well as strong support from the department of Defense and broad U.S. government actions have allowed us to minimize our the financial impacts on our company.
This coupled with outstanding operational performance have enabled us to increase our full year outlook for sales earnings EPS and cash from operations.
Sales in the quarter were 12% greater than last year as all four business areas increased from 29 team.
Our segment operating profit results were also strong growing 15% year over year, driven by both higher sales growth and an increase in segment profit margin to 11%.
We had a strong quarter of cash generation, bringing over $2.2 billion of cash from operation and executing on our balance cash deployment strategy.
Moving to new business activities, we received nearly $22 billion in orders this quarter, raising our backlog to over $150 billion, a new high watermark.
Our Aeronautics business area led the company with over $9 billion of orders.
Including $7 billion of total orders booked for the F 35.
We were able to at 84 Jets the program with the Finalization of two lot 14 production contracts, bringing the current number of planes in our backlog to 411 aircraft.
Our F 35 team also added approximately $1 billion in combined Sustainment and development awards this quarter as well.
Missiles and fire control also had a strong quarter with the defense Department announcing several Pac three awards, including one for over $6 billion to supply Pac three MSC interceptors lunch or modification kits and associated equipment to support the United States and foreign military sales customers across multiple calls.
Tracked years.
These awards demonstrate the global demand for Pac three MSC interceptors and to meet that demand. This year. We began work on an 85000 square foot building expansion at our Camden, Arkansas facility.
The building is expected to be completed by fourth quarter 2021 was operations there beginning in the first quarter of 20 to 22.
Our rotary Mitt and mission systems secured orders of over $1 billion to support and supply 24, MH 60 Romeo helicopters to the government of India. The Sikorsky Seahawk aircraft will provide maritime anti surface and anti submarine warfare capabilities, India as well as cargo.
Cody and search and rescue missions.
And our space business area added multiple orders, including a classified award for over $1 billion.
In total the corporation grew orders, 23% above second quarter 2019, and achieved a company wide book to Bill ratio of nearly 1.4 for the quarter.
I'll touch briefly now and the department of defense budgets as both the house and Senate Armed services committees have completed the respective markups or the fiscal year 2021 National defense authorization that.
These first here as to the bipartisan budget Act of 2019 spending targets.
An equal approximately $740 billion for National Defense.
Appropriation committees from each chamber are in the process of drafting the funding legislation to accompany that the authorization.
There are encouraging elements for our portfolio is the Senate version confirmed that the National Defense strategy remains the roadmap for the armed services.
The Bill was passed with strong bipartisan support.
Our portfolio was well supported in the Senate version.
Well the recommended increase of 16 F 35 aircraft above the President's request.
Additional funding for missile defense parties, including an eight that battery.
An increase funding for the Homeland Defense radar Hawaii program.
Congress will continue with the authorization and appropriations stays.
We look forward to the Finalization of the process and supporting our war fighters need.
Moving on I would like to highlight several significant events that occurred across the corporation during the past quarter.
Beginning with Aeronautics, Yes, 35 team achieved another operational milestones as our United Kingdom partner celebrated the initial period deployment of at 617 squatter.
This legendary unit known as the Dambusters from their exploits the World War two is now for the HMS Queen Elizabeth aircraft carrier.
Watering will now begin a series of flight trials, demonstrating the jets ability to defend the carrier combat Airpatrol rapid deployment and interoperability with other UK naval assets.
This is all in preparation for their second embarkation later in the year when the squadron will join the carrier and her task group for a large multinational training exercise with us European and NATO partner.
The simple then sale set sail again next year for her maiden global carrier strike route 21 deployment.
We're proud to provide this unrivaled fifth generation aircraft to help support our UK partner and the security of their nation.
Moving to RMS our radar surveillance systems team achieved two notable milestones this quarter.
In April they successfully completed the Sentinel a four radar program preliminary design review.
Following successful system requirement and system functional reviews, which took place earlier this year.
So just four months after an initial contract award the sentimental team is already achieved several key milestones as it progresses. The critical design review Phase later this year and then in the fabrication demonstration and test.
I don't know a four radar replaces the current Athree variant and will provide improved air and missile defense against low flying unmanned aerial systems cruise missiles drones and other threats.
Well the program of record of approximately 200 systems plus international partnerships. The sentimental program alone as a total potential contract value of over $3 billion.
RMS also delivered to the U.S. Army. The first NTP Hugh 53 radar system, which is equipped with gallium nitride to provide additional power and enhance counter fire target acquisition capabilities.
The TV Q 53 vacant radar locates and tracks enemy indirect fire.
There are 360 degree or 90 degree mode and was first deployed in 2010 to Iraq, and Afghanistan were delivered outstanding performance and reliability to defend our troops.
We're currently in full rate production to provide approximately a 190 units for the contract value at $1.6 billion.
So both the Sentinel April or and the Tbtu 53 are part of Lockheed Martin's open scalable rare our architecture. The cornerstone of each of these systems design, which allows for upgrades that will not only extend the lives of the radars, but of all their capabilities over the next 40 or so years.
And missiles and fire control, our air and missile Defense line of business Mark the delivery of the 500 pad interceptor to the US Army that that program as a key part of the U.S. missile defense system has been selected by multiple international partners to support their national security.
MFC continues to expand our production filled it facilities to accommodate that than that.
This quarter, our space business area as part of the Blue origin National team and this really is exciting and was down selected for the next phase of the human landing system for Nasa's Artemus program.
The Artemus program is the country's ambitious endeavor to land humans on the Moon in 2024 and return them safely to Earth.
Leveraging designs and technologies used on on our Orion program.
Steve Martin will produce the crew essent element.
Vehicle, which will transport astronauts from the lunar serviced surface to become their journey back to Earth.
We look forward to supporting this remarkable mission.
Continue my long running out of legacy of supporting NASA mission.
Before I turn it over the call to Ken I'd like to take a moment the thank Maryland Houston for her years of leadership and express how honored I am to have the opportunity to lead Lockheed Martin accompany that I consider a national asset.
My experiences as Air Force pilot flying Lockheed Martin aircraft in Operation Desert She'll help shape my belief that helping to provide for the defense of our nation and its allies as one of the most important endeavors that one can undertake.
When presented with the opportunity become president and Chief Executive Officer here.
Have you had it not in the job offer the call to service.
Moreover, Maryland in her executive team has positioned the company for even greater success in the future.
And I'm eager to deliver on that prospect.
Since becoming CEO about a month ago I've met often virtually with a significant number of our key government customers to introduce myself.
Reaffirm our commitment to performance and affordability and get their feedback.
I've been pleased the Rod response of confidence and Lockheed Martin as a key partner, but also the candid discussions on the challenges, we jointly phase and the National security space.
That's great appreciation for the technologies and solutions we provide.
And we have a long heritage of innovation for our customers.
I plan to continue this legacy as well wells pursue a long term strategy to deliver enhanced capabilities to support what I call. The 21st century Warfighter concept.
That concept endeavors to bring relevant lessons in the latest technologies from the broader tech sector to the defense industrial base.
I believe Lockheed Martin is uniquely positioned to address this and other evolving security and needs of our nation and its allies and I'm excited to have this opportunity.
We've also had the chance to me with many of you on our Investor community in recent weeks that engage in conversations and I look forward a continuing that dialogue.
As you can tell him quite convinced that we can further leverage our key platform positions and broad portfolio to drive long term value to our shareholders, while Florida, furthering both national defense and scientific discovery.
With that I'll turn the call over to Ken.
Well, Thank you, Jim and welcome aboard and good morning to everyone. As Jim noted I also hope that each of you are doing well and staying safe.
As I highlight our key financial accomplishments. Please follow along with the web charts that we've included with our earnings release today.
So let's begin with chart three and an overview of our results for the quarter.
We saw strong result in year over year growth in sales segment operating profit cash from operations in earnings per share this quarter.
We delivered $16.2 billion in sales $1.8 billion in segment operating profit in $5 in 79 cents earnings per share, which included a non cash charge related to an international joint venture that we are now exiting.
We generated $2.2 billion of cash from operations and we continue to execute our balance cash deployment plan for 2020.
Returning almost $1 billion to our shareholders.
We achieved a new record backlog of greater than $150 billion exceeding our all time high for the corporation for the eighth consecutive quarter.
We have updated our full year guidance, increasing our estimates for sales earnings and operating cash flow as Covance 19 mitigation plans in our outstanding performance and minimize our year to date impacts.
Overall, it was a strong quarter for the business in challenging times.
Turning to chart for we compare our sales and segment operating profit this year with last year's results.
Sales grew 12% to $16.2 billion led by volume and Aeronautics and missiles and fire control.
While segment operating profit increased 15%.
By earnings growth in Aero and Rms.
The resulting segment operating margin was a strong 11% for the second quarter.
These results include the impacts caused by covert 19 and reflect the proactive efforts of Lockheed Martin and our customers to mitigate the says these disruptions, particularly as they apply to our supply chain.
And as we have closely monitor this evolving situation.
Become apparent but some of the impact we anticipated will be realized in the second half of 2020 versus being contain primarily in twoq.
Chart five shows our earnings per share for to Q2 thousand 20.
Our EPS of $5.79 was up 79 cents over results last year.
Driven by our sales volume increase favorable performance in additional fast Kaz income.
And excluding the 34 cents for the impairment of the international joint venture. We are exiting the second quarter earnings per share would have been $6 in 13 cents.
Our chart six we will discuss in more detail the cash returned to our shareholders this quarter.
We also had a strong quarter of cash flow generating $2.2 billion in cash from operations.
We continue to invest in capital projects to support long term growth, which resulted in over $1.8 billion of free cash flow.
We paid out dividends at $2.40 per share and repurchased $259 million worth of shares and year to date, we have now repurchased over $1 billion in shares fulfilling our 2020 outlook.
Our ability to consistently generates strong cash flow allows us to continue with our longstanding balance cash deployment strategy.
Let's move on to chart seven.
Strong operational performance in all business areas have allowed us to increase our outlook for all financial metrics as we continue to implement mitigation actions to combat the Corona virus.
We're now projecting full year sales growth of 7% over 2019 with consistent segment profit margins and we've increased our cash flow by $400 million to greater than or equal to $8 billion.
On chart eight we will breakout the increase sales guidance by business area.
We have adjusted our estimates for Aeronautics space and RMS increasing the midpoint of our sales range by $1.1 billion to $5 billion.
And based on our current assessment of the full year, while covert 19 has caused disruption in our supply chain and that some of our key locations. We have had non covance performance that has offset the impacts and gives us confidence to increase our 2020 outlook.
On chart nine we show the corresponding increases to segment operating profit by business area again led by Aeronautics space and RMS and in total we have raised the midpoint of our segment operating profit guidance by $100 million.
And to conclude on chart 10, we have our summary.
We had strong quarter, both operationally and financially and we have increased our full year outlook for all metrics.
We had another quarter of backlog growth our eighth in a row, a reflection of the strength provided by our broad portfolio.
We continue to closely monitor the environment and evolving conditions in our business related to cope with 19.
And we remain committed to providing long term value to our customers and our shareholders.
And with that John we are ready to begin the QNX.
Certainly in ladies and gentlemen, if you would like to ask a question. Please press one zero.
If you wish to remove yourself from the Q you may repeat the one zero command. We ask you. Please limit yourself to one question. If you have any follow up questions you can place yourself back into the Q.
And first were lineup David Strauss with Barclays. Please go ahead.
Thanks, Good morning warning.
Jim to to follow up on some of your comments one dash.
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Lockheed portfolio position to perform relative to peers.
If you look at it potentially a tougher budget environment over the near term.
And how youre thinking about sustaining the companys peer leading growth into the longer term if you could take this both.
From an R&D perspective, as well as high you will evaluate investment decisions.
Tom perspective thanks.
Sure David Good morning.
This company to me is incredibly well positioned for any reasonable range of outcomes in defense spending in the economy over the next few years.
As well as.
The breadth of product and service that is really essential to the national defense strategy. So when you put the two things together I think the company easily appears is incredibly well position relative to others that backlog of $150 billion is is equipment and services that the customer needs.
They've already been signed up in budgeted for.
And again this waste to solve both opportunity sets. One is if theres a rising defense budget or stable. One we can continue to deliver on that backlog just as its contracted but if it changes.
Those those requirements are still going to need to be met.
Because of our platform position, David we can extend and broaden the capabilities of existing platforms.
Make sure that their life can.
Peak extended while at the same time, a being upgraded to whatever a standard is required at that point in time, So I think the breadth of the companies.
Folio of products services and domains that we operate and it's going to position us well even in a downturn.
Secondly on long term growth.
The threats aren't going away.
Defense is going to have to be supported I think in any reasonable person's view going forward, especially if those for those people are in positions of responsibility no matter what party that may come from so I view that defenses got to be an important priority for the country.
Going forward there may be a mix change if you will but it's still going to be an important priority again the benefit of coming in the door here is the existing portfolio position of the company across the services domains international space et cetera.
That broad platform is a risk mitigator in my opinion to a downturn in say the defense spending trajectory. So.
So on the upside.
The innovation gene at this company is fantastic. So when you can apply that innovation genetic.
Somewhere to the broad portfolio that we have and I hope bring in some tech industry practices, and maybe some new partnerships and technologies to augment that I think the upside for long term growth is really tremendous.
And on the R&D front, if we can get our customers convinced that.
Certain types of.
Independent research and development need to be compensated for perhaps new ways by the government. So the companies like ours and others can take risks and we can bring in partners of the willing to take risk.
At least knowing they may have a path to compensate the end of the day, then we're going to be able to accelerate our growth. So we're in great position to try to work.
Any environment I think whether its defense spending.
Algae deployment.
Got to idea called Fiveg Dot mill that we're going to try to figure out how to create and really bring that technology isn't just one example, entire space and and drive performance. At this company is result of that.
And Jim just quick follow up there how do you based on your time, an American tower, how do you measure success from a.
From a financial perspective, I think there's really emphasize free cash long free cash flow per share and return on invested capital you can apply the seen kind of frame work at the at Lucky.
I'm pleased to say that Ken's already applying it as we speak and before I got here. So I was really.
Glad to see that that's our capital allocation decisions decisions there historically been made here.
I think that my experience that American tower, we used a wide variety of vehicles to deploy capital get others to do it on on our behalf in partnership with US and maybe we can add some of those elements here and some nice pre existing relationships and the tech sector in telecom to join us and in some of this investor.
Profile, but Doug.
I do think that that we can continue to drive cash flow per share growth here and ROI sees stability our expansion at the same time, we did at American tower over 20 year period, and I think we can do it here too.
Our next question from Rob Spin that with credit Suisse. Please go ahead.
Well good morning.
Welcome Jim very nice first quarter out of the gate I have a couple of quick things for Ken on the guide.
So can MFC was the one segment, where you didn't change the guidance you had this good bookings quarter, but and I guess growth declined a little bit in the second half is this a result of co vinod is it just where the business is.
When would it might it re accelerate the double digits and then just separately wanted to ask you what you've got embedded in the guide for F 35 production sustaining development.
You bet.
Good morning, Rob So, yes missiles and fire control is the one that.
We did not adjust guidance, where you're exactly right just to.
To remind everybody. It is still our fastest growing business areas still most profitable business area, but going around the horn and it's a little bit of what I talked about in the first quarter. Our biggest concern from a hoeven impacts standpoint with clearly at air.
And Onyx and clearly the main driver main concern at Aeronautics as F 35.
And we've done a good job of anticipating that in the quarter and hence the result is on the quarter, we had really strong.
Results at missiles and fire control in the second quarter frankly in the in the first half.
You're right if you look at.
Where we're going.
We're holding guidance, we do see Covance impacts. This is a very high volume business. So we are starting to see some pressures on hellfire deliveries and ATAC them deliveries.
Regarding.
Mainly driven driven by 12 it but.
We're going to be up year over year mid single digit from a growth standpoint in the second half so still pleased with the trajectory of of where the business is going.
To your second question on guidance for F 35.
Yes second quarter, we saw.
Strong growth across across F 35.
Follow on modernization, we received some.
Awards in the quarter that resulted in strong.
Sales growth year over year in fact, we'll see that into the second half of the year off production. If you recall we had a.
A little bit of a slow start in the first quarter and that was basically timing of ER.
Supplier.
Payments to us that picked up in the second quarter, but really strong production growth in the second quarter and Sustainment is up as well and so off for the year.
We're looking at.
Double digit growth for for F 35.
Okay.
Overall, we're seeing development up really strong sustainment really strong and production mid mid single digits, which is.
Higher higher than than what we thought.
Our next questions from George Shapiro with Shapiro Research. Please go ahead.
Yes, good morning.
Thanks.
Can I wanted to pursue a little bit more aeronautics.
35, you had an incremental margin of like 18 and half percent in the quarters. So obviously you must be raised the margin. If you can share how much to margin went up and I. My second question is if you look at your implied guidance at the high end the second half of the year has only 3% growth in Aero.
Way down from 15.5% in the first half and the margin is implied in about 10.6%.
So is that just being conservative or are we starting to really see some slowdown there. Thanks.
Thank you George so yes in the in the quarter.
F 35 is up very very strong yamamah I'm on the topline growth safe production was up strong sustainment of strong as I mentioned on on the previous question. If you look at.
Margins.
From a production standpoint, they were strong double digit we had some risk retirement.
On a few of our production lots. It wasn't just walked by that it was a few of our.
Previous lots that actually or are still open. So we had some retirements their development on so sdd. The FCD has wound down that was a low margin.
Business for Us and now we're embarking on follow on modernization with our with our customer and we're seeing strong though its cost plus we are seeing stronger margins that we did on sdd think of those is high.
Single digit margins and then on Sustainment, we had a variety of risk retirement, not one single Sustainment program that I could spike out, but theres a variety of sustaining programs that had.
Some risk retirements in the quarter. So so you're right on that is strong.
Quarter from a margin standpoint second half were not anticipating.
The risk retirements that we had in the in this quarter George and your other question was looking at the high end of the guidance. So, though we think we have done a very good job with our customer customer mitigating a lot of the risks due to covered in the second quarter, where we are starting to see.
The.
Risks, specifically in Texas, and specifically in our supply chain.
Due to Cove, it and we do anticipate seeing a couple couple hundred million dollar impact specifically on F 35 production topline due to covert risks and so.
Your question is that being conservative.
It's only conservative if covance does not happen, but if it happens we feel comfortable with our our midpoint of guidance and our high end of guidance.
And next who goes in line and Jon Raviv with Citi. Please go ahead.
Thank you and welcome Jim looking forward to working with you hope everyone as well.
Just seeking capital allocation I know you guys have reiterated your balance capital strategy Nice Inc. back to the last time this industry faced a potential political change hi, deficits potential budget pressure the capital allocation strategy looks to get a little bit imbalance.
So just any more through the perspective on on how capital allocation strategy can shift and flex if the reality on the ground changes what may be different today versus let's say 10 years ago units in two years ago, your heavy into repo pretty big dividends on relative basis, Capex fall lot, whereas now capex is still.
With a pretty high level.
So if you call. So we've been you're very on Levered balance sheet as well and just thinking about how capital allocation plays a role.
The pressure budget environment. Thank you.
Thanks, John Hi, Good morning, it's Ken I hope, you're well as as well.
So I'll take that.
No John we were committed to providing its still a significant significant portion of our cash flow to our shareholders and thats regardless of.
What happens what this downturn looks like but.
Ill.
What I'll start with with cash and.
We just took our cash up to the to greater than or equal to $8 billion. This year.
We have some tailwinds and frankly this year, we had some some headwinds and with that balance in what we see a with our working capital improvements we were comfortable doing that one thing I'll say going out to the future.
And it's based on our on our strong backlog in this what I'll call. Our culture of cash I've mentioned in the past that we're comfortable right now with even with the headwinds that we see out in 2021 of $7.7 billion base, what we see right now we're comfortable taking that up $100 million to seven.
0.8.
And then out to 2022, we talked about the pre.
Tax change for the amortization of.
R&D that we saw a path to roughly.
$7.8 billion in 2022, we're comfortable today taken that up another hundred million dollars so think of.
Cash that could be used for internal investments and for cash deployment up 400. This year up 100 next year and up 120 22.
We've talked about capital this year and next year are probably the highest capital spends we're going to have think rough numbers about 1 billion. Seven this year, though there is an appetite to spend more at the business areas, but right now we're forecasting a billion seven and probably a billion seven next year, which gives us still.
Very strong.
Free cash flow going forward.
We're committed to the dividend Theres absolutely no question that is our priority and we don't see that changing.
In the future, Jim and I will go to the board to recommend.
A change to our dividend rate in the September timeframe for the next four quarters based on what we see today, it's for planning purposes, we should assume high single digit.
Increases I think for planning purposes that.
What we will plan going out into the futures I still think repos repos has a place for us.
We've talked about $1 billion this year.
We've done about 1 billion one ish through July we're now going to pause at least.
In the near term that makes sense for us to do that faith based on this covered environment and just from a planning standpoint, we should assume a billion dollars in 2021, and 2022 and think of that is.
To prevent dilution in our share count and as you mentioned.
Jim has talked about this other and other investments we need to make.
We have the balance sheet to do that we have to cash flow to do that and you saw in the second quarter, we did.
Flow a billion won 50, a debt we did that Opportunistically got got a great yield on that money and.
We will continue looking at whether it makes sense for us to go into the debt market or whether it's for organic or inorganic investments.
So John this is Jim can just gave you a great.
Landscape picture of the whole the scenery here and I think that and pick up on one thing you did say about and maybe something you are looking for your question too is what would we do different potentially and the downturn on capital allocation and just as just to recap the dividends there it's going to be a growing dividend and our view at least kennen mines.
Or as I expect would agree with us but in a downturn in my historical recent experience and my philosophy here is that maybe also presenting an opportunity for us. If there is a downturn we're going to look at the silver linings that may be there and whether it's M&A and other investments. So if you add together the scale of Lockheed.
And the cash flow that comes from that they can just define the backlog on top of at the extends out into time in the balance sheet strength that we have.
There could be opportunities for us to act in a time period, where asset prices are depressed for things that we may want to bring into the company or JV with or whatever and so that's just another way to.
Picture It is the strength in the breadth and the foundation. This company allow could allow us as it did at my prior experience to get assets, we really wanted that might be even more available at attractive prices, which then drive the nice ROI see that you won the cash flow growth.
To come with it.
Oh and.
And gentlemen, just a brief reminder, if you do have a question. Please press one zero.
And next we'll go to the line of my Rich Safran with Seaport Global. Please go ahead.
Thanks, Jim can Greg Good morning, how are you Goodrich good morning.
So if you mentioned this in your opening remarks, I apologize I missed it.
Hopeful when you have a fiscal 21 button in place for started this fiscal year, but what I wanted to focus on was.
What I wanted to ask he was about the global settlement, you've talked about and Im sure Youre aware that Theres also been chatter about additional stimulus funding. So what I was looking for is if theres any risk to your cash flows and sales guide if they are actually isn't a global settlement and or stimulus funding Im just curious.
About what assumptions are embedded in the new guide and what you're expecting from a settlement.
Yeah, Good morning, Rich I'll I'll take that so.
You're right.
We have provided.
Let's see the department of Defense, a ROM based on what we see as impacts to Lockheed Martin and its supply chain.
Yeah.
That go out to September we just had a few internal conversations and we're starting to have conversations with with the customer probably makes sense.
Since that is already stale. This is a fluid situation probably makes sense.
For us to update that rough order of magnitude and it may make sense for it to it for us to extend that beyond September will go through that with them.
Regarding what we're assuming from from a sales and margin standpoint, what were generally seeing rich is these impacts are out farther than we thought.
Say 333 months ago and.
Probably more in the 21 time period, maybe a little bit in the fourth quarter. This time period. So if there is not a deal.
The Grand deal I think the next course of action would be for us to go work.
Individually with our with our respective customers to negotiate on a case by case basis, what the impacts our to us.
And one or not.
The issue is going to be available funding for that.
If there is not funding. These are all allowable costs and then the question becomes we put that into our forward pricing rates and there might be some modest impact to a couple of our programs, but that would be probably more at the profit level not not at the top line and right now we don't see.
See.
That plus playing out as advertised so it's fluid and we're working through this with our customers.
It seems like the summary is the 2020 guidance.
It is not greatly affected in either direction, whether the stimulus goes through or not.
Our next questions from Cai von Rumohr with Cowen and company. Please go ahead.
Yes. Thank you very much Shannon you comes from the tech background.
Oh, no seeing opportunities tops.
Hi, this is from promotion technology.
Tension partnerships.
Program.
You know could you expand.
In terms of how would you bring commercials technology company and what would you expect to gain from it.
Sure kite.
A number of approaches to this again in my previous experience. We're embarking on this for commercial Fiveg applications, which is internet of things at scale.
Including autonomous land and air vehicles. So that's happening in the tech sector. Now. So there is a fiveg standards of that Theres computing.
Which is storage and processing of data that's moving to the edge of the network in intermediate places from data centers to the edge and there's the autonomous vehicle infrastructure and devices, we call them edge devices over in the tech side.
That are being built and you think of them as the driverless car et cetera et cetera. So so all of those elements.
Our being.
Process of pace, it's going to take time by the way to do any of this and the commercial space.
And those practices can be brought over I think to the to the defense industrial base.
But only quickly if our customer comes along with us and changes some of the procurement practices, how we can get paid for things.
Theres a licensing regime that you may be aware of in the telecom space, particularly that enables global standards to be bill and then each participant or competitor designed to that global standards. That's how you can get 234 fiveg done in the space a 20 years when it takes that line to get one defense program. Don So those are the kind of practices I think we can.
Hi, great over with some of those partners that are working on these things on the commercial side now again. This is a long cycle initiative.
Is it is on the commercial industry to its going to require cooperation with our customer and their authorizing us to try some of these things because no. One is going to take any risk on the defense industrial base by implementing these technologies in a different way if they not sure they're going to get paid for it.
So we've got a lot to do.
But frankly it.
American tower, we endeavor to change the industry to go from where transmission sites for telecom networks or.
Nonperforming cost centers inside a telephone companies and we converted them through commercial.
Practices and basically sale leaseback type of approach, we turn those assets into performing assets for commercial companies like ours that we're able to create value for shareholders over a long arc of time. So this can be done.
But it's going to take time, it's going to it it's going to require just like it required at American tower. The cooperation of our customers who are then the telephone companies to work with us and engage in this and the only reason they did was because they can deploy their networks faster good capital from us to do it and also to have a lower total cost of ownership for the side.
Overtime and when you multiply that by you know we have 180000 sites back in my prior company, we basically help change industry not just us around the world. That's the kind of aspiration, we have here Lockheed Martin and we're in a position to do it and I would argue a way better positioned than we ever were back in the and the tower in it.
Digital infrastructure industry, 15, 20 years ago, So thats the aspiration Chi how to do it we know we've got a great example on commercial.
Telephony and technology and how they collaborators through.
Standards bodies, and other mechanisms and Jvs and alliances to get this done and so those are the kind of practices. We can bring over it's not easy it's not going to happen in a hurry, but the benefit again Lockheed Martin has is the backlog is so strong on what I call the product centric way of doing defense industrial base business that we've got time.
And we can perform as we try to also move the the industry towards a network centric way of doing business.
Our next questions from Seth Seifman with Jpmorgan. Please go ahead.
Thanks, very much and good morning learning.
Kind of I wanted to just follow quickly maybe on Rich's question about a a settlement and the industry has been fairly vocal about about being important.
You guys have mentioned that there is not very much impact one way or the other on the guidance for 2020. So should we think about it then as you know if it is important and it's not a port for 2020 to think about it as being something that's important for 2021, and maybe if you could explain to us a little bit about them.
Capex.
When there is a settlement sort of what happens is that.
Is that cash that the company has been missing out on this year that that that will come.
Perhaps next year, how should we think about the mechanics of how that all runs through the through the piano.
Yes, so whether it hits this year next year all year set that it is important it's important to the industry.
And it's not just Lockheed Martin, it's it would be across our entire supply base.
As I mentioned.
This is fluid it's got a lot of moving parts.
It probably just for for our financials. It will hit modestly in the second half of the year, but then probably hit more and ripple through the supply chain.
In the first half of two.
2021 is our best assessment.
Mechanically the way the way this could work if it was a.
Big settlement, we'd still have to go through the details, but I'm guessing that the expectation would be so picked the F 35.
A grand settlement I think the expectation internally just from a program performance standpoint, and that the cut at the customer level they would want those.
Costs and those budgets, if you will to flow into those respective programs I'm going to I'm going to speculate that they're probably would be some client a clip level.
From a dollar threshold standpoint that we would.
Utilize with the customer set of what gets flow to to programs with you're probably as a point, where it's going to be up diminishing return and cost more to implement data across programs and not assuming if there's not a grand.
Deal I think what you would see as each program with deal when it case by case, and then mechanically that how that would happen in it would be.
A sales impact a cash impact and an EBIT impact across each respective program, but what what you're talking about you know.
Ballpark no whatever our number is it's worth 65 billion round up to 65 billion dollar company.
It's not going to be.
That material to our bottom line, specifically if it's over.
A multitude of bye bye.
Hi years. So we'll we'll we'll see we'll see where this goes I think this has got to take some time to play out still.
Next we'll go to Noah Poponak with Goldman Sachs. Please go ahead.
Okay.
Hey, good morning, everybody good morning.
So.
You feel there's a number of questions here on what what your business could look like for your capital deployment could look like in the hypothetical.
Defense Moses comps.
And so.
I wanted to ask the question do you think the defense budget will decline.
And.
We all obviously can.
We view on that based on the.
Inputs that are visible to us books.
No I'm, assuming you all.
More insight into the geopolitical landscape and then maybe what.
Both.
The size of the Io are thinking right now and in the committees, but also in the potential presidential.
Platform, So maybe beyond just the standard worlds a dangerous place so.
What is your view on whether or not defense spending goes down and if it were to actually grow what specifically good news that happened from here.
No it's Jim.
Tried to not speculate on the behavior of the people.
That are going to make independent decisions that we can't predict so we're just getting the company ready for either scenario frankly, if it's stable slightly rising or moderately rising defense budget, we know how to handle that.
But if it's a declining defense budget, we're planning for that too. So we can't predict one way or the other that the behavior of human beings, whether its six months from now or whenever they are going to make these kinds of decisions, but what we can do is prepare for both scenarios and that's exactly what we're doing all of our VA is are looking at all their programs and saying if.
And they're planning this understand that tends guidance, if theres a downturn in defense, depending which I've asked every VA to look at and get back into the into the integrated plan if in that scenario. It's a red team kind of an exercise what would we do it's a contingency plan that says okay. We would offer with our to our customers to say look if you're budgeting.
X minus why this is what we think you should do with our products and programs for extending lives and other things like that and with the backlog we have any orders and track into production lines that are that are going to supply chains that operate it's going be two to three years before those defense budget cuts actually flow into the.
Defense Industrial base production line. So we've got time to work with the customer to make sure that you know that they can have their contingency plan and were behind and working with them 100%.
Next we'll go to Myles Walton with DBS. Please go ahead.
Great. Thanks, good morning.
Im curious if you look at from an operating segment level.
Where do you think your senior leadership might have the most impact from what's your brings a table richer technology partnerships lessons learned vertical integration from an M&A perspective, and how would that manifest would it be faster growth better margins.
Maybe just you know where you think you could have the bigger impact maybe one level down at the organization.
So by operating segment.
Each of those businesses with the corporate support they've had.
There are great at what they do I'm, probably not going to make a better missile design the people in MSC and make so what I think might benefit or at value added might be as cross cutting those VA is in a way that hadnt been done before here or anywhere else and then linking them with a customer to to do what the customers literally asking us for which is how do we.
Connect equipment systems communication networks across what they call domains. So how can I have satellite get a signal from an F 35.
Then goes back to a ground based missile defense system to hit it incoming tar incoming threat to.
Up one of our installations, that's what they really want.
Not any single one of our business areas or any other companies frankly, I think can give them that that solution. So we're working with our recently hired CTO, who was previously running DARPA. So look horizontally across what are the missions at the Deo D. and our allies need to do and what VA days.
In what is do we have the assets resources and technical capabilities to provide them that horizontal solution. So our typical backlog, we're providing what I call. It vertical solutions, we're providing products platform services generally to one service. The F 30, fives, an exception of course, but until one service maybe just the one car.
Entry, but we're going to need to link across services that are we didn't need to link across our allies better and work and that's what this network solutions really about in my mind, So thats, where I think miles we can bring our tech world partners, and and U.S. and other allied countries companies into this to make us better.
Horizontally I'm not sure they can even make us all that better vertically all that often but horizontally I think we can and that's where you bring in the AI. The fiveg the distributed computing things like that some of our vertical.
Technologies like Hypersonics, we're going to do just fine in that and we made by individual.
M&A.
Opportunities or targets to be able to fill ourselves energy, but more mission system work and in the technology like that but I think it's more horizontal and vertical miles to just answered quickly.
Our next questions from Peter Arment with Baird. Please go ahead.
Yes. Thanks.
Good morning, and Jim and Ken.
Ask your question on just the order environment, you had a really strong quarter I think Jim mentioned $22 billion in orders or 1.4 book to Bill, but maybe you could just highlight some of the international pursuits that are still in front of you and if you are seeing any kind of delays or chatter because of covert 19, and maybe just a highlight.
Spec.
They'll come in this year in 2020 thanks.
Good morning, Peter Thank you. Thanks for the question, Yeah, we still see some great opportunities out there.
Specifically internationally, we're not seeing that much slip to the right I'd say the only thing we may be seeing slipped to the right are are the request for proposal.
Solicitations or move into the right, but there are holding firm to the end date, but to answer your question.
Specifically.
A couple of things that we have out there that are quite large our we have a indefinite quantity indefinite delivery F 16 order coming the marquee customer is Taiwan and into an another cost another country customer that should get announced sometime.
And in this quarter think of that as an additional 90 aircraft for US 16, which we're quite pleased with there is a cdone hundred 30, Indonesia order that were also anticipating happens later this year. There is some follow on work for that for the.
Recently announced India.
MH 60, our program that we got earlier.
Those are those are the main Lars <unk> main mainly the large ones. We also have an aegis ashore, Japan order that we're anticipating.
Later this year and then of course, there's a variety of F 35 production orders.
That we plan to book later this year that rough numbers, 40% of those quantities will be b of a international nature going into next year. We see we also continue to see some strong demand for specifically F 16, our integrated.
At Air and missile defense.
In parallel with with our customer we're pursuing a CH 50, Threek K order in Germany, and in it and Israel that should get a will shape that this year and hopefully get that awards in a competition sometime next year. So there are a lot of international opportunities.
Out there and really not seeing a lot of slowdown.
In a in from an order books standpoint.
John I think we have time for one more question.
Great and that will be from Rob Stallard with vertical research. Please go ahead.
Thanks, so much and good morning, good morning.
Batting cleanup here I think is like you guys describe it I think just to follow up on that won't know was asking about.
Not asking you to necessarily speculate on where the U.S. defense budget could go too, but maybe just follow up on your introductory comments about the challenges in national security and these challenges around resources or easy to Randy affording Andy capabilities. The us we'll need to address and national security threats going forward I Wonder if you can elaborate a little bit more.
On that thank you.
I would characterize the challenges are the pursuits that China and Russia are taking to regain status is pure competitors the United States in this in this field.
And when you get into the depth of what's going on.
It's a it's concerning from someone who's been in this space my whole career off and on so.
Thats the real challenges, we've got a country that.
The form of China, which is getting very aggressive in their actions their attitudes in their aspirations and they're investing.
And capabilities some of them are symmetric in some of them are asymmetric to find our are vulnerable spots in our traditional way of running our defense.
Operations and trying to get ahead of us in those especially vulnerable spot. So theres got to be a lot of investment and a lot of technology investment to to firm up those vulnerable places in our defensive posture and that's what I would characterize is the big challenge and Russia on the strategic side.
There its hypersonic missiles or or other.
Early strategic threat type.
The elements is back in the game and investing too. So they may not be the great land Army. They were in the 19 eighties, threatening Europe and that way, but they've gone to a technological threat posture, which allows them to do it from a greater distance and with <unk> with a much smaller military organization. If you will.
And gentlemen, just pass the hour so I think.
We'll turn it back over to Jim now for some final thoughts.
Sure as I conclude the call today I do want to thank the employees of Lockheed Martin for their contributions and dedication. During this time of global pandemic. They perform with excellent supporting our customers that are important missions and I'm extremely proud of them and to be par Lockheed Martin team now with 110000 plus other teammates.
So thank you again, everyone on the call today for joining US we look forward to speaking with you on our next earnings call in October and have a great rest of the week.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.
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