Lockheed Martin Corporation

Good day, everyone, and welcome to the Lockheed Martin second quarter 2020 earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.

Thank you, John, and good morning. I'd like to welcome everyone to our second quarter 2020 earnings conference call. Joining me today on the call are Jim Taklett, our President and Chief Executive Officer, and Ken Posenreid, our Chief Financial Officer. Statements made in today's call that are not historical fact are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release and our SEC filings. for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.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 Jim.

Good morning everyone and thank you for joining us today. It's a pleasure to be here on my first Lockheed Martin's earnings call and I look forward to working with all of you. I hope this call finds you and your families safe and healthy. The world continues to combat the coronavirus outbreak while striving to recover and sustain economic activity. Our primary objective at Lockheed Martin is to ensure the health and welfare of our employees and their families, our teammates, customers, and communities. We remain vigilant, taking the necessary steps to help protect our workforce while producing the products and solutions our customers need to achieve their important readiness objectives. Our business areas have taken actions including implementing alternative work schedules, health and safety checks at our facilities, and telework wherever possible. Most recently, our aeronautics team established a rotational facility plan for our F-35 production line allowing us to continue to manufacture the aircraft while practicing social distancing and completing regular deep cleanings. The corporation also continues to support our critical industrial-based suppliers, frontline medical workers, and our local communities with COVID-19 relief and response. In March, the Department of Defense announced it would increase progress payment rates to large businesses from 80% to 90%. accelerating payments for the completion of work in recognition of the challenges posed by covid 19. the dod's expectation was that prime contractors would flow these accelerated payments to the supply chain through the second quarter lockheed martin has slowed all of the accelerated payments the corporation has received from the department of defense 1.3 billion dollars in total to our supply chain in this process we've given priority to small and vulnerable suppliers as we continue our efforts to promote a healthy and sustainable defense industrial base. We've also continued to support our local communities, and to date have made substantial donations to nonprofit organizations involved in COVID-19 related relief and assistance, with emphasis on veterans and military families. And as a global organization employing thousands across the world, we are supporting related initiatives in 15 different countries, including donations to food banks, health care facilities, distance learning, and research efforts to help combat this disease. This corporation has hired more than 9,000 new employees across the United States since the crisis began and is advertising for another 3,000 positions. We remain on track with plans to hire approximately 12,000 employees during 2020. And across the country, we've produced more than 65,000 protective gowns and 32,000 face shields, and we've donated PPE at 174 locations where frontline medical workers are caring for COVID-19 patients and others at risk. Through all these initiatives, Lockheed Martin remains committed to supporting our employees, our suppliers, and communities in which our company operates through the course of this ongoing pandemic. Carol will review our first quarter financials and updated four-year outlook in more detail in a few minutes. As you've seen from our press release, we had a very strong quarter financially despite the effects of the coronavirus. Mitigation plans put in place by each of our business areas, their teammates and supply chain, the international community, as well as strong support from the Department of Defense and broad U.S. government actions have allowed us to minimize the financial impacts on our company. This, coupled with outstanding operational performance, have enabled us to increase our full-year outlook for sales, earnings, EPS, and cash from operations. Sales in the quarter were 12% greater than last year, as all four business areas increased from 2019. Our segment operating profit results were also strong, growing 15% year over year, driven by both higher sales growth and an increase in segment profit margin to 11%. We had a strong quarter of cash generation, bringing in over $2.2 billion of cash from operations and executed our balanced cash deployment strategy. Moving to new business activities, we received nearly $22 billion in orders this quarter, raising our backlog to over $150 billion, a new high watermark. Our aeronautics business area led the company with over $9 billion of orders, including $7 billion of total orders booked for the F-35s. we were able to add 84 jets to the program with the finalization of two Lot 14 production contracts, bringing the current number of planes in our backlog to 411 aircraft. Our F-35 team also added approximately a billion dollars in combined sustainment and development awards this quarter as well. Missiles and Fire Control also had a strong quarter, with the Defense Department announcing several PAC-3 awards, including one for over $6 billion to supply PAC-3 MSE interceptors, launcher modification kits, and associated equipment to support the United States and foreign military sales customers across multiple contract years. These awards demonstrate the global demand for PAC-3 MSE interceptors, and to meet that demand this year, we began work on an 85,000 square foot building expansion at our Camden, Arkansas facility. The building is expected to be completed by fourth quarter 2021, with operations there beginning in the first quarter of 2022. Our rotary and mission systems secured orders of over a billion dollars to support and supply 24 MH-60 Romeo helicopters to the government of India. These Sikorsky Seahawk aircraft will provide maritime, anti-surface, and anti-submarine warfare capabilities to India, as well as cargo, utility, and search and rescue missions. and our space business area added multiple orders, including a classified award for over $1 billion. In total, the corporation grew orders 23% above second quarter 2019 and achieved a company-wide book-to-bill ratio of nearly 1.4 for the quarter. I'll touch briefly now on the Department of Defense budgets as both the House and Senate Armed Services Committees have completed the respective markups of the fiscal year 2021 National Defense Authorization Act. Each version adheres to the Bipartisan Budget Act of 2019 spending targets and equal approximately $740 billion for national defense. Appropriation committees from each chamber are in the process of drafting the funding legislation to accompany the authorization. There are encouraging elements for our portfolio as the Senate version confirmed that the national defense strategy remains the roadmap for the armed services, and the bill was passed with strong bipartisan support. Our portfolio was well supported in the Senate version of the recommended increase of 16 F-35 aircraft above the President's request, additional funding for missile defense priorities including an AFAD battery, and increased funding for the Homeland Defense Radar Hawaii program. Congress will continue with the authorization and appropriations phases. We look forward to the finalization of the process and supporting our warfighters' needs. Moving on, I would like to highlight several significant events that occurred across the corporation during the past quarter. Beginning with aeronautics, the F-35 team achieved another operational milestone as our United Kingdom partner celebrated the initial carrier deployment of its 617 squadron. This legendary unit, known as the Dam Busters from their exploits in World War II, is now aboard the HMS Queen Elizabeth aircraft carrier. The squadron will now begin a series of flight trials demonstrating the jet's ability to defend the carrier through combat air patrols, rapid deployment, and interoperability with other UK naval assets. This is all in preparation for their second embarkation later in the year when the squadron will join the carrier and her task group for a large multinational training exercise with U.S., European, and NATO partners. The ship will then set sail again next year for her maiden Global Terrier Strike Group 21 deployment. We're proud to provide this unrivaled fifth-generation aircraft to help support our U.K. partner in the security of their nation. Moving to RMS, our radar surveillance systems team achieved two notable milestones this quarter. In April, they successfully completed the Sentinel-A4 radar program preliminary design review, following successful system requirement and system functional reviews, which took place earlier this year. So just four months after the initial contract award, the Sentinel team has already achieved several key milestones as it progresses the critical design review phase later this year, and then in a fabrication, demonstration, and test. The Sentinel-A4 radar replaces the current A3 variant and will provide improved air and missile defense against low-flying unmanned aerial systems, cruise missiles, drones, and other threats. With a program of record of approximately 200 systems plus international partnerships, the Sentinel program alone has a total potential contract value of over $3 billion. RMS also delivered to the U.S. Army the first ANTPQ-53 radar system. which is equipped with gallium nitride to provide additional power and enhanced counterfire target acquisition capabilities. The TPQ-53 radar locates and tracks enemy indirect fire in either a 360-degree or a 90-degree mode and was first deployed in 2010 to Iraq and Afghanistan, where it delivered outstanding performance and reliability to defend our troops. We are currently in full-rate production to provide approximately 190 units with a contract value at $1.6 billion. So both the Sentinel-A4 and the TPQ-53 are part of Lockheed Martin's open, scalable radar architecture, the cornerstone of each of these systems' designs, which allows for upgrades that will not only extend the lives of the radars, but evolve their capabilities over the next 40 or so years. In missiles and fire control, Our air and missile defense line of business marked the delivery of the 500th TAD interceptor to the U.S. Army. The THAAD program is a key part of the U.S. missile defense system and has been selected by multiple international partners to support their national security. MFC continues to expand our production facilities to accommodate that demand. This quarter, our space business area As part of the Blue Origin National Team, and this really is exciting, it was down selected for the next phase of the human landing system for NASA's Artemis program. The Artemis program is the country's ambitious endeavor to land humans on the moon in 2024 and return them safely to Earth. Leveraging designs and technologies used on our Orion program, Lockheed Martin will produce the Crew Ascent Element, the vehicle which will transport astronauts from the Lunar Service surface to begin their journey back to Earth. We look forward to supporting this remarkable mission and continuing our long-running legacy of supporting NASA missions. Before I turn over the call to Ken, I'd like to take a moment to thank Marilyn Hewson for her years of leadership and express how honored I am to have the opportunity to lead Lockheed Martin, a company that I consider a national asset. My experiences as an Air Force pilot flying Lockheed Martin aircraft and Operation Desert Shield helped shape my belief that helping to provide for the defense of our nation and its allies is one of the most important endeavors that one can undertake. When presented with the opportunity to become president and chief executive officer here, I viewed it not as a job offer but as a call to service. Moreover, Marilyn and her executive team have positioned the company for even greater success in the future, and I'm eager to deliver on that prospect. Since becoming CEO about a month ago, I've met often virtually with a significant number of our key government customers to introduce myself, reaffirm our commitment to performance and affordability, and get their feedback. I've been pleased with the broad response of confidence in Lockheed Martin as a key partner, but also the candid discussions on the challenges we jointly face in the national security space. There's great appreciation for the technologies and solutions we provide, and we have a long heritage of innovation for our customers. I plan to continue this legacy as well as pursue a long-term strategy to deliver enhanced capabilities to support what I call the 21st century warfighter concept. That concept endeavors to bring relevant lessons in the latest technologies from the broader tech sector to the defense industrial base. I believe Lockheed Martin is uniquely positioned to address this and other evolving security and needs of our nation and its allies, and I'm excited to have this opportunity. I've also had the chance to meet with many of you in our investor community in recent weeks. We've had engaging conversations, and I look forward to continuing that dialogue. As you can tell, I'm quite convinced that we can further leverage our key platform positions and broad portfolio to drive long-term value to our shareholders while furthering both national defense and scientific discovery. With that, I'll turn the call over to Ken.