Lockheed Martin Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Lockheed Martin Third Quarter 2019 earnings conference call. For the conference, all the participant lines will be 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 Invest Relations. Please go ahead,

sir. Thank you, John. Good morning. I'd like to welcome everyone to our third quarter 2019 earnings conference call. Joining me today on the call are Marilyn Houston, our Chairman, President, and Chief Executive Officer, and Ken Poznery, 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 our charts on our website today that we plan to address during the call to supplement our comments. Please access our website at .lakeedmartin.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, Greg. Good morning, everyone, and thank you for joining us today in our third quarter 2019 earnings call as we review our quarterly results, our key accomplishments, and discuss our preliminary outlook for 2020. As today's release illustrates, we had another quarter of strong results financially, strategically, and operationally. These results reflect the continued strength of our core legacy program with recent strategic wins contributing additional growth. Our focus on program execution and investments in long-term growth capabilities have our team well positioned for the future. Kim will discuss our financial results in more detail and provide preliminary trending data for 2020. First, I'd like to begin by highlighting a few of the elements that drove our strong third quarter performance. Sales this quarter exceeded last year's third quarter by 6%. Year to date, we are nearly 12% over our 2018 results. Missiles and fire control had the highest overall growth this quarter as deliveries of tactical and strike weapons, development work on new hypersonic programs, and PAC-3 missile production grew from last year. Our aeronautics business area also saw strong sales growth in F-35 development, sustainment, and production, and we increased our joint strike fighter deliveries to 28 aircraft this quarter compared to 20 in last year's third quarter. Our space team saw continued growth from recent strategic wins in their overhead persistent infrared or OPIR contract, the GPS-3 satellite production program, and new hypersonic wins in their portfolio. This quarter, we added over $600 million to our backlog, which now exceeds $137 billion and has reached a record level for the fifth consecutive quarter. Our segment profit grew by comparable amounts, with the third quarter results improving 5% over the 2018 third quarter. And we had a strong quarter of cash generation, achieving $2.5 billion of cash from operations We now have brought in over $5.8 billion of operating cash year to date, keeping us on pace to deliver at least $7.6 billion in cash from operations for the year. Our team continues to drive growth and performance in all financial metrics with a portfolio of products, technologies, and services that are in great demand by our customers and which continue to provide long-term value to stockholders. Turning to cash deployment during the quarter, our board of directors approved two key actions demonstrating our commitment to returning cash to stockholders. First, the dividend was increased by 9% to $2.40 per share quarterly and $9.60 annually, continuing our commitment to providing shareholders a strong dividend. Second, our share repurchase authority was increased by $1 billion, bringing our total repurchase authority to $3.3 billion at the end of the third quarter. The recent actions taken by our board will position us to continue our shareholder-friendly focus on returning cash to stockholders through dividends and share repurchases. Turning back to our business areas, I will touch on some significant operational and strategic accomplishments in just a moment, but I want to first highlight a few of the notable new business wins and follow-on awards that have helped position us for long-term growth. I'll start this quarter with our Rotary and Mission Systems Organization, whose integrated Warfare Systems and Sensors line of business was selected by the U.S. Army to develop the Sentinel A4 radar system. The Sentinel A4 radar replaces the current A3 variant and will provide improved air missile defense against low-flying, unmanned aerial systems, cruise missiles, and other threats. The initial $280 million award is to develop and deliver 18 new A4 systems. The Army plan of record is to upgrade 199 A3 radars with new Sentinel A4s, with a total potential value of approximately $3 billion over the life of the contract from sales to domestic and international customers. This strategic win provides the corporation with a new growth opportunity, building upon our successes in the Space Fence, Long Range Discrimination Radar, and Homeland Defense Radar programs, and I am very pleased to add this program to our portfolio. RMS also announced the award of two contracts totaling over $500 million to evolve and improve the U.S. Ballistic Missile Defense System for the Missile Defense Agency. Our Command, Control, Battle Management, and Communications Contract, or C2BMC, a legacy program dating back over 15 years, received a $320 million award to enhance the MBA's Ballistic Missile Defense System, integrating our Long Range Discrimination Radar and other new sensors into the solution, providing advanced tracking capabilities for emerging threats, and further hardening the cybersecurity posture of the system. C2BMC is a cornerstone of the nation's layered air and missile defense network, and we are excited to evolve this critical capability. Separately, the Missile Defense Agency awarded RMS a $240 million contract to support the modeling and simulation framework for the Ballistic Missile Defense System. This new contract will test the operational effectiveness and performance of fielded ballistic missile defense equipment and evaluate new conceptual architectures to help ensure the warfighter receives the most effective solution possible. In aeronautics, our F-35 team received notification from the State Department of the approval for a proposed foreign military sale to Poland. The notification includes the procurement of 32 conventional takeoff and landing, or C-TOL, variants with a total potential value of approximately $6 billion. The F-35 C-TOL, once deployed, will integrate seamlessly with the Polish Air Force's existing 48 aircraft, F-16C, and would replace aging fourth generation legacy aircraft. We are proud of our long-standing partnership with the Polish government and industry and look forward to continuing that relationship as we deliver this unrivaled fighter jet to this important NATO ally. Our F-35 team was also awarded a $2.4 billion IDIQ contract for continued sustainment support to provide initial spare parts for our U.S. Marine Corps, Navy, and Air Force aircraft, as well as for partner countries and other international customers over a two-year period. Keeping with Aero, our F-16 program received the formal $800 million award for the production and delivery of 14 -the-art Block 70 fighter jets to the Slovak Republic following the notification we discussed last year. This award brings our F-16 backlog to 30 aircraft, with Bahrain and the Slovak Republic as our latest customer nations, and we are pleased to have the opportunity to help provide security products to these important allies. We are excited with the opportunities we see ahead of us in the F-16 pipeline, and we look forward to building this remarkable aircraft for years to come. In missiles and fire control, we received a $1.4 billion order to provide terminal high-altitude air defense, or FAD, interceptor support to the Kingdom of Saudi Arabia, and this announcement brings the total award and value of the KSA FAD program to over $3.5 billion. Moving forward to our space business area, we received a $2.7 billion award to deliver the first three Orion spacecraft to support NASA's deep space exploration objectives with a second order of three Orion vehicles planned in fiscal year 2022. Orion is the NASA spacecraft that will carry astronauts from Earth to the Moon and bring them safely home as part of the Artemis Lunar Exploration Program. NASA has expressed a commitment to land the first woman and the next man on the Moon by 2024, and Orion is the planned delivery vehicle. The goals of the Artemis program are to demonstrate new and innovative capabilities with the ultimate objective to provide the technologies and experiences to launch a mission to explore Mars in the 2030s. We are excited that Orion has been identified as the spacecraft to deliver these brave astronauts to lunar and one-day Martian orbits and bring them safely home to Earth. And just after the close of the third quarter, our space business area received a $495 million award with the potential for over $1.2 billion of value on the Trident D-2 program. The award is for the production and deployed system support for the Trident D-5 submarine-launched ballistic missile system, a program we have been leading for over 60 years. These announcements reflect the long-term investments we have made to develop new technologies leading to new franchise programs and innovations to enhance legacy products, providing us with continued growth opportunities for the future. Turning briefly to budgets, the Bipartisan Budget Act of 2019 was enacted into law during the third quarter and established increased spending levels for discretionary defense budgets and total national security spending for FY20 and FY21, effectively eliminating the constraints imposed by the Budget Control Act of 2011. Both chambers of Congress have advanced appropriation bills in support of these budget increases, and in both versions, our programs are well supported. Final legislation approving these funds has yet to be passed, and the federal government is currently operating under a short-term continuing resolution for fiscal year 2020 that is set to expire on November 21. The CR limits the Department of Defense authorization to previous fiscal year levels until an appropriations bill can be signed into law. With a large portion of our backlog work already funded from prior fiscal years, we do not expect any impact to our 2019 financial outlook from this current short-term CR. Should the continuing resolution and its associated budget constraints be extended beyond November 21, we could experience some level of impact to our 2020 trending data, depending on the duration of the CR. Moving on, I'd like to highlight several significant events from across the corporation that occurred during the past quarter, which demonstrate our strong operational performance. In Missiles and Fire Control, we are excited by two expansions we are undertaking to accommodate planned growth in our tactical missile and air missile defense lines of business. In August, we opened a new 30,000 square foot facility in Texas to support production of PAC-3 missiles, FAD interceptors, and guided multiple launch rocket systems. In September, we broke ground on a new long-range fires production facility in Arkansas, which will add 70,000 square feet to the current property and allows us to accommodate increased production demand in our Army Tactical Missile Systems and other precision fires programs. In our space business area this quarter, I was extremely proud to attend the official groundbreaking ceremony announcing Northern Alabama as our flagship location for the corporation's hypersonic strike work, establishing a new facility for the engineering and manufacturing of hypersonic weapons. These three actions reflect our commitment to investing in legacy programs as well as emerging technologies to support the current and future needs of our customers. In Rotary and Mission Systems, our Sikorsky team completed an extensive set of testing for our Combat Rescue Helicopter to successfully achieve the milestone C decision, moving the program into the low-rate initial production phase of the contract. The joint Sikorsky and U.S. Air Force test team executed over 70 hours of envelope expansion flights, validating the modifications to the Venerval Black Hawk platform that will allow it to perform its important search and rescue mission. The U.S. Air Force plan of record is to receive 113 helicopters with five aircraft currently in various stages of production. With enhanced avionics, improved offensive and defensive capabilities, and a new fuel system that nearly doubles capacity, the Combat Rescue Helicopter has now been deemed capable of fulfilling its crucial mission to save downed warfighters anytime, anywhere around the world. With that, I'll turn the call over to Ken.

Thanks, Marilyn, and good morning, everyone. As I highlight our key financial accomplishments, please follow along with the web charts that we've included with our earnings released today. Let's begin with chart three and an overview of our results for the quarter. Sales, segment operating profit, cash from operations, and earnings per share continue to be strong. We generated $2.5 billion of cash from operations, and we continued our cash deployment actions in the quarter, returning nearly $830 million of cash to our shareholders through a combination of dividends and share repurchases. And we grew our backlog to $137.4 billion, representing the fifth consecutive quarter in a row of record backlog. Based on the strength of our third quarter performance, we've updated our financial metrics for 2019. In addition, we'll be discussing how our performance this year is carrying over into 2020 with our preliminary financial trends. Turning to chart four, we compare our sales and segment operating profit in the third quarter of this year with last year's results. As I mentioned earlier this year, for comparison purposes, the third quarter of this year had 13 weeks in the accounting period, while last year's third quarter had 14 weeks in the accounting period. Even without the extra week in the quarter, our results succeeded last year. Sales grew 6 percent compared with the same quarter last year to $15.2 billion, continuing the strength we had in the first two quarters, while segment operating profit increased 5 percent over last year's level to nearly $1.7 billion. Year to date, all four business areas contributed to the significant increases in both sales and operating profit. On chart five, we'll discuss our earnings per share in the quarter. Our EPS of $5.66 was 52 cents, or 10 percent higher than our results last year, driven by operational performance. Moving on to chart six, we provide a revised outlook for 2019. With just one quarter left in the year, we are providing a point estimate of results for the entire year versus the ranges we have provided in previous quarters. We expect sales to be approximately $59.1 billion for the year, above the midpoint of guidance range we provided last quarter. At $6.4 billion, our forecasted segment operating profit is above the midpoint of the guidance range last quarter, resulting in a 10.9 percent margin. This puts our sales approximately 10 percent above 2018 results and segment operating profit approximately 9 percent above last year. Moving on, our FASCAS pension adjustment remains unchanged at a little less than $1.5 billion. Our earnings per share is expected to be around $21.55, above the high end of our previous guidance range, driven by a lower tax rate than our earlier estimates and the continued performance across our businesses. Cash from operations remains at equal to or greater than $7.6 billion, which has increased in the first two quarters of 2019 from the $7.4 billion outlook in January. Chart seven provides a reconciliation of our earnings per share outlook this quarter compared to last quarter. Operational performance is expected to drive approximately $0.07 increase in EPS from the revised outlook for segment operating profit as a result of higher sales volume in our business areas. Tax predominantly makes up the remaining $0.48 in EPS, with most of that increase coming from a lower tax rate as we continue to reflect the latest benefits from the FDII, or the Foreign Derived Intangible Income deduction that we discussed earlier this year. We now expect our full year effective tax rate to be approximately 13%. Together, these changes represent an expected $0.55 improvement from the midpoint of the EPS range we provided last quarter to a new outlook of $21.55 per share. Chart eight shows our new outlook for sales by business area for the year. Our point estimate for sales outlook is above the midpoint of our last guidance, increasing to $59.1 billion. On chart nine, we provide a similar view of our new outlook for segment operating profit by business area for the year. Like our sales, segment operating profit is above the midpoint of the guidance range from last quarter. RMS is slightly above their midpoint, and SPACE's latest outlook shows them exceeding the high end of their prior range. On chart ten, we provide a preliminary look at our 2020 trends. We expect our 2020 sales to be approximately $62 billion, 5% growth over our current outlook for 2019 sales. We expect our segment operating margin will be between .5% and 10.8%. This marginal level assumes similar performance in our legacy programs in all business areas, with some dilution from the continued growth in new STAR programs we have recently won. We estimate that our cash from operations will be equal to or greater than $7.2 billion, inclusive of our required $500 million pension contributions next year. We also plan to have at least $1 billion in share repurchases, the same level as we expect to have in 2019, more than offsetting any planned share issuances in the year. And similar to 2019, we have a debt maturity coming due next year, worth approximately $1.3 billion. Just to note, our 2020 trending data does not include any impacts regarding the recent potential sanctions or other actions the government may take with respect to Turkey. We will continue to evaluate any potential impacts to our programs. Moving to our FASCAS outlook, we expect our net 2020 FASCAS adjustment will be approximately $2.1 billion, or about $600 million higher than the adjustment for 2019. This adjustment reflects the final phase of the plan freeze of our salary pension plans that we previously disclosed. This estimate assumes a discount rate at the end of the year of .25% or 100 basis points below the 2018 rate. Based on our performance to date, we are assuming a 15% return on our assets for the full year. And going forward, we are maintaining our long-term asset return assumption of 7% per year. And finally, on chart 11, we have our summary. We've seen strong performance from all of our business areas this year, and I'm especially pleased with our record backlog throughout the year. Our updated financial metrics anticipate strong full year results, and we expect to see continued growth into 2020 based on our portfolio of legacy programs, new wins and strategic investments that have continued to grow our backlog throughout the year and across our portfolio. And with that, we're ready for your questions. John?

John Kieschnick Thank you. And ladies and gentlemen, if you'd like to ask a question, please press star one. You'll hear a tone indicated and placed in the queue. If your question gets answered and you wish to remove yourself from the queue, please press the pound key. Again, star one if you have a question. And first on the line of Rich Safran with Buckingham Research. Please go ahead.

Ken Gregg Maryland, Ken Gregg. Good morning. How are you? Ken Gregg Good morning. Ken Gregg So, either Marilyn or Ken, a question on your 2020 guide with a few parts to it. You know, you're guiding the 5% growth. You just covered that next year. Now, always to the best you can, could you discuss, you know, the segments you expect to see the most growth from next year, what the primary drivers are of the 5% growth and a way you see some possible upside. And on margins, I just wanted to ask that, you know, your guide for next year just seems a little bit light relative to where expectations were. And I thought maybe you could discuss what's driving that. Thanks.

Ken Gregg You bet. Thanks, Rich. It's probably best I take that question. And if you don't mind, Rich, I'll give you some color. You can go across all business areas. So, I'll start with Aero. You know, next year we see mid single digit growth across the business area for aeronautics. F35, we see growth on F35 similar to the Aero growth at mid single digits. Development and sustainment, we see that growing faster than production. We see strong growth at IFG and that's specifically F16. You heard Marilyn mention we've got the Slovak Republic order behind us. We are now starting to build Bahraini jets that will start delivering out in late 2021 and we've got strong mod work there. And we also see strong growth at Skunk Works. If you recall, we talked about the classified program we won. The Skunks should grow double digit sales next year. And finally for aeronautics at A triple M, no surprise, we see sales decline in 2020 compared to 2019. If you recall, we're expecting around 25 next year and then a reduction in 2021, so about 23. So, you'll see mid single digit decline in sales there. So, just to summarize again for aeronautics, mid single digit growth. At Missiles and Fire Control, it'll be our fastest growing business area again. We see low mid digit growth. We see strong growth at Strike Weapons, specifically in precision fires and in Jazzum. And we also see strong growth in integrated air and missile defense and that would be FAD and PAC 3. At RMS, we see low single digit growth. We're finally starting to see some strong growth at Sikorsky. Think of that as MH 60, Combat Search and Rescue and the Presidential Helicopter, the VH 92 program. That'll more than offset the surplus. We see declines in our IWSS business. Think of that as littoral combat ships and the domestic piece of Aegis. And in space, we see growth, which last year at this time, we would not have thought we were going to see growth at Space. And if you recall, we talked about our strong order book this year, and the lions share that upside with that and we're continuing to see that in the future. The upsides are in hypersonics programs, and think of the space transportation segment of that business, Orion, OPOC. OPIR is growing, and that is slightly offsetting declines, and think of some of our historical programs that are starting to wind down at, like, CIBRS and Advanced DHS. So net, we see roughly 5% growth for the corporation. Going to profit margins, we see aeronautics having similar margins as they did in 2019. F35 profits will grow at the same rate as sales, so think of that as mid-single digits. As I mentioned with sales, development and sustainment is growing faster than production and therefore dilutive in nature. I mentioned the skunks, so the skunks is growing. Their absolute profit dollars will be growing, but that is also dilutive in nature. So you'll see basically mid-single digits at aeronautics. Missiles and fire control, we see right now less risk retirements in 2020 than we saw in 2019, and as we've talked about the classified program that we won, that will continue to grow, as will other development programs ramping up so that they have dilutive margins. Missiles and fire control, we see overall will have lower margins in 2020 than in 2019. RMS, we're seeing similar to or slightly higher margins in 2020 compared to 2019. That's driven by our training business and our support piece of the business. And finally, at space, we also see, like missiles and fire control, less risk retirements are forecasted in 2020, and also the new program starts. And on ULA, we see similar earnings in 2020 as we do in 2019. So overall also, we see space like missiles and fire control will have lower margins in 2020 than we had in 2019. Hopefully that gave you enough color,

Rich. Next, we'll go to Miles Walton with UBS. Please go ahead.

Great. Thanks. Good morning. Marilyn, I was hoping you could talk about the F-35 and in particular the context of any risk you're managing around Turkey. Obviously, you've excluded it from the guidance. But Ellen Lord, I think, this week mentioned that Lockheed is actually the agent for reassigning the work that might be or is being sourced outside of what's being done inside of Turkey to other players. And can you clarify for us if that means that Lockheed is just the agent for resourcing that work or if there's any risk that you're carrying in that transition as well?

Thanks for the question, Miles. And I think probably a broader answer beyond just F-35. I'll ask you, Ken, maybe to weigh in on the balance of the portfolio because we've had some questions from others about it. This might be a good time just to cover Turkey all up. But, you know, as you know, back in July, the Department of Defense announced exclusion of Turkey from the F-35 program, and that included the in-country suppliers with a target date of March of 2020. So we've been working closely with the U.S. government for several months, for quite some time, on establishing alternate sources of supply in the United States to be able to quickly take the place of the current contributions that Turkey is providing to the program in terms of components and parts, et cetera. And all throughout that, we continue to evaluate our supply chain. We are, you know, as the prime contractor for those sources of supply, we are doing that work, yes. I mean, if that's the – if I understood your question, do we have the responsibility? We do. And we're working with – of course, we have some major contractors that have work in country, as does Pratt & Whitney, which we don't oversee. Pratt & Whitney has their own responsibility for that. So we are the agent for reassigning the work, and we have been working on it for some time. But in terms of the risk associated with it, we have a contract modification from the U.S. government that covers all of that risk, because this is a decision by the U.S. government to take Turkey out of the program. And so for that purpose, even though we're the ones that are reassigning the work, we have coverage from the contract standpoint. Ken, I think it might be helpful also to kind of give some color on the rest of the work that we have in Turkey at

this

point.

You bet. Good morning, Miles. You know, we had the disclaimer in our earnings release talking about, you know, 2020 no impacts to – related to Turkey. Let me just give you some color, and I'll talk about four areas. So the first one – and this is – one of it is related to F-35, so it's exports. And so this is the delivery of aircraft to Turkey for the F-35 program. And that's by far the largest item here. And I think, you know, our F-35 contract with Turkey, it's a partner agreement. So, you know, they're one of the partner countries through the U.S. government. We have – the U.S. government has documented that Lockheed Martin will not absorb any impacts for planes we've built or are currently building for Turkey. So we believe we're covered here. And I'm sure you saw on our balance sheet some growth in our contract assets. Part of that growth is because we're still working through with the U.S. government to get a contract mod from them for this work so we can bill and collect for that. All other exports to Turkey from the other business areas really are not material, so there's really no impact to us there. The second item is we have a few Turkish military programs that would be impacted by any continuing imposition of the sanctions. And we're currently reviewing them to determine the financial impacts. And one of which is we have a – it could potentially have to give back a cash advance, an advance payment that's not material in nature. And we do know that any inability to perform due to U.S. government sanctions, we would have a backlog adjustment. Think of that as about $900 million, you know, ballparked less than a billion dollars. But that's more, as you know, a bookkeeping element at this stage. Net on these Turkish military programs for 2020, we don't see any material impact to sales, our profits, or our cash. Even the cash advance, it would not be material to us. The third area is we have a joint venture in Turkey with a company called Alpata Group. It's the Alp Aviation. And think of that as Alp manufactures finished precision parts and mechanical assemblies and has scope for the F-35 and Black Hawk production. And we have an equity stake in this joint venture. And think of that as about $40 million. We also recognize equity earnings, and they're less than $10 million a year, so really not a large amount. So, you know, at this time, if Alp would be prohibited from selling component parts to the Ministry of National Defense, however, unless reciprocal sanctions are implemented, Alp should be able to continue to sell component parts to support. They won't be for F-35. We're working through that. This is for Pratt and Whitney components. We're working through that. So right now, we don't think there'd be a material impact there either. And then the last one is the Turkish suppliers that are actually supporting U.S. programs. And that's more than just F-35. So, you know, the way the sanctions are written, transactions and activities for the conduct of the official business of the USG by Lockheed Martin, they'd still be authorized. But independent of the sanctions, we're still working second source supply contracts, as Marilyn mentioned, and they're underway. And we're working that to wind those down in the 2020 time period. And as Marilyn mentioned, we've been partnering closely with the U.S. government and our supply chain to minimize the impact on the F-35 program. We've been working hard to establish alternate sources of supply in the U.S. The first second sources will all be U.S. based to quickly, as possible, accommodate Turkey's current contributions to the program. And we'll continue working with the U.S. government to understand any potential impacts. And lastly, you know, even if the current sanctions are lifted, we're mindful of the countering America's Adversaries Through Sanctions Act related to Turkey's purchase. And that's due to the S-400 system. But we'd be speculating at this time if there are any impacts at this point. So, hopefully that helped answer the question.

Coordinator-Moderator Next we'll go to Sheila Cayelan with Jeffries. Please go ahead.

Sheila Cayelan Good morning, Marilyn and Ken. Thank you very much.

Ken Kuehn Good

morning. Sheila Cayelan In the past, you've talked about a three-year cash flow target and with operating cash flow flat in 2020-X pension contribution, how do we think about the longer-term drivers of free cash flow and the offset in 21 given a pension step up and just closing pieces on CapEx and working capital?

Ken Kuehn Yeah, I think... Sheila Cayelan We're asking you

to build a model, Ken, so...

Ken Kuehn Okay. Thanks, Sheila. You know, so if you go back, I think Bruce teased this up about a year ago and what he saw, you know, based on what we did in our long-range plan, about $7 billion. He said $7 billion in 2020, 2021. And, you know, right now, as we see $7.2 billion with inclusive of the $500 million pension contribution, I'll remind everybody that's up about $300 million. That pension contribution is up about $300 million due to the returns we had in 2018. So we've done a nice job working our way through working capital. And I mentioned, you know, six months ago, seven months ago, that's a priority of ours this year. You know, that's what we could see this year right now for 2021 and 2022. We will be north of $7 billion. Not sure how much north of $7 billion, but we'll be north of $7 billion. And right now, it looks like our pension contributions out in 2021 and 2022, based on, you know, the assumptions we've made, would be about $2 billion in pension. So again, I think we've done a nice job of continuing to grow our cash. And, you know, we'll refine that over the next couple months. And when we give you guidance in January.

Next, we'll go to Noah Poppenack with Goldman Sachs. Please go ahead.

Hey, good morning, everyone.

Good morning.

So just coming back to the 2020 revenue outlook, you know, it's a company that grew revenue in a lot of years in the past five to seven, where outlay growth was negative. You know, you had this type of growth rate, you're projecting a 5% type growth rate, 2016, 2017, when outlays were still declining. You know, you did something closer to 10, 2018, 2019, when the bookings really started to ratchet up. And you've now got the trailing 12 month book to bill and the recent backlog growth, basically as good as it's ever been in the history of the company, trailing 12 month book to bill 1.5. So unless it is a longer dated backlog than ever, or if there's just a handful of specific programs that come out of the P&L completely in 2020 that were already out of the backlog, you gave a pretty extensive list of new wins recently in the preparatory marks. I'm just struggling mightily to match up this backlog change with this revenue growth projection.

Well, no, it's Ken, I think I'll take this and I'll try to relieve your struggling the best I can. So, you know, we talked about backlog, we see backlog end of this year, probably it's going to continue to grow based on the orders we believe we're going to receive in the fourth quarter, the biggest one being the end of the block buy once we get that definitive and we're very close. So it

is going to grow again in the fourth quarter.

Yeah, so we'll be up to about 140 billion. And if you look at the increase we had this year over what our plan was, think of that as about $17 billion. Think of the $17 billion, about seven and a half of that were pull ins from from 2020 into 2019. Think of that as the event. AWE, we got three years worth of orders this year rather than the one, so that piece is longer. Think of the block buy, which is overall $35 billion, give or take. That'll be over a three year period. We're going to get the multi-year three in the fourth quarter for C-130. That is over a longer period of time. If I go back to the $17 billion, the remainder is about nine and a half. Those are just pure upsides that we did not plan for. So we have guided from the start of the year to now increased our guidance by $2.6 billion. Think of that $2.6 billion came from the nine and a half billion dollars of upside of orders that we had. But back to your comment, in that $140 billion, the gestation period, if I could call it that, is a longer period that then we have historically seen.

Next question from John Reviv with Citi. Please go ahead.

Hey, thanks everyone and good morning. Marilyn, what is your broad question here, but what's your perspective on your position in the industry? You have the sense that there's always some shifts in terms of industrial structure, in terms of who's a platform provider, a platform integrator, a technology enabler. Is there any perspectives on that kind of dynamic and what that means for your, when you say long-term growth, what is that, 22? Or do we have line of sight a little bit beyond at this point? Thank you.

Thanks for the question, John. I guess, you know, as I look at where we are today, I mean, we have transitioned our portfolio over the last few years, several years, toward a more platform provider. We used to, as you recall, had IS and GS, which was a very strong services component of the portfolio. At the time that we invested that element, we brought in, of course, the platform based program. In addition to that, though, of course, we've got our sensors, our tactical missiles, our air missile defense, a lot of components to go on those platforms. But if you just look at it from that standpoint, you could even argue to some extent that those are platforms. When you look at the growth for the company, F-35, of course, is going to be our major element of growth for the next five to 10 years. We know that from ramping up production sustainment of the aircraft. But in addition to that, when you look at Sikorsky, the CH-53K, the combat rescue helicopter, even the presidential helicopter are all programs that will be into production and are platforms for us going forward. We've got, we're looking forward to downstream hypersonics production that will ramp up. You know, we've got a lot of developmental wins that we've had, we expect that we'll move more into production there. Future vertical lift is another area. When you look at the light and medium lift helicopters that we're competing for on future vertical lift, platform based, our F-16 resurgence. As you heard from Ken, we were able to get a handshake agreement on our multi-year three for the C-130J in the last month or so. Orion, which again, another important platform in the space exploration arena. So, you know, that to us, that is where the elements of growth are. Certainly on those platforms, we do more than just frames with our systems and sensors and weapon systems, et cetera, that are part of our overall portfolio. That's pretty important. When you look at just in the air and missile defense side, what we're doing on PAC-3, on FAD, all of the growth that we see in those arenas as well as, you know, Aegis systems. So, I would just argue that, you know, for us, that's the growth. They all come with, you know, autonomy and AI and, you know, software development elements of them. So, those are important. And I just, I don't want, I want to foot stomp again, that big win we just had on the Sentinel A4 radar. I mean, that was a great win for us as a company to go along with the several other radars that we have. So, hopefully that answers your question, John.

Next, we'll move to David Strauss with Barclays. Please go ahead. David Strauss, your line is open if you're on mute possibly.

Hi. Hi. Can you hear me? We can. Yes. Hi, David. Okay. Great. Great. Thanks for taking the question. So, I wanted to ask you about your guidance for the full year for 19 seems to imply a pretty big margin step down in the fourth quarter. It looks some more close to, you know, kind of high nine to 10% for the segments. Could you touch on that? And then also on, you know, on your operating cash flow outlook as we think about 20 and 21, can you talk a little bit about working capital? As best I can tell, it seems to imply not much of a working capital improvement. You know, there are fairly big working capital burn in 20, again, off of the working capital building 19. Thanks.

You bet. Okay, David. I'll take that. So, I'll go around the business areas for the fourth quarter on margin. So, at Aeronautics, we're seeing similar margins that we've basically had for the rest of the year. So, I think that Aeronautics is in line with the rest of the year. Missiles and fire control, you're right, it is down. And if you recall what we talked about in the first and the second quarter, we had step-ups risk retirements planned in the third and the fourth quarter. And based on where we were in the production cycle of those products, it made sense for us to do those risk retirements earlier in the year than later in the year. And if you compare that to last year from timing standpoint, we had more step-ups in the fourth quarter than we're going to have this year. So, it's just basically timing of the production cycle on missiles and fire control. RMS is like Aeronautics, it's similar sales growth, similar profit growth. So, that's in line with pretty much with what we've done in previous years. And then lastly, space is similar to missiles and fire control. And I'll give a plug to our advanced EHF program. They are having an absolutely tremendous year. They had enormous risk retirements in the year, and we're just not going to replicate that out in the fourth quarter. Also, ULA earnings will be lower in the fourth quarter of this year compared to earlier and last year. Oh, and then on cash. So, I think I have a different view, David. We're going to reduce working capital significantly in the fourth quarter. We had the build-up in the first half of the year, and in the third quarter, we only grew working capital by $30 million. And line of sight for 2020, right now, with the 5% growth, we're only going to grow, we only see growing working capital by about $100 million. And most of that will be in contract assets and in inventory. So, as we continue to focus on working capital, we are seeing the improvements there. And that's why we took our trend data from $7 billion to $7.2 and when Jill asked the question for the out years, we see a line of sight of doing better than what we forecasted in 2021 and 2022 on cash relative to what we disclosed last year.

Next, we'll go to Kai Von Rimmer with Cowan and Company. Please go ahead.

Yes. Thank you very much. So, you've had a lot of good growth in terms of wins and hypersonics. You mentioned Skunk Works. Can you give us some numbers in terms of what percent is classified work of your sales today and the expected growth rate next year? And then kind of tie it into this whole issue. Some of us have felt that the sales growth number would be a little bit higher for next year. If you were going to have an opportunity in sales next year, where would it be? Thanks so much.

Unfortunately, our customer frowns upon us spiking out our classified. But what I can say is, just based on what we're seeing and what I described earlier, because of the skunks and the classified program at Missiles and Fire Control, they are growing faster than the corporation. And I would say that is one of the opportunities that we do have. I'd say the other opportunity, and I think I gave color on the last call in terms of hypersonic sales. So, we see sales this year in hypersonics as being around $600 million. Best of what we see today, best of year hypersonics, frown numbers is about $1 billion. But just for everybody's benefit, these are not, for the most part, programs of record. And as Marilyn mentioned, we are still in the prototype phase. And we'll start doing first launches starting next year out into 2022. It is possible that because of the investments we've made in strike hypersonics and in counter hypersonics, because there really haven't been any programs yet on counter hypersonics, there is some likelihood we may see some opportunities there in counter hypersonics as well. So, it could be in classified and it could be in counter hypersonics.

I would just add, when you look at growth, this year we're planning to deliver 131. F-35 is going to ramp up to over 140. And so, that still continues to be our big growth area. And then, as mentioned earlier, there's Corski programs with CH-53K and CRH and the Combat Rescue Helicopter and our missile defense with PAC-3 and FAD. Those are the key growth areas as we look at them and continue to grow in F-16, C-130 as well as the hypersonics growth. So, we've got a lot of solid growth programs. I think strong 5% growth is, as I look over the history of our corporation over the last 10 years, I feel really good about the growth that we're seeing as we go into 2020.

Our next question is from Peter Armand with Baird. Please go ahead.

Yeah. Good morning, Marilyn. Ken, I guess this question is for you. We're really testing your long-term forecasting here. But definitely, when I look at aeronautical margins, if we look back at the last cycle, this segment kind of peaked around with F-22 production. And does the same apply here when we're thinking about F-35 deliveries or is this now changing just given the growth you're highlighting with skunks and some of the sustainment work that's happening in the air ramping, just maybe just a profile, how you think about margin profiles and the improvements that we've kind of all been forecasting. Thanks. Thank you, Beth.

So, Peter, thanks for the question. Yeah, I'll start with 2020 again and just summarize that we're seeing similar margins at aeronautics next year that we saw this year. I'd say, you know, you got the sustainment, which, as we've mentioned and you've probably seen in the press, will continue to grow, but for the most part, they're annual buys. And we put a proposal, an unsolicited proposal on the table for a five-year PBL. So think of that as performance based logistics. There is some interest in the government. We're working through that now, socializing that now. That would give us an opportunity for sustainment to not be dilutive to margins. And so think of that as we're putting more risk on industry. So industry would invest, industry would commit to metrics. And with that, there should be additional rewards. So I think the opportunity also in aeronautics would be once this classified program in Desconce starts getting multiple customers and it starts going into production, there should be some margin improvement there that could be similar to margins on the rest of aeronautics that would help with some margin expansion there. And as I've mentioned earlier on the F-35 production deal, we feel good with the deals we're getting with the customer. We think they're fair and reasonable. They're balanced. And, you know, we're now going through some housekeeping on the block buy and hopefully we have that definitized in the next week or two. And we'll start performing on that. If we perform, there's opportunity for margin expansion there as well.

Next we'll go to Carter Copeland with Mellios Research. Please go ahead.

Hey, thanks for the time. Just a couple, just quick ones here in the interest of time. One, Ken, on the program charge you called out in the release on MFC, was that related to the same program you have disclosed before? Was that something new? And then secondly, on the F-16 pipeline, what, from a production rate standpoint or I guess aggregate volume standpoint, what do you see beyond what you've talked about here in the 30 aircraft and potentially going to other customers? Thanks,

Carter. I'll hit the second one first and then I'll do the charge because that'll be probably a left of a long-winded answer. So F-16, you know, right now in backlog, as Marilyn mentioned, we have 30 aircraft. First one gets delivered, Bahrain gets delivered, the Austrian country by last day of the year of 2021. We see a production build of roughly one a month. Right behind that, we're hopeful. You've probably seen in the press Bulgaria. Bulgaria once, looks like they won eight aircraft. So we're in the process of working through that. In our plan, we see countries like Morocco and other countries out in the Far East that in aggregate could grow our backlog by another 60 aircraft. And if you think through that, that'll start ramping up that production line to two, three a month. There is other interest out there. The countries in the Middle East, there's discussion about another country in the Far East that could one as many as 66 and we'll see where that goes. But all those aircraft would be built in Greenville. And right now, we think we have capacity to build four a month. And like I said, we'll start with one a month. And that would be frankly a good problem to have. The other wildcard is we've announced our Indian variant that we're going to propose, which is the F-21. We're going to build that airplane in India if we're fortunate enough to win that program. But that program would be worth $10, $15 billion. So great opportunity out there. There's other mod work out there as well that there are customers that will elect to keep their current aircraft and will modify those aircraft. So we see a great future for F-16. Regarding the charge we took at missiles and fire control, it is actually a different program than what we had. It was a modest charge. And we think from a performance standpoint, with balance sheet reserves and the charge we took, we think we won't be talking about that program anymore.

Our next question is from Joe Donardi with Stiefel. Please go ahead.

Yeah, thanks. Good afternoon. Maybe Marilyn or Ken, I think it seems like international demand for F-35 has maybe pleased you guys positively or been a positive surprise of late as the price has come down there. Can you just talk about what the pipeline looks there and then what the conversations are with the DOD in terms of what peak production would be? I think at one point there was some discussion about taking it to 180 to 185. Just a little more color there. Thank you. Sure.

I'll take that, Joe. So yeah, we are very happy with where the F-35 program is going internationally. You saw Japan announced an additional 105 aircraft on top of the aircraft they originally committed to. Singapore has announced an interest in buying the aircraft. It will be for a modest amount to start, but that's a great start. And Japan actually said they want to buy some bees. It's likely Singapore will buy some bees. We're pleased with the award we got for Belgium for 34 aircraft. We're in a competition now for Finland and Switzerland. We'll continue to shape those, and you're exactly right. We got to the $80 million aircraft earlier than we thought. It's in lot 13, which will certainly help with those opportunities. We're in the competition with Canada, which could buy up to 100 aircraft. We're feeling good about that. We don't think we're out of the German competition yet, so we're still continuing to shape that. We heard about Poland. Poland wants to buy 32 aircraft, so we think there is a strong pipeline out there for the F-35. Regarding capacity, you got it right. If you look at the FACO, the final assembly, and check out at Fort Worth, the one in Italy and the one in Japan, we see capacity right now as we continue to build that out in Fort Worth to be about 185 aircraft. We got a ways to go. Hey, John, this

is Greg. I think we've come up on the top of the hour here, so I'll turn it back over to Marilyn for some final thoughts.

Thanks, Greg. Let me just end by restating that we really completed another strong quarter of financial and operational performance. As you heard, we have a record backlog. We're focused on program execution, and with the strong demand for our portfolio of products and services, we believe we're well positioned for a successful closure of 2019 and continued growth in 2020. We appreciate you all joining us on the call today, and we look forward to speaking with you at our next earnings call in January. John, that concludes our call today.

Thank you, and ladies and gentlemen, you may now disconnect.