Lockheed Martin Corporation

And ladies and gentlemen, thank you for standing by, and welcome to the Lockheed Martin fourth quarter and full year 2020 earnings results conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. If you should require assistance during the call, please press star, then zero. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Greg, and good morning, everyone. I hope you've all had a great start to the new year and that this call finds you and your families safe and healthy. Welcome to our fourth quarter 2020 earnings call as we review our results, strategic new business activities, key accomplishments, and our outlook for 2021. Before I begin, I'd like to take a moment to reflect on the loss of Michelle Evans. our aeronautics business area leader who passed away earlier this month. Michelle dedicated 34 years of service to our company and touched the lives of countless people, both inside and outside the corporation. I knew Michelle for years, and I can say that she lived a life of strength and grace. And while we mourn her loss, we also are thankful to have had her as part of our Lockheed Martin family. We'll all miss Michelle. As we look back to the year from a broader perspective, 2020 introduced personal and professional challenges to each and every one of us. I'll begin my summary of Lockheed Martin's results today by thanking the men and women of our company and their families for stepping up to deliver outstanding performance during an extremely difficult time. It was through their dedication and commitment that we were able to drive operational and financial results, which not only exceeded many of our expectations, but also set records in several areas. the coronavirus outbreak remains an ongoing pandemic, and we're continuing to take actions to mitigate its impacts. Vaccines are also becoming available to help combat this disease, and we're hopeful for a return to a more normal business environment as we progress throughout the year. Our dedicated workforce and our resilient supply chain continue to perform with excellence during these demanding times, supporting our global customers and their important missions, and I'm very proud of their accomplishments. Moving to our results, we delivered another year of outstanding performance in 2020, strategically, operationally, and financially. Ken will discuss our financial results in more detail and provide our full-year 2021 financial outlook, but I'd like to provide a few highlights from the past year, a period in which we set high watermarks in sales, earnings, and cash from operations. First, sales and segment profit each grew 9% over 2019, and our 2020 earnings per share increased by 11%. We had a strong year of cash grant generation, achieving $8.2 billion of cash from operations, even after a $1 billion voluntary pension contribution, and after accelerating payments to our supply chain to help mitigate COVID impacts. We are continuing this practice prioritizing our vulnerable and small business partners. We recorded over $68 billion in orders in 2020, growing our backlog by $3 billion, resulting in a robust $147 billion year-end total backlog. These results reflect the high level of execution being achieved across the company, providing critical security and deterrent solutions for our customers. As we look to 2021, our broad portfolio has us positioned for continued growth in all four of our business areas. We expect our cash generation to remain strong, and we plan to continue our balanced cash deployment actions, investing in innovative technologies and strategic opportunities to provide our customers with enhanced capabilities and still returning cash to shareholders. Turning to defense budgets, the fiscal year 2021 National Defense Authorization Act has been passed into legislation, and the Department of Defense appropriations were approved as part of the FY21 Omnibus Funding Bill. Both of these congressional actions adhere to the Bipartisan Budget Act of 2019, which established spending levels for discretionary defense budgets, with a total fiscal year 2021 National Defense Spending Target of approximately $740 billion. Also, Congress passed a $900 billion COVID relief package, which extended Section 3610 of the CARES Act to March 31st, providing federal agencies the authority to reimburse contractors who are temporarily unable to work due to facility closures or other restrictions. Lockheed Martin programs were well supported in the FY21 Appropriations Bill, with Congress adding funding of over $1.7 billion for 17 additional F-35 aircraft and other development and integration activities for the program, adding nearly $900 billion for nine additional C-130Js plus support work for that airplane. and over $400 million for Sikorsky programs, including additional CH-53K and Black Hawk helicopters, and also the initiation of an eighth THAAD battery for the U.S. Army. Turning to our portfolio, I'd like to touch on several notable achievements, demonstrating our focus on strategic growth and operational performance. As we announced last month, we have entered into a definitive agreement to acquire Aerojet Rocketdyne, an action that, once finalized, will bring long-term strategic value to our entire portfolio. As we commented then, our 21st century warfare strategy includes enabling growth areas such as hypersonics, tactical and integrated air and missile defense, and space systems domains. Aerojet's expertise in propulsion systems will benefit our existing hypersonic programs as they progress from development to production and will improve our tactical missiles and air and missile defense products while continuing Aerojet Rocketdyne's legacy as a merchant supplier to the entire industry. We believe this combination will deliver innovations and improve efficiencies that will offer more timely and affordable solutions for all of our customers, including the Defense Department. domestic manufacturers, and our international partners, and we're very excited about this transaction. Moving to the business areas, in aeronautics, our F-35 team finished the year strong, delivering a total of 120 F-35 aircraft. Our aero production organization, our partners, teammates, and the supply chain all worked to overcome manufacturing issues introduced by this pandemic. We've now delivered over 600 airplanes since the program's inception, with nearly 360 jets still in backlog, and domestic as well as international opportunities ahead of us. Over two-thirds of the jets in the plan of record are still to be ordered. So the aircraft continues to perform well. It's operating from 26 bases and ships around the globe, and the Royal Australian Air Force recently declared initial operating capability in December, the seventh country to do so since the program began. Also in our aeronautics business, the U.S. Air Force awarded a $900 million contract for us to provide sustainment and support services for F-16 aircraft, including maintenance and modification activities. Of course, the F-16 is one of our longest-running production programs, and we will look to optimize the Air Force's F-16 fleet for greater capability, readiness, and performance via this new sustainment contract. Moving to our space business area, we recently won a $4.9 billion award for our Next Generation Overhead Persistent Infrared, or OPIR, contract. This award funds the production of three geosynchronous satellites and ground systems to provide initial warning of ballistic or tactical missile launches anywhere in the world. These new space vehicles will have more powerful sensors and greater resiliency to enhance our nation's air and missile defense capabilities well into the 21st century. Keeping with our space organization, we're pleased to be selected for one of the awards to develop a prototype payload for the new Evolve Strategic Satellite Communication System. ESS is designed to be the successor to the advanced extremely high-frequency constellation of satellites, one of our signature programs that provides secure and survivable strategic communications for national leaders and tactical commanders alike. This is our OPIR satellite. The ESS constellation is intended to provide improved resiliency, survivability, and increased capabilities. We look forward to participating in this opportunity as we work to enrich our platforms with more mission systems content, which is another key facet of our 21st century warfare strategy. I'll close with our rotary and mission systems and missiles and fire control business areas, which recently led Lockheed Martin's participation in an exercise, Valiant Shield 2020, which is a biannual joint effort for the US Navy, Army, Air Force, and Marine Corps. Our combined team used a virtualized Aegis weapon system to conduct a pioneering joint multi-domain long fires demonstration. By delivering machine-to-machine interfaces across joint force systems, this effort accelerated speed of decision-making and then to action. It demonstrated a primary premise of our 21st century warfighting strategy by networking separate sensors, communication links, and weapons across multiple platforms. The result is more effective joint all-domain operations that provides enhanced capabilities and greater effectiveness to the commander in a field of operations. These achievements highlight our strategy to help address emerging threats with 21st century capabilities, to invest in new and innovative technologies, and leverage our signature programs to provide powerful deterrents to future military conflicts. That's our mission, and with that, I'll turn the call over to Ken.

Thanks, Jim, 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 release today. So let's begin with chart three and an overview of our results for the year. Sales, segment operating profit, cash from operations, and earnings per share from continuing operations closed with record annual highs. We generated $8.2 billion of cash from operations after a $1 billion discretionary contribution to our pension trust this quarter. And we continued our cash deployment actions, returning $3.9 billion of cash to our shareholders for a combination of dividends and share repurchases, while continuing to invest in the strategic growth of the business, including acquiring I3, and record investments in IRAD and capital expenditures. We also entered into a definitive agreement to acquire Aerojet Rocketdyne in the fourth quarter, with the close expected in the second half of 2021. I will note that our 2021 outlook excludes all results associated with this transaction. While backlog declined approximately $3 billion in the quarter due primarily to the timing of the F-35 Lot 15 production order, 2020 represented the sixth consecutive annual increase in year-end backlog for the corporation. In summary, it was an outstanding year for the business, and Lockheed Martin is well-positioned for continued success in 2021. Turning to chart four, we compare our sales and segment operating profit this year with last year's results. Sales grew 9% in 2020 compared with last year to $65.4 billion, continuing the strong performance over the first three quarters, while segment operating profit also increased 9% over last year to nearly $7.2 billion. On chart five, we compare sales by business area with last year's results. As Jim mentioned, All four of our business areas experienced strong sales growth in 2020, led by aeronautics and missiles and fire control at 11%. Aeronautics growth was driven by development and sustainment increases on F-35 and F-16, as well as growth in advanced development programs. Missiles and fire control's growth was primarily from production volume in tactical and strike missiles and air and missile defense lines of business. I will note that all four of our business areas achieved record highs for sales in 2020. Chart six shows our earnings per share for 2020. Our EPS from continuing operations of $24.50 was up $2.55, or 12% higher than our results from last year, driven primarily by increased volume and sustained performance. On chart seven, we'll discuss our backlog. Driven by annual increases at three of our four business areas, we maintained a book-to-bill ratio above one for the full year of 2020. This continued backlog growth, combined with further visibility of our 2021 orders, provides additional confidence in our increased sales outlook for 2021. On chart eight, we'll discuss the cash return to our shareholders in 2020. Subtracting our capital expenditures from approximately $8.2 billion of cash from operations, our free cash flow is greater than $6.4 billion, nearly a 6% increase over to 2019. This growth was achieved despite accelerating more payments to our supply chain than we received from the favorable DOD initiated progress payment increases and the deferral of payroll taxes under the CARES Act. We increased our dividend by more than 8%. and executed our planned share repurchases for the year with $1.1 billion in total shares retired. This brought our total cash return to shareholders to $3.9 billion for the year, or 60% of free cash flow, providing a solid returns to the shareholders in 2020. Moving on to chart nine, we provide our outlook for the year ahead. Our outlook for sales ranges from $67.1 billion to $68.5 billion. The midpoint of this range represents nearly a 4% increase over 2020 and improving from our October estimate, even after incorporating the impact of the UK MoD's decision to insource contract support for the atomic weapons establishment. The $700 million sales reduction for this change is reflected in our outlook for the space business. Were it not for this decision, Our estimated sales increase would have been approximately 5%, which is greater than the estimated 3% sales growth we discussed in the last earnings call. We have incorporated the known COVID impacts into our 2021 financial outlook. We will continue to work with our US government customers to monitor COVID risk to our operations in the supply chain, and we will continue exploring potential paths to recovery of cost impacts where appropriate to minimize future impacts. The range for segment operating profit is estimated to be approximately $7.4 billion to $7.5 billion. Our estimated FAS-CAS pension adjustment is approximately $2.3 billion. Our estimated range for 2021 earnings per share grows to between $26 to $26.30. The midpoint of this range represents approximately an 8% increase over 2020 results. Cash from operations is now projected to meet or exceed $8.3 billion, and I will discuss this in greater detail on the following chart. Our chart 10, we will walk through our future cash expectations, folding in the $1 billion discretionary pension payment we made last quarter. Strong operational performance drove a reduction in working capital, which allowed us to increase our cash outlook for 2021 to greater than or equal to $8.3 billion. We now see approximately $8.7 billion of cash flow from operations in 2022, increasing our three-year cash generation estimate by $900 million over our prior assessment. And as we sit here now, we see 2023 cash from operations of approximately $9 billion. I should note this outlook and trends are prior to an estimated R&D tax deduction impact from the 2017 Tax Cut and Jobs Act change that would impact 2022 cash by approximately $2.1 billion and lower 2023 cash by approximately $1.8 billion. On chart 11, we break down our sales and segment operating profit outlook by business area. All four business areas are positioned for continued sales growth in 2021, approximately 4% for the corporation, led by aeronautics at 5%. Segment operating profit growth is also projected to grow at approximately 4% in the aggregate, with our largest growth in aeronautics at 6%. And finally, on chart 12, we have our summary. We believe 2020 was an exceptional year for Lockheed Martin during these challenging times. Our team diligently worked to minimize the impact of the pandemic to our business and our supply chain, and we have increased our estimates for 2021 for all key financial metrics. Our results in 2020 exceeded previous highs and have positioned us well for continued growth and value creation this upcoming year. We remain focused on cash generation and growth in 2021. We will continue to invest in discriminating technologies and strategic initiatives to deliver value to our customers while providing strong cash returns to stockholders. And with that, we're ready for your questions. Brad?