Q2 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Lockheed Martin Second quarter 2019 earnings results Conference call.
At this point all the participant lines are in a listen only mode. There will be an opportunity for your questions and instructions will be given at that time. If you should require any assistance during the call. Please press star zero and operator will assist you offline as a reminder, today's call is being recorded I'll turn the call now are 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 2019 earnings Conference call.
Joining me today on the call are Morone Hewson, our chairman, President and Chief Executive Officer, and Ken Posner, Our executive Vice President and Chief Financial Officer.
Statements made in today's call that are not historical facts are considered forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law.
Actual results may differ materially from those projected in the forward looking statements.
Please see today's press release, and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward looking statements.
We have posted charts on our website today that we plan to address during the call to supplement our comments. 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 Marilyn.
Thanks, Craig Good morning, everyone and thank you for joining us today on our second quarter 2019 earnings call.
As we review our quarterly results and increased financial outlook for 2019.
As today's release details, we had a very strong quarter financially strategically and operationally.
As you will see from some of the performance highlights and quarterly achievements.
Then I will discuss in a few minutes.
We have a remarkable team dedicated and talented employees, who are designing developing and producing innovative solutions for our customers and I'd like to take this opportunity to express my sincere appreciation to them.
Before I discuss the quarter in depth I'd like to take a moment to comment on the recent announcements regarding the decision by the U.S. government to suspend Turkey from the F 35 program.
The U.S. government made this difficult decision and as always we will continue to follow any official guidance as it relates to the delivery of the F 35 to Turkey or the export of goods from the Turkish supply chain.
Although the current program of record for total deliveries to Turkey is 100 planes. The quantities included for them in the recent slide 12 through 14 handshake agreement were a modest eight aircraft per year.
Also Lockheed Martin has been partnering closely with the U.S. government and our supply chain to minimize the impact of the F 35 program.
Over the last several months, we've been working to establish alternate sources of supply in the United States to quickly accommodate turkeys current contributions to the program.
These actions should limit any future production or sustainment impact.
And we remain on track to meet our commitment of delivering 131 F 30 fives this year.
As F 30, fives in the fleet deliver exceptional capability.
And as costs continue to come down we see increasing global demand for the F 35 that will grow the total program of record.
We believe the F 35 program remains healthy and is performing exceptionally well for all of its stakeholders.
We'll discuss the F 35 in more detail later on the call.
Moving back to our quarterly results. The corporation continues to perform with excellence driving outstanding growth and strong financial results and create value for stockholders.
This performance from across the corporation and expectations for the remainder of 2019 enables us to increase our full year outlook for sales operating profit earnings per share and cash from operations.
All four of our business areas experienced growth this quarter.
And each has contributed to our updated full year outlook, reflecting the outstanding performance of our entire team.
Our backlog has continued to increase and is again at a record level.
Our broad portfolio and long term growth opportunities have us well positioned to deliver outstanding value for our stockholders.
I'll touch on a few of our financial achievements upfront and Kim will discuss our results in more detail a little later on the call.
We grew sales again this quarter exceeding last year's second quarter by 8% with each business area, increasing revenues from the second quarter of 2018.
The growth was led by missiles and fire control from ramping production rates for tactical in Strache strike weapons.
Particularly precision fires as well as from increased sales and new Hypersonics and classified programs.
Our space organization also experienced strong sales growth with the overhead persistent infrared and GPS three contracts two programs, we won last year contributing to year over year increases.
The space strategic and missile Defense line of business also contributed to increased revenues because of strong volume in new hypersonic programs being performed in this business area.
Our segment profit increased by 6% year over year as strong performance across the corporation contributed to the growth.
As with sales missiles, and fire control and space led the way.
With improved operational performance and the growth in revenues I just discussed driving increases.
These outstanding results in sales and earnings and our focus on cost reductions and operational efficiencies also allowed us to increase our full year outlook for cash from operations to at least $7.6 billion.
Our portfolio of products and services is well aligned with our customers' needs with both our legacy solutions and new technologies in high demand.
Our heritage of innovation and performance remained strong and we are excited by our long term growth opportunities.
I will discuss some significant performance milestones in just a moment, including a tremendous honor bestowed upon our F 35 team, but first I'd like to highlight a few key orders and award activities that demonstrates the value of our broad portfolio.
In Aeronautics our F 35 organization and the Department of Defense announced a handshake agreement for the production of lots 12, 13, and 14 aircraft totaling 478 jets.
Once finalized this contract will represent the largest F 35 production contract to date.
And we will mark the largest procurement in the history of the fence Department.
I would like to express my thanks to both the Pentagon's Joint program office and the Lockheed Martin F 35 team for the outstanding coordination and cooperation they've shown in arriving at this historic agreement.
Importantly, with this agreement we now offer the lot 13F, 35 a model.
At a unit price below our long standing objective of $80 million.
Fair by achieving this target one year earlier than planned.
Through a relentless focus on cost reductions and manufacturing efficiencies across the F 35 enterprise.
We can now offer this remarkable fifth generation fighter at a price equal to or lower than legacy fourth generation aircraft, making this platform the best value fighter jet available in the world.
We are proud to be able to provide this unrivaled stealth fighter to our nation's warfighters, our partners and international customers and we look forward to finalizing this agreement in the coming months.
In our space business area.
Our team continued to build on his previous hack saw and conventional prompt strike hypersonic wins.
During the second quarter, we were selected as the prime contractor for the long range hypersonic weapons system integration efforts in support of the Army hypersonic projects office.
In addition, our space organization is part of a team led by dynamics that was selected by the US Army for the common hypersonic glide body prototype contracts.
We anticipate that both of these opportunities will be negotiated in the next few months.
And when finalized will bring the potential value of all of the hypersonic contracts across the corporation, including those awards, we discussed on our last earnings call to over $3.5 billion.
Moving to missiles and fire control, we received several contract awards in our tactical missile line of business totaling over $1.6 billion, which led to a quarterly book to Bill of 2.0.
The three separate awards were for Hellfire missiles, ATACMS missiles, and the recapitalization of multiple launch rocket system equipment in support of the Us Army and international customers.
As demand for strike weapons continues.
And rotary and mission systems, our Sikorsky team was awarded $1.1 billion contract from the US Navy for 12, CH 50, Threek K low rate initial production or L. with two and three heavy lift helicopters.
These aircraft are part of the Navy's 200 helicopter plan of record with deliveries beginning in early 2022.
We anticipate production will continue beyond the 2030 timeframe.
Providing long term growth opportunities well into the future.
Sikorsky was also awarded the first L Rep contract.
For the VH 92, a presidential helicopter.
This 540 million dollar order follows an affirmative milestone C decision. This past may and includes the first six aircraft as a total 23 unit plan of record.
Sikorsky has been producing helicopters to transport every us president and commander in Chief since Dwight Eisenhower and we are proud to build on this heritage to deliver this remarkable product for years to come.
These announcements reflect the strength of our legacy products and services as well as the demand for new solutions and platforms that are coming online.
Our heritage of investment and innovation and operational performance and position us well to perform for our customers and drive future growth.
Moving briefly to defense budgets, it was announced yesterday that the president and the house and Senate leadership have reached a broad agreement on F. Y 20 National defense funding proposing spending levels that would be a compromise between the do d. request and the house bills that have been approved and would represent an increase from the current employee 19 enacted values.
Importantly, this agreement supports removing restrictions placed on defense spending by the 2011 budget control Act caps for both flight 20 and acquired 21 fiscal years.
This action was passed by both Chambers of Congress and signed into law would remove the prospect of automatic spending reductions known as sequestration and raised the final two years of budget ceilings.
Providing crucial near term funding visibility for our national security objectives.
We will await the details of this bipartisan action.
We believe this is an encouraging step in the process to continue to provide the support for the recapitalization or national defense assets and the investment in our country's defense.
Moving on I'd like to highlight several significant events that occurred across the corporation during the past quarter.
First I'd like to offer my sincere congratulations to our F 35 organization for being part of the automatic ground collision avoidance system for auto G. cast team that was awarded the 2018, Robert J. Collier Trophy in April .
The Collier Trophy is presented annually to recognize the greatest achievement in aerospace in America.
This award celebrated the R&D cast team a collaborative group from the from industry and government, including the Air Force. The F 35 Joint program Office NASA, The Defense Safety Council and our Lockheed Martin F 35 organization for successfully completing a rapid design and implementation of life saving technologies for the worldwide F 35 fleet.
This system improves the safety of aircraft and pilots using a set of complex collision avoidance and autonomous decision making outlook algorithms.
Pushing the boundaries of autonomy and artificial intelligence.
This technology has already been credited for seven F 16 saves and the F 35 enterprise accelerated implementation of this software is seven years ahead of schedule.
Lockheed Martin companies and employees, including Glendale, Martin and Kelly Johnson have won or been part of the winning team for this prestigious honor over a dozen times since the first Collier Trophy was awarded in 1911.
And I am extremely proud that our F 35 team again joins this distinguished group of innovators.
Moving to missiles and fire control, our tactical and strike missile line of business achieved a key milestone this quarter on the air launched rapid response weapon or Aero Hypersonic missile program.
In June our team in the US Air Force successfully completed a captive carry flight test of the arrow weapon on the services be 52 Stratofortress Palmer.
Mounting the missile below the aircraft wings to gather data on drag and vibrations.
The Arrow missile successfully passed the preliminary design review in March and this captive carry test is the most recent step in the air Force's rapid prototyping strategy to mature this hypersonic weapon.
In rotary and mission systems, our Sikorsky team celebrated a key milestone with the first flight of our combat rescue helicopter. The latest rotorcraft designed to perform critical search and rescue operations for the US Air Force.
This aircraft based on the Venerable New age 60 Black Hawk.
Provides a significant increase in capabilities from previous rescue helicopters with extended range were effective defensive systems cyber security and weaponry that all lead to improved survivability.
The program continues to be on schedule and this successful first flight paves the way for a milestone C decision later this year.
To move the platform from the development phase into production.
The program of record calls for 113 of these modernized aircraft.
And we look forward to providing this crucial rescue helicopter to help ensure the air force fulfills its mission to leave no one behind.
I'll close with our space business area, whose or Ryan team took another remarkable step in returning astronauts to the moon with their successful demonstration of a crucial launch safety system.
Which completed just after the close of the quarter.
Orion is part of the backbone for our nation's planned for deep space exploration and Nasa's Artemus program, which aims to return humans to the lunar surface by 2024.
Lockheed Martin space, the prime contractor producing the Orion spacecraft for NASA designed and built the state of the art escapes system to safely pooled accrual module and astronaut's away from a life threatening event during the launch.
And this event known as the ascent aboard flight test.
The vehicle rose to an altitude of 31000 feet, where it experienced the high stressed aerodynamic conditions expected during early flight and within milliseconds. The aboard system initiated a series of maneuvers that propelled the test version of the Orion capsule away from the rocket and into a safe descent.
This test marks an important milestone as a nation celebrate the fiftyth anniversary of man's first lunar landing and now prepares for a return of human space flight.
We are proud to continue our legacy in Spacex relation by supporting New Ryan program and delivering this base the safest spacecraft.
Ever built.
With that I will turn the call over to Ken Ken.
Thanks, Marilyn and good morning, everyone.
As I highlight our key financial accomplishments. Please follow along with the web charts that we have included with our earnings release today.
Let's begin with chart three and an overview of our results for the quarter.
We exceeded our expectations for every financial metric in the second quarter carrying forward the strong performance from the first quarter.
After generating $1.7 billion of cash from operations, we returned over $840 million to our stockholders in the quarter.
We also achieved another quarter of record backlog totaling a $137 billion.
And based on another strong quarters results, we have increased our outlook for sales segment operating profit earnings per share and cash from operations for the year.
We're very pleased with our results as we progress into the second half of 2019.
On chart four we compare our sales and segment operating profit in the second quarter of this year with last year's second quarter results.
Sales grew 8% compared with the same quarter last year to $14.4 billion, while segment operating profit increased 6% over last year's level to $1.6 billion.
On chart five we show the sales growth for second quarter by business areas compared to last years second quarter.
As shown on the business areas experienced growth again this quarter.
And as Maryland highlighted missiles, and fire control and space experienced the highest growth in the quarter with 16% and 11% respectively.
Both business areas recognize growth in their hypersonic programs.
In addition missiles and fire control sales growth also included volume on classified business and precision fires.
And space also so volume increases on Nexgen OPI ARR in GPS government satellite programs.
Rotary emission systems had 6% growth driven by multiple programs that are WSS line of business, but partially offset by Sikorsky primarily due to lower volume.
Aeronautics had 4% growth driven by timing on the F 35 program and I'll note. The F. 35 program is tracking ahead of the year to date point.
On chart six we compare segment operating profit by business area in second quarter 2019 versus our results in the second quarter 2018.
Segment operating profit was up again this quarter compared with last year results in each business area.
And here missiles and fire control had the largest increase in operating profit.
17% higher than last year, primarily driven by the volume I just discussed.
Space increased operating profit by 5%, mainly due to risk retirements.
Retirements on HF in volume on government satellite programs.
This increase was partially offset by lower ULAE equity earnings.
Arrow in RMS grew operate operating profit by 3% and 2% respectively.
Aero was volume driven by both the F 35 production and our Skunk works business.
In RMS at higher risk retirements through volume at Allied WSS. This was partially offset by a charge taken at our training and logistics solutions business.
Turning to chart seven well discuss our earnings per share in the quarter.
Our EPS of $5 was 23% higher than our results last year driven by a few items.
First the quarterly volume drove higher segment operating profit.
In addition that reflects the higher Fas Cas benefit and lower tax rate, including additional tax deductions for the foreign derived intangible income or 50 that we also experienced in the first quarter of 2019.
Turning to chart eight will discuss the cash return to our shareholders in the quarter.
Subtracting our capital expenditures were approximately $1.7 billion of cash from operations in the quarter, our freight free cash flow was approximately $1.4 billion.
We returned nearly 60% of our free cash flow to our stockholders in the quarter between dividends and share repurchases.
And as I mentioned, we are increasing the full year cash from operations outlook from greater than or equal to $7.5 billion.
To greater than or equal to $7.6 billion with another quarter of strong performance.
We are on track for our continued investment in the business through capital expenditures of $1.7 billion plan for the year, which as usual is proportionately higher in the second half of the year.
For the full year, we are progressing toward our cash deployment goals.
Chart nine provides our updated guidance for the year.
We are increasing our sales outlook by $1.5 billion based on higher expectations for all our business areas for the rest of the year.
This increase in sales was driven by strong backlog across all our businesses.
Three of the four business areas had an increase in backlog again this quarter.
This outlook takes us to an impressive 10% year over year sales growth expectation and as a reminder of Gen. Our January guidance for the year was 5% sales growth.
We are also increasing our segment operating profit outlook by $225 million due to the higher sales volume across all four business areas.
In comparable to sales our segment operating profit outlook is up 9% year over year and as a reference point our January guidance was about 3%.
There is no change to our net Fas Cas adjustment.
We are increasing our earnings per share expectation by 80 cents I will provide more detail on this increase on the next chart.
And for cash from operations, we are increasing our outlook by another $100 million to greater than or equal to $7.6 billion.
Chart 10 provides a reconciliation of our current and prior earnings per share outlook for the year.
The vast majority of the increase is driven by our operational performance and volume. This results in a 66 cents increase than our EPS.
The remaining 14 cents improvement in EPS was driven by a lower estimated effective tax rate from approximately 15.5% to 15% for the year.
These items resulted in a total increase of 80 cents and a new EPS outlook of $20.85 to $21.15.
On chart 11, we show our revised sales outlook by business area.
As I discussed on our prior chart, we increased our sales outlook in all of our business areas.
An increase of $65 million that space.
350 million at RMS.
$300 million at Aeronautics and $200 million for missiles and fire control.
Totaling an increase of $1.5 billion above the outlook, we provided on our last call.
Chart 12 provides the updated segment operating profit outlook by business area.
Consistent with our sales outlook each business segment increased your operating profit for the year.
Space by $140 million missiles, and fire control by $40 million $25 million for Arrow, and 20 million for RMS totaling two an increase of $225 million above last quarter's outlook.
And finally on chart 13, we have our summary.
We continued with another quarter in 2019 with strong operational and financial performance across our portfolio.
We see strength in our backlog for near term and long term growth prospects across all of our business areas.
And based on the results of the quarter.
We increased our full year outlook for sales segment operating profit earnings per share and cash from operations and with that we're ready for your questions John .
Thank you and ladies and gentlemen, if you would like to ask a question on the call. Please press star one.
You will hear a tone, indicating when placed in the queue. If your question gets answered any wish to remove yourself from the queue. Please press the pound key again star one if you have a question. We do asking me. Please limit yourself to one question. If you have additional questions. Please place yourself back into the queue and first from the line of Peter Arment with Baird. Please go ahead.
Yes, good morning, Marilyn Ken Hi, good morning.
It's Maryland on the F 35, and the impact from Turkey being dropped from the program you mentioned the production loss 12 to 14 only include roughly eight units per year. So the question is really can those units be absorbed by other parties in the program and secondly are removing Turkey from the F 35 supply chain certainly seems more complicated given the.
The numerous parts that they supply so how quickly can those those components be.
Produced are transferred to other other suppliers and do you anticipate any temporary slowdown of production. Thanks.
Thanks for the question Peter I know this is.
Lot of questions around this but I wanted to start by saying that it is a pretty fluid situation, but one in which we've been engaged with the department of defense for a number of months close to a year is looking at.
Challenge you might see on this program because there have been indications that.
There were discussions underway. So it's clearly a government to government matter as I mentioned, we're going to always follow with the official guidance is at the U.S. government and so thats why weve added a lot of discussions with the department of defense on that.
In terms of your first question about.
Could those eight per year in the next three lots in 12, 13, and 14 by be absorbed by others, yes. They could as you know there have been additional countries that have expressed interest on onsite Poland. For example that has most recently said they like to purchase 32 in.
And they are in the process right now moving through that.
Process for their third Lenovo requesting an agreement there are other countries that have clearly indicated that they want more we mentioned, Japan in the past and and others. So I don't see that as a big challenge for us to absorb them, where we continue to ramp up production relative to your question on the supply chain.
We have been working on this for a number of months.
Kind of looking at what what could potentially be the impact of making sure that we can mitigate the risk associated.
With the the product so the parts that are produced in Turkey, and so we have a very good.
Mitigation plan.
So this can discontinuing their participation certainly would impact the supply chain posture across production sustainment to some extent and so because of that we've been working on and the F 35 enterprise Ajay BPO Lockheed Martin all of our suppliers are fully confident in the strength and stability of the program and were working.
We've been working to wind down the the Turkish industry involvement.
And so we havent we havent.
Timeline that we're working toward.
As Youve heard it's add through March of 2020 that we think it will all be resolved.
And I think we're in because we addressed it.
It's been percolating for a while and we addressed it early and have been working closely with the Pentagon and and even they have requested reprogramming dollars out of Congress to supported where.
We're very much comfortable that we're on a good path to mitigate any risks to the program.
Hey, Peter the only this Ken the only thing I would say is we have worked very closely with.
The joint program office, and if there is any.
Harm to two industry.
We will be compensated for that so we're working very closely with them you know that could you know regarding our cost schedule or or any any payment terms. We are we will be fully compensated for that which which is obviously a good thing.
Our next question from Carter Copeland with mailing US research. Please go ahead.
Hi, Good morning, Greg and Ken Roll Tide, Marilyn good morning, Lower AG.
Hi, James So 30 days ago, you announced kind of get excited.
One question you talked a lot about.
Hypersonics in your prepared remarks, obviously with the.
Our proposed M&A activity in the space that spend more topical and I think it's been a good bit of disclosure about what programs are out there in recent months and so I just wondered if you guys have positions on.
Several of these development prototype type.
Efforts, but.
When do you think we see real programs of record how should we think about the timing and the service leadership around that what do we think.
Hi, how are you thinking about that what what's the future look like from a from a real sustainable program of record standpoint, a Carter it's Ken in.
For the record I did not go to Alabama, but since my ball that's okay. We'd like you, we'd like you all I'm, saying.
So its way bosses sitting across the table for me I'll say roll tide.
So you know you are right we have done a nice job of working with the customer side due to weather the army the Air Force the Navy DARPA.
As Marilyn mentioned, we've got $3.5 billion of contracts that are either in our backlog or will soon be in our backlog.
It's they are generating sales they are in all these programs are in the development the prototype.
Faiza of of their of their program.
You'll start seeing our first launch prototype launches starting next year on most of these programs.
Some of these programs App actually have scope that is to prepare for production doesn't mean, they're going to go into production, but I think once these things are either deemed successful or not while meeting the prototype the development phase once we get past first launch.
Then I think it will be the time for that customer set.
To sit with us to see if it makes sense to go to go into production and Thats, probably say two years out would be it would be our best guess so you will see this year next year and into 2021 us continue.
To perform on these programs from a prototype development standpoint, perhaps.
Shape, a couple more programs and get a few more.
In our backlog, but production won't happen for the next couple of years.
And next we go to George Shapiro with Shapiro Research. Please go ahead.
Yes, Ken.
Overall can you explain I mean, you raised.
Sales growth by two and a half billion for the year end and a lot of your business is fairly long cycle. I mean, there's some shorter cycle businesses, but can you explain why it would get raise that much or is it just the prior CFO , giving a pretty conservative numbers to work with thanks.
So everybody is on a roll today. Thanks, Thanks George.
You know actually actually.
If you look at our order book.
And if you put aside we assumed we would get the block by order in the second quarter DEFINITY DEFINITY station for lot 12, and lost 13 that did not happen if you put that aside.
For the year, we're we're up beating our orders planned by $11 billion.
And those some of those are pull ahead, so think of the ADW. We order that we got it was for three years or so we're not getting many sales this year for that.
For that order there are some orders this year that.
Frankly were pull ins or were orders that we did not expect there were a few and F 35, plus some follow on modernization contract and Sustainment contracts. We did not expect in fact space is having.
The strongest year from an order book standpoint, a lot of those are in mission systems. There was some Orion work, we did not expect and that is why you've seen the increasing guidance for space being as robust as it is so roughly that billion billion and a half a lot of that is in still in front of us in the third and the fourth quarter and a lot of that is for frankly for a front end orders. We got this year also remind you that we got the OPI our contract late last year CSC, the Canadian surface combatant out of RMS and GPS three.
In late last year.
Those programs, especially since space has talked about the agency has talked about go fast. We are we are taking them by their word and we are going fast and we've accelerated.
Sales and so a lot of it is the order book from late last year and the increase in orders we got in the first half of this year, we've done very well there.
Thank you.
Our next question is from Seth Seifman with Jpmorgan. Please go ahead.
Thanks, very much and good morning.
Marilyn.
The recently announced plan to merge between Raytheon United Technologies has brought up a lot of discussion about scale and I think that cost down to a lot of people scale sounds like shorthand for being bigger in order to.
Absorb more development risk.
And I think thats that can be a cause of concern for investors since the industries.
Discipline over the past 10, or 15 years I think is something that investors have have applauded and come to appreciate and so you know.
Given that there seems to be more discussion of scale do you find Lockheed having to rely more on scale as you go out.
In search of opportunities and are you seeing others behave any differently.
Well, that's a great question Seth I would just stated I think for US our scale is an advantage for us because it gives us the opportunity to.
Invest more in research and development I think Thats true when you look across our industry. It allows us to reach out to small and medium sized businesses and and to maybe take and in fact, we increased our our ventures.
Fund so that we could spend more in that arena. We're looking at we've increased our <unk>, Iran expenditure independent research and development over the last few years. So.
So I think just by the nature of the size of our corporation and and the financial performance of our corporation that we've been able to invest more in research and development.
I gave you. An example would be you know a lot of the wins that we've had and Hypersonics I mean thats an area. We've been investing in for a number of years are directed energy autonomy and lot of those areas is because we have been able to invest in things that were looking out beyond today, not just on what we need to invest to keep our current portfolio relevant.
As we look at Raytheon and United Technologies merger I mean, we'll continue to monitor that transactions, then progresses and and evaluate what that impact might be for Lockheed Martin, but I think we're very well positioned in in terms of where we're investing and I think just just seeing our financial performance this year and increasing our outlook in terms of.
Sales for the year, and where we were taking the business side I think that just demonstrates that so hopefully that answered your question.
Anything you want to add Ken.
The other thing I'd add.
Seth is we do have a very robust I'll call a corporate development process, which includes everything that Maryland talked about including divestitures divestitures in M&A. In fact, we meet with Merrill Lynch and the head of our corporate strategy lead on a monthly basis to to review that and also to review exactly what you just described what impact will.
The scale of UGC have on on on US UGC Raytheon have on us and we're still sorting that out.
Our next question is from Rich Safran with Buckingham Research. Please go ahead.
Narrowed Ken Greg Good morning, how are you good morning, well thanks.
So I was very interested in your opening remarks on the F 35, and pricing and I think it's been a while since you spoke about the F 35 margin. So I wanted to ask you on.
Couple things about that first.
And always to the best you can could you discuss how much of an improvement in margins, you're expecting on Delaware 12, and the new handshake deal that you're going to finalize I realize things are still forward there.
Also in your answer if possible could you contrast margins on the production program with margins on the Sustainment business, thanks to beverage and I'll take that so you're right. The ink is not yet dry on.
On the on the block by contract yet, but we're still going through the through that and we're hopeful in the third quarter, we'll have that.
Lot 12, and 13 DEFINITY ties.
Regarding pricing.
We have we have I think done a nice job with the joint program office.
On this contract demonstrating where we think costs are going we've worked very closely with our supply chain.
In terms of driving down costs and ensuring they still got value from the program from from a profitability standpoint.
And you're right. It is early but the deal. We think we've signed we've it's two parts so of of of profit. It's a base fee and part of that base fee is a supplier incentive fee that that were going to receive and that is.
Ensuring that the quality of the of the work being done and also the the price of the work done by our supply chain will.
If we hit those targets will be incentivized for that the second piece is very similar to lot 11.
We're going to get a.
Performance incentive fee and Thats based on final Assembly on lot 12, and then May.
On lot 13, and 14, and we feel really good about those targets going forward and we do think if we perform.
We have an opportunity to improve.
Margins on lot 12 through 14 relative to previous lots and part of that is the fee arrangement that we have that incentivizes us on good performance plus saw we're comfortable with the cost the cost targets that we have for our internal costs in our in our supply chain regarding.
Sustainment in production we're seeing.
We're seeing production is probably going to be higher in the future.
Compared to Sustainment, there there would be one thing that that could potentially impact that if we can work with the customer.
To get a some type of PPL contract that incentivizes us to reduce to reduce cost and availability that potentially could help but just based on the mix of programs on.
On sustainment between cost plus and and fixed price compared to production, which is all fixed price.
We'll see higher margins on production going forward.
Next we'll go to Rajiv Lalwani with Morgan Stanley . Please go ahead.
Hi, good morning, Marilyn Tongon.
Good morning.
Maryland, a question for you.
Just coming back to some of your prepared comments around the budget and being able to get a two year deal can you talk about what sort of revenue visibility you've had gives you maybe.
How far out you can you can now go and then.
And as part of might be for Ken any implications on the Capex side, I mean, having that sort of visibility at this point in time does that put upward or downward pressure based on everything that you're seeing today.
So.
Dave I think you know talking about budgets, maybe it gives us a better sense of.
What our customers will have in terms of where they would make their decisions we'll have to see how it plays out in terms of what that means for Lockheed Martin I mean for the current.
Negotiations it appears that our programs are well supported but again, we'll just have to wait until Congress gets through its process and and closing on that so I can't really give you a revenue projection around that the best thing. We can do is what we are giving you in and our outlook today and we're right now in our planning process that we do annually of looking at what is going to look like in the next coming years. So we'll continue to do that the one thing I would point to that for you is this strong backlog. We have 137 billion narrow black backlog gives you should give you a sense of.
A very strong performance for us in the next few years and then.
The upside, we'll see as we win more programs and build that backlog is.
An indication on on revenue growth for US. We we are very much focused on a strategy of long term growth and continue to think that not only our portfolio of products, we have today or well supported by both us and our international customers, but beyond that we are investing in areas that we think are going to be in demand in the future. So I feel very good about our growth prospects I can't really.
Make a direct connection between what the budget and negotiations are on Capitol Hill versus what our revenue growth is yes. The only thing I'd add on that and then I'll get to the capital question is.
You look at you look at the.
The budgets that are out there and what some of the sound bites are it does play nicely into our portfolio. So so we do feel good about that and as Marilyn mentioned we're excited.
To start seeing the business areas come in and show us their long range plan in the next.
Quarter, and we'll give you some color on that in the October call.
Regarding Capex we've mentioned.
Weve had were stronger than in capital expenditures than we have been historically and we'll see that for the next couple of years and a lot of that is driven by the recent wins, we had in Palmdale. So we're building new buildings out in Palmdale for some of the classified wins.
That we have an all in all note that.
That big classified job, we won last year, we did get the second customer order. This year, which is great news. So that's progressing as as we'd like we talked about missiles and fire control. The ramp on production that will continue and we are continuing to see strong demand there so that will be.
Strong capital requirements, there and.
Ed space, where could continue to finish up our gateway program. So we will be around the billion 7 billion eight of Capex probably for the next next couple of years. So thats. The best line of sight, we have today.
Our next question is from David Strauss with Barclays. Please go ahead.
Thanks, Good morning, good morning.
I wanted to ask about the working capital build that you've seen year to date pretty significant and based on the.
The free cash flow for current operating cash flow forecast for the full year doesn't it doesn't appear like you're assuming that any of that.
Kind of comes off through the rest of the year can you talk about that and then also the potential and how you're thinking about the pension contributions that you've talked about in 2021 and the potential pay potentially pull that forward into into 19. Thanks.
You bet, you're right. So we have had some.
Working capital growth in the in the first half of the year, primarily in inventory and in.
Our unbilled receivables or contract assets you know the thing I would say, though is we have grown the first half of the year.
Very very strong relative to where we were on December 30, Onest. So we think we're doing the working capital build in a in a smart way we do see.
Strong cash generation in the second half of the year and then going into.
Into next year. So we do have a concerted effort to reduce on build inventory reduced.
The inventory that's on the on the balance sheet.
In the second half of the year, and then going into into into next year.
And we've always said.
No that would happen to just pick isolate and pick Sikorsky will start having those development programs start going into production programs. In the next next couple of years. So we will see our working capital come down in a significant way in the next couple of years, you'll read regarding pensions. The best line of sight, we have today.
It is so interest rates are down 75 basis points from where we thought they would be.
And we've talked about our long term.
Asset growth of 7%, we are close to 12% year to date I know the years not over so if you look at those two variables.
Right now we will go through the planning process in the next couple of months, but right now we see a pension contribution of about $500 million next year.
And then $2 billion in 2021, and probably another $2 billion in 2022.
We will go through.
Our financial review later this year and we will look at.
The timing of those pension contributions whether it makes sense to pull them forward and that.
We'll have to be relative to some of the debt obligations that we have in 2020 and 2021, So we'll sort that all out in the next couple of months.
And next go to Doug Harned with Bernstein. Please go ahead.
Yes, good morning, good morning, good morning.
I wanted to go back to the F 35 in margins because.
You made some real progress here with reaching the $80 million target early.
If we look forward when I think of.
Combat aircraft programs like this you want to be up at that kind of eventually 13, 14% type margin level.
So when you look forward and this and this program matures you expected to get up to those kind of levels and then what kind of timeframe is reasonable.
Yes, Doug.
So I gave you color on I guess I gave you color on.
Lot 12 through 14, so we'll hit.
Milestone C on on F 35, soon and will hopefully start converting these FDI contracts.
Two from fixed price contracts.
And that then will give us the opportunity to to recoup more of the of the under runs.
Then what was the contracts we have today, so basically today the overruns are.
Capt, just like a fixed price contract, but we are sharing in the in the under runs and on a few of these programs. We have been fortunate where we have under run and weve been sharing that with the United States government. So I think it would be going forward it would be beyond.
The the block buy and it would have to be starting when we start getting into multi year. So lot 15.
And beyond what would be the opportunity for us to get up into the to the 13th than we would do our recent 13%. We would do everything we can to make that happen to make sure is still a fair deal for our customers as well.
Our next question is from Joe Denardi with Stifel. Please go ahead.
Yes.
Good afternoon.
Ken I think.
I think Bruce a couple of years ago talked about kind of the three year revenue growth goal and I think thats, obviously changed a little bit.
So can you maybe just revisit just given how strong this year has been going what the the framework should be for next year revenue growth and then what's your ability is in a couple of years to offset some of these pension contributions with better working capital in that type of thing. Thank you.
Thanks, Joe So I, we really don't have visibility yet into into next year and you're right. We have a much stronger growth. The good news is backlog is much stronger as well so we need to see the timing of that burn down of backlog and we won't have that visibility for another for another two months and I will I promise give you that color.
On the October call.
Just.
Going forward.
If you look at.
We're where we're going.
From from a from a pension standpoint, we do see line of sight out in the 2026 time period, where.
You hopefully you'll recall, we are freezing our pension for the most part totally by the end of the year and we do see line of sight in the 20 ended this year excuse me a lot line of sight in the 2026 2027 time period, where.
We will be making a modest pension contributions generally for bargain bargaining arrangements that we have.
So it will be out and that they will be out in that time.
Period, where.
We'll be able to do that and just to recall if you look at.
Our Cas recoveries, our Cas recoveries out for the next couple of years are going to be around.
Two and a half billion dollars.
And as I mentioned earlier, our pension contributions as we see them today in the 2021, two and three time period are likely to be around $2 billion, but even going farther out as our Cas recoveries go down they will still be higher than our our pension contributions out to that 2026 2027.
Time period.
And that should.
Be able to offset working capital to to potentially.
Fund the pension plan so.
Yes that that potentially could happen.
And next we'll go to Pete Skibitski with Olympic Global Advisors. Please go ahead.
Yes, good morning, guys.
Good morning, Tony just thinking about the continuation of potential continuation of this great growth we've been seeing the last few years guys at missiles and fire control.
I think you're still spending growth capex in Arkansas.
Got some of these hypersonic wins and I think that you've also got this I think pretty big competitive take away. This aim to 60 program.
Can you can you talk about the visibility that you do have that missiles given there some.
Strategic.
Priority type programs in that segment.
Offset by maybe some really tough comps just just maybe talk about some of the visibility you have there. Thanks, you bet. So yes.
Top and talking to missiles and fire control and they talking to their to their customer set and thus actually being in the in the in the room with them at times that we see strong growth.
Still across their portfolio. So if you look at Hellfire Amin you mentioned, Pete you mentioned you're spot on there there is still continued capital growth there.
And it is bought and by the United States government. They understand what we're doing and fully support it you will see us and Hellfire go from roughly 8000 units up to 11000 units, we see line of sight of that.
GML Rs from 6000 to 10000.
ATAC comes up to 500.
Jasmine, we'll see significant growth that we will continue to see significant growth and Im sure you saw the big.
Order, we got this year from KFC. So we do see continued demand.
With that our Pac three.
350 to 500 fact.
Missiles and fire control has heard from their customer set that we could build 750.
They are in the international customer would take them. So we do see very very strong demand.
For the next couple of years, so with the supplier control in fact, they will likely be the fastest growing.
Business area.
Of the Lockheed Martin portfolio for the next couple of years.
And we'll go to Ron Epstein with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, good morning.
Just wanted to follow up on.
Sikorsky looking at where the business is performing today, how is it performing relative to where you thought it would be when the deal was done.
So Ron good morning.
So we're pleased with how Sikorsky is performing you have.
Strong performance with with the Blackhawk programs.
We just as Marilyn mentioned in her prepared remarks, we got to El Rey.
Two and three with.
On CH 53, K., we're happy with that performance.
We're we're trying to shake the deal in India for the MH 60, we have a lot of international demand there.
Generally speaking, we're pleased with the cost take out that we did.
At Sikorsky, how we integrated them into our RMS some of the production programs have slipped to the right.
Understandable I mean normal development things that happened, but I'd say on the whole were were very pleased with.
Or the performance of Sikorsky, we talked about the working capital growth.
Earlier, a lot of that working capital growth.
Is that Sikorsky and it will it will burn down over the next.
Couple of years.
We are trying to shape a couple new business wins that we feel good about that.
No the the flora, which is the medium lift helicopter, we feel good about that going forward and then faraj, which is the light.
Lift helicopter, we feel good about that so on the whole we were pleased with where things are going.
The only thing I would add the one area that we it's been a little bit of a disciplined but it's such a small element of the portfolio. It hasn't it's been offset by balanced growth opportunities that you highlighted can with his commercial.
We had we have been challenged in our commercial oil and gas area. That's.
Thats well known its.
It hasn't come back and I think that's true across the industry, but that's that's small element of the portfolio has been very well offset by the growth opportunities we've seen on today and into the point I would make there is.
And I think we highlighted this Bruce did that we.
Discounted a lot of that going forward, but you are right that would have been nice upside if the market turns.
Our next question from Rob Spingarn with Credit Suisse. Please go ahead.
Hi, Good morning, good morning, good morning.
I want to Ken going back to your point on not having line of sight. So much into the out years I'm. Just curious was this higher level of wins in the first half.
At any level of pull forward of award you might have expected later this year or next year or are these mostly market share gains. Like example, aim to 60 or Hypersonics et cetera. If you could just talk to that a little bit and then Marilyn if you could speak perhaps to why you're winning some market share there and especially in the missile side.
You bet, Rob So as I mentioned earlier, we are ahead of our AR or or will beating going to beat our plan. This year by about $11 billion.
I'd say.
Rob, it's probably half up pull aheads and.
Half.
Things that we shaped.
With our customer set that.
We're not.
In our plan So you mentioned hypersonics.
On the whole most of those awards were not in our plan and just to give you a little color, we're going to probably book about $600 million of sales and Hypersonics. This year.
And in the end than the rest of that $3.5 billion would go into.
The next two years as I mentioned earlier.
AAMC the two additional years would be a pull pull ahead the the aeronautics for the most part where.
Our upside they were not pull aheads.
A lot of the other space programs were.
Upside so we're Ryan.
Additional scope is.
His upside the mission solutions.
Work is is new scope, we had a new order for.
International customer for our Soffe.
S 70 I program.
So I'd say on the whole about half.
Pull aheads and half.
Shaping by us to win new programs.
And then to your question about why you think we're winning market share I would just say that we we.
Could innovation and investment in and extending our products and investing in new products as a priority in this company I mean that sir.
Thats, we know that Thats, where we bring value to our customers and so its long running investments that we've been making into a programs that are coming to fruition that allows us to win for example, Hypersonics is a great example of that a lot of the work that we've been doing that for a number of years directed energy is another example, these are areas that.
And even on our current portfolio as we look at extended ranges like Pac three MSC or we look at.
Other other opportunity that fit.
That we can do to investing in our current portfolio is what allows US and then I think you know the key thing is that we've got a very talented team of folks that are always focused on performance and performing on the work we have sets us up well to be able to two.
To win new business, because we can we can invest and affordability, we can invest in innovation to bring that value.
Okay.
John This is Greg I think we've kind of over the top of the hour here. So I'll turn it back over to Maryland for final thoughts.
Thanks, Greg So let me just conclude the call today by again reiterating that our second quarter results and our increased 2019 outlook reflect our commitment to our strategy of growth and operational excellence.
Because we are going to continue to deliver long term value creation for our stockholders and innovative solutions for our customers. So once again, we thank you for joining us on the call today and we look forward to speaking you to you on our next earnings call in October .
John that concludes our call today.
Thank you ladies and gentlemen, you may now disconnect.
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