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 Investor 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 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 our charts on our website today that we plan to address during the call to supplement our comments. please access our website at www.lockeymartin.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 on 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. Ken 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 It replaces the current A3 variant and will provide improved air and 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 MDA'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 CTOL, variants with a total potential value of approximately $6 billion. The F-35 CTOLs, once deployed, will integrate seamlessly with the Polish Air Force's existing 48 aircraft F-16C and would replace aging fourth-generation legacy aircrafts. 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 state-of-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 nation, and we are pleased to have the opportunity to help provide security products to these important allies. We're 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 awarded 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 II program. The award is for the production and deployed system support for the Trident D5 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 a continued growth opportunity 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 21st. 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 worth 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 21st, 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 and 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 THAAD 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. And 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 Venable 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.