Q1 2021 Lockheed Martin Corp Earnings Call
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[music] Your conference will begin momentarily please continue to hold.
Good day and welcome everyone to the Lockheed Martin first quarter 2021 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 to welcome everyone to our first quarter 'twenty 'twenty One earnings conference call.
Joining me today on the call are Jim <unk>, our chairman, President and Chief Executive Officer, and Ken Posner Reid, our Chief Financial Officer.
Statements made in today's call that are not historical fact are considered forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law actual results may differ materially from those projected in the forward looking statements. Please see 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 today's 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.
I'd like to turn the call over to Jim.
Thanks, Greg Good morning, everyone and thank you for joining us today on our first quarter 2021 earnings call.
As today's release illustrates we had a strong financial results this quarter and continue to perform at a high level strategically and operationally.
Our achievements reflect the quality of our work force the breadth of our products and services and the focus we all have on delivering value to our customers and stockholders.
We continue to deliver these results in spite of the ongoing difficulties presented by the COVID-19 pandemic.
My Thanks go to the men and women of Lockheed Martin for their outstanding contributions during these challenging times.
I'll begin today with a quick update on the strategic acquisition of Aerojet Rocketdyne debt, we announced in December a transaction, we believe will enhance Lockheed Martin's ability to develop and supply advanced products in support of National security and our civil space objectives.
We also plan to strengthen aerojet rocketdyne capabilities as a merchant supplier with improved offerings for all of its industry and government customers, which is a critical component of closing our acquisition business case.
Last month Aerojet stockholders approved the merger agreement with over 99% of votes cast being in favor of the transaction.
Also this quarter as expected both companies received a request for additional information or a second request from the Federal Trade Commission as part of the regulatory review process.
The second request extends the waiting period pursuant to the Hart Scott Rodino Act.
We're working cooperatively with the FTC and continue to expect resolution of the regulatory review process by the latter part of 2021.
Moving to our financial and operational results Lockheed Martin got off to a strong start for the year.
Ken will discuss our financial results in more detail and provide an update to our 2021 financial outlook, which increases key financial metrics across the board, but I'd like to continue by providing a few highlights right upfront.
First quarter sales increased 4% over the year earlier period with rotary and mission systems growing 10% due to the delivery of an international pilot training system and ramping production of Sikorsky aircraft.
Segment operating profit increased as a result of our sales performance and earnings per share also saw strong growth.
Our EPS benefited from gains in our Lockheed Martin Ventures Fund.
<unk> ventures make strategic investments in early stage companies developing disruptive cutting edge technologies and it supports our technology roadmaps and growth strategies.
Ken I'll give a little more color on this in a few moments.
Our cash generation remains outstanding driving over $1 $7 billion of cash from operations. This quarter, which includes the nearly $1 4 billion dollar downward impact of accelerating payments to our suppliers, including thousands of small and vulnerable companies, there, especially stressed due to.
COVID-19 impacts.
Altogether. These results reflect the high level of execution being achieved across the company.
Our outstanding cash generation and strong balance sheet also provides us the flexibility to complete our $1 billion accelerated share repurchase agreement this quarter to opportunistically buyback stock.
We expect our cash generation to remain strong and we cant plan to continue our balanced cash deployment actions by investing in innovative technologies executing our 21st century warfare strategy.
Providing our customers with enhanced capabilities and returning cash to stockholders.
Turning to federal budgets as a reminder of the fiscal year 2021 budget cycle Mark the final year of the budget control Act that was originally enacted in 2011.
The department of Defense Appropriations approved as part of the FY 2021 omnibus funding Bill resulted in a fully funded national defense budget of approximately $740 billion.
The White House recently released their preliminary budget proposal for fiscal 2022 targeting an approximate $11 billion topline increase for the department of defense.
An indication of the desire for continued stability and national security funding and in line with our expectations.
Similarly, the president issued an interim national security strategic guidance document, which.
Which incorporates key elements such as diplomacy economic development innovation and modernizing our military capabilities into a broad framework for addressing accelerating global challenges.
This guidance document places emphasis on deterrence investments in emerging technologies, such as artificial intelligence and secured Nextgen five G infrastructure as well as the need for having strong defense and intelligence capabilities.
We believe this vision is well aligned with our 20 <unk> century warfare strategy and plays to the strength of our broad portfolio and our culture of innovation at Lockheed Martin.
Also in the quarter. The American Rescue plan Act of 2021 stimulus package was enacted into legislation.
This bill extended the cares Act section 36, 10 provision until September 30th 2021.
Enabling federal agencies to continue to reimburse contractors for the cost of keeping employees and sub contractors in a ready state as a result of the global pandemic.
Importantly, this legislation also contained cash funding relief provisions affecting single employer pension plans.
Primary reason for our increase in our cash outlook.
Ken will discuss this further during his remarks.
Turning to our business areas I'd like to touch on several notable achievements demonstrating our focus on operational performance strategic growth initiatives and the strength of our portfolio.
I'll begin with Aeronautics, where our team participated in this year's Orange flag exercise.
That's the U S Air Force's annual event to assess integration maturity of their warfighting platforms.
This year's Orange flag featured a broad network centric demonstration showcasing the integration of the F 35, and other legacy aircraft, including the F 22, and the U two.
With long land based long range fires naval fires and space based sensors.
This exercise demonstrated a fully functional internet of things or Iot architecture, integrating a number of our nation's most advanced weapon systems are.
Our team was on the Vanguard of this effort, enabling F 30, fives and F 20, twos, the past data to a U two all Lockheed Martin aircrafts with a Youtube then relaying information do a ground based control center Targa.
Targeting data was then transferred using machine to machine data sharing with an army engagement operation Center as well as to Navy ships.
By providing data by a fifth generation aircraft to multiple command and control nodes that information can be used for real time targeting.
This exercise demonstrated a Lockheed Martin is readiness to provide unmatched situational awareness and a rapidly field capabilities today in support of our customers' joint all domain operations concept.
In rotary and mission systems. The CH 53, K King stallion was selected by the Israeli Ministry of Defense is the winter and they're heavy lift helicopter competition.
Upon contract award our Sikorsky line of business will provide new CH 53 days to replace the Israeli Air Force as current fleet of legacy Sikorsky Fifty-three D aircraft is.
You'll will become the first international customer for our new 53, K variant and we look forward to working with the Israeli Defense Force and the U S government to finalize the agreement.
And our missiles and fire control business area. The U S Army awarded our precision fires team a $2 8 billion dollar contract for additional guided multiple launch rocket systems or Jim Lars products and services that continue a relationship that's lasted for over 40 years.
This quarter MFC also delivered the 50000 gambler system.
Another sign of the enduring demand of our signature programs.
Moving to our space business area. The missile Defense agency down selected our space team for the next generation Interceptor program awarding a $3 7 billion dollar five year contract for technology development and risk reduction activities.
This award Leverages, our internal investments and experienced from our stat and other programs to deliver the capability to respond to multiple threads with a single interceptor.
N G I will be a key element of homeland defense of our country against ballistic nuclear missiles, and we're extremely proud to be selected to pursue this opportunity.
Our space came also announced a strategic interest agreement with telecommunications firm omni space to explore collaborating on a hybrid communications network using both satellites and ground based wireless technology.
Tying together space in terrestrial systems into a seamless five G network has the potential to greatly enhance military applications and help manage complex information centric warfare and all of the operational domains.
We continue to explore opportunities like this one with the goal of accelerating the benefits of commercial telecommunications technology into our five <unk> Dot mill initiatives to rapidly increase the capabilities of our soldiers sailors and airmen and the 21st century.
I'll close by again, highlighting our space team and their contribution to the recent successful Mars perseverance landing Lockheed.
Lockheed Martin space designed and built the Mars 2020, Aero shell, which encapsulated both the perseverance Rover and the innovative engineered drone helicopter protecting them during entry into sent through the Martian atmosphere.
Lockheed Martin also designed and built the Mars helicopter delivery system, which transport and ingenuity on the Rover and successfully deployed the helicopter for hit its historic first flights on Mars.
We build Aeroshell systems for every one of Nasa's Mars Rovers in Landers, and we've been part of every NASA Mars mission, beginning with the Viking program in the 19 seventies.
We continue to incorporate innovative technologies and decades of experience into each new spacecraft.
And we're excited to continue our Mars heritage with the perseverance program.
These many achievements highlight the breadth of our portfolio our focus on innovation and next Gen technologies, and our commitment to providing the United States and its allies with twenty-first century capabilities to support crucial national security missions.
And with that I'll turn the call over to Ken.
Thanks, Jim and good morning, everyone.
As I highlight our 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 quarter.
We saw strong results in sales segment operating profit cash from operations and earnings per share this quarter, while maintaining our backlog of $147 billion.
We generated $1 $7 billion of cash from operations.
And we continued our balanced cash deployment actions, including the execution of our $1 billion accelerated share repurchase program this quarter.
Returning a total of $1 $7 billion to our stockholders, including our quarterly dividend payments.
With these results and strong performance from our rotary and mission systems segment, we are able to increase our outlook for the year for all key financial metrics.
And turning to chart four we compare our sales and segment operating profit this year with last year's results.
Sales grew 4% compared with last year to $16 $3 billion, continuing our expected growth of the business while segment operating profit was $1 $7 billion.
We had a segment operating margin of 10, 8%.
Consistent with our expectations as we did not record any equity earnings this quarter due to no launch events in our U L. A joint venture at space.
Chart five shows our earnings per share for first quarter 2021.
Our earnings per share of $6 56 was 48 cents above our results last year, driven by volume and as Jim mentioned includes 18th of a gain from investments in our ventures fund and I'll discuss this a little more in a subsequent slide.
This was partially offset by 10 cents and severance charges from previously announced actions taken to improve efficiency and lower total costs for our business.
On chart six we will discuss in more detail the cash returned to our stockholders this quarter.
Subtracting our capital expenditures from approximately $1 $7 billion of cash from operations, our free cash flow was nearly $1.5 billion.
By executing our planned share repurchases of $1 billion in the first quarter as well as providing our dividend of $2 60 per share we were able to return 119% of free cash flow to our stockholders this quarter.
And moving onto chart seven as we noted we are increasing our outlook for the current year's for sales segment operating profit earnings per share and cash from operations.
On chart eight we show the increase to our sales guidance range of $200 million and reflected in our estimated sales range for rotary and mission systems.
This increase reaffirms our growth for 2021 projected to increase year over year by 4%.
On chart nine we show our outlook for segment operating profit by business area and.
And consistent with sales, we have increased our RMS and our outlook by $25 million.
On chart 10, we take a closer look at our increased guidance for 2021 earnings per share.
As I noted a moment ago, we recorded a $68 million gain on strategic investments, we hold in our Lockheed Martin Ventures Fund.
Which translates to approximately 18 and earnings per share.
As Jim noted previously these investments are part of our growth strategy focused on innovative technology and early stage companies and their valuations may fluctuate over time.
Moving on reduce tax expense as a result of the American Rescue plan Act and the timing and execution of our share repurchases have also favorably impacted our outlook for EPS.
Has the increased earnings we noted from rotary and mission systems.
There is an offset to incorporate the nonrecurring severance charge, we discussed earlier.
In total our full year earnings per share outlook has increased by 40 cents at the midpoint of the range.
On chart 11, we will look at our increased cash flow forecast for 2020 one.
With increases also estimated for 2022 and 2023.
With the passage of the American Rescue Plan Act, we are no longer planning to make a $1 billion discretionary pension contribution in 2021.
This benefit is partially offset by reduced pension tax deductions with a net increase to cash estimated to be about $600 million.
The net impact also improves our anticipated cash flow in 'twenty, two and 23.
This change allows us to recover the entire eight $3 billion of existing cash pre funding credits by 2026.
And based upon this change in law and our current estimates and assumptions for future pension asset performance.
We do not believe there will be a required pension cash contribution before the year 2026 and minimal contributions thereafter.
In total this change in legislation increases our three year cash flow estimate by $1 billion income.
And combined with reduced future cash expenses will improve our cost competitiveness and our affordability to customers going forward.
I should note as I did on our last call that this outlook and trends are prior to an R&D tax deduction reduction impact from the 2017 tax cuts and job. The jobs Act that's effective in 2022.
And to conclude on chart 12, we have our summary.
We believe that the first quarter of 2021 has laid the foundation for a strong year.
Our backlog remains robust and our key programs continued to deliver growth and sustained performance.
We have increased our full year outlook for sales operating profit earnings per share and cash from operations.
And as a result of a change in legislation or three year cash flow expectations have grown by $1 billion.
And with that John we're ready to begin the Q&A.
Certainly and ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating one zero command.
And if you're using a speakerphone please pick up the handset before pressing the numbers. Once again, if you have a question you May press, one net zero at this time and.
And our first one line of Rob Spingarn with Credit Suisse. Please go ahead.
Hi, Good morning warning zone.
Good morning, I wanted to dig into this space a little bit two part question one for each of you and I thought I'd start with Ken and just wondering how we think about top line growth for the three space sub segments, So satellite strategic and defensive missiles and space transport over the next few years.
Ex the AWS fade, particularly now that we have some budget details from NASA and then Jim while we're on the topic of space NASA and with the Artemis H L. S Award to Spacex class week, and all of the other startups were seeing.
The new space crowd is coming on strong and I wanted to ask you. How you think about that from Lockheed perspective. Thank you.
Sure Hey, Rob, it's Ken I'll I'll start off with your long term question regarding our top line growth.
So.
Everyone's aware if you look at the last couple of years, we've had a very strong order book in our space business you know some of it planned and frankly some of it nice surprises. So you know if you go around.
The Warren if you look at our National Security space.
Segment, I'd say, probably the biggest growth opportunity we have there. It is in our classified space area. We are seeing.
See an enormous amount of opportunities out there are a lot of them planned and frankly a lot of them that are we we are helping shape and so you know I would say long term theres a lot of opportunities there and national security space from a strategic and missile defense standpoint.
I would start out with what Jim described as a very nice win for US which was the N. G. I contract I think over the next couple of years, we're going to see some some nice opportunity from a growth standpoint are they are you know that that program will be developing and demonstrating our <unk>.
Kato, enabling systems, and though there'll be ready for operational use as early as today. So some opportunities there I'd say the second area of large top line growth opportunity is is our hypersonic business. So if you think about hypersonic today, we're gonna.
We're gonna do about $1.5 billion rough numbers of sales in our hypersonic area and roughly about two thirds of that is in our space business think of that as a C. P. S.
So I think some strong opportunities there.
And then in commercial space, probably not as a robust growth.
As the other two business segments, but we do see we do see some opportunities there and that's in light of of Homeland Security I'm also going to mention the you know the one initiative with omni space that Jim brought up I think there are some exciting opportunities there.
Not just in the in the government arena, but also in the commercial arena that will help shape with them and then I think the last piece I'll talk about is our L. M. 100 initiative. This is a mid sized satellite bus that can support missions to both Leo N G O and that'll be joining our fleet.
<unk> of the L. M 50 in the L. M. A 'twenty 100 series and some of those investments in advanced payload technologies and demonstrations will be using that bus that can yield some future growth. So I think there are a lot of exciting opportunities there for us it's space. It really is an opportunity rich environment.
And Rob when it comes to space from a strategic standpoint, I think the important framework to start with here is that 80% or more of our space operations revenue comes in National security space and strategic missile defense. So the remaining 20% is where sort of the action.
On exploration.
And you know, we're playing right in the middle of that so we were on the you know that the largely commercial team led by Blue origin. The national team on the the Moon Lander.
Lander.
That our team did not particularly a be successful in this doesn't mean, we weren't participating we are part and parcel of the new order. If you will in civil space and teamed up with Blue origin.
The other hand, we've got a plan.
Got a franchise position on our iron and Rins. The actual crew compartment spacecraft that will be used for the Artemis missions going forward. So we've got a great position there will.
To work with whether it's omni space or others Blue origin <unk>.
Spacex whatever makes sense for us from a partnership a flash competition perspective, we're going to play and we're gonna be there, but again, 80% of our system Oh space systems. Our net revenue is going to be coming from again franchise are situations and strategic missile.
And in missile defense and National Security space, where I'm not saying those are newer firms play at the level, where they can compete with us.
Our next question is from Seth <unk> with Jpmorgan. Please go ahead.
Thanks, very much and good morning I'm Frank.
Your sort of vision for the company that that you've talked about would seem to require maybe some changes in the way that the department interacts with contractors I guess you know after being in the role for a year. What would you say are the top one or two changes that you need from the department.
Yeah, you know kind of really drive the 21st century warfare strategy and what's the plan for forgetting. This sure set up let me just frame up the strategy quickly for everyone on the call and and then for each of the four or five main areas all I'll make a point as to what we hope to encourage and work with our government cut.
<unk> to do on their side. So overall, our objective is to lead our national Defense Enterprise, which is industry and government and the military services toward a higher and faster trajectory of development.
This is essential to meet the challenges I think in an area of resurgent great power competition. So this isn't just a business strategy I think it's a national strategy, that's an imperative and Lockheed Martin we're in a great position to try to lead that at with our customer base and there's really four or five elements and so I'll hit each element and say well what do we have.
To get a along with our behavior from our government customer in the military services to work with US on this first of all I think we it's imperative again, we established what we call a five <unk> Dot mill network architecture, So something that is a a standards based.
Architecture with interfaces are frequencies, we're gonna use bands, we're going to employ.
Ways to do hierarchies, and and and he is intellectual property from numerous companies inside and outside the defense enterprise to actually create an architecture just like you see being done in say five G. In the in the telecommunications World I think we can leave that for a number of reasons, but we're going to absolutely have to have our government customer involved with us.
And when you look at exercises like Orange flag.
That demonstrates that they see the need as well and ultimately we're gonna have to have a an ability to work with our customer base to have new new.
Ooh acquisition and appropriations.
Processes, so the weaken speed things up and get things done faster and the kind of world. We're talking about one of the things that.
You know frankly as a core competency of Lockheed Martin is dealing with the federal acquisition regulation and I do feel we can be a bridge during the sort of changeover period. If you will to commercial tech we can license with them on one hand, the way they're used to working and we will deal with the federal government.
As far as the contracting goes.
On that side I think we can be a great bridge for that but the first thing we need to do is establish that architecture and have cooperation with our government customers to do it and we are.
The second thing is we really intend to partner with these leading companies in the telecom and technology space, because we need as a defense enterprise to accelerate our adoption of those 20, <unk> century technologies and capabilities. So again, we'll try to be the pivot point for that linking the two industries with our customer.
But we're gonna have to again have an interest in adapting procurement processes and speed to the kind of speed that the commercial companies are used to those are interesting model for this the intelligence community. There are some budgets that are handled at the DNI level, which have a lot more flexibility than a standard D O D budget.
Line would have and so that's just one idea, but we need to start working with our customer more closely on some of those fast track kind of initiatives.
The next piece of what we're gonna do a Lockheed Martin is we're gonna enable eventually all of our major platform programs in aerospace and maritime and land domains to seamlessly connect into this architecture.
And then.
On the customer side, we're gonna have to work with them to make sure that they're comfortable using the standards that we come up with and some of the software defined network protocols that we intend to use we're going to have to work with them on that now why that's important is because.
Currently.
The.
Sequential design test paradigm that the department of defense users to develop weapons systems.
Is too perfectionist and too slow to actually do this and so we want to work with our government customers to to use them more rapid development process. So for example on hypersonic were already using it.
We look for 80, 20% kind of splits on success on all of the test points and metrics and we move on to the next test we.
Don't strive for 99% to 100, because that will be too slow to get this done so theres a sequential design test paradigm change frankly, Seth that we have to work with our customers to achieve their two and.
And at the end of all of this why are we doing that I think at the end of it all our customers and achieve greater deterrence capability and operational abilities by by moving towards this direction and our shareholders are going to benefit too because we're gonna be a stronger and more resilient growth machine and engine for our business. So there is benefits to shareholders, there's benefits to government and.
We hope to lead the charge on this.
Yeah.
And our next question is from Rob Stallard with vertical research. Please go ahead.
Thanks, so much good morning, Hey.
Hey, Rob.
Jim there's been some commentary out of Congress over the last month or so about the F 35, and the operating cost to the aircraft I was wondering if you could give us your perspectives on this issue and what are the obstacles could be to getting this operating costs down to a more agreeable level. Thank you.
Sure. So I'll start with is the next air Force pilot and Havent spoken Israeli pilots in.
Our own test pilots here at Lockheed Martin and and also those and serving in the military today in the United States.
This aircrafts the most capable fighter plane ever developed in history.
It's got a lot of leading edge technology with it.
Just the propulsion system alone integrated with our stealth technology is pretty groundbreaking and enables this airplane to do things that no. Other one can do and survive in the process of that the other piece of it is.
Liking Martin was ahead of even my thinking and making sure that the F 35 would be.
Ultimately they are a hybrid base station or a you know mobile.
Mobile compute.
Node for the Battle, the Battle field, and so we've got the sensor capability the computer processing power.
And the communication linkages from that airplane to the network again, it makes the airplane much more than just a single purpose fighter. So having said all of that it's an expensive machine.
And it's expensive to maintain in large part because of the stealth technology, that's more advanced than anywhere else.
Having said all that we are working on all three dimensions of affordability with the customer very closely and myself included.
And that is on production, where we have already achieved the company has already achieved that.
Goal of $80 million F 35, a and we're a million or two below that these days.
So production is in good shape, and we're going to keep working on it.
For modernization.
This airplane because of this evolving threat and the speed at which that's happening is going to have to continually modernize and if we can employ employ some of these commercial technology practices into our own modernization program, we'll be able to get some efficiencies out of that and then Sustainment is also key and what we need to do is have.
A joint strategy and develop it with our joint program office and our services to the end customers would have to actually fix this aircrafts in.
And maintained it in the field.
Get the optimal sustainment strategy, the the right level of funding for spare parts et cetera, and really clearly defined roles and responsibilities for the depot system for frontline maintenance and for the OEM and our supply chain I think that's a very doable thing and we're embarking on that are led by the joint program office into the service Chiefs.
So I think we're going to address all three dimensions.
And that the goals that the government has put in place for us at $25000 of flight hour. If we work with them in tandem is achievable.
And next we'll go to Peter Arment with Baird. Please go ahead.
Yeah, Yes, good morning, Jim and Ken.
Hey.
And maybe just.
A high level one on the backlog your target I think of $150 billion in 2021, maybe if you could just walk us through some of the key moving pieces that you think they're going to allow you to get there and anything to call out on the international front and just Jim related to that if you could also just comment if you're seeing any any kind of changes in the administration on the on the international.
Actual award from Thanks.
Hey, yeah. Thanks, good morning, so yeah from an order standpoint, Youre right Peter.
We think our if you will.
Book to Bill it'll be up by by the end of the year it'll be above one and we should be close to about $150 billion a couple of the.
The awards that that will get us.
Going forward, our there's a variety of.
<unk> 35 orders I'd say probably the.
The one worth highlighting or the two worth hide lighting is if you recall lot 15, four F 35, we deferred the booking of that last year and we moved that into this year that that's a big order and in there. There is you know just sticking with the the international theme.
There is a good size of not just U S airplanes, but also partner countries and and F. M S countries.
The other big F 35 order, which is in the fourth quarter would be lot 16 production.
And think of that as a just ballpark $9 billion and similar to lot 15, It's got U S. Airplanes. It's got our it's got partner airplanes in Fms airplanes. In fact, when you start getting out into that time period.
The partner in Fms percentage of ER aircrafts starts getting close to roughly a 50% in wheat. So we still see continued.
Demand there we have a handful of other international Aeronautics.
Orders out there there's a few F 16 orders, there's a few seaborne 30 orders.
Another key one will be the next tranche of a CH 53, K, that's a lot five or expecting that order. This year. There is a bunch of Pac three fiscal year buys that were expecting this year.
There is a a reasonable size.
Span order for for the space business, which is Australia. There's a few special programs out of space. So I would say we are extremely comfortable.
With our with our orders profile I would say the only one that possibly could move out to the right would be the.
The lot 16 per production order and again that will just be timing you know.
Can the joint program office and.
It's get alignment on pricing and in fact, you know just a I'll just bring up the point I'm sure someone's going to want to talk about the pension change, but you know one of the rationale for us to quickly declare why we're going to implement the cash adoption.
<unk> to 'twenty 'twenty, two was for us to get that into our forward pricing rates into 2022 and beyond because you know in fairness to our customers, they're not going to concur.
Conclude negotiations with us until we push that down into down to the that benefit down to the business areas and into their forward pricing rates. So that was one of the key reasons. We made that declaration now and started in 2022, because that'll help with the lot 15 negotiations that are going on now.
Many other large negotiations we have going on now.
And Peter it's Jim when it comes to the current administration's approach to international.
Defense.
I think there's really four important points to make one is the vitamin illustration clearly recognizes that we're all in an era of this resurgent great power competition and regional disruptive powers are that are out there as well like Iran, and North Korea, that's a world that's not going to get any.
More peaceful anytime soon most likely and so strong national defense is a priority of the administration I believe based on their own statements.
Lee.
By the administration's reinforced and elevated the criticality of alliances to actually meet this kind of situation.
And that again is a positive for international defense cooperation.
The third item that I I did note is that there is a very.
Experienced and capable foreign policy and National security cadre of leaders a lifetime professionals many of them in this space and they know exactly what they're dealing with and how to make it work.
And then fourth yeah, there's going to be some process alignment between the White House. The department of State Department of Defense and Congress on how to actually conduct all of this but I do see strong opportunities going forward under this administration for international Defense cooperation and that would benefit Lockheed Martin I expect.
And next we'll go to George Shapiro with Shapiro Research. Please go ahead.
Yes, good morning, Ken I wanted to pursue aeronautics a little bit I mean sales were flat.
In the quarter, how much of that was due to having one less week in the quarter deliveries were like 17 versus 22 for the F 35, and you lost some revenues from taking the development contract down. So do we do we make up this shortage of revenues in the fourth quarter when we pick up.
The weak and if you can just get into a little bit more of the detail like I was just asking.
Sure George Shake Aborning, Yeah, I, you know the main driver of.
Why Aeronautics was flat frankly was and this is non COVID-19 related we had a aside a sizeable couple hundred million dollar vendor invoice that we anticipated to hit in the first quarter George that actually hit it already.
In the month of April. So it was just that was a timing event. So I'm not so certain 12 weeks versus 14 weeks is going to have that much of an impact it was really more of a.
Of a oh.
A delay in the in the invoice from the first quarter to the second quarter, but you know just to give you a little color in the first quarter you know basically.
F 35.
Was generally down.
And that's mainly due to development being down I'd say production on the Hull was relatively flat and Sustainment was up.
Modestly and then to your ended to your point, we're going to continue to see momentum in in the quarter in the in the upcoming quarters and in fact to your point the largest.
Quarter for Aeronautics.
Is the fourth quarter. So yeah, you will you will see some of that continue.
Continue.
Going into the into the fourth quarter. So I think it's fair to say it was the the vendor payment slip into the into the second quarter second quarter is a little less in the third and the fourth but they're.
They're they're all all three of them are I would say somewhat considerably higher than our than our first first quarter. So thanks for the question.
Our next question is from David Strauss with Barclays. Please go ahead.
Thanks, Good morning, good morning.
So in the quarter Kenny talked about tenant 10, 8% segment margins I think a couple of years back the day. The corporation was doing 12% north of 12%. So wanted to ask about.
How you view the potential opportunity for for mix and productivity.
Improved segment margins and in a more difficult budget environment from here. Thanks.
Thanks, David do you want to talk about beyond 2021, I assume exactly okay. So yeah.
Yeah, I think it's probably best we go around you know each of the four business areas. So if you look at the mix at Aeronautics F. 35 is still going to be a dominant piece of aeronautics regardless of how quickly the rest of the segments of that of that business are growing at all.
And I'll get into that in detail, but no. So if you just peel the onion on F. 35 are you know Jim mentioned are you know when he answered the sustainability question.
If you look at the three elements you know a nice pleasant surprise for us.
As a good news story is there is a demand still for added capability added technology on on the airplane that we and our partner.
Companies are working on so we still see development being a decent size are relatively speaking decent sized piece of the portfolio. It's going to be you know cost plus so dilutive, but you know we'll take it which then takes us to production, which is still going to be the lion's share.
<unk> of our of the that piece of the portfolio and you know I've said this before if we perform on our current contracts as we believe we should be able to and we're able to get acceptable deals on our future L reps there.
It should be some margin opportunity. There you know the only thing I'd caution is where.
We're looking at our performance on lot 12 through 14 now and.
Whether we do a risk retirement later this year, we want to see some more improvement there before we do that so you know I think the point I. Just made is valid debt you know the opportunity is there we have to perform and you know we're just keeping a close eye on that and then sustainment is going to be the fastest growing piece of this.
Hum.
Part of the portfolio and it'll continue to grow I mean, we're going to continue to stand up bases, we're going to continued need sparing we will back on the follow on modernization work, we're doing in development.
<unk> have to retrofit some of those aircrafts that are already in the field, but today, they're cost plus and our customers buying on an annual basis, which is a you know the argument Jim made is inefficient theres going to have to be we believe theres, a better way to procure and that's why we offered debt performance based logistics.
<unk> concept and we will see where that goes if that morphed into something and if industry as prepared as we are to take on the investment and take on the risk and sign up to a service level agreement and we perform there should be some profit opportunities there F 16.
We've got 128 aircraft in backlog five customers, we have we see a lot of.
Interest out there internationally for many many countries, we're going to deliver eight aircraft next year and we will basically by the middle of this decade ramp up to about three three and a half.
Airplane deliveries per month, there should be and they're all Fms contracts and that's the way the customers procuring them today, there should be some margin opportunity there for US and then the last piece of Aeronautics is our skunk works and it is our fastest growing piece of aeronautics.
Likely will be in the foreseeable future, but a lot of those contracts are classified a lot of them are cost plus again, maybe margin erosion, but I'll take the topline growth with.
He added profit any day, so that that's aeronautics missiles and fire control I think we have the opportunity to keep the margins where they are today, we do have a little bit of a mix.
The issue is we should continue to see strong demand for Pac threes.
Into the foreseeable future, we're continuing to build out.
Real estate are to to continue with.
The needed demand out there and then the other piece that is going to continue to be quite large and continue to grow is in the classified area, which today is cost plus will be.
In the foreseeable future, which will have a.
Dilutive effect on margins, but we'll take that any day, and ultimately that should morph into production and fixed price and allow us to.
Grow margins there at RMS I I think it's probably best to talk about Sikorsky, we're starting to see the CH 53, K go into production Jim in his prepared comments talked about some of the international opportunities specifically, Israel, we have there which will be a great opportunity for us.
Lot of these other helicopter programs are now into production.
And then ultimately we will have the down select on flora and pharma and we're bullish on those and by the end of this decade, you know it'll start they'll start out as development programs by the end of this decade there'll be in.
Production as well and hopefully seeing some margin improvements there and then lastly space a space.
It wasn't for AWS day would be our fastest growing business area. This year at <unk>.
7% and we should see you know with our core space business, we should continue to see.
Growth there it will be a mix between cost plus and fixed price United launch Alliance is alive, and well and will continue to be and will give us a.
A nice equity earnings stream, but I see some you know based on where we are today I see some margin upside there as well based on where they are today.
Our next question is from rich Safran with Seaport Global Securities. Please go ahead.
Thanks, Hi, Jim Ken Greg Good morning, how are you good.
Good thanks.
So you know given the accelerated share repurchases I wanted to ask you again about capital deployment and just how you're thinking about it.
Does the accelerated share repurchase and for any change in how you're thinking about the balance between dividends buybacks and M&A and on that topic is.
Is there any intent to continue to or make larger investments in businesses and technologies like a b L.
Okay, Hey, rich it's Ken.
You know I.
Hopefully this will resonate with you, but you know I think it's a consistent story.
First and foremost we're going to generate as much cash as as we can and that was one of the rationale of why we decided to start deferring or ERISA funding in 2021 from an economic standpoint that that made that made the most sense.
But first and foremost we're going to invest in our business, whether that's organic or inorganically, we have still some decent.
Decent sized capital outlays. This year have you know rough numbers about a $1 $8 billion.
We're at record levels of Ah I read spend this year and we will continue to do that and you know this is again, we will focus on organic and then inorganically in Jim's prepared statements, we talked about Aerojet Rocketdyne that's on track.
And we just got our second request from the FTC, which is no surprise nothing's changed.
We're still very bullish about that for that to come to resolution in the fourth quarter of this year.
And then it comes down to the excess cash what do we do with it.
Where you are focused on are our dividend strategy that that would be the next in the the batting order we're going to in the in the third quarter.
Jim and I will go see the board with all our treasurer, John <unk> to make a recommendation on what's the appropriate increase in our dividends and it.
It should be deemed favorable to our to our shareholders and then lastly, it's share buybacks and you know frankly rich what we saw in the first quarter, where our stock was trading we thought it was grossly undervalued and we went into this accelerated share buyback plan and are deemed to be <unk>.
Successful.
And we will opportunistically in the next three quarters.
Buy back stock, where it makes sense and you know think of that is anywhere from $500 million.
$2 billion to $1 billion in the next three months, we have the you know the balance sheet to do everything I just described and.
We will continue evaluating that and I'll hand, it over to Jim.
Talk about if there's any other investments and I think you mentioned a b L.
And other than other type opportunities out there.
Yes, rich you know going back to that.
Overall strategic framework that I outlined earlier.
You hear a lot in there about partnering with leading technology companies are leveraging commercial industry research and development investments they've already make made or are making to reduce our costs that are then transmitted to our customer. So we want to use the full range of transactional options.
With the inclusion inclusive of our defense industrial base. The colleagues that we're used to dealing with but well beyond that right. So a b a b L. A is more of a kind of a bulk buy option type a commercial agreement for example, which is maybe the lowest on the spectrum of what you might do you know all the way up through partners.
<unk>, which are our like for like contributions joint ventures, which are actual equity.
Agreements with the different companies like we have with U L. A for example, and then full on acquisitions like Aerojet Rocketdyne or our ice free which is a smaller tech company that we bought last year. So we're going to use that full range of strength of transactional options to pursue the strategy that I talked about.
So you'll see us be I think a little more creative at times, a more open aperture.
But it'll be thoughtful it will all fit within the batting order that they can just described but we're going to make sure that we're.
Being.
Widely viewing the options. So that we can take advantage of cost reduction of R&D. That's already been made in other sectors or of other business models. So just one last point on this someone that's already going to invest in low Earth orbit.
At scale production for commercial uses well, maybe we could tap into some of that their production for military and defense uses and and again, let them do the Capex investment and we'll just commercially by off what we need from them, which is similar to ABL agreement.
And our next question from Cristina <unk> with Morgan Stanley. Please go ahead.
Hey, good morning, everyone.
Yeah.
Uh huh.
Can you share with a B L.
Ralph initially invested in the company and also what is an exit of an investment looked like an album ventures.
When we acquired them.
T O.
How do you look at that.
Hey, Kristina its can we really didn't make an investment in ABL, what we what we basically agreed to is to is to is to commit to.
A a range of launch vehicles and you know think of this for.
Lower lower level satellites that don't require.
Is that the the horsepower of say our United.
Launch.
Alliance.
You know the only the only investment we do have is in it's in our ventures Ventures group and you know think of that as a.
This is more for the for the technology.
That that they bring to to make to make our products better.
It's a relatively modest.
That's a relatively modest investment so I am not sure I would look at it as something that are you know from.
From an acquisition standpoint, and in the question you asked for a when do we look at getting out of those.
Those type of investments. So you know we did as you as you heard we did have some.
Investments are there.
It actually went public debt allowed us to make a gain.
Some of those are specs, which we're gonna be required to hold and then we'll make a determination whether it makes sense for Lockheed Martin to to get out of those ventures, but then to continue to utilize that technology and just as an example, a b L. We we would do something very similar.
And again, I'm, not suggesting that whether they're public or not we would just make a determination when it makes sense for that modest investment and then that that we have whether it makes sense for us to get out or not continue to utilize their technologies and.
John This is Greg I think we have time for one more.
And that will be from Ron Epstein with Bank of America. Please go ahead.
Yeah, Hey.
Good morning, guys.
So how do we think about this thing in the quarter right.
F 35 volume was down in F. 'twenty, two volume was down and I.
I I think about those as you know kind of the underlying foundation of the company.
How can we get comfortable that.
That's not going to be a trend that debt.
Growth engine is still.
Healthy and there.
Sure sure.
I'll take that Ron good morning.
I think a little bit goes back to.
George was asking me in terms of.
The first quarter versus the rest of it so I would say on production were down it's I'm going to call a flat Ron just because it's down year over year 20.
25.
Millions of dollars, but what we're basically looking at on development on the Hall and this goes back to the earlier conversation you know that this is some ways as for Lockheed Martin is a good problem to have we continue debt.
To have that demand out there for <unk>.
Increasing technology, but I don't see development growing so.
For year over year call it flat.
Production.
Based on you know if you think about production revenues, it's really not for the for the most part it's really not for the deliveries, we're making this year, which are lot 12 and lot 13, it's really for the deliveries, we're making next year, we're building those aircraft out.
Now for next year and then we're doing.
The the buy ahead, if you will for the for the following year, that's generally where the sales are coming for for this year and we're fairly confident or very confident I should say and in the in the stream and the flow of what's going on so think of production is going to grow this year low single.
Digits and Ive been relaying that debt sales.
Sales are going to continue to.
Grow at a relatively slow pace for production the growth is in Sustainment and then in the in the quarter, we did see growth in Sustainment and we will see growth for.
For the year in the close to the almost 10%.
So I don't think that's a concern I think F 'twenty two.
I'm not sure you you called that.
The linchpin or the or the bedrock of the business area I'd say you know Ron relatively speaking.
F 16 is almost double the size of F. 'twenty two I think that's more of the parameter.
Parameter of where the rest of aeronautics is going including including the Skunk works I would say a.
F. 'twenty two is going to continue to be flat in declining as we will see 130 in the pleasant surprise surprise and see when 30 is it's not declining as quickly as we thought it was the team has done a nice job.
Of getting.
<unk> will add from the United States government and international.
Customers for that for that grade workhorse and that's.
That's gonna be flat over time, so I would say your big drivers going forward for growth at Aeronautics will be sustainment on F 35.
<unk> and then the Skunk works and then.
Bed rock, if you will will be the the modest growth that we're going to have going forward on production.
Hey, John This is Greg I think we've come up on the top of the hour here. So I will turn it back over to Jim for some final thoughts.
Thanks, Greg Lockheed Martin had a strong first quarter delivering outstanding performance operationally for our customers.
Providing continued growth and value for you the stockholders too and I wanted to just close by reiterating my thanks to the Lockheed Martin team for their dedication and commitment to excellence during a difficult time for everyone.
And thank you again for joining us on the call today, we look forward to speaking with you on our next earnings call in July.
And that concludes the call for today, Thanks again everybody.
Yeah.
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