Q4 2020 Lockheed Martin Corp Earnings Call
And ladies and gentlemen, thank you for standing by and welcome to the Lockheed Martin fourth quarter and full year 2020 earnings results Conference call.
At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time if.
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As a reminder, today's conference is being recorded I would now like to turn the conference over to Greg Gardner Vice President of Investor Relations. Please go ahead Sir.
Thanks, Greg and good morning, everyone.
I hope you've all had a great start to the new year and that this call finds you and your families safe and healthy.
Welcome to our fourth quarter 2020 earnings call.
As we review our results strategic new business activities key accomplishments.
Our outlook for 'twenty and 'twenty one.
Before I begin I'd like to take a moment to reflect on the loss of Michelle Evans.
Our aeronautics business area leader, who passed away earlier this month.
Michelle dedicated 34 years of service to our company and touch the lives of countless people both inside and outside the Corporation.
I named Michelle for years, and I can say that she lived a life of strength and Grace.
And while we mourn or loss. We also are thankful to have had or as part of our Lockheed Martin family.
Well I'll Miss Michelle.
As we look back to the year from a broader perspective, twenty-twenty introduced personal and professional challenges to each and every one of us.
I'll begin my summary of Lockheed Martin's results today by thanking the men and women of our company and their families.
For stepping up to deliver outstanding performance during extremely difficult time.
It was through their dedication and commitment that we were able to drive operational and financial results, which not only exceeded many of our expectations, but also set records in several areas.
The coronavirus outbreak remains an ongoing pandemic.
And we're continuing to take actions to mitigate its impacts.
Vaccines are also becoming available to help combat this disease and we're hopeful for a return to a more normal business environment as we progress throughout the year.
Our dedicated workforce on a resilient supply chain continue to perform with excellence. During these demanding times supporting our global customers and their important missions and I'm very proud of their accomplishments.
Moving to our results we delivered another year of outstanding performance in 2020 strategically operationally and financially.
Ken will discuss our financial results in more detail and provide our full year 2021 financial outlook for that.
To provide a few highlights for the past year.
Period in which we set high watermarks in ink and sales earnings.
Net cash from operations.
First sales and segment profit each grew 9% over 2019, and our 2020 earnings per share increased by 11%.
We had a strong year of cash grant generation, achieving $8.2 billion of cash from operations, even after a 1 billion dollar voluntary pension contribution.
And after accelerating payments to our supply chain to help mitigate COVID-19 impacts.
We are continuing this practice prioritizing are vulnerable and small business partners.
We recorded over $68 billion in orders in 2020.
Growing our backlog by $3 billion, resulting in a robust 147 billion dollar a year end total backlog.
These results reflect the high level of execution being achieved across the company, providing critical security and it turns solutions for our customers.
As we look to 2021, our broad portfolio has us positioned for continued growth in all four of our business areas.
We expect our cash generation remains strong and.
And we plan to continue our balanced cash deployment actions investing in innovative technologies of strategic opportunities to provide our customers with hand and enhanced capabilities and.
Still returning cash to shareholders.
Turning to defense budgets for fiscal year 'twenty 'twenty, one National Defense Authorization Act has been passed into legislation.
And the Department of Defense Appropriations were approved as part of the FY 'twenty, one omnibus funding Bill.
Both of these congressional actions adhere to the bipartisan budget Act of 2019, which established spending levels for discretionary, but defense budgets with a total fiscal year 'twenty 'twenty, one Nashville defense spending target.
Approximately $740 billion.
Also Congress passed a $900 billion Covid relief package.
Which extended section 36, 10 of the cares Act to March 31st for.
Providing federal agencies, the authority to reimburse contractors, who are temporarily unable to work due to facility closures or other restrictions.
Lockheed Martin programs were well supported in the FY 'twenty, one appropriations Bill with Congress, adding funding of over $1 $7 billion for 17 additional F 35 aircraft and other development and integration activities for the program.
Adding nearly $900 billion for nine additional C 130 days plus support work for that airplane.
And over $400 million for Sikorsky programs, including additional CH 53, K and Black Hawk helicopters.
And also the initiation of an eighth bad battery for the U S Army.
Turning to our portfolio I'd like to touch on several notable achievements demonstrating our focus on strategic growth and.
And operational performance.
As we announced last month, we have entered into a definitive agreement to acquire Aerojet Rocketdyne an accident once finalized will bring long term strategic value to our entire portfolio.
As we commented then our 20 <unk> century warfare strategy any.
Includes enabling growth areas, such as hypersonic tactical on integrated air and missile defense and space systems domains.
Aerojets expertise in propulsion systems will benefit our existing hypersonic programs as they progress from development to production and.
And will improve our tactical missiles missiles, and air and missile defense products.
While continuing aerojet rocketdyne as legacy as a merchant supplier to the entire industry.
We believe this combination will deliver innovations and improve efficiencies that will offer more timely and affordable solutions for all of our customers, including the defense Department day.
Domestic manufacturers.
And our international partners and we're very excited about this transaction.
Moving to the business areas in Aeronautics our F 35 team finished the year strong.
Delivering a total of 100 20-F 35 aircraft.
Our arrow production organization, our partners teammates in the supply chain all work to overcome manufacturing introduce our manufacturing issues.
Introduced by this pandemic.
We've now delivered over 600 airplanes since the program's inception with nearly three 360 jets still in backlog.
In domestic as well as international opportunities ahead of us.
Over two thirds of the jets and the plan of record are still to be ordered.
So the aircraft continued to perform well so operating from 26 basis and shifts around the globe.
And the Royal Australian Air Force recently declared initial operating capability in December for.
Seventh country to do so since the program began.
Also on our Aeronautics business. The U S Air Force awarded a 900 million dollar contract for us to provide sustainment and support services for F 16 aircraft, including maintenance and modification activities.
Of course, the F 16, as one of our longest running production programs and we will look to optimize the air Force's F 16 fleet for greater capability readiness and performance by this new Sustainment contract.
Moving to our space business area. We recently won a $4 9 billion dollar award for our next generation overhead persistent infrared or O P. I R contract.
This award funds a production of three geosynchronous satellites and ground systems.
To provide initial warning of ballistic our tactical missile launches anywhere in the world.
These new space vehicles will have more powerful sensors and greater resiliency to enhance our nation's air and missile defense capabilities well into the 21st century.
Keeping with our space organization.
We're pleased to be selected for one of the awards to develop a prototype payload for the new evolve strategic satellite communication systems.
E. S. S is designed to be in the successor to the advanced extremely high frequency constellation of satellites.
One of our signature programs that provides secure and survivable strategic communications for national leaders and tactical commanders alike.
This is R. O P. I R satellites. The E. S. S. Constellation is intended to provide improved resiliency survivability and increased capabilities.
We look forward to participating in this opportunity as we work to enrich our platforms with more mission systems content, which is another key facet of our 20 <unk> century warfare strategy.
I'll close with our rotary and mission systems, and missiles and fire control business areas with.
It's recently led Lockheed Martin's participation in an exercise Valiant shield 2020.
Which is a biannual joint effort for the U S Navy Army Air Force and Marine Corp.
Our combined team used to visit Virtualized aegis weapons system <unk>.
To conduct a pioneering joint multi domain long fires demonstration.
By delivering machine to machine interfaces across joint for systems.
This effort accelerated speed of decision, making and then to action.
It demonstrated a primary premise of our 20 <unk> century war fighting strategy by networking separate sensors communication links and weapons across multiple platforms.
The result is more effective joint all domain operations that provides enhanced capabilities and greater effectiveness to the commander in a field of operations.
These achievements highlight our strategy to help address emerging threats with 20 <unk> century capabilities to.
To invest in new and innovative technologies and leverage our signature programs to provide powerful deterrents to future military conflicts.
That's our mission and with that I'll turn the call over to Ken.
Thanks, Jim and good morning, everyone as I highlight our key financial accomplishments. Please follow along with the web charts that we've included with our earnings release today, Let's begin with chart three and an overview of our results for the year.
Sales segment operating profit cash from operations and earnings per share from continue operations close with record annual highs.
We generated $8 $2 billion of cash from operations after a $1 billion discretionary contribution to our pension trust this quarter.
And we continued our cash deployment actions, returning $3 $9 billion of cash to our shareholders for a combination of dividends and share repurchases, while continuing to invest in the strategic growth of the business, including acquiring I, three and record investments in Iran and capital expenditures.
We also entered into a definitive agreement to acquire Aerojet rocketdyne in the fourth quarter with the close expected in the second half of 2021.
I will note that our 2021 outlook include excludes all results associated with this transaction.
While backlog declined approximately $3 billion in the quarter due primarily to the timing of the F 35 lot 15 production order.
2020 represented the sixth consecutive annual increase in year end backlog for the Corporation.
In summary, it was an outstanding year for the business and Lockheed Martin is well positioned for continued success in 2021.
Turning to chart four we compare our sales and segment operating profit this year with last year's results.
Sales grew 9% in 2020, compared with last year to $65 $4 billion continuing the strong performance over the first three quarters. While segment operating profit also increased 9% over last year to nearly $7.2 billion.
On chart five we compare sales by business area with last year's results.
As Jim mentioned, all four of our business areas experienced strong sales growth in 2020 led by Aeronautics and missiles and fire control at 11%.
Aeronautics growth was driven by development and Sustainment increases on F 35, and F 16, as well as growth in advanced development programs.
Missiles and fire controls growth was primarily from production volume in tactical and strike missiles, and air and missile defense lines of business.
I will note that all four of our business areas achieved record highs for sales in 2020.
Chart six shows our earnings per share for 2020.
Our EPS from continuing operations of $24 50 was up $2 55.
Were 12% higher than our results from last year, driven primarily by increased volume and sustained performance.
On chart seven we'll discuss our backlog.
Driven by annual increases at three of our four business areas. We maintained a book to bill ratio above one for the full year of 2020.
This continued backlog growth combined with further visibility of our 2021 orders provides additional confidence in our increased sales outlook for 2021.
On chart eight we'll discuss the cash return to our shareholders in 2020.
Subtracting our capital expenditures from approximately $8 $2 billion of cash from operations are.
Our free cash flow was greater than $6 $4 billion, nearly a 6% increase over 2019.
This growth was achieved despite accelerating more payments to our supply chain and we received from the favorable D. O D initiate progress payment increases and the deferral of payroll taxes under the cares Act.
We increased our dividend by more than 8% and executed our planned share repurchases for the year with $1 $1 billion in total shares retired.
This brought our total cash returned to shareholders to $3 9 billion for the year or 60% of free cash flow, providing a solid returns to the shareholders in 2020.
Moving on to chart nine we provide our outlook for the year ahead.
Our outlook for sales ranges from $67 1 billion to $68 $5 billion.
The midpoint of this range represents nearly a 4% increase over 2020 and improving from our October estimate even after incorporating the impact of the UK Mod decision to in source contract support for the atomic weapons establishment.
The $700 million sales reduction for this change is reflected in our outlook for the space business.
We're not for this decision our estimated sales increase would have been approximately 5%.
Which is greater than the estimated 3% sales growth we discussed in our last earnings call.
We have incorporated the known Covid impacts into our 2021 financial outlook.
We will continue to work with our U S government customers to monitor COVID-19 risk to our operations and the supply chain.
And we will continue exploring potential path to recovery of cost impacts where appropriate to minimize future impacts.
The range for segment operating profit is estimated to be approximately $7 4 billion to $7 5 billion.
Our estimated Fas Cas pension adjustment is approximately $2 $3 billion.
Our estimated range for 2021 earnings per share growth to between $26 to $26 30.
The midpoint of this range represents approximately an 8% increase over 2020 results.
Cash from operations is now projected to meet or exceed $8 $3 billion and I will discuss this in greater detail on the following chart.
Our chart 10, we will walk through our future cash expectations folding in the $1 billion discretionary pension payment we made last quarter.
Strong operational performance drove a reduction in working capital, which allowed us to increase our cash outlook for 2021 to greater than or equal to $8 3 billion.
We now see approximately $8 $7 billion of cash flow from operations in 2022, increasing our three year cash generation estimate by $900 million over our prior assessment.
And as we sit here now we see 2023 cash from operations of approximately $9 billion.
I should know this outlook and trends are prior to an estimated R&D tax deduction impact from the 2017 tax cut and jobs Act change that would impact 2022 cash by approximately $2 $1 billion and lower 2023 cash by approximately $1 8 billion.
On chart 11, we break down our sales and segment operating profit outlook by business area.
All four business areas are positioned for continued sales growth in 2021, approximately 4% for the corporation led by Aeronautics at 5%.
Segment operating profit growth is also projected to grow at approximately 4% in the aggregate with our largest growth in aeronautics at 6%.
And finally on chart 12, we have our summary.
We believe 2020 was an exceptional year for Lockheed Martin during these challenging times.
Our team diligently work to minimize the impacts of the pandemic to our business and our supply chain and we have increased our estimates for 2021 for all key financial metrics.
Our results in 2020 exceeded previous highs and have positioned us well for continued growth and value creation this upcoming year.
We remain focused on cash generation and growth in 2021, we will continue to invest in discriminating technologies and strategic initiatives to deliver value to our customers.
While providing strong cash returns to stockholders.
And with that we're ready for your questions Brad.
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And our first question today comes from the line of Ron Epstein with Bank of America. Please go ahead.
You for the question.
Jim could you speak to your your broader space strategy.
And I appreciate your comments on average it in your prepared remarks.
Can you be more specific on out it creates value, particularly in the absence of maybe a broader strategy or is it actually part of a broader roll up strategy. I mean are you guys thinking about doing more.
The strategic actions in space.
How are you thinking about space for Lockheed Martin.
For Ron I came into this role with Lockheed Martin and being the leader in National Security space as it is and the benefit of the position of the company is that we have a strong position in these I'd say classic large bus.
Military defense satellites, and then our intelligence community satellites.
But we also have the ability to go down.
Down a range into medium and low orbit as well as the geosynchronous orbit. So the whole playing field of National Defense faces is open to Lockheed Martin and what we're doing in the business is we're introducing these twenty-first century technologies and taken advantage of that space Plaid.
For them and so you see us winning.
Recently, a low orbit transport layer, a contract which is a pioneering.
Initiative of the of the Department of defense to start introducing five G and other modern networking technologies into the space domain or part of that.
And what we've been able to do is to connect our space assets already using some of those newer technologies.
<unk> technologies in AI and also distributed compute.
Into our aerospace land and sea forces as well as the platforms that we deploy there. So we have a broad space strategy, which is to take 20 <unk> century networking <unk> storage.
Storage and compute technologies into.
Our space domain as.
As really a competitive advantage versus other defense contractors that don't have that asset available to them.
The second part of your question is well how does aerojet rocketdyne create value in doing this.
And it really goes.
Hand in hand, with our hypersonic strategy, which is part of our 'twenty for century War fighting in that initiative.
You know I I view Lockheed Martin is.
Benefit of roll in defense enterprise is adding velocity to it the world is moving faster.
Connecticut, if you will and and a networking and AI perspective, as well and we need to speed up and just taking one dimension of that hypersonic missiles and counter in a hypersonic missiles requires a much better tighter integration of the propulsion system into the body.
Of the of the missile.
The heat generated by these hypersonic missiles is incredible and just managing that heat and thermal issue is on the reasons, we invested in ice free as well. So we are selecting what we think are the most important defense platforms in <unk>.
Connectivity.
<unk> capacities for the future of warfare, and we're investing in those and Aerojet rocketdyne as part and parcel of that investment strategy propulsion integration into hypersonic missile a glide bodies is essential.
For the benefit of.
US are working.
More in a more integrated fashion with Aerojet rocketdyne as we'll be able to bring our broad engineering expertise, our capital and our operational experience into Aerojet Rocketdyne and bring the best of Lockheed Martin to the propulsion side of missiles and space. So there are incredible synergies here I know.
Dan can speak to a little bit more.
More on those later, both revenue and costs.
But given my long answer I'll stop there.
And we do have a question for the line of Pete Skibinski with Alembic Global. Please go ahead.
Hey, good morning, guys.
Hey, Jim can you talk about kind of your updated mid term view of the D. O D budget now that we have you know, obviously, a new sector and administration, but you know maybe even more importantly, a change of control of the Senate I'm, just wondering what you're kind of seeing and hearing T. Lee wise in terms of you know the budget outlook.
Thanks.
Well.
Sure Pete the administration has on unveiled its actual plan or trajectory for defense budgets, but I take.
And in a couple of things one is that the national security and intelligence and in our International Affairs team that President Biden is proposing or has brought on.
As experienced they are professionals in that realm of many.
Of them, having decades of senior government experience dealing with these issues and so youre going to have we.
We believe a lot of continuity in policy and also in focus on how important.
Strong defenses for this country.
So I think the.
The proposed team is a plus.
And you know unfortunately, frankly that the threat outside.
Against a potentially the United States is growing.
It's accelerating too by the way in.
When we.
Look at the National Defense strategy.
It reoriented itself and Reorienting, our defense enterprise towards great power competition.
And it's something you cannot just sit still and watch go by because we will we will be overtaken because of the aggressiveness of our potential peers.
I'm, taking solace in these trends as far as the defense budget goes that you're a professional experienced people leading it for the administration.
And that the threat environment is greater versus lesser we feel that supports a stable defense budget going forward.
Yeah.
Yeah.
Yes.
And we do have a question for the line of Joseph de Nardi with Stifel. Please go ahead.
Thanks, Good morning.
Ken can you talk a little bit about the R&D tax impact and I guess relative to the political backdrop do you see that playing out as it is more likely or is there still on an outcome, where that's less onerous. I mean are you now planning differently than you were a few months ago in terms of the potential cash flow impact from that thank you you bet.
So yes, Joe I I have socialized with you guys as a you know as much as we could once we concluded.
Our view of what what the tax laws on the interpretation of that was and as I stated a few times now it looks like it's about.
$2 $1 billion in 2022.
One $8 billion in 2023, and it will continue trending down.
You know one of the reasons, we are extremely focused on cash you know US you heard in my prepared comments the amount of cash debt, we're generating in 'twenty, two and 'twenty three.
I've stated we've taken we took a pause.
For the roughly the second half of last year before we started talking to the key constituents on about that impact. It is still our belief that we think there is some likelihood it will either be repealed or altered. So it just doesn't include entire.
Research expenses, which would include our cost plus contracts, but would be just our research and our ire at our research and development costs, which would not be a material impact to our to the outlooks. I gave you. We still think there's a good likelihood thats going to happen because if you think about it.
If in 2022, we have $2 $1 billion less of cash. This is just Lockheed Martin and as you know Joe. This is not just Lockheed Martin and not just day in D. This is all of industry. So this is going to hit pharma hard it's going to hit high Tech card. These are dollars that we're not going to have the ability to plow back.
Jack and invest.
Into our into our portfolio and into our technologies and I think that is a compelling story and I think guy at the end of the day, that's going to rule. The day now having said that we are still generating larger.
Large amounts of cash in fact as you know we ended the year in excess of $3 billion cash on hand, right now assuming our dividend assumptions in our share repurchase assumptions for 2021, we're going to end 2021 with over $5 billion of cash.
That number is going to continue.
To grow and that frankly, that's a good opportunity for us to do the things Jim described for them an investment standpoint, and then to continue our robust.
Cash deployment strategy that we have historically had with our shareholders.
Okay.
And we do have a question from the line of Hunter Keay with Wolfe Research. Please go ahead.
Hi, good morning, its actually Mike Maugeri on for Hunter.
Mike.
Hi, so according to your filings from 2009 to 2017 square footage on your spaces that you leased or owned fell $8 5 million square feet or 15%, while youre still growing revenue.
So I know that you have an investment in Palmdale coming on board in the next budget Downcycle flattening whenever it should come facility consolidation is that a lever you'd be willing to pull or able to pull again.
Yeah. Thanks for the question, Mike It's Ken So I think this year. Our 2020, we're going to end with roughly 72 million square feet and you know theres for pieces to that one is that you know the space, we actually own and in a large share of that is going to be manufacturing space and thats about half.
Of our real estate and then and then the other half is a combination of lease space.
Go co, which is government owned contractor operated much like our Fort worth facility, and then Gogo, which is government owned government operated which is AWS and so theres. A couple of just short term notes a couple puts and takes assuming.
The U K government does.
Take over the management of AWP, we lose about four and a half million.
Square feet out of that 72 million squares.
When we're successful with the Aerojet Rocketdyne acquisition I believe they have about 3 million square feet that we would add back you mentioned, Mike the Palmdale building net we're building. We also have a little bit of a real estate debt, we're expanding in space and in RMS and <unk>.
In missiles, and fire control and that net to about a million square feet. So you know at the end of the day you know, we're going to be down about a half a million squares, but now the opportunity comes you know right now we have roughly half of our employees are working remotely some of them are periodically coming in.
But we have over the last couple of months have rolled out a plan.
Frankly looking at Lockheed Martin forward is what we call an end and it's frankly, the future of work and we are going to start looking at getting out of some of that lease space as our leases expire.
Expire you can expect us to.
Reduce our footprint by at least a couple of million square.
Square feet on the next couple of years, if not more will go to more hotels will allow people that where it makes sense for them to work from home and we will make sure. This is a competitive and strategic advantage for us.
And we do have a question for the line of Christine Li Wang from Morgan Stanley. Please go ahead.
Hey, good morning, guys good morning Christine.
Jim maybe on following on the question on the New administration, but in a slightly different way, how do you think about opportunities and challenges regarding foreign military sales.
For the New administration do you see.
<unk> on more tailwind on before.
Good morning, Christine as far as international business, including foreign military sales.
The.
Tendency of the people on the by the administration and the President's on statements reiterate his view that alliances are important that they need to be cultivated and that they have real value on deterrence and national defense and so I do think that we will have a more open in <unk>.
Fire meant for F. M S N E commerce and direct commercial sales to our international partners.
The other benefit.
You've seen it recently in the press is that we have some fantastic and unmatched products that are in great demand and highly desired by many countries. So you know you've seen F 16 sales coming back on F 35.
<unk> was a pivotal element of the Abraham of cards, we believe and that are you know that that system is so highly desired by our allies in the United Arab Emirates, and elsewhere that it actually helped us bring a modicum of piece to the middle East and so are our prop between our products.
And the Biden administrations.
Stated proclivity to enhance our alliances I think we're in a better position going forward.
Yes.
And we do have a question for the line of Carter Copeland with Melleous Research. Please go ahead.
But in a good <unk> good morning, gentlemen.
Hey, Carter.
For your Q for probably the best time debt to ask a question like this just to get some color on it but classified has obviously been a big a big component of bookings and growth in your focus I wondered if you might give us some more color. If you can around you know how much classified grew in 2020 or.
Some more color on on bookings growth or if you can't do that even you know relative growth versus the rest of the business just any kind of sense you can give us on you know the sort of seed corn projects that will fill out the revenue outlook in the next three to five years and beyond.
You bet Carter and unfortunately, I do have to be a little cryptic and I apologize for that but I'll try to give you color to the best of my abilities. We have we have seen our classified business.
From an order book standpoint, and from a sales standpoint are growing faster than the corporation. If you go around the horn.
I've mentioned in the past we won a a strategic program in Palmdale, where we're starting to see the benefits of a.
Multiple customers starting to one once that system. In fact, we're also a conversation with and international a partner of the United States of their their interest in that system and back to back to Mikes question. That's the reason for the capital growth out in Palm.
There is some other things going on out there that unfortunately, we cant talk about that.
I think we'll reap the benefits of some of them are hypersonic.
Some of them are other platforms at missiles and fire control, we've talked about the large development program that we won it is progressing well on.
It's going to continue to grow grow in the future prop.
Probably as fast if not faster than the rest of missiles and fire control and then probably the other big place to talk as space. We won a couple rather large strategic programs. In 2020. We're also pursuing a few in 'twenty 'twenty, one and also.
The.
From a sales standpoint, as I as I mentioned for across the corporation growing faster than top.
Topline that then then our business in the aggregate is.
From a margin standpoint.
Margins in Aeronautics for Palmdale to classified work right. Now is is dilutive just by the nature of the contract types same with missiles and fire control. These programs are going to be dilutive.
Net growing faster than the rest of the portfolio, but from a margin standpoint gonna be.
Gonna be dilutive the good news also is but for me from.
From a contract type standpoint, they're not an impact to working capital. So so there'll be a reasonably good cash flow in the space business. Some of these programs are our fixed price, but most of them are going to be cost plus as well. So just slightly dilutive to the overall portfolio, but again I apologize that's about as much as I can.
Say about the portfolio.
Yeah.
And we do have a question from the line of Robert Stallard with vertical research. Please go ahead.
Thanks, So much good morning, good morning, Robert.
Jim a question for you given the recent share price performance and the valuation on the stock and of course, a very low interest rates here and do you think is the best use for the balance sheet to continue to pile up more cash and perhaps you should be more aggressive on the share buyback.
Well we're.
Balanced in our cash application and they always have been as a company and my legacy back at the my prior company as well.
And there are many competing parts right. So we have an opportunity set and a desire to grow and we're pursuing that growth strategy, while carrying for cash deployment to shareholders. So.
Again to be a little cryptic.
We've got all of the keys on the piano at our disposal.
We're going to work our way through some decisions on opportunities here in the near future, but yeah I may accolade of the notion that when share prices below intrinsic value that you're aggressively to the extent that you can buy it back based on regulatory and other matters that go on and so on opportunities that.
May be being looked at or not and so we'll work our way through all of those issues, but I can assure you that if we're in the clear and our intrinsic value.
It was greater than the share price, you'll see Ken and I are diving back in the market.
Yeah.
And we do have a question for the line of Sheila <unk> with Jefferies. Please go ahead.
Hi, good morning, Jim and Ken.
Yes.
Just given 3%, 4% EBIT growth this year versus nine in 'twenty 'twenty, how do you think about some of those drivers as it relates to your 9 billion target in 2023 is it sort of steady as she goes in terms of your earnings outlook and then I guess the age old question of is there an opportunity where earnings growth exceeds revenue.
Going forward given decelerating environment.
Hey, Sheila Hi, good morning, I Hope Youre doing well you and your family. Thank you very much so yeah.
You know, we see if you look at our cash and and as you noted we see eight three cash from ops in 'twenty 187 before the.
The tax impact due to the R&D of in 'twenty, two and then 9 billion in 'twenty three.
We see right now we see margins are pretty steady at 11%. So most of that is I've talked.
The Wall Street about our our focus on cash what we've called it is a.
Culture of cash we're generally over the last couple of years, it's not just frankly, a balance sheet issue is not the finance community just to solve it for the entire Corp.
For say production operations understand the consequences of making or missing deliveries and how that impacts cash so we see more opportunities going forward.
Managing the balance sheet, specifically contract assets and inventory and ensuring that if theyre going to grow they're growing at a at the most efficient way possible and then also as Jim mentioned, we see opportunities I'm not going to talk about specifically after the mass for probably more.
Our direct.
Government sales, where there is an opportunity for us to get cash advances.
To answer your second part of your question, we do see some opportunity, though to be better than 11% and that specifically our programs.
That will start to mature take F. 16, you know we're generally in the beginning of the production cycle again, we're going to deliver a eight airplanes and 'twenty 'twenty two and then we will get up to a significant double digit.
Deliveries in 'twenty, three and beyond there is an opportunity for us to to have margin improvement. There F. 35, you know everybody wants to talk about F. 35, we do still think there's opportunities there for.
From a margin standpoint, where production we've talked to you about the P. B L concept. The performance based logistics concept that we've had that we do think there's.
Some margin opportunity there for industry, assuming we perform assuming we hit the critical service.
Service level agreements that that we want a hypersonic will soon get out of our development and hopefully you know go into limited rate production and production that will help us all the helicopter programs that we've talked about youll start to see CH 53 day moving out of development into production.
In presidential helicopter of course is moving into production you have combat search and rescue that I'm moving to production. There. Those are just a couple of examples Sheila I think that will give us an opportunity to enhance our margin overtime.
Yeah.
And we do have a question for the line of Doug Harned with Bernstein. Please go ahead.
Thank you good morning, good morning.
Jim.
Earlier, you said that the goal would be to.
Enrich your platforms with mission systems content, and if I have to say this for me sounded like something I could've heard back in the advanced Kaufmann normal Augustine days on something that didn't really work out well because of Doj concerns D O D concerns.
So now with the.
I'm trying to do that.
Then also you talked about the advantages you could get from the Aerojet Rocketdyne acquisition, and then and a Raytheon with the acquisition of Blue Canyon. That's a you.
They make buses that you know.
They do work for you guys for all three Harris for Northrop Grumman I mean are we seeing do you think we're seeing a different.
Structure to this industry going forward it was much more vertical integration.
Can you can you comment on this from them.
From a sort of a philosophical standpoint on.
Sure Doug I mean, if you go all the way back to the primary notion that we're back into <unk>.
On a world of great power competition.
It's important to look I think beyond our own defense industrial base structure, but outward to those of the that the competitors, which are China, Russia, Iran, and North Korea for example.
And compare our capabilities in the day, if I'm in government depend.
Dependent.
Comparing our defense industrial base capabilities to those of the peer group how is China operate its defense industrial base, how does it organize it and what are the capabilities and velocity again that comes from that.
And from that perspective, my view would be that vertical integration concerns from a classic antitrust perspective are dwarfed by the lack of velocity and inability to integrate an added cost frankly that comes from the the.
Existing defense industrial base structure, the stratified with a supply chain, that's quite fragmented I think it's better for the country and for the defense enterprise.
To enable industry to make logical proposals for bringing in mission systems. If you will are the supply chain that goes into the major platforms into a more integrated organization. So I think that's the philosophical basis.
On the other hand, we cannot predict the decisions of individual regulators and those coming into office, but I do think that it's critical that those decisions look through the lens.
Of great power competition on how we compare.
To the defense industrial base, certainly the China.
Okay.
And we do have a question from the line of Noah Popinac with Goldman Sachs. Please go ahead.
Hi, Good morning, everyone. Good morning Noah.
How much revenue is youre, a hypersonic franchise.
On generating and in the 'twenty 'twenty one outlook.
And then how much revenue could your hypersonic franchise be generating.
Closer to the middle of the decade.
Okay, No I'll I'll take that you do like these are long ball.
Answers so I'll do the best for my abilities on the second part, but if you look at our hypersonic portfolio through 2020 our.
Our total order book was was north of $3 billion, we generated about 1 billion two and hypersonic sales in 2020 and think of that as mostly development and cost plus programs on apps actually we had a couple a risk retirements at the end of the year. So our programs are performing.
<unk> for 'twenty 'twenty, one Noah the best of our abilities right now, we see hypersonic sales being about 1 billion five.
And still dilutive margins just based on the contract type and the type of work that's being done.
You know, where we're going to have a handful of these programs will have first launch continued demonstration of our capabilities this year and next year.
And then as I've stated in the past you'll start seeing some of these programs the net down as a as you saw last year, where we had one program terminated but we actually saw the funding start to go to some of our other our other platform. So you know for us really not a harm and intuitively made sense.
So by the middle of the decade, it's conceivable that debt number could be closer to $3 billion, you'll start to see.
Some of these limited rate production programs happening.
These programs will actually start going into full scale production. So it's conceivable that our sales will more than double.
By the by the Middle of this decade, and also the contract type will start changing and they'll either be fixed price incentive or fixed price.
Contracts.
And we do have a question for the line of Richard Safran with Seaport Global. Please go ahead.
Uh huh.
Jim Ken Greg Good morning.
Thanks Rich.
So I wanted to ask you about the international we've now on the Trump administration went through extensive measures to promote a U S defense exports.
I'm just wondering you know maybe you could dovetail off for the comments you have made you know coming from your government Affairs people about the New administration do you see any changes with.
With how the new administration is looking at exports do you think there's going to be continued growth there and Hum do you think this could be a benefit to you on to the international sales of Air Defense equipment.
Richard It's Jim again, it's too soon to tell what individual policymakers are gonna do since they haven't been named are confirmed in large part yet, but if you go back to first principles of the administration based on candidate Biden and now President Biden campaign.
Campaign jobs and economic recovery incredibly incredibly important.
To him into his administration.
And.
There are no better source of jobs on international military sales for this country and in May.
In large part because.
These are <unk> tend to be engineering stem Hyatt salary and the manufacturing jobs also high wage reliable dependable jobs with companies that have strong benefits et cetera. So so if if jobs in the economy are important.
The promotion of International Defense sales, one would surmise would also be important so from that perspective, I expect that we're going to get strong support let alone from as I mentioned earlier, the interest and desire to have.
Increased collaboration and cooperation with our allies.
And you know as an ex pilot myself I can tell you that theres no better way to get a tighter bond with an ally then sell them jet aircraft fighter aircraft because.
All the way back in the in the mid eighties. When I was in pilot training, we had saudis in our class for example, and then when I was at Pratt and Whitney we build an F 100 engine overhaul and repair shop insight, Saudi Arabia that further cemented our collaboration with that country.
Just two tiny examples and then you've got again the training collaboration you've got industrial collaboration you're doing exercises together, you're using the same cockpit avionics just goes on and on how you can increase your alliance.
Stickiness, if you will.
With major defense sales, so I think on those two dimensions at least that we.
We would expect some positive momentum.
Okay.
And we do have a question for the line of Myles Walton with UBS. Please go ahead.
Thanks, Good morning for.
Just a quick one on space. It looked like there was some implied margin erosion or or compression sequentially into 2021, but I would've thought that AWP you would've would've helped on.
Is there something else that moved around on the mix that you you know for.
Point us to.
Sure Hey, Myles, it's Ken Yes, the Big driver is if you look at our United launch Alliance.
Due to the mix of of launches.
We're going to see less profit.
Next year.
At U L a than than we had in 2020, but youre right that unfortunately that more than offsets the U L. A I'm sorry, the AWS dilution.
And we do have a question from the line of George Shapiro with Shapiro Research. Please go ahead.
Yes.
I wanted to go through some of the margins Kenneth in Aeronautics I mean, you had this increase and see you on 30 profits and it looked like revenue has changed much otherwise you would have spelled it out and then you had a reduction in the U S.
Our margin and it looked like you had to have an increase in the production margin on the F 35 to get these big increases you had so I just wanted if you could clarify that a little bit more sure Hey, George I got a clarifying question for you you're talking about fourth quarter of 'twenty or you want to talk about 'twenty one.
Talk about the for full year 'twenty 'twenty.
Full year 2020, well, it's probably just makes sense then to talk about the.
For the fourth quarter because that.
That's the most current information. So you know just just you know in aggregate I'll talk I'll talk topline topline and Bottomline for for Aeronautics. So we saw development topline increases. They you know generally they were mid singles.
Digit increases in net that was driven by a follow on modernization I mean, we're still.
Seeing a lot of success there are a lot of demand by by our customer set for increased technology on the platform production was down in the quarter year over year in the fourth quarter, George and that was mid single digits as well that was probably more of a timing issue than anything else Sustainment, we saw strong.
Growth in our what we're going to see strong growth into 2021 that'll be the fastest growing piece of our of F. 35 in 2021, we saw strong increases on.
On F 16, you're starting to see production are kicking in and you also had strong sustainment <unk> 30 sales were up 3%.
So think of that as a you know low single digits 88, a D. P. The skunk works has a strong double digit increases there as well and I'll go to profit for you so for the for the quarter.
We were up 7% you know roughly 10.8 margins versus a 10 six but F. 35 F 35 to your point was was down that was driven by by production. So we had high single digit margins I mean, it was almost 10% but down a little.
Bit versus last year, which were stronger double digit margins and that was just frankly driven by less risk retirements in the fourth quarter of.
2020 than 2019, our Sustainment was up a little bit F 16 margins for the quarter George we're up.
Both were double digit margins, but fourth quarter. This year, we were almost 20% margins.
Margins on F 16, that's because we had a risk retirement on an international Sustainment program.
<unk> 30 margins were up in the fourth quarter as well and that's because we had a risk retirements on our Fi asked for and our <unk> programs and ADP was up.
And most of that was volume, but we actually good news had some risk retirements there as well so hopefully that helps give you some color.
Brett it's Greg before I hand, it off to Jim I've been informed that some listeners might not have heard the forward looking statement at the beginning so let me just reiterate for a for a minute that statements made in today's call that are not historical fact are considered forward looking statements are made pursuant to the safe Harbor provision. So please check our SEC filings for.
For more discussion on the risks and historical facts and with that I'll turn it over to Jim for closing comments, Okay. Greg. Thanks.
Look our business performed exceptionally well in 2020 under extremely difficult circumstances, and again I want to thank the men and women of Lockheed Martin for stepping up to that when we delivered outstanding program execution and operational performance for our customers.
Strong financial performance for you the stockholders, so a robust backlog, our broad portfolio and our long term strategic focus have us well positioned for continued growth. We think so we thank you again for joining us on the call today and we look forward to speaking with you on our next earnings call on April and John that concludes our call today, Brad. Thank you.
Yeah.
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