Lockheed Martin Corporation

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 to Mr. Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.

Thank you, John, and good morning. I'd like to welcome everyone to our second quarter 2019 earnings conference call. Joining me today on the call are Marilyn Hewson, our Chairman, President, and Chief Executive Officer, and Ken Posenreid, our Executive Vice President and 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. Please access our website at www.lockemartin.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 that 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 Lot 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 Turkey's 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-35s this year. As F-35s 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 up front, and Ken 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 and strike weapons, particularly precision fires, as well as from increased sales in new hypersonics and classified programs. Our space organization also experienced strong sales growth with the overhead persistent infrared and GPS-3 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 in space led the way, with improved operational performance and the growth in revenues I just discussed driving the 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 remains 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 will mark the largest procurement in the history of the Defense 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 13 F-35A model at a unit price below our long-standing objective of $80 million, thereby 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 its previous hacksaw and conventional prompt strike hypersonic winds. During the second quarter, we were selected as the prime contractor for the long-range hypersonic weapons system integration effort in support of the Army Hypersonic Projects Office. In addition, our space organization is part of a team led by Dynetics that was selected by the U.S. Army for the Common Hypersonic Glidebody Prototype Contract. We anticipate that both of these opportunities will be negotiated in the next few months and when finalized, would 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 U.S. Army and international customers as demand for strike weapons continues. In rotary and mission systems, our Sikorsky team was awarded a $1.1 billion contract from the U.S. Navy for 12 CH-53K low-rate initial production, or LRIP, 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 LRIP contract for the VH-92A presidential helicopter. This $540 million order follows an affirmative milestone sea decision this past May and includes the first six aircraft of the total 23-unit plan of record. Sikorsky has been producing helicopters to transport every U.S. President and Commander-in-Chief since Dwight D. 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 have positioned 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 FY2020 national defense funding, proposing spending levels that would be a compromise between the DoD request and the House bills that have been approved and would represent an increase from the current FY19 enacted values. Importantly, this agreement supports removing the restrictions placed on defense spending by the 2011 Budget Control Act caps for both FY20 and FY21 fiscal years. This action, once passed by both chambers of Congress and signed into law, would remove the prospect of automatic spending reductions known as sequestration and raise 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 of our 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, or AutoGCAS, 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 AutoGCAS team, a collaborative group 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 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 the implementation of this software seven years ahead of schedule. Lockheed Martin companies and employees, including Glenn L. 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 and the U.S. Air Force successfully completed a captive carry flight test of the AERO weapon on the Service's B-52 Stratofortress bomber, mounting the missile below the aircraft's 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 U.S. Air Force. This aircraft, based on the venerable UH-60M Black Hawk, provides a significant increase in capabilities from previous rescue helicopters with extended range, more effective defensive systems, cybersecurity, 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 sea 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 Orion 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 plan for deep space exploration and NASA's Artemis 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 escape system to safely pull the crew module and astronauts away from a life-threatening event during the launch. In this event, known as the Ascent Abort Flight Test, the vehicle rose to an altitude of 31,000 feet, where it experienced the high-stressed aerodynamic conditions expected during early flight And within milliseconds, the abort 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 the nation celebrates the 50th anniversary of man's first lunar landing and now prepares for a return of human spaceflight. We are proud to continue our legacy in space exploration by supporting the Orion program and delivering the safest spacecraft ever built. With that, I'll turn the call over to Ken. Ken?