Q3 2020 Lockheed Martin Corp Earnings Call
Good day and welcome everyone to the Lockheed Martin <unk> third quarter 2020 earnings results Conference call. Today's call is being recorded at this time for opening remarks, and introductions I would like to turn the call over to Mr., Greg Gardner Vice President of Investor Relations. Please go ahead Sir.
Thank you John and good morning, I'd like.
I'd like to welcome everyone to our third quarter 2020 earnings Conference call. Joining me today on the call are Jim take what our President and Chief Executive Officer, and Ken Posner, Our Chief Financial Officer, Steve.
Statements made in today's call that are not historical facts 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 today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward looking statements.
We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in todays call. Please access our website at www Dot Lockheed Martin Dot com and click on the Investor Relations link to view and follow the charts.
With that I'd like to turn the call over to Jim.
Thanks, Greg Good morning, everyone and thank you for joining us today on our third quarter 2020 earnings call as we review our financial and operational results highlights some of our key accomplishments and discuss our updated outlook for 2020 and trend information for 2021.
I do hope this call finds you and your family safe and healthy.
The Corona virus outbreak remains an ongoing global pandemic and were all working to mitigate its impacts.
Our priorities at Lockheed Martin remain ensuring the health and welfare of our employees and their families can too.
Continuing to perform and deliver for our customers and our national security and.
And using our resources and leadership as a company to assist our communities our country and our allies.
We are continuing to take actions to address issues brought on by this virus made.
Maintaining robust health and safety protocols in the workplace delivering personal protective equipment to frontline workers and donating over $20 million to COVID-19 charities.
We have continued expediting payments to our supply chain and have hired over 12000 employees since the pandemic began.
I think all of the men and women of Lockheed Martin for their dedication and commitment during these trying times as they perform with excellence for our customers and there are important missing.
I'd also like to take a moment to express my sincere sympathies to those across our nation affected by the recent hurricane and wildfire disasters we.
We hope that our employees and other citizens the affected communities recover quickly from the devastation caused by these events.
Moving to Lockheed Martin's results as our press release illustrates we delivered another strong quarter across the board financially strategically and operationally.
Ken will discuss our financial results in more detail and provide preliminary trending data for 2021, but I'd like to begin by providing a few financial highlights from the quarter.
Sales this quarter were a record and exceeded last year's third quarter by 9% year to.
Year to date, we are 10% over our 2019 results.
Our business areas grew segment profit by 6% over the 2019 third quarter and year to date were 7% over 2019.
We had a strong quarter of cash generation, achieving $1.9 billion of cash from operations we.
We now have brought in nearly $6.4 billion of operating cash year to date, keeping us on pace to deliver at least $8 billion in cash from operations in 2020.
We won approximately $17 billion in orders, resulting in another high watermark for our backlog and our ninth consecutive quarter of backlog growth.
And in cash deployment actions during the quarter, our board of directors approved a dividend increase of over 8% to $2.60 per share and $10.40 annually.
Providing outstanding returns to shareholders through a strong dividend remains our cash deployment priority and this action marks the 19th consecutive year that we have increased our quarterly dividend.
Our outstanding year to date results and record backlog enabled us to again increase our full year 2020 outlook for sales operating profit and earnings per share.
Our team continues to deliver exceptional performance and operating results for the port fell a portfolio that is well aligned to our customers' priorities.
Turning briefly to budgets, you'll recall that the bipartisan budget Act of 2019 was enacted into law last year and instead.
And established spending levels for discretionary defense budgets well the total fiscal year 2021 National defense spending target of approximately $740 billion.
Lawmakers continue to work on authorization and appropriations bills and in the interim the federal government is operating under a continuing resolution for fiscal year 2021 through December 11.
While we did not expect impacts to our 2020 financials should the continuing resolution be extended beyond 20, Oh. Its December 11, 2020, we could experience some level of impact to our 2021 trending data depending on the duration of the CR.
Similarly section 36, 10 to the cares Act, which was passed in March to provide authorization for federal contractors continue to support government initiatives. Despite COVID-19 disruption was also extended through December 11.
Today no additional funding has been provided free she was introduced by the Corona virus as well.
So the DRD appropriations Bill we do not.
We do not anticipate a material impact to our 2020 financial results shouldn't delay and cares Act funding continue and we remain engaged in discussions with the defense Department regarding a macro settlement for issues caused by the virus.
Turning to our portfolio I'd like to highlight a few of our notable strategic achievements that demonstrate the solid demand for our signature platforms and their relevancy to next generation war fighting capabilities.
And our Aeronautics business area, the department of Defense announced the foreign military sale for a total of 90, New F 16 fighter aircraft to the countries of Taiwan in Morocco.
Aero received an award of nearly $5 billion, adding to recent orders from Bahrain, Slovakia in Bulgaria, and bringing the F 16 backlog to nearly 130 jets.
This 90 airplane award as part of a new $62 billion indefinite delivery indefinite quantity contract vehicle put in place to facilitate F 16, Fms sales to international customers, taking advantage of standardized contracting to expedite the process for future Awards and I can tell you I flew a block seven.
Andy last year and it isn't.
And it is an awesome airplane.
Our space business area was awarded a new contract that represents an opportunity to bring together an array of high tech platforms into one cohesive network that spans every domain for unmatched situational awareness Howard with Fiveg technology.
Last month, the space Development agency awarded our team one of two contracts for approximately $200 million to develop initial data transport capabilities are the first generation of the national defense space architecture.
The award represents an important step towards building, an interoperable connected and secure mesh network of satellites.
That links ground see an air capabilities to sensors in space.
The space transport layer contract initiate the design and development of the system. The launch of a constellation of 10 small low earth orbiting satellites and this network will be capable of sending and receiving secure wideband data directly to the war fighter and to weapons systems.
This interoperability and enter service networking, we'll communicate and analyze data seamlessly to enable a force multiplier, that's flexible and formidable so that those in battle in effectively perform joint all domain operations.
Future sensors data collectors and communication payloads can be incrementally added to this constellation to create a web that will link the most time critical intelligence and tracking data.
We are very pleased to be part of this opportunity and look forward to the launch of the satellites and the demonstration of the initial mesh network and just two years.
At our missiles and fire control group, our integrated Air and missile Defense team achieved two important mission success events.
Demonstrated our commitment to innovation and a network centric focus Lockheed Martin.
Most recently, we successfully conducted a test at white sand just after the close of the quarter or a Pac three MST missile intercepted it incoming target using location data provided by the terminal high altitude area defense network or Thad weapon system.
This demonstrated a critical capability to expand the defendant area through integration of existing systems.
In July the U.S. Army U.S. Air Force and Lockheed Martin together demonstrated the ability to integrate F 35 intelligence surveillance and reconnaissance track data, where the U.S. Army's integrated Battle command system during an Orange flags evaluation, there Edwards Air Force base, California.
This out valuation this demonstrated the value of utilizing data from the F 35 to enable enhanced integrated air and missile defense such as Pac three engagements.
This accomplishment is one of the first instances of demonstrating our Fiveg Dot mill concept with the F 30, fives compute and data storage capabilities, enabling that F 35 to serve as an edge node of a network centric operational architecture.
This concept and the ability to share data across platforms is another example of our commitment to adopting a joint all domain operations mindset to maximize the collective value and power of our customers highly capable assets and our platforms.
Networking every sensor with every shooter across the services and across domains will provide real time data to maximize the effectiveness of our total for us.
These strategic highlights represent just a few of how we will pursue a strategy to help our customers meet emerging threats with 21st century capabilities as well as create a powerful the turret to future military conflicts, we continue to engage industry as well as technology leaders in the commercial sector to explore.
Collaboration and align technology Roadmaps for transformational solutions for our men and women in uniform.
With that I'll turn it over to Ken.
Thanks, Jen and good morning, everyone as I.
As I highlight our key financial accomplishments. Please follow along with the web charts that we included with our earnings release today.
Let's begin with chart three and an overview of our results for the quarter.
Sales segment that segment operating profit cash from operations and earnings per share remained strong and as.
And as Jim noted, we achieved record sales in the quarter we.
We generated $1.9 billion of cash from operations, we continued our cash deployment actions in the quarter.
Returning $757 million in cash to our shareholders through a combination of dividends and share repurchases.
In addition to these results, we again increased our backlog to $150.4 billion, representing the ninth consecutive quarter of record backlog.
Based on the strength of our performance to date, we have updated our financial outlook for 2020 and are also providing our 2021 preliminary financial trends.
Turning to chart four.
We compare our sales and segment operating profit in the third quarter of this year with last year's results.
Sales grew 9% compared with last year to a record $16.5 billion country.
Continuing the strength, we had in the first two quarters, while segment operating profit increased 6% over last year's level to nearly $1.8 billion.
On chart five we'll discuss our earnings per share in the quarter.
Our EPS from continuing operations was $6.25, an increase of 59 cents or 10% higher than last year, driven by 800 million dollar increase in segment operating profit and additional Fas Kaz income.
Partially offset by an increase in the effective tax rate.
On chart six we review our year to date cash from operations.
Through three quarters, our cash from operations is $6.4 billion, a 10% increase over the same point in 2019.
This performance does include $1.4 billion of cares act benefits, which were.
Which were more than offset by $1.8 billion of accelerated payments to our suppliers.
Moving on to chart seven.
We provide our revised outlook for 2020.
With just one quarter left in the year.
Now providing point estimates and results for the entire year versus the ranges we have provided in previous quarters.
We expect sales to be approximately $65.3 billion for the year, that's above the high end of the guidance range, we provided last quarter.
At $7.1 billion, our forecasted segment operating profit is also above the high end of the guidance range last quarter, maintaining a 10.9% margin.
This puts our sales approximately 9% above our 2019 results.
Segment operating profit approximately 8% last year.
Our Fas Cas pension adjustment remains unchanged at a little less than $2.1 billion.
Earnings per share is expected to be approximately $24.45.
Above the high end of our previous guidance range, driven by additional sales volume and the continued performance across our business.
And cash from operations remains at greater than or equal to $8 billion, which assumes no contributions to our pension trust in 2020.
Chart eight shows our new outlook for sales by business area for the year.
In total our point estimate for sales outlook is approximately $1 billion above the midpoint of our last guidance and that's driven primarily by aeronautics.
On chart nine we provide a similar view of our new outlook for segment operating profit by business area for the year.
Like our sales segment operating profit is $150 million above the midpoint of the guidance range from last quarter, and Thats, driven primarily by aeronautics and on EPS.
On chart 10, we provide a preliminary look at our 2021 trends.
As we look ahead, we expect our 2021 sales be greater than or equal to $67 billion, a 3% increase over our current outlook for 2020.
We expect our segment operating margin will be between 10.9% and 11.1%.
Showing continued strong performance in our legacy programs and all business areas.
And as you recall from last quarter, we expected 2021 cash to be at least $7.8 billion, including a 1 billion dollar contribution to our pension trust.
We are now pleased to increase that estimate by $300 million to $8.1 billion still including the same 1 billion dollar pension payment.
We also plan at least $1 billion in share repurchases the same level as we anticipate in 2020.
That's more than offsetting any expected share issuances in the year.
And Additionally, we have a debt maturity coming due next year a $500 million.
Moving to our Fas cash outlook, we expect our net 2021 fast Kaz adjustment will be approximately $2.1 billion and that's similar to the adjustment for 2020.
This estimate assumes that discount rate at the end of the year of 2.5% or 75 basis points below the 2019 rate.
Based on our performance to date, we are so.
We are assuming a 7% return on our assets for 2020.
And we are maintaining that same rate of 7% per year for a long term asset return assumption.
And finally on chart 11, we have a summary.
We have seen growth and strong performance from all our business areas. This year with increased backlog and sustained cash generation throughout the year.
Our updated 2020 financial metrics anticipate strong full year results and we expect to see continued operational performance.
And increased cash flows in 2021.
Based on our portfolio of legacy programs, new wins and strategic investments in key growth areas. We.
We have continued to grow our backlog deliver value to our customers and return cash to our stockholders and with that we're ready for your questions John.
Thank you and ladies and gentlemen at this time, we are opening our lines for questions. Please press one zero to enter the queue.
To remove yourself from the queue. Please press one zero again in the interest of time, we are limiting new the one question. Please return to the queue for any follow up questions and just as a quick reminder, we have a question. Please press one zero and first from the line of Sheila Kahyaoglu with Jefferies. Please go ahead. Thanks.
Thanks, so much and good morning, Jim and Ken.
Revenues have grown 30% since 2017, and if we exclude that 35.
Liam's up 17%, so high single digit growth per year.
Programs or product areas do you think the salary the most in your view from these high single digit levels at 3% imply Chen line by 2021 and then.
Is this something of a new normal we should be thinking about or do we transition from platform programs to less quantifiable opportunities that could reshape that the growth curve.
Thank you. Thanks, Sheila I'll tell you what Allah I'll kick it off and then I'll ask him if he's got some color at the end. So it's probably best we start with how we got to this trend data so.
If you think of our of our planning process over the last couple of months, we've been going through going through our long range plan are working with our business areas and working with the corporation on assumptions regarding tax or pension assumptions excel.
Pension assumptions et cetera. We then we then review that with our board and is primarily a reaffirmation of our 2020 numbers and then a long range plan for 2021 through 2023 do that in the late September time period.
The quarter closes. We then do an assessment to come up with what we think our trend data will be and I'll, just remind everybody and we said in our prepared comments, Jim and I, We did take our guidance up a $1 billion for.
For for 2020.
So if I could go around the horn I'll I'll do I'll do sales go around the Horn and then I'll give you. Some my perspective on some opportunities out there and then handed over to Jim. So we start with an arrow and we look at 2021 right now we're seeing a low single digit growth a year over year for the portfolio.
Ill and specifically if you talk about F 35.
We're seeing growth similar to the overall aero growth of low single digits.
Right now, we see production and development flat and we see primarily the growth coming from Sustainment as our fleet expands.
On F 16, we see solid growth as the program continues to ramp up production activities and also the modernization programs that we have going on at all for F 16.
Air mobility sale. So surprisingly are flattish, we've been talking about or a slight.
A slight decline, but they are stable going into 2021 and.
And finally, a for Aeronautics, we do anticipate seeing strong double digit growth at our Skunk works are classified advanced development programs.
We continue to execute execute on those recent awards, if I move on to missiles and fire control.
We're seeing a low single digit growth there as well and thats. After several years of very strong growth as we approach production.
Production capacity on some major missile programs Ah think of Hellfire NGL MRF, we're still seeing very strong demand there, but just year over year, we see it being more flattish than not ours.
Our growth is being led by our production programs think Pac three which will be up double digits for.
Precision buyers will be up mid single digits and jazz on lower RASM will be up double digits.
Thats, partially offsetting some of the growth in our dad programs and Thats just due to some procurement cost timing on them on and multiyear award.
If I could move to RMS. We also anticipate low single digit growth are there as well at least for now at Sikorsky, We're seeing low single digit growth and Thats, a reflection of the mix across our production programs have as life cycles change so think of the.
Combat rescue helicopter program and CH 53, K., we'll see double digit growth there as these programs ramp up into production.
That's partially offset the growth that VH 92, as it ramps down and lower volumes on our Canadian military helicopter program and the same with the Blackhawk, even though it's a strong contributor and the top line year over year, we'll see a modest decline within.
Within eye WSS, we'll see a slight decline from 2021.
Our aegis franchise, whoever will see high single digit growth and that's driven by international opportunities. So we're still seeing inner international opportunities there offsetting that growth that we're seeing reductions within our rader businesses to T. Pute CPQ declines, while we await the next gen programs think of a Sentinel and team.
Why X.
Beyond 2021 and.
And we're also seeing lower volume on our look Torill combat.
Program in 2021 nice.
Nice surprise in RMS is our training solutions will we're going to see solid double digit growth there driven by.
Digital a percentage of a few key events in 2021 on an international pilot training program and finally space.
It will be right now we see it as our highest growth ER business area. A mid single digit range think of that as this strategic missile defense portfolio is expected to be up double digits, that's mainly driven by Hypersonics programs and then also the anticipated next generation Interceptor Award.
And thats, partially offset by the the growth.
In reductions on our legacy mill space programs.
And predominantly think Sippers advanced CHF and EPS, they're all down mid single digits due to program lifecycle.
So we'll we'll go into January we will spend the next three months going through the second phase of our plan and a couple of things before.
Before we give guidance, we'll see how we ended up 2000.
2020, how we finished the year.
He will then reassess our orders planned for 2021 and adjust that accordingly.
And its impact that has on our 2021 topline growth for sale.
And then we'll look at our backlog and looked at the assumptions that our business areas are making of conversions to sales in 2021.
Before I turn the call over to Jen.
Just some orders opportunities are out there.
We still see continued need and demand for additional capabilities on F 35 that ultimately down the road, maybe not in 2021, but we'll see some growth there in the future. There are certainly other countries that have a keen interest in the F 35 from a product standpoint, so we'll see demand there.
Ah F 16, Jim mentioned the idea Q contract.
We received the first two countries or are part of that idea Q, we see many opportunities out there for EPS 16.
And the same with C 130, and then in the classified area of Aeronautics there are a multitude of opportunities out there.
Missiles and fire control, we have T. lvs, that's a future air and missile Defense program for Germany, Theres upside there for US CH 53, K. and RMS for International course will we've always talked about the future vertical lift and then in spacers are classified.
Classified space and then most of these are platform program. Sheila there are others were looking to focus on our mission systems, Jim talked about the Fiveg work and the Internet connectivity of our products solution for our customer and I'll, let him give some more color on that iffy iffy has has it.
Sure Ken that was great summary of some of the detail of the line items that go into 2021, but she'll I would just add an extend from what Ken said on some themes for growth over the next not only the next year over the next number of years. So the way I'm looking at it is that as Ken said, there is high demand for our signature products already both domestic and international.
35 at 16.
CH 50, Threek et cetera, and we.
And we are going to drive some mission systems content into those as we move forward and technology insertion and upgrades as was mentioned briefly but those are some really big themes, we don't know exactly what customer and what order and what version they are going to be seeking what the quarter, but I assure you. These things are going to continue.
The next theme I would offer is there's some new technology ramps to production that Ken alluded to but when we speak of Hypersonics I think there is.
Very big upside there because there's a very big threat that is getting worse out of Russia, and China and the us and its allies are going to have to meet at both on offensive and defensive hypersonic systems, which I believe we're the leader here.
The classified space Arena.
Is is really.
Wide open field, our space business is again, the clear leader in this area and we're putting out some really fantastic products I think that are unmatched in our industry and then.
And then there's future vertical lift as Ken said and and keep that in mind, because as we go to network centric operations, which I just alluded to a couple of examples that we've already implemented evident as we go down to that network centric approach more widely.
It's really going to strengthen our platform positions.
Those signature platform, so think of aegis F 35 future vertical lift.
Whether it's the client or not.
Those are going to be the edge compute nodes of the future and the processing systems that act as the core network. The tie it all together so our platforms are extremely well positioned to actually implement the sort of Fiveg Dot mill theory that we have that we're pursuing and then it's going to be new revenue streams I think.
As a result of Fiveg mill, and our kind of 21st century, Warfighter concept and those could be inclusive of networking as a service and more of a subscription model that we do on behalf of our customers and then we do the upgrades and the calm layer and make sure we tie it all together just like you experienced on your cellphone subscription.
You don't know all the pieces that go into it. So every morning, when you turn it on it works and it works with the latest.
Applications and it works with the latest technology. So those are the kinds of things, we're going to explore I will take a little bit longer to get there, but we're positioning ourselves to do that as well.
Our next question from Myles Walton with GBM. Please go ahead.
Thanks, Good morning.
First one is just a clarification for Ken in your remarks on backlog you mentioned some of the opportunities, but I didn't hear if you thought it would end the year, a flat up or down and then Jim if we take everything that can laid out from a cash and capital deployment with respect to the billion share repurchase and then the debt retirements about a billion dollars a year you'll have.
Maybe 6 billion at this time next year in a business that requires.
One and a half to 2 billion on hand, so it's it's going to continue to raise the question of how you're progressing looking.
Looking at potential opportunities, particularly in the M&A arena.
So hoping you can give some perspective, there as you've looked a little bit deeper your time. Thanks.
So hey, Myles good morning so.
So first first question on the backlog we are right now planning on growing our backlog in the fourth quarter. There is there is one.
Binary event that has to happen and that is the closure on a lot 15 production. We're in the midst of negotiations with the customer right now I see.
I think there is agreement on both sides to try to get this done by year end, but if it doesnt happen it doesn't happen in rolls into next year, but if it does happen we will continue.
The growth in the fourth quarter of backlog increase.
And so miles to speak to M&A approaches I think we access to take too.
Levels up and speak for us as a strategy for the company.
The executive team and I and the board agree on what we call our 21st century, Warfighter concept, which has four pillars to the strategy and I'll go through them really briefly but first of all its lead we want to lead the acceleration of 20 Onest technology.
Century technologies into the National defense space not.
Not just by doing it ourselves, but by teaming with commercial industry and things like AI and Fiveg edge computing autonomy additive manufacturing et cetera. So we're playing to lead that acceleration into 21st century technologies.
Going to innovate as the second pillar internally along with that.
So we're going to innovate in both the realms of science, such as directed energy Hypersonics I mentioned earlier as well as in this networking innovation.
And bring capabilities to all of our platforms and frankly are ultimately our competitors platforms too.
To be able to make them more effective on behalf of our customer the third pillar of all of this is driving operational excellence and so that's really about while doing all this increasing Lockheed Martin's margins and ROI, while reducing the total lifecycle cost for our customers for because for them to afford what they need to do in the future our industry actually asked.
Get more efficient at the same time and then.
And then lastly, and this is where we get into more of capital allocation. We believe in this business and we're seeking to invest in it for growth so growth of our asset base in our capabilities as sort of the fourth pillar and that's going to provide solutions to our customers if they're going to need.
In the future that we can't necessarily deliver today. So when we take those four pillars and say, okay, well what are we going to do with capital allocation and all that cash at this really fantastic businesses generating as you said, it's really first of all to support our strong dividend, we're going to continue to do that.
And secondly, we're going to keep investing in organic capital expenditures to build capacity to deliver on our core business much of.
Much of what we spent this year as on classified programs in both the Aeronautics and space.
That are growing relatively rapidly and so we're going to continue to do those organic investments every time, we can.
Thirdly, we alongside those Capex investments, we're going to invest in R&D.
Sustain our technological leadership and again, both in traditional or or defense centric areas such as Hypersonics and also is as more commercially introduced areas such as networking so.
So those are the first raised the dividend capex and R&D, but were.
But we're also going to seek acquisition and joint venture opportunities to deepen our capabilities and things like mission systems, as Ken said and to add technological firepower to our to our existing company. For example, we just bought a big.
On this call I read that gives us some novel capability in thermal management for hypersonic light bodies, which is something we wanted to bring in house and.
Again accelerate our own potential for developing that piece of the technology that so absolutely critical and so.
And so we're going to be looking for opportunities in the M&A space and the joint venture space and even partnerships that are commercial to pick in our portfolio and also to bring in the technologies faster into the company that we think are going to be crucial for the future. So we plan to be active but we also plan to be very very prudent.
Thats the business experience.
We were fairly active on the M&A front, but we turned down actually quite a few more opportunities than we went through was so we'll continue to have that discipline here at Lockheed Martin.
But we do want to invest in this company and grow and use our cash flow to do that when we can.
Our next questions from rich Safran with Seaport Global Securities. Please go ahead.
Jim can Greg got good good morning.
So space question with about three parts.
Margins in space were a bit weaker than I saw it and I'm guessing there was an issue. There you will lay so I thought you might discuss that next we're talking about 2021, I thought you might discuss the competitive dynamics in this space business, you know to Spacex represent a challenge to your plans and given the remarks. He just made you think contested spaces.
The growth area next year finally here, Jim I thought you might expand on the opening remarks about the new satellite constellation and if it's applicable discuss generally the long term space opportunity set here.
If the 20 Onest century Warfighter program you just mentioned is involved.
Okay, Hey, rich that's all.
That sounds like four part question.
Good at math, so yes regarding the.
The margin reduction on spaces, it's based on a couple of things one we had one less event on you all a there was a slip in.
In the <unk> in one of the launches so that was the main driver, but you also had a lower risk retirements on advanced CHF and fleet ballistic missile in 2020 compared to a 2019 regarding Spacex and then I'll, let Jim chime in we we.
You will play, we Boeing and the United launch Alliance leadership team, we have seen Spacex as an emerging threat I mean, there they are more than an emerging threat right now, but what I would say is of the recent competitions. We've had with them we've actually been pleased with the.
Outcome of where.
Were you a lay landed relative to Spacex, so I think going forward.
We're confident that.
We certainly have the.
The mission capable abilities, but we also think we now have a price point that is compelling to customers that will allow space.
We'll lay too.
Get its fair share of.
Awards over Spacex I don't know, Jim if you want to talk about the next two or sure when it.
When it comes to test in space. All I'll say is that there are kinetic and non kinetic emerging threats to Spain on orbit space assets uneven ground stations and the links between them.
And so as a prudent national defense I think our government is going to need to understand and work with industry on how to address those kinds of threats and so I'll leave it there, but those threats are emerging and they're becoming more material.
When it comes to the new satellite constellation.
This is Tim.
To me coming from the telecom and technology sector.
Real cracking open up the door of having a multi layer multi lateral.
Survival communications system that can.
That can enable a fiveg bill concept that we're working with so I think it was a real breakthrough for Rick Ambrose in his business to win.
A big part of that it's called the transport layer as I said and what that does is put a low orbit constellation.
Similar to what you are hearing about and in the commercial sector.
That will be able to transmit fiveg speed capacity and latency signals between really all domains now so it'd be into out upper space Orbitz.
Down two aircraft.
In the air to ground troops and vehicles to ship borne operations and theoretically and potentially even to undersea. So this transport layers sort of one of the the first elements of what we would envision in the future.
As five teed up mill architecture, and so we're right in the middle of designing that now with our customers. So yes. It's an important piece there will be more competitions. This will be a competitive space, but we want to get out in front of it and I think the the space business area of Lockheed Martin gives us a huge advantage over really anyone else.
And taking the lead in this.
And next we'll go to Noah Poponak with Goldman Sachs. Please go ahead.
Okay can you hear me, yes, hi, Noah Okay.
Okay.
[music].
Ken I thought you had been pretty consistent for a while here that MFC would remain the fastest growing segment of the company through.
For a few more years.
And you've just recognizing that the dispersion of the growth rates you just guided to for revenue in 2021 by segment is pretty tight.
Didn't guide to be the fastest growing segment and its a meaningful deceleration from 2020, so what's changed there if anything or.
Or do you just have conservatism built into that and then on the margin in that segment.
Following that coming down for a few years now with the mix shift.
Is that bottoming in 2020 or any color on them the margin going forward in that segment would be helpful. As well you bet. Thanks for the question. Yes. There is a couple of things that soft topline. There is a couple of things going on so as I mentioned.
Well when shale opened up the call with the question on where we saw slowness of growth.
Some of it is just so.
Some of our.
Tactical strike missile programs are at capacity right now so think of Hellfire end.
Gamblers, you have a little bit of it of a timing issue with.
With that but going forward, we see growth with that the growth opportunities for missiles and fire control down the road will be tax free.
And precision fires for the most part because of the.
They are not at capacity and we are seeing extremely strong demand.
Internationally and domestically for for that product and what we Didnt talk about in the development phase.
They still is the large classified program that we have.
We will start to see in the next four to five years that go into limited rate production and then ultimately into production and you'll see a large.
Increase there as well so I think.
I think you see.
I think you see at least in the short term so.
Some of the some of the areas are going to be a capped by.
Capped by capacity, but we will work with our customer based on the strong demand that we see does it make sense for to us to increase our capacity for say Hellfire through example, we've.
Regarding.
Margins.
For 2021, we actually do see it's a slight decline to margins in 2021, and I do mean slight and as we've talked about it before and I just mentioned it with that development program as it continues to grow at the top line, we will see dilution there that's the.
That's the main reason, but so think of margins is a slight slight dilution in 2021.
And next we go the line of Ron Epstein with Bank of America Merrill Lynch. Please go ahead.
Hey, Good morning, guys morning, Jim just a quick question for you.
On the technology stuff.
Back then it was a couple of weeks ago do you announce there.
Fiveg experimentation and testing.
Five different installations.
And I was surprised to learn that that lot.
Good wasn't part of that given.
What you've been seeing lately.
Can you can you talk about that.
Where do you think about that and is that an area that walk you would be interested in or is that just something that the company is not interested in.
This this too.
Concepts around Fiveg.
One is so.
Standard communications.
Activity so terrestrial.
If you all commercial communication. So what is generally going on in the programs awarded you referred to as certain bases are ranges that are going to have a.
Standard terrestrial fiveg implementation on those bases and ranges.
It's not so much what were interested in were interested in operationalizing, the technical capabilities of Fiveg wave forms and.
And technology software and hardware to improve our defense products and our defense products performance and energy related way. So that's a derivative of of having the network in place.
At a base level, that's not going to really deliver what we're looking for.
We need a global.
Five G.
Connectivity platform and Thats why space is so important to an element of this its also why our airborne platforms will likely have a big role as well because we need.
Edge compute nodes and edge transmission points to be able to get into battle.
Outside of the basis, if you will so so we're really talking more about how do you go to war.
On a battlefield and bring with you and have available to you the throughput of data.
The latency benefits and the ability to do software defined networks and managed spectrum dynamically on a battlefield, that's really what we're after and that will improve our national defense.
And next we'll go to Cai von Rumohr with Cowen. Please go ahead.
Yes. Thank you so much for all the great information Youre given us so cash flow you expect cash flow from ops up a 100 million next year, even though it looks like you have a headwind pension of about a billion you have a headwind in terms of payroll tax deferrals.
Looks like 500 million and sort of what are the drivers to get you up what's happening to capex, how much is going to come down and maybe give us some color. If you could in terms of the relative direction and 2022 facts that Cai good morning.
Yes, so we've been embarking on what I'll call a culture of cash for quite some time now and we are actually starting to see.
The fruits of that that effort Chi and to your point, what we're seeing in 2021 as I stated in my prepared comments I gave.
You all some.
Some color on 2021 2022.
On our last call. So here, here's what we're seeing now.
It's.
Well, obviously the farther out we go the little less granularity, but to the best of our abilities by doing.
A long range plan balance sheets in class cash flow statement is what we're seeing right now is as you stated $8.1 billion.
Cash from operations in 2021, which as as we stated is $300 million above the outlook. We talked about earlier right. Now we are seeing capex in 2021 at about $1.7 billion Thats fairly consistent with what we're seeing this year.
And as you mentioned, we've got the payroll tax.
Holiday this year, it's a tailwind to $460 million.
And we're also getting the benefit of.
About 750 $800 million by the end of the year of the.
Acceleration of the progress payment rate from 90% excuse me, 80% to 90% we.
We are going to accelerate all of those benefits that we got from the government to our supply chain. So we will be hall will have the government hole in 2020 with those benefits. We received so we do have with that payroll tax we do have a headwind 50% of that 460 gets paid.
Next year, so that is a headwind and then the other half gets paid out in 2022 as you state. We do have a billion dollar pension contribution next year.
In the following year, what we're seeing in 2022 is we now see a number closer to $8.2 billion. We gave you a little color in the last call. We were at 7.9 to another 300 million dollar improvement on cash from operations.
We see Capex today based on what we know today in terms of our capacity requirements and infrastructure builds and whatnot.
Billion seven.
In 2022, so capex will be roughly 1 billion seven from 2020 to 2022 and actually I'll go out to 2023, we think Capex right. Now is about 1 billion seven so we have that other headwind as we mentioned on payroll tax.
In 2022, and we have the pension payment of about it's about 1 billion seven out in 20 to 22, so think pre.
Pension payment our cash from operations right now in 2022 is about $10 billion now the only other wildcard in all this is we've talked about the change in the R&D tax assumptions, where we're no longer expensing R&D out in 2022 and beyond we're amortizing it.
So if that assumption would reduce our cash from operations out in 2022 by $2.1 billion out and.
Out in 2023, we see.
Cash from operations of greater than or equal to $8.3 billion to another 100 million dollar increase from a where we see 2022 I mentioned, our capex at about 1 billion seven.
Right now we're forecasting a pension contribution of roughly a billion seven and.
And the R&D impact goes down from two.
From two one it'll be about 1.8.
<unk> billion dollars out out in that time period. So we have spent a lot of effort on our working capital improvements and to be Frank Kai. We think certainly in contract assets, we have some opportunities still to to hopefully improve these numbers.
And our next question from Doug Harned with Bernstein. Please go ahead.
Thank you good morning.
I have a two part question on the F 35, when you look at the President's budgets and they keep taking down numbers for the F 35 Congress keeps adding some back and at the same time, you've got some growing international opportunities, which you've talked about but those don't come immediately so.
One would think of that more stable trajectory would be helpful. Here. So how do you how do you plan production around.
This kind of scenario and as we see more growth coming from Sustainment.
How do you think that will affect your margin trajectory on the F 35.
So.
Ill take that Doug.
Yes, so right now because of Covance.
Impacts.
We started the year roughly we thought we were going to deliver about 140 aircraft. This year. They are predominantly lot 12 airplanes. So thats the first.
Lot of our block by.
So right now the team is forecasting rough numbers 120 to 125, it's still a little bit influx, but.
That's our that's our outlook right now right now based on what we're seeing in working with our supply chain and working with our production operations team where.
We're outlooking roughly 140 aircraft deliveries out in 2021.
We think based on the demand we have.
With lot 12, 13, 14, and ultimately that talks about the lot 15 production lot order that we're hopeful we'll get at the end of this quarter.
Quarter, we see about a 169, so let's just round up to 170 aircraft.
Deliver it out in the.
2022 time period, and then out in 2023, we see similar about 170 aircraft, that's basically predicated on United States Government program of record earlier year would have some to your point the congressional ads, but we're not assuming any congressional adds at least today.
Okay.
Once you get beyond 2021, there are there is still pent up demand with our partner countries.
Our Fms customers demand and then as you stated dug out in that time period. There are other interests for for the for the airplane with our partner countries existing Fms countries and there are some new potential fms countries that potentially buy aircraft, but it will be.
Beyond the 2023 time period. So I think we have a pretty good handle out to about 2020 to 22 23, where we think our production is going to be regarding margins.
No it really comes down to the ER.
To the PBL.
Right now just based on how the customer is buying a.
Sustainment they are in.
Dilutive to the overall F 35 portfolio, where we do see opportunities is in production. We do think if we continued to perform continue to.
Weed out inefficiencies and and hopefully negotiated deal where the customer rewards EPS for that there is production opportunities, but it comes down to the PDL and we do believe.
We are starting to get more and more interest from the from the customer.
For I. PBL, a performance based logistics concept and that would have us taking on investment in us industry, taking on an investment in investments risk and it would then give us the opportunity assuming we perform and hit the service level agreements will sign up two to two for that.
Be margin accretive.
And next we'll go to Jon Raviv with Citi. Please go ahead.
Thank you and good almost afternoon.
Question about sort of Capex environment in your operating and as you can see there is a lot of focus on your growth rates, especially the deceleration from 2020 growth to 2021, Chris. Please tell you see it now but the same time Capex is remaining at this one seven level. You said 21, 22, 23, so even though there seems to be an assumption that growth.
Threats and opportunities are slowing down you're still spending a lot more capex and you were almost ever so how do we how do we sort of square those two things and as the industry is the customer I should say offering you enough certainty.
To be spending that capex, such that you don't have the long term health that we all that we're all looking for.
Thanks, Hey, John almost good afternoon it.
It.
So I'll I'll discount I'll take that so if you go around the portfolio Oh, we are still seeing demand for Capex and then there is one point I'll make and I'll hand, it to Jim because he may have a comment on this as well, but if you think aeronautics.
We have slowed down our capitalization spend on F 35, b because of Covance, but if we're still going to ramp up to those higher quantities that I described when Doug asked me. The question on F. 35, we are going to have to still build out our capacity on F 35, the same with EPS.
18, you know Jim mentioned, our backlog right now is 130 aircraft, we're going to deliver our first airplane roughly or beginning of 2022 rough.
Rough numbers will do about EUR 80 year, and then ultimately by the time, we get out to the middle of this.
This decade, we'll be delivering a three to four F. Sixteens a month. So we will have to build out that capacity and then we've talked about the class applied when in Palmdale we've.
We still need to build the building out.
Out there and we are hopeful that.
Performing on that program. There are other customers that have a keen interest in that program and Thats one of the opportunities I talked about when Sheila asked the question there are opportunities out there for us that just frankly aren't planned right now if you look at missiles and fire control. We are still building out capacity for Pac three though we're not building.
It out for say Hell Flyers or gamblers, we'll talk to the customer we feel very good about the tacttthree build out for example, we do see opportunities for 500, plus Pac threes per year and potentially significantly more than that the question. Then is the is there is it the right time for us to continue.
Build out in excess of the 500 per year that we are going to build out space. We have this state of the art Gateway Center.
And there are some other opportunities out there, where we have to spend capital and then RMS they've done a very nice job of portfolio shaping that is the place we really don't see a lot of facilitation or increased capital one thing Jim has kept us on and we were in the middle of doing this not.
Yes, we're capital, but our erad and into other investments are are there low hanging fruit, if you will where it doesn't make sense for us to spend that capital or ROI Rad and then and then are there places where we should be investing regarding 20 onest century warfighter.
The digitalization effort that we're trying to take on so though we may stay at the same level the balance or the the mix of our spend may change overtime.
Just one comment I'd add to that is we are raising the.
The capital expense decision, making process a level and we're going to be looking across all the business areas.
Simultaneously and doing the rank ordering at that level, which will may result in some adjustments as Ken suggested and also I would highlight the digital transformation side of this which is.
Both in the factory offices and functions that.
Thats going to.
Going to help us meet our customers needs on one hand, but its also going to help us improve margins on the other hand to be more efficient internally as we do all of this as soon as investment upfront for that as well so it's going to have a dual benefit.
And our next question is from Seth Seifman with Jpmorgan. Please go ahead.
Thanks, very much and good morning.
I think I can you mentioned a little bit earlier the profit.
Profitability expectation for missiles and fire control and 21 can you just walk us through the other segments real quick.
You bet.
Thanks, Seth I think I think we're at the afternoon now yes. So.
So add.
Aeronautics, we're actually ER.
We expect a slight improvement in margins from 2020, which we're very pleased with.
35 margins in the balance of our compact combat air margins are expected to increase and that's consistent with our overall margins and we.
And we expect fairly consistent margins in 2021 on on air mobility.
The combat Air and air mobility margin improvements more than offset the dilution because you would expect just where the skunk works is that they would be dilutive and I.
And I've mentioned missiles and fire control, so I'll move on to RMS.
We're happy to see returns double digit margins this year and we expect a slight improvement in 2021, which we're very pleased with so all that integration work that we've talked about.
We talked about the portfolio shaping that we're doing in RMS were starting to see the results. There odd Sikorsky is the primary driver they'll have year over year improvements.
On production programs think of those sets as black Hawk feet 90, 892 in CRH.
And then lastly, its base, we'll see a.
We'll see a little bit of a role.
Erosion in margins.
In 2021, and Thats very similar to missiles and fire control or Youre seeing dilution.
Due to the OPI, our development program and also increased development content at a strategic and missiles and missiles.
Missile defense portfolio as think of that as Hypersonics and then the net.
Next generation interceptor. So thanks for the question.
So, it's Jim I'll and the session today by reiterating the Lockheed Martin completed another cordless strong financial and operational performance and without robust backlog focus on our program execution and strong demand for the portfolio of products and services. We have we're positioned for a successful closure of 2020.
Continued growth in 2021, so thanks.
So thank you all again for joining US today, we look forward to speak with you on our next earnings call, which will be in January.
That concludes the call John Thank you, yes. Thank you ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.
John its Greg just checking into that sound, okay on your end.
We're sorry your conference is ending now please hang up.