Q3 2021 Lockheed Martin Corp Earnings Call
Okay.
Okay.
Good day and welcome everyone to the Lockheed Martin third 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 third quarter 2021 earnings Conference call. Joining me today on the call are Jim take what our chairman President and Chief Executive Officer, and John Moller, Our acting 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.
These 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 Joe.
Thanks, Greg Good morning, everyone and thank you for joining us today on our third quarter 2021 earnings call.
In a few moments John will provide a detailed review of our quarterly results updated 2021 guidance and training information for 2022.
But first I will provide a five year sales outlook and discuss our plans for accelerating capabilities to our customers and driving per share value to our shareholders over that time horizon.
Last month I, let our executive leadership team as we completed our annual strategic and financial planning process.
Given the scope of changes in our operating environment over the past year, we conducted a more in depth and extended assessment of our financial forecast.
Based on these strategic and financial reviews, and the information available to us today.
Our current expectation is that sales in 2022 will decline slightly from our expected 2021 sales level.
We then anticipate sales will increase slightly in 2023 with steadily increasing sales growth through 2026.
This sales trajectory reflects a number of factors, including the continuing effects of the ongoing COVID-19 pandemic and extended delivery timelines across our supply chain.
Moderating growth rates in the U S defense budget.
Shifts in customer priorities driven by recent events such as the withdrawal of U S forces from Afghanistan, and the Renationalization of the AWS program in the U K.
And our recently completed agreement with the F 35 Joint program office on a rebase lining of aircraft deliveries under our production program.
I'll address the significant agreement a little later in my remarks.
As with all forward projections, our performance on current programs our ability to win highly competitive new starts.
The future defense budgets and the global geopolitical landscape will all influence our ultimate growth rate over the coming five years.
But as we look ahead there are four primary areas that underpin our longer term growth forecast.
The first of these future growth areas within our hypersonic portfolio.
We are currently performing on six hypersonic programs across the company and following the successful completion of ongoing testing and evaluation activity multiple programs are expected to enter production between 2023 and 2026.
The second growth area is within our classified activities three of our four business areas are engaged in significant classified development programs and pending successful achievement of the objectives within those programs. We expect to begin the transition from development to production again between 'twenty three and 'twenty six.
Yeah.
The third area of expected growth lies in our current programs of records.
Our portfolio is very well aligned with our customers' mission requirements and as a result, we have multiple programs from each business area entering growth stages.
This includes the CH 50, <unk> heavy lift helicopter F 35, sustainment activity increased pad III production rates and the modernization and enhancements to the fleet ballistic missiles.
And finally, we are in competition for several significant new business awards, including the future vertical lift Florida in Barra competitions.
The next generation Interceptor program.
And the KC wide tanker program.
These represent meaningful opportunities to accelerate our projected top line growth profile with new long term projects that are critical to our national defense.
Now I'd like to discuss our strategy for driving strong returns for our shareholders in the near term.
While remaining well positioned for our expected return to growth in 2023.
The central tenet of our value creation strategy is using a disciplined and dynamic capital allocation process.
We will first reinvest capital into our business to meet our customers' requirements and drive organic growth.
Concurrently, we will continue pursuing actionable inorganic growth opportunities that strengthen our core business.
And we will return cash to shareholders through increasing dividend payments and a significantly expanded share repurchase program.
To drive sustainable organic growth, we will continue making significant investments in our business areas.
These investments include nearly $2 billion of annual capital expenditures and approximately $1 5 billion and independent research and development spending each year.
These investments are being made in our signature platforms and systems to provide our customers with the high value solutions, they're going to need to execute their missions are deterring.
If necessary to feeding the pacing threats across all of the domains of operation.
Additionally, we are transforming our internal operations, where the model based engineering and enterprise architecture, and we are building digital factories of the future. These.
These investments in state of the art engineering manufacturing and Sustainment tools and techniques will ensure our business areas can continue delivering outstanding performance levels on current programs.
We're also positioning us to prevail in upcoming campaigns.
After making these significant investments in our business to support our customers and drive organic growth. We expect to have substantial free cash flow is available to return to you the shareholders through dividends and share repurchases.
Last month, the board increased our quarterly dividend by 20.
Our approximately 8%.
$2 80 per share and now $11 20.
Per share annually, providing shareholders, especially our yield investors with strong returns.
This action marks the 20th consecutive year that the board has increased Lockheed Martin's quarterly dividend.
Along with making an increased quarterly dividend payment we.
We will also provide additional value to shareholders by returning excess cash to them.
Through our greatly expanded share repurchase program.
As discussed in today's press release, we've already repurchased $2 billion of our shares through the first three quarters of 2021.
And last month.
My recommendation the board increased our remaining share repurchase authority by $5 billion, bringing.
Bringing our current total share repurchase authority to approximately $6 billion.
With our stock trading at a level well below what we calculate as the company's intrinsic value we.
We have significantly increased our planned share buybacks and I anticipate that we will repurchase up to $6 billion of our shares over the next 12 to 18 months if conditions warrant.
As a final note on shareholder value, we are going to dynamically allocate capital to the highest return opportunities prioritizing investments that lead to growing free cash flow per share. That's our new metric, we will remain opportunistic in pursuing accretive bolt on acquisitions evaluated additional increases.
Our current share repurchase authorization.
And continue to reinvest capital into our business to drive long term growth.
We have the balance sheet flexibility and firepower to pursue multiple avenues of growth, while returning significant capital to our shareholders. We built this balance sheet to use it and we will do so consistent with our focus on long term shareholder value creation.
Our strong balance sheet provides us with the capability to close on the Aerojet Rocketdyne transaction provide robust returns to shareholders and continue to invest in our portfolio to support our customers and drive future growth.
The Aerojet Rocketdyne transaction continues moving through the regulatory approval process and we now anticipate closing in the first quarter of 2022.
Before I turn the call over to John I'd like to highlight the efforts of the entire F 35 organization.
The government's joint program office, our teammates and suppliers are.
Our Aeronautics organization.
And our international partners for establishing a new aircraft production baseline and delivery profile provide industry government partner countries and Fms customers as well as you the investor community with important visibility well into the future.
The program is strong and stable and we have opportunities ahead of us to add to that strength.
The program has delivered over 700 production aircraft out of a plan of record of over 3300 Jets.
Including to all three U S services and nine international customers, So far and we look forward to continuing the successful program for decades to come.
With that I'll turn the call over to John and ill rejoin you to answer your questions.
Thanks, Jim and good morning, everyone.
As I highlight our results. Please follow along with the web charts. We've included with our earnings release today.
Let's begin with chart, three and an overview of third quarter activity.
Starting with sales, we recorded revenue of $16 billion.
This result was below our expectation as we realized larger than anticipated supply chain impacts across aeronautics.
Missiles, and fire control and space.
These impacts spanned multiple suppliers and our expectation is that we will incrementally recover from these disruptions over the next 12 to 18 months.
Despite this reduction in sales volume our segment operating profit increased year over year to $1 9 billion.
On strong operational performance across the enterprise.
Our earnings per share of $2 21 included a noncash charge.
$4.72 related to our previously announced pension transaction.
We generated $1 $9 billion in cash from operations and continued our practice of accelerating payments to our supply chain with one $5 billion and accelerated payments at quarter end.
The supply chain disruptions, we experienced during the third quarter underscore. The fact that many of our suppliers are still dealing with the financial stress caused by the global pandemic.
In addition, we continued to return substantial amounts of capital to our shareholders through both dividend payments and share repurchase activity.
And we have provided trending data for 2022, which we will discuss further in a few minutes.
Turning to chart four we compare our sales and segment operating profit this year with last year's results.
As we noted in our earnings release, our third quarter sales are below 2020 levels, primarily because of the renationalization of the atomic weapons establishment program and our space business area.
Our third quarter sales also reflect recent supply chain delays, most notably on the F 35 production activity and on several production programs within both missiles and fire control and space.
Despite this reduction in sales volume our third quarter segment operating profit is up from last year as strong operational performance resulted in significant risk retirements across all four business areas.
Chart five shows our earnings per share for the quarter.
Our earnings per share of $2 21 incorporates a $4.72 noncash charge associated with the $4 9 billion dollar pension liability transfer we completed back in August.
On an adjusted basis, our pre transaction earnings per share of $6 93.
Was 11% higher than our 2020 results due to improved segment operating margins reduced share count and another quarter of mark to market gains across our Lockheed Martin ventures portfolio.
While future volatility associated with investments in early stage companies as expected the significant gains realized across multiple holdings in our ventures portfolio reinforced the value of investing in and partnering with companies focused on cutting edge technologies.
On chart six we will look at our year to date cash generation and deployment.
Subtracting our capital expenditures from almost $5 billion of cash from operations, our year to date free cash flow is greater than $4 billion.
We've repurchased $2 billion of shares year to date, including $500 million during the third quarter and have made more than $2 billion in dividend payments.
In total our balanced cash deployment of nearly $4 $2 billion represents over 100% of free cash flow returned to our shareholders year to date.
And we will continue these shareholder friendly actions going forward as evidenced by our recent dividend increase and share repurchase program announcements.
Moving on to chart, seven and our 2021 guidance update.
We've lowered our 2021 outlook for sales and segment operating profit to reflect the previously discussed supply chain impacts that emerged in August and September.
We've reduced our outlook for cash from operations, primarily to reflect our updated plan to maintain our current $1 5 billion dollar level of accelerated payments to our supply chain.
We plan to continue supporting our suppliers as they recover from pandemic related impacts, especially small and medium businesses, both across the country and internationally to help maintain program schedules and customer missions.
The full year outlook for earnings per share has increased 35 from the midpoint of last quarter's range driven by Lockheed Martin ventures investment gains and several non operational items.
Yeah.
Now turning to chart eight we take a closer look at the current year revisions to 2021 sales by business area.
As discussed Aeronautics missiles, and fire control and space have all been affected by lower than anticipated activity coming through our supply chain.
The level of reduction in supply chain activity over the past two months is higher than what we've been experiencing since the beginning of the pandemic.
And our 2021 sales outlook assumes that we will see a return to more normal activity levels in the fourth quarter.
In addition, our sales outlook for 2021 and are trending information for 2022 excludes any potential impacts associated with the recent executive order on safety protocols for federal contractors.
On chart nine we see segment operating profit tracking with a reduction in expected sales volume and our expected segment operating margin outlook remains at 11%.
On chart 10, we take a closer look at our initial trending information for 2022.
We've estimated 2022 sales at approximately $66 billion of.
A decline of one 5% from our projected 2021 results.
As a reminder, the renationalization of our work in support of the United Kingdom's Atomic weapons establishment earlier. This year creates a headwind of just under $900 million on a year over year basis.
We are expecting segment operating margins to remain at approximately 11%.
And we are projecting growth in cash from operations year over year to greater than or equal to $8 4 billion.
This outlook assumes there'll be no increase in tax payments related to capitalizing R&D costs if current.
Legislation is not amended our cash from operations outlook could be reduced by up to $2 billion.
Also given we continue experiencing impacts across our supply chain, we now anticipate maintaining accelerated payments at the current one 5 billion dollar level through year end 2022.
Our prior multi year cash forecast assume there would no longer be a need to accelerate payments to our supply chain beyond 2021.
We are currently assuming a statutory corporate tax rate of 21%.
And we are not including any financial projections associated with closing the Aerojet Rocketdyne acquisition, which as Jim mentioned is now expected to occur during the first quarter of 2022 subject to required regulatory approval.
Turning to pension related assumptions interest rates have increased since year end 2020, our year to date actual returns have been higher than previously expected and we've lowered our long term rate of return to six 5%.
And in response to investors asking for additional information on pension trends. We've included two charts on this topic in the appendix. These.
These trends include no required pension contributions through 2025 based on current assumptions.
On chart 11, we outline our expected capital deployment activities for 2022.
We anticipate spending approximately $2 billion on capital projects next year, which represents an increase of approximately $300 million over expected 2021 levels.
In addition, we anticipate investing approximately one $5 billion on independent research and development activities.
Which represents a $200 million increase over plan 2021 levels.
These investments are being made to enhance our delivery of critical systems and products to our customers as they execute their national security missions, while ensuring we are well positioned to compete for new business opportunities.
We will be making over $3 billion in dividend payments next year based on our recently announced <unk> 20 per share increase to our quarterly dividend rate.
And as Jim shared earlier, we will also continue to strategically buy back shares when we believe they're trading below intrinsic value as they are now.
We are planning to opportunistically repurchase up to $6 billion in shares over the next 12 months to 18 months.
We are confident we have the balance sheet flexibility and firepower to pursue all avenues of growth, while returning significant capital to our shareholders.
On chart 12, we provide some additional detail on our expected long term trajectory for F 35 sales.
As Jim commented earlier, we recently reached agreement with the joint program office on our expected F 35 delivery plan.
This joint plan represents the best intersection of production operations and supply chain capabilities.
Technology insertion in support of increasing mission requirements.
And both the timing and quantity of anticipated new production aircraft award decisions.
We are very pleased with the outcome of this joint production re plan as it provides stability and predictability across all key elements of this program.
Deliveries are expected to grow to 156 aircraft by 2023 and will remain at that level for the foreseeable future.
We are projecting F 35 production sales in 2022 will be lower than 2021 levels and sales will also decline slightly in 2023.
Revenues are expected to remain around 2023 levels throughout the balance of the forecasted timeframe.
As we've previously discussed the growth in F 35 sales volume will primarily be driven by sustainment activity as the number of deployed aircraft and associated flight hours grows rapidly while we continue to aggressively pursue cost takeout in partnership with our customer.
Finally, we are also projecting modest growth and development activity as our customers continue seeking further advancements and capabilities for our unrivaled fifth generation aircraft.
To conclude on chart 14, we have our summary.
We've reduced our 2021 outlook based on the higher than expected supply chain impacts we experienced during the third quarter <unk>.
The supply chain and related production impacts along with our updated F. 35 production plan any other factors, Jim mentioned have shaped our outlook for 2022 and our future expectations.
Our strong balance sheet and cash generation give us multiple options to deploy cash and to echo Jim we will prioritize investments, which will grow free cash flow per share.
And with our broad portfolio dedicated employees strong balance sheet, and a disciplined and dynamic capital allocation strategy. We remain focused on our customers' mission and long term value creation for our shareholders 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 the one 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, one then zero.
At this time.
And first in line of our rich Safran with Seaport Global Securities. Please go ahead.
Jim John Greg Good morning.
Kim John I have a two part question here on your 2020 to guide a.
Long term cash flow guide and some of your opening remarks.
What's the baseline budget that you're assuming in your guide and specifically.
If the plus ups to the President's request and from Hess and SaaS bar included does that imply some upside to your 'twenty two guide or is it just too late for fiscal 'twenty two funding to have an impact in the second part to my question is so you lowered your cash from operations guide for 'twenty, two I want to know.
If you could discuss a bit more about what you think cash flow looks like beyond 'twenty, two and what youre, assuming along with that thanks.
Yeah. Thanks, Rich, it's John I'll take both both parts of that two part question.
First in regards to the assumptions in and around the budgetary baseline we're using the president's budget.
$715 billion for the government fiscal year 2022, and the trending information we've given you.
I'd say, we're encouraged about the direction of the various committee markups as they reflect really good support for a number of our programs.
And to your question about how much if any of this will come through in 2022, you know the answer to that question is going to be based on how much incremental funding is actually appropriated how long it takes for that that appropriated funding they end up getting on contract with us and us slowing that down to R. R.
Supply chain and then the third factor is what specific programs.
The incremental appropriations are applied to its easier obviously to maintain programs at current run rates and it has to accelerate program. So any programs that we're planning and.
Sort of a trend down would be really good candidates for being able to see opportunities in 2022 related to the increased appropriations.
I'll kind of finish this section by saying obviously by the time, we were in January when we were giving you an updated outlook for 2022, we should have a lot more clarity in and around the budgetary trends.
Now turning to your second part which had to do with we had previously given a multiyear cash.
Cash flow operating cash flow guidance and of course, all all this all of these metrics are gonna be assuming the R&D tax.
Change does not go into effect our prior guidance was like 899 and nine one you.
You've seen we've got our guidance now at eight three for this year and eight four for next year and I'll say, we anticipate higher than eight four operating cash flow guidance.
As we look ahead to 2023, but really the only the only factor that has changed since the multi year guidance. We gave before is in the level and the duration of the accelerated payments were planning to make to our supply chain.
I think I mentioned in the script, we had previously and that 89991 track assumed we would be accelerated and $1 $2 billion worth of accelerated payments to the supply chain at year end at the end of this year, but then the assumption was the pandemic would be behind us in 2022, we would unwind that program.
We would end 2022 with no accelerated payments being made.
Through our supply chain, our current forecast the eight three and eight four assumes we're at $1 $5 billion of accelerated payments at the end of this year and $1 $5 billion of accelerated payments at the end of 2022. So if the pandemic impacts are behind us.
Four we end year end 2022 are our guide of eight four would increase by that $1 $5 billion.
Thank you.
Youre welcome rich.
Our next question is from Rob Stallard with vertical research. Please go ahead.
Thanks, so much good morning.
Good morning, Brad.
Jim just a quick question kind of vacation on your five year sales outlook did you say you expected sales growth to accelerate after 2023, and then secondly, as a question what are your expectations for operating margins over this period. Thank you.
I'll speak to growth Robyn.
Make a point on operating margin that John can pick up on so yeah based on hypersonic and classified programs programs of record light CH 50, <unk> and others.
We do believe that we'll have a rebound to meaningful growth in 2023 and beyond but again Thats also dependent on a number of factors, including the budget is such that we've just talked about so yes that is the idea and frankly.
Want to use this year or two period.
To accelerate share repurchase reduced accounts, so when that inflection point does come on growth.
You will have as shareholders.
Basically it amplified benefit during that latter period. If you will so we fully expect that with margins being pretty steady along the way right. John Yeah, absolutely. So Rob let me just to kind of foot Stomp wood with Jim was saying to give a little color. The four categories that Jim mentioned in his scripted remarks hypersonic class.
<unk> growth in programs of record and competitive new starts when I look at that subset of of revenue.
For those four categories in 2021 is sort of in the in the neighborhood of $17 billion.
Over the period growing out through for the next five years that set of activity, assuming we hit our operational marks assuming these these programs continue on their programs of record and we win our share of these competitive new business opportunities that we've talked about that.
That $17 billion worth of program revenue today, it will grow.
At about a 9% compound annual growth rate, which you know give gives me some level of comfort that the longer term trends that Jim talked about.
I'll hold just to reiterate we're we're expecting a slight decline in 'twenty two a bounce back in 2023, and then I would say increasing growth.
And increasing growth rates going going forward now on.
On the topic of margins I think 11% is a good working target for us given the evolution in our portfolio and the activity.
That we see going forward I just highlighted the four categories that will be seen growth a lot of those are new start programs. There is there is going to be some growth in programs of record, which we would hope to.
You know turn into accretive margin programs, but there is a lot of growth in new start areas developmental areas. You know the good news is we will get there will be cost reimbursable contract will have assurance of of recovery of the costs, we're incurring but by definition will be lower margin.
Activities moving forward and I should mention and this is just to get this on a record early.
There are certain classified activities that we can't talk about but if if those programs.
Good.
Continue to progress along the track that they're on my expectation is we will be making investments in some of those programs out in the 'twenty three 'twenty four 'twenty five timeframe that will be dilutive to margins.
But I think an imbalanced and 11% operating margin is a good metric for us.
Our next question from Mike Margerie with Wolfe Research. Please go ahead.
Hey, good morning, Thank you for the time.
So following on Rob's question, and you gave us the four priorities underpinned the growth forecast.
But Jim or John can you give more specific and sort of quantify these buckets how they translate.
So revenue and feather into your outlook beyond 'twenty two for a return to growth and then separately what headwinds are you anticipating to offset these growth buckets.
Yeah sure Mike, It's John I'll take and I'll talk somatic leave first through the four buckets and growth over time, and then you know maybe now's as good a time as any to talk specifically about sort of what we're seeing movement from 'twenty one to 'twenty two.
The headwinds, but you know the four big buckets. The first one is hypersonic activity today, we're doing about 1 billion and a half dollars worth of revenue in that area.
If we are able to move a number of those activities into into a from development into production, which we fully expect will happen, we're making great progress on a number of them that are visible.
Being reported on today, but.
Our projection would be.
Assuming a number of those activities proceed into a production environment that billion and a half dollars could grow as high as $3 billion by 2026.
The second area classified in.
I'll say upfront, we hesitated even highlighting this given there's not a lot that we can say in general about classified activity.
But because it is a large and growing component of our business. We thought it was important to at least give you a top level trend information and because like I said, we will be making investments in some of this activity downstream, which will have dilutive impact I thought it was a good idea to talk about.
But in aggregate our classified portfolio will grow we expect at a rate above 5%. So that is a strong growing area.
For us the programs of record, which you know as Jim tick through some of the big ones. He mentioned will be CH 53, K F 35 sustainment.
Pac three program and then additional growth in the fleet ballistic missile and.
Evolutions and new advances in that program.
That portfolio today is worth about $8 $5 billion.
When we project out to 2026 over that period of time, the compound annual growth rate in in that program set.
As like a 8%.
And it's highlighted by CH 53, K, where we will be delivering out to a program of record of 200 units.
I think the final deliveries are made in 2032, but you know.
Just keeping that program on its program of record.
Go a long way towards towards us achieving that growth and a program of record CAGR that I just talked about.
And then the final area is the new business, which are a set of sort of wildcards youre going to get binary decisions in and around the Florida competition or the foreign competition.
One of the new business areas that Jim talked about his next generation interceptor.
Absolutely moved into a down select where there's ourselves and one other competitor, we're making great progress we've achieved a number of important program milestones recently, we feel good about where we're heading.
But that'll be a down select and then sort of the wildcard in the bonds and opportunity. We're very excited about is the KC why tanker program, where we've announced that we will be teaming.
With Airbus, who we think is a very capable.
Frame for doing this mission I think we bring extensive experience in the in the mission capabilities.
That would go onto that airframe I think we make a very formidable team, we're very excited about that opportunity.
And depending on outcomes I mean, obviously as we're doing next to nothing in either any of those programs. Besides the next generation interceptor Yep.
That growth rate could be explosive.
If we prevail on flora in pharma, which we think we're very well positioned to do if we're down selected on N G. I N a tanker program.
It was awarded to US there will be substantial growth in that in that bucket.
And the headwinds I guess.
As I said now, let's tactically kind of walk through the 2021 outlook of roughly 60 $67 billion and how that translates as we look ahead.
The 2022, obviously you look at the math and we're down about $1 billion.
The obvious large year to year headwind as it related to the AWS.
Renationalization, which I believe either Jim or I talked about in our script as being a headwind of just under $900 million.
The second headwind Youll see on our F. 35 revenue chart, we're projecting a decrease in F 35 production related revenue of about $400 million movement from 'twenty, one to 'twenty two.
And then we have two programs that are sort of an international lifecycle evolution very successful programs.
But they've delivered out and that's the black Hawk.
Helicopter program and by delivered out I mean, it's it's moving down from the peak the number of helicopters were going to deliver this year will be cut in half by the time, we're two years out and then our highly successful next generation <unk> program both of those programs moving from 'twenty one to 'twenty two if you.
On the downtick in revenue it aggregates to about $600 million.
Then one of the other external factors was the recently announced and executed withdrawal of the U S military presence in Afghanistan.
The primary impact to us is in a contract that special ops logistics support program. We had some other other Afghan drawdown related impacts in total it's about a $200 million year over year headwind.
But now as I pivot.
The plus side one of the programs, it's ramping up year over year is one of those in the AR.
I'd call it competitive.
Category that we talked about is the next generation interceptor, where were doing about $200 million in revenue in 2021, we expect to do about $600 million.
Of revenue in 2022, we have a lot of growth as we mentioned within our classified activity a lot of that activity is being done in our Skunk works organization within Aeronautics that work is going to be growing about $400 million year over year and a final large.
Graham a record growth is and the CH 53, K heavy lift where we'd expect to see $300 million year over year growth. So.
On balance it's down but the headwind is remove removal of the AWAC.
Activity, we were doing.
Our next question's from George Shapiro with Shapiro Research. Please go ahead.
Yes.
To follow up on your comments on the.
Sectors.
<unk> W. A $900 million hit I thought that program had been running more like three or $350 million.
A quarter and obviously, it's really only the first half that overlaps for 'twenty one to 'twenty. Two so if you could comment on that and then if you looked at each of the sectors. There I would think that the aeronautics would be down you know, maybe a billion billion and a half dollars, but you'd get.
Some growth in our M. As you get some growth in AR.
And it's a space X. The AWAC. So if you could just kind of comment on on that status.
Yeah sure George Thanks. Thanks for the question. So you know if you go back to like our first and second quarter press releases.
But in the year to date AWS first quarter activity. This year was $440 million AWP activity in the second quarter was $435 million you some.
Those two you get the $875 million level of activity, we saw probably higher than what you might have remembered because you had a lot of of wrap up associated activity that took place, but the $875 million.
In 2021 that that won't recur.
And maybe what I'll do is do a high level sort of around the horn of how those.
The headwinds and tailwind play out by segment I mean the.
The first segment, we talked about was aeronautics as we look ahead to 'twenty two we're expecting low single digit growth rates in aeronautics.
With a slight increase in margins you know think of in the 10 to 20 basis point range.
Within missiles and fire control, we're actually expecting a slight decline of low to think of it as a low single digit decline.
With with margins slightly lower than 2021 level set again 10 to 20 basis points.
If you go to RMS.
RMS, we're expecting a low single digit decline as well.
With margins.
Maybe up to a 40 basis points below what we're what we're going to end up with in 2021, and then finally at space, we're expecting mid single digit declines, obviously, that's where the AWS.
Reduction.
It takes place with with margins kind of comparable to what what we've what we're expecting for 2021, yes. George This is Jim just to give you a little more color on just pick one RMS right. So John already mentioned, our black Hawk is going to be down next year or year to year and the CH 53, K is up they actually offset each other okay. So in <unk>.
'twenty two is kind of a wash between lets call. It those two programs and then similarly, we had combat rescue helicopter upside maybe $100 million, but probably <unk>.
Atlanta's VH 92, Hay production down about 150 million a day offset.
You might remember that we were part of the Australian future conventional sub program, while that's gotten deferred into nuclear ops nuclear submarine.
Propulsion option and we're going to compete for that but it is going to be a while before that kicks in so there's another 150. So there are puts and takes on an every.
And every VA, if you will and it.
As part of again New administration.
Changes in priorities changes alliances I think they all settle out to the good but it's going to take a couple of years to get through all that.
And kind of maneuvering and you know what we're going to do the best we can in the next couple of years to make sure that if.
If theres a flattish.
<unk> for our company as far as revenue, we're going to really double.
Double down and triple down on returning cash to shareholders because we've got we've got it and the other thing I would say George real quick to add onto something that John said earlier, we are voluntarily continuing.
Our acceleration of payments the supply chain. This is something for the good of the industry for the go to the customer.
And we want to contribute.
All of US are in our own ways in this country to recovering from Covid and again as John said when Covid subsides, we will get that.
<unk> cash flow a number back to where you thought it was going to be in the first place. So just a couple of color commentaries on there because I think you guys are asking some really good questions.
Okay.
And next we'll go to a pizza dubinsky with Alembic Global Please go ahead.
Yes, good morning.
Hey, guys can you give us greater insight into the supply chain because it seems like you know we're in a period here where cash flow terms are unusually generous so it's hard to understand.
Why are they being such financial strain is at all related to things like you know just labor availability or COVID-19 mandates or semiconductor shortages can you give us greater insight as to why the supply chain is in you know.
Such dire Straits, given the cash flow you know terms that they've been operating under.
Good good question.
I think a large part of the impact that our supply chain is facing our and our suppliers that are dual dual use I mean, they are supplying to both commercial aerospace and defense. So.
If we're looking at parts of the supply chain that are strictly defense, they're probably not nearly as stress financially as our dual use suppliers people that are.
They'll make landing gear for us and they'll make landing gear for commercial aircraft they make breaks.
Those are the suppliers that have fixed operating costs that have seen substantial revenue decreases on the commercial supply sign that have really cut into their operating cash flow.
And we think it's the right thing to do we have access to capital we have access to cash at extremely good rates, we generate a lot of cash flow, it's and as Jim said, it's in the industry's interest and our customers' interest and frankly.
There is an element of self preservation here, we need our supply chain to be successful for us to be successful. So while it's you know it's voluntary is not 100% altruistic I mean, we need to make commitments, we need, especially our dual use.
Vendors and partners.
Partners, our supply chain partners to be successful for the long term.
And next we'll go to Ron Epstein with Bank of America Securities. Please go ahead.
Hey, Yeah, good morning, maybe.
Maybe if we could just back up the aperture a little bit.
Jim When you first came on board you talked a lot about a focus on you know the 21st century War fighter Warfighting connectivity that sort of thing.
Then we shifted a little bit maybe with the.
The acquisition of rocket died and now here, we are and it seems like the story has now shifted to those cash return story with no growth.
And I think but on a lot of People's minds is ultimately what is the strategy I mean, where you're taking the company and and what what's the vision here because it really seems.
And I know this may be my it's not unfair, but it seems a little bit rudderless right now at least from an outsider's perspective, if you could give us some color on that.
Well when you're running a business Ron in a dynamic industry with changing government heartland governments. Your major customer you've got to be agile right. Now. The first thing you mentioned is the longer term strategy of the company is ready to deliver on our programs of record that drive operational excellence, but we're driving it towards our mission oriented.
Paradigm at the end of the day at Lockheed Martin versus a product paradigm, which we've been.
<unk> been operating under since at least before World War II. So that paradigm is still there we're working towards it in the meantime, we got to deliver for you all as shareholders financially and we've got to deliver for our customers operationally, but I'm getting it.
Like to think tremendous traction with senior government officials in the U S and elsewhere that understand that while our industry and their purchase of our products and services over the years has been effective is largely effective in the physical world. If you will as Newtonian world were really good.
And technologies like hypersonic space travel.
Precision weapons et cetera. Those are those are the Newtonian world, we're really good at that as an industry and our customer knows how to buy that stuff.
We're not as good as we need to be in the defense industry is emerging that excellence and the physical world that we can bring to the national defense, but merging that with the.
The developments the accelerated developments in the digital world by companies that are specialized in things like <unk>, and AI and distributed computing and networking because if we merge those two things together and the ways that we're forecasting that we're building technology Roadmaps to do we will increase the effectiveness of our current set of platforms.
And faster and more robust way than behind it.
Just using the physical attributes in the physical.
We're all technologies, we're going to keep doing all of that but we can actually.
Turn on an afterburner for Michigan capability for our customers by by accelerating those digital technologies into our space and that is our strategy.
Benefit of that is in addition to having a more effective national defense had a relatively efficient cost.
Is that it will make our platforms more attractive than relative the other Oems platforms, because we intend to build the architecture first with his pathfinders with some of our platforms and bring in others as we get some success. So that is the strategy of the company.
It has not changed and iota, but our capital allocation strategies had to change because of the dynamic situation that we find ourselves in externally.
And in our M&A approach has had to evolve because theres not that much supply out there in our industry as far as acquisition candidates of any scale and.
In a regulatory environment is also shifting a bit so we're shifting with it and we're saying okay. We still got our baseline strategy 20, <unk> century warfare is where we need to end up down the road with our customer.
We wanted to get there partly through acquisition like Aerojet Rocketdyne and three to get the technologies mainly in the physical.
Physical world that we need to move those things forward.
The M&A.
Window isn't that open right now for a valuation availability and regulatory regime.
We are just being.
And doing the things that you have to do when you're running an actual business in the real world, which is being agile.
One thing I want to add to that because there may be some misconception about Ron.
Brian. Thank you for the question by the way it opens up I want to make absolutely clear that our M&A approach does not and has not included the acquisition of major commercial technology or telecom companies, we're not trying to become that we want to use their IP their people to accelerate that kind of technology that digital technology into our world.
So our approach is to partner with industry leaders in those spaces via commercial agreements licensing joint teaming and participation standards bodies to accelerate those capabilities into our technology Roadmaps, we have no intention of acquiring emerging with any of those major commercial sector companies. So yes, you got to be dynamic and agile when you run.
On a business as big in the real World and that's what we're up to and we still have our target being the pathfinder towards 20, <unk> century National defense.
Ron This is John just just to pile on to what Jim said he's done a very good job of articulating our strategy from an external perspective, but it is a guy that's been with this company for over 30 years, what I most C and resonate with his house Jim's actively changing the culture across Lockheed Martin.
You internally to embrace it any kind of innovative technology, despite where they come from we've got a lot of really bright creative scientists and engineers, but we don't have to invent the solution to every single problem and historically, we struggled with some level of non not invented here, which may come as no surprise.
That's on me.
So what Jim has been stressing and our team is getting as we need to identify and partner with whoever does have the best solution in an industry agnostic manner.
And I think we're doing a pretty good job of that in our ventures investment fund, where we're going to start ups and seeing the art of the possible, we're starting to get pull demand from the business areas for some of these technologies, which I personally view is a huge step in the right direction.
And he's driving that that mindset, the openness that technology across the entire R&D and engineering community. So.
I haven't seen a change.
I appreciate the direction from an internal perspective.
And ladies and gentlemen, just a quick reminder, if you do have a question. Please press one then zero at this time.
And next we will go to the line of Myles Walton with UBS. Please go ahead.
Thanks.
Certainly the markets I'm looking at the 22 cashed out in particular, it and John just wanted to clarify something so the one 5 billion of supplier advances that you you mentioned you hadn't planned on or are those net from.
In other words are you, suggesting that the prior guidance included zero announced 1.5, and so pro forma the prior you know the move from the prior guidance is all operationally towards aren't quite around $1 billion. Yeah. So then is 23 9.9 billion.
So let me make sure we're tracking the prior guide was eight nine and nine today, we're doing eight three and eight four and in that 841 billion and a half that was not not there. So we're up $300 million I'm, telling you today are a four is going to be.
Higher.
We'll be higher than eight four in 2023.
Depending on how much we still have to accelerate.
In 2023.
That number can be.
Anywhere from a.
$1 billion higher.
The $800 million higher or $200 million higher.
So the punchline is if you think about the two years 'twenty two.
'twenty, one and 'twenty two we're ahead.
And on the outcome of where where Covid is in either 22 or 23 and it.
Could be equal to or slightly behind the prior multi year guidance if that makes sense.
It does but I guess the other question is these are advances presumably rotate back to you. So that's why I'm asking about 'twenty three and beyond.
So you don't get the full benefit of a $1 billion five because it is a rolling.
A roll off of if you will quarter to quarter as you go through the year. So there are some subset of that is John is saying depending on when the music stops you know we'll be able to then.
Great.
Cash flow, we report because we didnt do a quarter or two of the typical flow throughs to the supply chain right. So we're going to be the whole year. So just just to make sure. We're on 100% the same baseline the old guidance was 899 O nine one.
Let's just use as a baseline 80, 384, and 85, that's down $1 $8 billion.
If we're at eight five we've got over $1 billion of assumed advances at the end of 2023.
So you could say notionally.
Where we're sitting here today over the three year period were down $800 million and some of that is driven by what I have now assumed in terms of.
We have an internal term.
It's funding that we or authorization spending we do in advance of contract turn ons based on history, There's a high likelihood that some of these programs when they shift from development to production.
Customer funding profiles arent going to align with need dates.
We are anticipating that we will be carrying a substantial amount of cost associated with that transaction.
Okay.
Thanks, a lot thanks.
Yeah.
Our next question is from my time on rumor with Cowen. Please go ahead.
Yes, thank you very much so.
Jim I'm, a little confused with the kind of capital deployment you talk about.
Spending an incremental amount in terms of I R and D. You are going to increase the dividend.
Have less Cas recovery.
You talk of $6 6 billion of stock repurchase, but if you do a J D. You can't do any stock repurchase unless you really ballooned up a balance sheet. So so what kind of a balance sheet and.
And net debt to EBITDA ratio are you looking for over this period.
Hey, Kai it's John I'll take that if you look at our operating cash flow and free cash flow, our net debt retirements over the I'll stick to the first three years of the plan.
Our excess cash balances would allow us to do the $6 billion, we're talking about and still have enough liquidity to run the business. So that's 0.1 that this $6 billion as.
Is it just deploying what would otherwise have been sitting in my bank account, earning 25 basis points. That's 0.1 0.2 with a J R. D. Our original expectation was.
We would probably finance call it $3 billion of the four and a half and use cash for the other billion and a half.
I'm leaning now towards especially given how low financing rates are maybe.
Financing the entire acquisition.
But kind of more broadly the way I think about acquisitions and I know, Jim and I are absolutely in a 100% violent agreement on this if you can find M&A that has the right operational fit the right culture fit and the right strategic fit M&A pays for itself I mean, it's for you have to finance them up.
Front.
But if it if it's a good deal youre going to get your money back very quickly. So I view like Jim does M&A is not a drain on your balance sheet, our balance sheet. As you know is single a or.
Our metrics would support a higher rating where a minus for the to the do you use the a minus scale conversations I've been having was it's hard to justify why we are in a minus instead of a flat a.
The punch line is we've got a tremendous amount of firepower, if as Jim talked about the disciplined and dynamic capital allocation process says, we need to we need to put additional resources in here or there or wherever.
We're going to have the ability to do that.
From a leverage perspective.
Got it.
We've got upside I mean.
Sure.
We've got a strong balance sheet and really tried to emphasize in the prepared remarks that you know.
We see.
Tremendous value and share repurchase at these pricing levels.
We will go to the debt capital markets to get the resources to make the smartest capital allocation at that point in time, and we'll manage the Leverages we hope.
And we can do it all everything you said, we can do it all and maintain a reasonable leverage ratio I believe in a strong credit rating I also in journals.
Our next question is from Noah <unk> with Goldman Sachs. Please go ahead.
Hello, everyone.
No.
I guess I'm still trying to better understand how much of the growth projection shortfall versus versus what the market was looking for is <unk>.
And market versus Lockheed programs, and I know, Jim you kind of talked about there being multiple puts and takes but.
Ex AWS I guess youre, saying, a few years of flat revenue true up low single digit growth.
You know what do you assume are you assuming that's what outlays are doing you know putting the 'twenty two authorization specifically aside is that what youre assuming outlays are doing are you assuming your.
Your worst than outlays, and then specifically at MFC, what's what's happened at MFC because at one point the growth rate was high the company was saying you know good growth was sustainable that there was really just capital and supply constraints.
It's down in the quarter and you're saying it's down next year, so that seems to have changed a decent amount.
Yeah.
John ill take the question.
I would characterize the 'twenty one to 'twenty two headwinds as may be being.
Unique to us in some regards although you know companies have a lot of exposure or had a lot of exposure to Afghanistan for example.
They may have half.
Similar headwinds, but I would say the.
The 'twenty one to 'twenty two headwinds are or may be confined to us, but you know the out year growth I think when I looked at the last drag on the President's budget that the growth rate was like 2% a.
A year.
Our.
Government fiscal year, 'twenty, three 'twenty, four 'twenty five and out.
C that is as a center point.
Again, if we're able though to prevail and competitions I see a path for us to grow faster than that rate.
We need to perform on our programs, we need to deliver helicopters and airplanes on our committed schedules and if we do that.
I see upside to the 2% growth that's in the President's budget.
And MSC more specifically.
And all of the Pac three.
Production is going to go up and we've been investing in that capacity as you know.
But it's just going to go up a couple of hundred million dollars and then again, if you do Hudson taste that special loss.
Logistics support program itself was John.
So you know in NFC, one program takes away all of the Pac three growth.
Year over year into 'twenty, two and then we have probably not as well known but for MFC has significant cash.
Insulation in the UK Theres, a warrior armored vehicle program that was canceled by the UK government and that was another $100 million downdraft and then that is tailing off a little bit too now in production rates.
Not much but another $100 million. So you really have to dig into the details in each VA to see why in 'twenty, one 'twenty two 'twenty three.
The effects are happening but.
We really are focusing on 23, 2023, plus so to speak or beyond 2023, because.
All of these programmatic effects will be known by then.
Got those four big areas, where we assume and expect that theres going to be material upside.
I understand that way better at that point and then we'll have some of those new starts that we.
Competition stay on time, we may know some decisions in those two so yes, theres going to be some puts and takes of Lockheed Martin specific the next couple of years, but we're positioning ourselves.
To weather this period and get through with a lower share count.
Materially I think lower share count by the end of it.
And then a growth vector that.
It has an inclination to it post 2023 and that's really.
Our overall financial strategy is to is to work the share count reward shareholders, along the way and then an inflection point in growth is what we're aiming for that is our goal.
Our next question is from Sheila <unk> with Jefferies. Please go ahead.
Good morning, guys and thank you for including me.
Actually let me just to follow up on Noah's question. If we could talk about the shorter term 2022 and 'twenty 'twenty three because I do think that's what investors are focused on what could be the potential element of upside surprise you guys mentioned $8 5 billion of the portfolio is focused on growing programs like the HSE Mek and Pac three is.
What would we would look to or are there other elements that come in.
Yes. Thanks.
Sheila I think you know.
It's.
Growth and opportunities across the big four categories that Jim.
As articulated a lot of our potential upside in 2023 is going to come.
From programs that are right now and operational testing.
Assuming they're able to achieve success through that those test programs they are going to migrate into production.
That's in the period, where you still have an overlap between development and production, that's where you're going to start seeing some bulge in that.
Kind of transition T ties into the.
The discussion probably two standard discussion I had with miles about if you look out to 2023 or your cumulative three years why he is slightly down from the last guide.
Yeah, I think we're going to be successful, we're going to need to bridge those programs to maintain their critical schedule. So we're going to carry.
You know a financial backstop against them.
There is absolutely no doubt the growth is going to come out of hypersonic and classified and growth in the programs of record I mean, Jim mentioned.
Pac three growing 200 million going from 'twenty, one to 'twenty, two and 'twenty, one we're going to deliver 350 ramp we're going to be delivering 502023, and 550 million in 2025 back so.
So Pac three growth is going to be very strong in that period of time and CH 53, K really starts Lebron and if we when we prevail on the future vertical lift programs, you will see an inflection point as well.
Okay. Thank you John.
Welcome to them.
Next we'll go to Doug Harned with Bernstein. Please go ahead.
Good morning, Thank you.
I wanted to really go to two issues that I think are related.
And talking about the strategy and in the past we've talked about Chad C. Two and a lot of the things you're thinking about long term.
Which I think are as important as platforms may be is much more about systems processing software sensors comes in and so forth and integration.
But when I look at where F. 35 is today one of the big challenges. There is an integration program and it's been tech refresh three that I think by any measure has not gone the way it has been hoped.
Can you talk about.
We are a tech refresh three the move to block four stands today, what risks that may pose for F 35 rates going forward, but then also if you extrapolate that and if I am to think about them doing broader systems architectures across domains.
How does how do I get confident that.
The integration capabilities you have are the are the best to deliver on that so it's the combination of both the F 35 situation and taking that to a long term strategy.
Sure Doug This is Jim so I'll start with tier three which is a.
And suggest a microcosm of the larger picture, but an important one.
Tier three gives you.
Declining just similar ones at least.
It gives you a better cockpit display more processing.
Dana in the airplane and more data stores, an airplane all good things for 20, <unk> century warfare, although they are not essential.
Two beginning the journey into networking that jet more.
Closely with other systems and.
In other platform. So we are doing those two things in parallel because I think they are independent.
Tier three has also been delayed a bit we're working with the J code, we feel on a common schedule now.
Got some significant supply chain issues.
That we've had to embed our own engineers into our suppliers to try to get them to perform we're counting on them.
It's important but it's not going to deter or differ us from our goal of really developing the F 35 platform to be the aeronautics cornerstone of our architecture for 20, <unk> century warfare, because yes. Once <unk> is in it will take another leap.
Frog up and data storage and data processing capabilities and networking capabilities, which we will add but we're already demonstrating how to do that.
A.
A hybrid base station there'll be actually fly in a Youtube that provides that connectivity today with the tech refresh two.
On the jet so these things are related but not.
Deferential or.
Co chairman and co terminus, we will get both of these jobs done.
And in the broader.
Program here.
I think derived by working with our government customers, so far and understanding contracts and things is that there won't be a.
Our overarching jazz situ of any kind, whether there will be is in reality in this business and I think in our customer.
Construct is that technology roadmap and this has been developed more since maybe the last time, you and I talked about this Doug but.
There's going to be a technology roadmap, which is platform by platform connectivity using an open architecture set of standards and protocols the whole industry can share.
And we're gonna be doing that one stage at a time and what I want to do and have to talk to our customers about as the most senior level is to provide every six to 12 months a mission capability by by implementing this technology roadmap mission by mission now we've got 14 missions and we got 14 technologies.
Incidentally that we have.
<unk> completed three of those missions, which happened to be a counter air serv.
Surface warfare and.
Integrated Air and missile defense, we're showing customers those roadmaps and getting feedback on what platforms, we should be tied together first and getting those sensors.
The decision, making a command and control systems and actual effectors connect.
Connected in the most optimal way every six to 12 months. So we're moving out on both fronts tier three is again.
<unk>, but not essential for moving out on the 20 <unk> century warfare front.
Hey, Thank you John I think we've got a little over our normal time, where there's been outstanding conversation today I think at this time I'll turn it over to Jim for some closing remarks sure Greg as I conclude the call today I want to end by reinforcing our commitment to delivering long term value to our shareholders here.
While using our strong cash flow and robust balance sheet to do so we are not shy about leverage you are not shy about moving out with speed and with the with scale as we've talked about.
Similarly in again, along the way, we're going to work hard and invest to advance our customers important missions along the way.
Those numbers are John from around two 2 billion of Capex and $1 $5 billion of IR, neither not incremental they are up from our kind of recent history, but they are not an incremental $2 billion that incremental $1 5 billion just to be clear on that so I just want to make sure everybody knows our approach here, we're going to be positioning.
Ourselves for growth inflection that we hope and expect to see a couple of years down the road and by doing.
The share repurchase at the scale, we're discussing in the timeframe we're looking at.
The per share valuation value of that growth inflection should be amplified that's our goal here and thanks again to all of you for joining us on this call today, we look forward to speaking with you on our next earnings call in January Thanks, a lot.
Ladies and gentlemen that does conclude your conference for today. Thank you for your participation you may now disconnect.
We're sorry your conferences ending now please hang up.