Q2 2021 Lockheed Martin Corp Earnings Call
Yeah.
[music].
Reported.
So Ralph.
Okay.
Yeah.
So the old systems.
And it's literally every day.
Sure.
Yeah.
Good day, and welcome everyone to the Lockheed Martin and second quarter 2021 and earnings results.
The 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 second quarter 2021 earnings Conference call.
Joining me today on the call are Jim take what 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 and 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 and 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.
<unk> 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 with that I'd like to turn the call over to Jim.
Thanks, Greg Good morning, everyone and thank you for joining us today on our second quarter 2021 earnings.
Ill begin my remarks. This morning with a few comments on our financial results, which Ken will elaborate on and a few minutes.
Our second quarter sales increased 5% over last year's second quarter.
As each business area exceeded 2020 levels led by our space team.
Our space business grew over 10% this quarter do.
Call it growth and hypersonic <unk> net.
And next generation overhead persistent infrared or <unk> satellite activities.
And increased support provided to the U K Ministry of Defense's Atomic weapons establishment program, which will close out our management of that activity.
Our segment operating profit.
Due to <unk> this quarter by a 1 time charge associated with the classified program and our Aeronautics business area.
While the classified nature of this program precludes us from discussing this matter and depth.
And we can say that our customers highly attracted to the capabilities that we're developing on their behalf.
There were.
And that was entered into delivering these capabilities and that the long term potential of this solution is significant for the company.
Our cash generation remains strong.
Driving $1.3 billion of cash from operations this quarter after making a $1.4 billion of accelerated payments to our supply.
<unk> as we continue to mitigate the risks brought on by COVID-19 for our supply chain.
Our cash generation and the strength of our balance sheet gave us the ability to complete a $500 million accelerated share repurchase agreement. This quarter and addition to the $1 billion ASR executed last quarter.
Thereby bringing our year to date and repurchases to $1.5 billion.
We remain confident and our ability to continue driving strong cash generation and supporting balanced cash deployment actions, including investing in key technologies to provide our customers with enhanced capabilities and.
And returning cash to shareholders.
Our holders.
Turning to budgets the white house submitted their fiscal year 2022 budget proposal to Congress.
Questing $715 billion for the department of Defense and $11 billion increase from the FY 'twenty 1 enacted budget.
Our programs continue to be.
Well supported including over $12 billion for the F 35 program.
Approximately $3.5 billion for our signature Sikorsky helicopters and.
And over $2 billion for hypersonic programs.
The President's budget request prioritize funding for innovation and modern.
Modernization as well and recognition of the need to invest in technologies and capabilities to address the great power competition the nation now faces.
These include areas of strength within the Lockheed Martin portfolio, such as continued support for air and missile defense programs.
<unk>.
<unk> III and our recent next generation Interceptor Award.
The space domain initiatives, including <unk> and GPS III satellites.
And the space development agencies transport layer architecture.
The Defense Department request also focused on investments and advanced capability enablers.
We believe this vision of deterrence and innovation is well aligned with our broad portfolio and our 20 <unk> century warfare vision.
And congressional marks to date of the FY 'twenty 2 defense budget request, we continue to see strong support from the hill for all of our programs which include increases for F 35.
130 <unk>.
<unk> hundred 53, K and Uhm 60 programs and fully approved budget request for many of our other systems.
Turning to some strategic and operational achievements from this quarter I would like to begin by highlighting the companys participant participation and nor.
Northern edge 21.
U S Indo Pacific command exercise and support the Pacific Day turns initiative.
This live exercise included multiple U S military services across a very wide geographic area with a goal of enhancing joint interoperability between the services and.
And the various domains that they operate in.
Signature programs from all 4 of our business areas participated in this event.
And we successfully demonstrated joint all domain command and control known as <unk>.
We demonstrated capabilities such as enhanced situational awareness by integrating sensors.
<unk> across land Sea and air and space for example.
Among our successful demonstrations of <unk> during the exercise was 1 enabling ages and Pac 3 MSE integration for and integrated Air and missile defense against advanced threats.
Also using the.
F 35 to provide real time tracking and targeting data generated near San Diego during a flight.
So the all domain operations center, and Alaska for prosecution and fire control.
Also facilitating space based connectivity at the same time using the Mewas narrow band satellite communications.
<unk> constellation.
And also supporting the international Guards demonstration of a new data link capability with our Legion pod, which integrates our infrared search and track targeting sensor technology into that broader network.
The northern edge exercised demonstrated our integrated offensive and defensive fires capabilities.
Ability our satellite communication links as well as the ability to adapt joint Battle management concepts and real time.
1 of my goals and the first year as CEO of Lockheed Martin was actually demonstrates the benefits of network effects to our customers using existing platforms under our 20 <unk> century.
Warfare concept.
Our integrated performance and northern edge did exactly that and we are just getting started.
Moving to some specific business area highlights and Aeronautics, Switzerland Federal Council announced this decision to purchase 36 F 35 conventional takeoff and landing.
And our see tall aircraft, along with Sustainment and training services as part of their air 2030 modernization program.
This is a significant win for Lockheed Martin with an initial value of $5.5 billion.
And a total value of approximately $15 billion over 30 years.
The F 30.
<unk> was selected over the F 18 and <unk>.
<unk> and the euro fighter because of its survivability information superiority and comprehensively network systems.
The Swiss Council also noted that the F 35 delivered outstanding value.
Offering both the lowest procurement and operational.
<unk> costs across all of those competing aircraft.
Switzerland will become the 15th nation to join the program since its inception.
And we're excited to welcome them into the F 35 community.
And rotary and mission systems, and the U S Navy awarded our Sikorsky team a contract for 9 CH.
53, K heavy lift helicopters for production lot, 5 which was worth nearly $900 million.
And we're continuing to drive costs down and provide reduce unit prices to our customer.
The award also included the option for 9 additional King stallion aircraft per lot 6 which when those are exercised would represent over 1.
And $1.9 billion and order for the last 5 and 6 combined.
Including the previous Slide 5 award we have received orders for $33.53 days out of a Navy program record of 200.
And so long way to go over 80% of domestic aircraft quantities and still in front of us.
And interest from.
International customers is driving additional opportunities.
And also in RMS Our C..6 ISR team participated in a unique collaboration with the Air Force.
To integrate critical Battle management capabilities from our command and control legacy product the theater Battle management control system or TV Mcs.
And to the Air Force as new Kessel run all domain operation suite.
The TV MSC television television Mcs and was first declared a system of record in 2000 and performs the planning and execution of air emissions interfacing with many other operations intelligence and <unk> systems.
Throughout the U S armed services.
Our RMS team delivered a cloud based architecture and delivery plan to enhance capabilities and migrate TV Mcs data into the Kessel run operations suite and supportive pilots and commanders executing joining our campaigns to another.
<unk> example of our 20 <unk> century work fare concept and action with our Air Force customer in this case.
And missiles and fire control, our integrated Air and missile Defense line of business delivered the first Pac 3 missile segment enhancement and MSE interceptors to Sweden, providing a country with the world's most.
Most advanced air defense capabilities to defend against incoming threats.
<unk> now becomes 1 of 10 international customers to choose Pac 3 MSE missiles.
In addition, our space business area has successfully launched 2 new satellites and supportive critical national security.
<unk> space objectives.
Our food space based infrared system, and geosynchronous Earth orbit or silvers Geo 5 satellite successfully deployed from its United launch Alliance Atlas 5 rocket.
And is now communicating with the operations team from the U S space Force.
<unk> hundred 5.
Is the latest satellite to join this space Force's orbiting early warning missile constellation.
And it's equipped with powerful surveil and sensors to support <unk> missile defense and expand technical intelligence gathering and bolster situational awareness for the Guardians that are defending the U S and its allies.
The.
<unk> Geo 5 satellite is the first military satellite built on a L. M 2100 combat bus.
That's a more resilient and modernize and modular space vehicle originally developed using Lockheed Martin internal investment.
Also the fifth global positioning system our GPS.
3 satellite was also successfully launched this quarter the GPS III space vehicle 5 is the 31st operational GPS satellite and the constellation with.
And with significant advancements over previous GPS space vehicles.
Including 3 times, better accuracy and improved anti jamming capabilities.
<unk>, the GPS III and <unk> satellite constellations are both Lockheed Martin and signature programs and.
And represent key elements of our network centric 20, <unk> century warfare console.
And lastly, our space business area was selected by NASA to build spacecraft for 2 separate missions to Venus.
Lockheed Martin will design build and operate the Veritas orbiter to investigate the surface and subsurface of Venus.
And the da Vinci plus vehicle to research the planet's atmosphere.
These missions build on our legacy Magellan program for the exploration of Venus and will represent Nasa's first return to the planet and more than 3 decades.
These achievements from across the company highlight our focus on providing innovative solutions and the strength and our broad portfolio gives us to support our customers' missions and Theyre all domain objectives.
I'll close my remarks today with a quick status on the strategic acquisition of Aerojet Rocketdyne that we announced last December.
The transaction that we believe will enhance Lockheed Martin as well as all of industry's ability to meet our future national security and civil space objectives. When it comes to propulsion.
We are committed to achieving the key Dod priorities of reducing cost increasing the quality and speed of new products.
In.
Okay, and enhancing aerojet rocketdyne as position as a leading merchant supplier to all of industry.
We remain and the process of responding to the Federal Trade Commission second request for information, which we received earlier in the year and step and the review process that we had expected.
We continue to engage with the FTC and department of defense stakeholders.
And as regularly as part of their review and pending approval, we hope to X.
And expect to close the transaction and the fourth quarter of this year.
With that I'll turn it over to Ken.
Hey, Thank you Jim and good morning, everyone.
And as I highlight our results. Please follow along with the web charts that we have included.
<unk> with our earnings release today.
Let's begin with chart 3 and an overview of our results for the quarter.
We saw solid growth and sales and earnings per share.
Segment operating profit was comparable to last year's second quarter total due to the $225 million impact of the classified aeronautics.
X program, while cash from operations was $1.3 billion.
Exceeding our expectations for the quarter.
For the second consecutive quarter cash.
<unk> returned to shareholders exceeded 100% of free cash flow as we executed another $500 million of share repurchases. In addition to 700.
$21 million of dividends paid.
Despite the issue of a single contract we were able to increase our outlook for earnings per share and hold our full year outlook for all other key financial metrics.
Turning to chart 4 we compare our sales and segment operating profit.
<unk> this year with last year's results.
Second quarter sales grew 5% compared with $2000.20 billion to $17 billion, continuing our expected growth of the business while segment operating profit remains at approximately $1.8 billion.
Comparable to last year's results.
Chart.
5 shows our earnings per share for the second quarter of 2021.
Our earnings per share of $6.52.
Was <unk> 73 above our results last year, driven by volume reduced share count and higher fast cash income.
On chart 6.
We will look at our cash generation and distributions for the second quarter.
Subtracting our capital expenditures from approximately $1.3 billion of cash from operations, our free cash flow was $950 million.
By executing additional share repurchases of $500 million and the second quarter.
As well as providing our dividend of $2.60 per share.
We were able to generate a excuse me we were able to return 129% of free cash flow to our stockholders this quarter.
Moving onto chart 7 as we noted we are increasing our outlook for earnings per share and holding our.
Our outlook for sales and segment operating profit and cash from operations.
Looking at chart 8 we.
We are increasing the sales outlook for RMS by $150 million, and that's primarily driven by volume at Sikorsky as well as a $25 million increase at our space business area and combined.
Offset the downward adjustment and aeronautics keeping total sales consistent with our prior guidance.
And on chart 9 we show the increased segment operating profit range for RMS missiles, and fire control and space also offsetting the impact realized at aeronautics, which allowed us to hold our guidance.
For the year, and we will continue to pursue cost takeout and margin improvement opportunities across the corporation.
On chart 10, we take a closer look at our update to the guidance for 2020.1 earnings per share.
Program performance and continued cost takeout offset are impacted aeronautics.
And we also saw improvements to earnings per share from investments and other non operational items, along with the benefit of our continued share repurchases.
To conclude on chart 11, we have our summary.
We continue to see sales growth year over year as well as strong operational cash performance while.
Still et cetera, accelerating cash to our supply chain to meet commitments vital to our national security.
And as noted we have increased our full outlook for earnings per share and are holding all other key metrics. As we look ahead to the second half of 2020.1.
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 1 and then zero on your telephone keypad and you may withdraw your question at any time by repeating the 1 zero command if youre using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question you May press, 1 and then zero.
At this time.
And first with line of Doug Harned with Bernstein. Please go ahead.
Thank you and good morning.
Good morning.
You know Jim I wanted to.
To see if you could describe some of the things that would likely drive growth at Lockheed Martin you talked some about the budget but.
But and we're now and a fairly flat budget environment, and Lockheed Martin's revenues and moved higher but the backlog has really not grown during the last 18 months is some legacy programs have naturally flat and.
You highlighted some good growth areas like hypersonic and space, but when you look.
Look at the next 5 years.
Do you believe you can get mid single digit say topline growth and this environment, particularly given flat recent backlogs I mean, basically what should we look for that could take backlogs higher and drive enough growth to offset.
Net potential declines and mature programs.
Good morning, Doug.
With the resurgence of great power competition, with China, and Russia that defense enterprise.
Overall, it's in and an inflection point and.
When I say defense enterprise and government military and industry and.
It needs.
To change.
And where I think I can address your question is during that period of change and it's very important and critical that we start now the Lockheed Martin is and our position with this breadth of platforms and systems and its cutting edge technology.
And to both drive and benefit from that needed.
Change and so yeah over the next 5 years, we're going to strive for mid single digit growth.
And I'm energized and enthusiastic about working with our government and military leaders, which you've already started.
And with our defense sector, and telecom and technology sectors partners that we're gonna have and the future.
To do this and I'm convinced that our shareholders are going to benefit from our leadership here.
Moving to benefit and a couple of ways and 1 of them is going to be by enhancing the value of our legacy programs, including the obvious F..35 is a much valuable more valuable platform.
And when you take advantage of the network.
Net work effect that it can deliver by connecting sensors across domains, you know, adding <unk> dot mill capability to our comm systems. So that we can communicate with satellites directly et cetera, you end up getting a whole network effect, where the value to the defense enterprise and the deterrent value is going to go up by implementing this across our technology.
<unk> roadmap over the next number of years, our existing systems. So I'm very energized about the growth prospects I think we are uniquely positioned capability to drive it and we've got a unique capability to interact with commercial industry and a whole number of sectors to help it happened.
If I can follow up on that.
When you talk about about the inflection point is this something that we should be looking for.
With respect to what Congress is doing with the administration is doing or is it already embedded and the budget because the budget the budget doesn't seem to set up for a lot of growth as it stands right.
And Oh.
The inflection point of need is here Doug.
But the system, we will work within.
It does not move up roughly let's say so its got to migrate over.
Period of time.
And it's way if you will and Congress will have a part and that.
And there and be a little bit more deliberate as far as the budget turns out but within that budget, we intend to make.
<unk> products platforms and services.
Leading edge and therefore, the most attractive ways to allocate that budget and all of the domains that we serve so we're actually not expecting.
It's our 20 <unk> century warfare concept to get funded independently rather we're going to use that to make our current and <unk>.
And future platforms way more competitive way more attractive user network effect to get more value for money for the government and and see how the budget and shift our way depending.
<unk>.
And in fact irrespective of how much the top line growth.
Let me ask Ken to follow up on that Doug If I could I'll give you I'll just give you a little more color that'll hopefully complement with Jim said, So if you think about our portfolio and where we are and where we're going so F.
And if 35.
Depending on well rough numbers, 27%, 28% of our portfolio and you think about.
And where we are and where we're going with that program. So were right now for production in the midst of.
Of a per dot, what's called a production re baseline and thats basically due to COVID-19 and trying to get.
And our technology refresh 3 on lot 15, and blocked for onto lot 16, the customer the joint program office is working with all the key constituents to look at what makes sense as you recall this year, we're going to deliver anywhere from 100.
<unk> reached 139 aircraft what makes sense next year and the next couple of years.
To make sure we maximize when we put that key technology on that aircraft, so you're going to likely see once that gets revealed and hopefully it'll be we'll be able to reveal that with the customer when we give trend.
30% in October, but it's likely to show the plateau.
Production.
Slightly pushed out to the right, but also along aiding if you will so I think at least and the next couple of years. There is likely some opportunity there from a production standpoint, there is definitely opportunity for us and Sustainment and if you think.
David It's only roughly 40, 50% of the basis are stood up so we still have a lot of work to do there. We're also going to have many more aircraft and the fleet and the next couple of years think of and the next couple of years, we're going to have over 1000 aircraft and the fleet, which are going to require more sparing.
And that modernization.
About it and I just talked about working with the customer. We're also going to have to modernize some aircraft to put this new technology on aircraft that are already and the fleet. So that that's 1 area sticking with excuse me sticking with Aeronautics you have F 16, which is an international play that we have a backlog of 120.
And <unk> aircraft that is going to continue to grow.
Top line as well as Skunk works.
That's going to become a larger part of the Aeronautics platform and just stick and internationally, we see strong demand for our integrated air missile defense products. If you look at our helicopter programs.
8 is starting to deliver CH 53 aircraft program a record of 200, plus the Israelis hopefully there'll be a couple of other countries that have an interest and that <unk>.
Platform, and then theres future vertical lift, which will give us a huge uplift in the middle of this decade going forward when we win.
And <unk> programs, and then Theres space.
You mentioned hypersonic stat is going to be a nice complementary part of that portfolio I agree, it's not going to dramatically move the needle, but youre going to have those programs go into production and the middle of this decade, which will give us some uplift and then national.
And those space whether its classified.
<unk>.
And Gi, we'll see some strong growth there so we feel pretty good complementing what Jim said, we feel pretty good about our prospects going forward.
Our next question is from Cai von <unk> with Cowen. Please go ahead.
Yes, thanks, so much and good overall quarter given the classified issue. So you did a.
And ASR in the quarter.
And then you had this classified adjustment did you know at the time you did the ASR. This would happen because I would have thought.
So I would come and you would've waited to do the ISR.
Hey, Kai good morning, good good talking to you. This is Ken I'll take that so.
If you think about when we did the ASR.
We basically put that in place the day after we were allowed.
And to trade again.
And which would have been a day after <unk>.
Earnings and as I mentioned before if you look at.
The large amount of cash that we have.
Our thought back then and it still remains today, we continue to have.
And that cash on our balance sheet and.
If you believe we're going to continue to have that after aerojet rocketdyne, we're going to remain and the market.
That was our thought process and April when.
When we did the $500 million ASR were.
And we're highly likely based on where our stock price is trading today.
We're going to enter the market again.
And as soon as we're able to may not be an ASR, but we're going to go into the open market and buyback more stock. It just absolutely makes sense to do that regarding when we knew about.
The charge.
That basically happened and the May time period, it became clear based off from a process standpoint.
We had a joint customer Lockheed Martin and review to do a deep dive on the program and then we also did 1 that was Lockheed Martin only.
To provide an additional assurance function. So we've done a very thorough assessment of the situation and that was done and the may time period.
And in fact, and the June time period, we reported out to our board So Jim myself and Frank St. John Our CFO reported out to the board and we also had what's called a <unk>.
Classified business and Security Committee.
Meeting and we actually owe them a comeback in September so.
<unk> fall and.
Initiated in May.
We're very comfortable with the charge and just to give a little bit of a flavor of that $225 million. So that is for the development portion of this program think of that as roughly 40% of that cost has already occurred and the.
That 50% is embedded in the new estimate to complete so we're not assuming that this program goes forward.
With the <unk>.
It gives me the prior ATC and as a new estimate to complete with that overrun embedded. So we think we have a good handle on that and from a timing standpoint.
It was after the ASR was put in place.
Yeah.
Our next question is from Noah <unk> with Goldman Sachs. Please go ahead.
Hey, good morning, everybody good morning Noah.
Ken maybe you can just.
It's classified and you said there's only.
Endpoint until you can provide but any incremental color you could give on what exactly happened where the performance what type of performance issue. It is.
And your.
We are confident and it doesn't linger and then just folding that into the total Aeronautics segment margin.
The revised.
And so much to all segment EBIT guidance for the segment implies that margin picked right back up.
And 2 above where it was pre 2 Q.
How do you do that with the reset number on this program plus I think you mentioned and the release up 35.
Margin.
And it didn't go up so any color.
And you're right on where the segment's margin goes from here.
So, let's first talk about the classified program and I will assure you know and for everybody on the call.
What we are able to say, we've got approval from the customer and I hopefully I've given you guidance enough.
Experience for albeit.
You can bring its parent as I can but on this there is only so much we can say so as I answered <unk> question.
No.
And we've done a lot of independent reviews, we've done reviews with the customer we think today based on all the information we have it's a development contract that we.
And as trade will be successful from a schedule and performance standpoint, and then and ultimately will turn into production and production program.
And we also believe there are additional opportunities out there and I'll I'll assure you.
We believe.
I can say this that.
We believe there is still a very strong business case, given these associated opportunity so.
And this will be.
And a great program for our customers and.
And I'm talking about all the customers out there that are going to utilize this and it'll be a.
And a good program for Lockheed.
There arent and corporation.
Regarding.
Aeronautics no you've got it right.
For the second half of the year.
We're basically assuming a little bit over.
<unk> percent return on sales.
And think of that is it's got to be primary.
Lockheed Me F 35, it will be.
From that standpoint, we are at.
Assuming some risk retirement on some production programs I have mentioned in the past on the block buy we have taken a pause on risk retirement.
And until.
<unk>, let me see improved performance there probably next year, but there are other lots out there back to the comments, we made about our cost takeout initiatives cost competitive niches and our strong performance and other parts of the portfolio. We believe F 35 production and Theres other opportunities.
Until these out there for us to.
And have risk retirement F 16, we'll also see.
Some improvement as we will see 130.
So I think you've got that right aeronautics, we feel comfortable being at around 11% or a little bit above 11%.
<unk> net sales for the second half of the year.
Yes.
And next we'll go to Kristine <unk> with Morgan Stanley. Please go ahead.
Hi, Good morning, Jim and good morning, Ken.
Right.
Maybe switching gears.
Directed energy has been 1 of the key areas of advanced capabilities.
Return on Vod has highlighted as an important cash.
Category, how meaningful is it that the Navy is building the Helios and the DDG 51, Arleigh Burke how much of the contributor could this be the long term top line growth.
And the next 5 years and also how.
And how far away.
<unk> the day, the way or are we actually seeing miniaturization of this kind of technology, and where you could deploy it on a platform like that 35.
So Christine it's Ken I'll take that 1 so yeah. We are we are in the and the thick of that with the with the contracts that you described and we're very pleased.
<unk>.
With the performance we've had on these on these programs and we're also pleased with where we think the customer's going.
We will see a.
Dramatic increase.
With our involvement but you have to put that and perspective relative.
<unk> to the size of what it is.
But it will be.
It will be accretive from a topline standpoint, it's just for $168 billion company that will continue to grow at least and the next 5 years.
Christine it's not it's not going to be.
Say a material impact.
In terms of miniaturization.
We're working that with the customer I think I think.
Based on what we've seen we're some ways away from that though.
But we'll give you an update when there is willing to give.
Yeah.
And next we'll go to Myles Walton with UBS. Please go ahead.
Thanks, Good morning.
And this might be another 1 for you.
Can you talk about the second half trends and applied on cash flow to get to that $8.9 billion and greater than $8.9 billion, and obviously that would imply and materially better than you've ever.
Second half and then similarly, if you can just color the backlog is it do you.
You have confidence you can get back to that 140.750 level is the F 35, progressing and such that those will actually close this year. We've just color on those 2 things.
Youre right so miles we've done.
And the first half of the year, a little over $3 billion, which would tell you we need to do $6.9 billion and based on what I'm seeing the lion's share of that I'm, not giving you much comfort, but once I finish I will hopefully the lion's share of that $6.9 is in the fourth quarter.
And really the driver there is we're in the midst and a lot of this is due to COVID-19. We're in the midst of re negotiating if you will.
The timing and the amount of performance based payments on the F 35 program that specifically blocked by where work.
<unk> through that now and if you look at January 1.2.
And at the end of the second quarter rough numbers, our contract assets grew by roughly $1.9 billion. The lion's share of that is F 35, and the lion's share of that is performance.
It <unk> payments.
Timing, if you will of when we liquidate that for F..35, we believe we're on a path with the customer to close on that this is the third quarter to close and close on that and the third quarter and just to give you a little more color. We think work excuse me we think contract.
<unk> assets are going to grow and.
Another $500 million in the third quarter, and then and the fourth quarter and most of that will be before December to give you. Some comfort will be liquidating contract assets to the point where we.
We only.
On track to contract assets.
Growing and <unk>.
In total by.
And immaterial amount will come down quite a bit and that's driven by the fourth quarter and most of that is driven by aeronautics and there is some work that needs to be done from a cash collection standpoint and Rms.
See well, but the lion's share of that is.
As aeronautics and we feel really bullish miles about the $8.9 billion and cash from ops for this year in terms of backlog I think we've already.
Stated that so <unk> got lot 15 that.
<unk> is thought for F 35 that we thought would settle.
Last year, we believe it's now going to settle this year, there's just a lot of complications going on and we think the joint program office working with all the constituents. It has a very difficult job, but they're doing a really great job of coordinating.
What the.
And that we've managed and the needs are.
The services plus the international customers, we think that will close and the third quarter, but because of that we have little to no comfort that lot 16 is going to close this year. So we are actually out looking that to close next year.
And that's our.
The digital order, it's just timing, which means right now we're forecasting backlog to end this year and about $143 billion. So we're actually going to erode backlog this year, but as I again, I'll stress, that's all timing and for Lockheed Martin we've gotten enough.
Our science funding funding.
On those lots for 15, and 16, where it is not an impact impact to us and it'll just be optically a reduction and backlog.
Our next question is from Peter Arment with Baird. Please go ahead.
Yes, good morning, Jim and Ken.
Good morning, Jim Jim question, I guess I'm sticking on F 35, and maybe can you touch upon just maybe the investments and Lockheed is making to reduce sort of the lifecycle cost and you have 35, and you expect to increase any of your internal spending just given the sustainment discussion continues to grow louder and I guess and front of your potential P. B L contract with the Air Force and maybe Ken.
And then just touch upon when you think the PPL contracts would come into play as well.
Sure.
And we spent about $500 million to date and investments to prove the sustainability causes F 35, there Peter.
And we will continue to make reasonable investments as we go forward, but there.
And if you could perspective that I can give you from a former air force pilot because operationally and on the line, where the pilots and the commanders or fly and the jets and defending the country and doing the missions Theres actually a lot of good things happening and they will tell you. This themselves, but first of all you can go to the.
The performance metrics mean at flight hour between.
There is a failure metric and when can.
Can you expect to fly the jet before you've got to get a spare airplane that day.
It is nearly double the contractual requirement and so the pilots when they get and assignment from Matteo number for emission on any given day, there are twice as likely to get and that airplane and fly the mission is.
Between for any other fourth Gen plane.
On top of that it's about twice as reliable as a fourth generation fighter.
And.
Meanwhile, the labor hours and maintenance needed for each of those flight hours is about 2 thirds of the contractual requirements. So if you get out the basis talked to commanders who have.
Either and they're.
They are in F.
F 30, fives and and other aircraft or they have commanded different squadrons of different types of aircraft and they will tell you that for the frontline performance and.
And the area of operations, if you will.
The F 35, and sort of head and shoulders above legacy aircraft.
In fact, the Air Force had about 18.
Wings and Centcom.
Recently, where they just got back from.
That too.
<unk>, if you will that 1300 sorties with F 30, fives and the mission capable rate was all it was nearly 75%, sometimes 80%, 90% any given week and Thats really really strong haven't.
<unk> done this before I can tell you that that's top shelf now.
On the other hand, the affordability, we need to address and I've met.
And with each of the service chiefs and the chairman.
To employ all of us to work together on this.
Lockheed Martin with that $500 million investment over the last few years.
And now has taken about 40% of the cost that we can control out of our.
Per view, if you will already we're going to shoot for another 40% over the next 5 years.
But somehow 40% keeps coming up where only about 30% of the total cost so 60% is propulsion and military.
<unk> government cost if.
If we don't have and all in a strategy together to address this we're not going to hit the goals and so again when I meet with the chiefs and the chairman and.
And hopefully soon with the service Chiefs, we will all get together on a tiger team and addresses and the only way it can be successful.
<unk> addressed as an integrated team. So that's how we're going to approach it I do agree with the team.
And aeronautics that there.
As a way to get this cost per flying hour and in a model and 25000 and our but its got to be and all of that approach and we're going to keep doing our part of course, but.
I am personally involved.
Success, China pulled to the wider team together to get that done.
So Peter just based on timing based on what Jim just said.
We are starting to see.
See a lot of interest if you recall we <unk>.
Issued a white paper that describes how we would drive.
And then and the cost we described how industry would sign up to service level agreements and as Jim mentioned, we are making great progress.
The engine industry.
Consortium.
And we do think we have.
Pratt Whitney and from a propulsion standpoint, and the services fully engaged.
<unk> now and we believe we're going to soon be.
Responding to and RFP, they're going to take a lot of the.
The key pieces out of our white paper for us than to what I'll call answer a conventional.
Request for proposal and.
And we're hopeful that.
Early next year, we industry could be under contract for some type of.
Performance based logistics concept and I'll just remind you that this is likely not going to be a top line enhancement and play for us that's probably all embedded.
But assuming the industry is incentivized to hit these targets or to over achieve these targets.
It could potentially be a.
Return on sales play for us.
Our next question is from David Strauss with Barclays. Please go ahead.
Good morning, everyone and good morning.
And the in the fiscal 'twenty to budget the Nextgen Air dominance program. So a nice plus up can you talk about the role you're playing on that program whether that work is all classified at this point or not and then I.
And could you also touch on the R&D tax amortization issue, where that stands has there been any movement.
And potentially doesn't do that thanks George.
I'll take both.
Yes, Unfortunately, David and Gad everything about and Gad is classified the only thing I will say is <unk>.
I guess Kurt.
The customers are the D. O D say that F 35 is not going to be a bell pair of and Gad and I still think that.
Still.
The answer out there, which is good news for the our great fifth Gen aircraft that unfortunately everything else.
Regarding and Gad as is classified and with them and we can't discuss what our role or not our role as a rig.
Regarding.
And the amortization of R&D, where we're still working with a lot of arc and stitch constituents.
When we come out with trend data in <unk>.
October David.
Our tax experts are telling us Unfortunately at that time, it's likely.
Not to be settled so it is likely we will offer trend data for 'twenty 2 that would right now what we see is assuming.
This issue.
<unk> goes away or gets deferred and does not impact 'twenty, 2 cash, we see $9 billion or greater of cash from operations.
Next year. So we're in the midst of going through our long range plan. So hopefully we'll be able to reaffirm that.
We're also then also.
Also going to have to state that right now what we see is this.
Amortization issue was a $2.1 billion dollar impact to cash.
And 'twenty 2.
And we're hopeful that this thing either gets.
Deferred.
5 years that's.
1 scenario, we're hearing I mean, we'll see where it goes or it gets repealed or it is interpreted differently than the way we industry are interpreting and it really is just what I'll call conventional.
Independent research and development for us, which would be rough numbers.
<unk> is a $300 million impact rather than.
The $2.1 billion impact, but regardless Lockheed Martin and sees a path forward for us to continue generating <unk>.
Strong cash this year and into the next couple of years, and we'll use that for our internal and.
Organic inorganic investments for our employees and.
And then give a.
Fair amount back to our shareholders.
Next we'll go to Rob Spingarn with credit Suisse. Please go ahead.
Hey, good morning.
Jim when I listen.
And the D O D. I hear them talk a lot about open architecture solutions and finding ways to be less locked into the contractors, but and listening to your answer to Doug's question. Before you spoke a fair amount about network effects, which some might view as another form of walk and so can you talk a bit about that tension whether you think it's there and if so.
So how lockheed resolves to deliver both the vision that you've articulated while also meeting dod's broader desires.
Sure.
And Rob the 2 things are completely compatible and Miami.
Recent experience has been and the telecom and tech industry, where.
It was essential that open architecture vs.
The baseline or the foundation, if you will for 4 and 5 <unk> network development and Telecom for example, so.
Our approach is completely based on open architecture, we even have a product we call open radio architecture that we demonstrated.
And are you to Lockheed.
And you too of course.
As a basically a cell tower and the sky connecting F 35, and F. 'twenty 2 data links to again, the open radio architecture, and we could add and F 18 are.
And.
And and other aircrafts, even and allied aircraft for Europe.
Example, down the road the whole point of this is you want to build the network effect as broadly as you can across frankly all of the platforms out there eventually, but we're building a roadmap internally to Lockheed Martin because this these are the products and platforms. We can control to install trial demonstrate and then produce these.
Right.
And our products at the same time like I said earlier, we're open to collaborating with our industry partners that are traditional and defense and aerospace and eagerly and already successfully with.
Some of my old counterparts, and my former counterparts, I should say and and telecom and tech where we're trying to build.
The internet of things.
Network of the future here so this.
This is something where you can and must have and open architecture and the vendor lock so to speak will diminish but this is this is a matter of leadership and speed and performance and that's where Lockheed Martin.
Can I think.
Build out and take a great position going forward here.
Our next question is from Sheila <unk> with Jefferies. Please go ahead.
Good morning, Jim and Ken.
Great.
I was wondering if you could just update us on the classified business in general how big is it across the business and how do you quantify Ralph.
And compression is about.
And our best and the business and maybe what are you seeing the most opportunity.
Hey, Sheila good morning, I'll take that so yes, generally speaking our customers frown upon us from talking about the size of classified but if you think about it.
Aeronautics and space would.
Take the largest.
Classified.
Our business and our portfolio and the third would be missiles and fire control and then fourth but last but not least our stress is is Rms.
We see a lot of opportunities.
In space.
And that that.
Has not been.
And Thats recent but it seems to be trending up and and accelerated way and also and Aeronautics we've talked about this and.
Fortunately missed charge on this program that we have today.
As I stress when asked earlier, we do believe this thing has a very strong biz.
Business case going forward, which will continue to grow there is also other programs and the aeronautics portfolio that will continue to grow and missiles and fire control we've talked about.
The classified program, we won that requires some capital that is still in development and.
And then not too distant future that also will.
Go into into production so we.
We see the classified.
Portion of Lockheed Martin.
Martin and growing faster than.
The non classified portion of Lockheed Martin regarding how we run classified versus non classified that's a timely question because.
Recall when I answered the question about our classified business and.
Security.
<unk>.
Committee of our board that is 1 thing that we do go demonstrate to them that the processes that we have and the white world.
Are identical to the processes that we.
Try to put in.
The black Black World and we also.
Also have the.
Our internal audit organization as part of that and we just reaffirm that and our external auditors Ian why are also and.
Instrumental and part of that so.
The key is we try to mirror.
Mirror, what we're doing and the non classified from a process standpoint into the classified world.
Next we'll go to Seth <unk> with Jpmorgan. Please go ahead.
Hey, thanks, Thanks, very much and good morning, everyone.
Morning, Seth and I was Oh good morning.
And I was wondering.
Talked a little in the past about the F 35 production revenue outlook and you mentioned the rebase lining earlier.
If we think about F 35 production sales this year, probably being in the let's say the mid $13 billion range.
As you think about this rebase lining where.
Or does that head into 2022 and.
And how would it eventually get up to that.
The plateau, which I assume is something in the range of 170 times the price per aircraft of for the 3 variance I don't know, maybe it's $90 million on average or something like.
That but specifically for next year, how does the rebase lining affect your production revenue expectation yes.
Yeah, Thanks, Seth and good morning to you.
So we're still.
As I said earlier, we're still working through that re baseline with the joint program office, who think of that as the.
The.
And the quarterback the program manager.
Dealing with.
The services and the international customers.
So all I can say today is our base plan was 169 aircraft. It is highly likely we are going to deliver less aircraft next.
Year, then a 169 and I just don't know what that is and the only other thing I could say and I don't mean to make this sound like Yogi berra, but it's likely going to be less than what it would've been I'm not suggesting it will be less and this year, but it'll be less than the forecasted 100.
Third 69, and you're spot onset. This re baseline may take 2.3 years and again, that's something else, we will get from the customer and.
And the plateau will ultimately be a 170 aircraft, perhaps a little bit more.
And that plateau than will extend out.
Farther out into the future than than what we thought and you go back to Jim's opening comments. We were just notified we won and Switzerland that is a big big deal for US We just put in our best and final offer and for Finland. We're in the hunt for the next generation.
Fighter aircraft and Canada. There are many other customers that have an interest and this aircrafts, including of course are the services and the United States. So we think there is a strong demand out there.
For this aircraft and I'll regarding price.
Regarding the B variant and the C.
Variance just based on quantities.
Likely.
Youll see the price of that aircraft either stay where it is or continue to come down the learning curve. The a variant and I'm not trying to negotiate with the customer on the on the on the phone, but due to where we are and learning due to where we are.
And with inflation and due to where we are with the added capabilities that they want on the aircraft.
It is likely.
And Youll see an increase in prices and a modest increase in prices and where we are today you.
You got to factor all that in.
We should have a better answer for you and.
And the October time period in terms of what the what the impact is.
Yeah.
And next we'll go to Joe de Nardi with Stifel. Please go ahead.
Thanks, Good morning.
Ken can you just talk about kind of how much of the portfolio, maybe aerospace's likely is related to sustainment.
And are you seeing any pressure there or has there been any shift and focus from.
Less of a focus on readiness more on modernization under this administration and then just on your comment on the F..35 block buy margins is that just related to the technology insertion or are there kind of other challenges.
As you're facing just on pausing risk retirements and F 35. Thank you.
Net Joe good morning.
On Sustainment and think of Sustainment Sustainment and F 35.
<unk>.
Back to the comments, Jim made and that I made earlier, we still see strong.
Demand will of course, we want to get the.
Cost per flight hour down we also want to ensure that there's available aircraft out there, but the demand is going to grow there and there is a keen desire.
For the Moorefield and aircraft that we have out there and a more robust sustainment.
Statement program. We have we also have sustainment and think of Sustainment and on F. 'twenty 2.
I mean, eventually F 20, twos, and they're gonna get sunset, but I would say in the foreseeable future think of.
F 22 sales.
Not being quite.
Say.
And 1 billion there are over $1 billion and.
Going forward.
They see that decline just a little bit F 16, and a big portion of F 16, and Sustainment for international customers and I believe we've mentioned this and they're not too distant past, we actually got a contract with the.
States Air Force to.
Sustain their aircraft and it's been quite a while since.
We've got and a current contract for that so I don't see that demand going away.
Or the interest going away either C 130, Ah Ah Ah.
A big piece of that is sustainment of.
And as the aircraft internationally and then.
And our.
Skunk works think of the Youtube is a sustainment contract and ultimately they will get sunset it as well, but not not in the.
Not not too.
Not too distant future and your second question.
Was.
Oh on the block block buy margins, Yeah, it's right now.
Joe we're seeing.
And we're taking a pause because what we agreed to and negotiations from a learning curve standpoint coming down the learning curve we're still.
And the learning curve from a court this is cost now.
Down the learning curve not as.
Robust as we planned to.
And to take these risks retirement, so we want to.
See continued performance into next year before we take.
Those risks.
Come and retirement at that time, and so think of a block buy margins are very high single digit margins. These risk retirements would take them up into the.
Low double digit margins, but will likely keep the key pause and that until.
Next year.
Risk free Hey, John This is Greg I think we've come up at the top of the hour. So I will turn it back over to Jim for some final thoughts.
Greg. Thanks look I'll just end by reinforcing our commitments first our 20 <unk> century warfare vision, which will make our platforms and services more resilient and more attractive as a customer.
In addition, and making us more effective and <unk>.
Creating a deterrent.
And I'll also investments and digital transformation and innovation.
And delivering thereby strong cash generation support net.
And to work that a strong dividend as we deliver long term value to you all.
And I wanted to just thank you again for joining.
Joining us today, we're going to have an upcoming investor event in August we hope you can join us for that and Johnny and conclude the call and thank everybody for being here. This morning.
Okay.