Lockheed Martin Corporation

Good day and welcome everyone to the Lockheed Martin first quarter 2021 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 first quarter 2021 earnings conference call. Joining me today on the call are Jim Taglet, our Chairman, 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.lockemartin.com and click on the investor relations link to view and follow the charts. With that, I'd like to turn the call over to Jim.

Thanks, Craig. Good morning, everyone, and thank you for joining us today on our first quarter 2021 earnings call. As today's release illustrates, we had a strong financial results this quarter and continue to perform at a high level strategically and operationally. Our achievements reflect the quality of our workforce, the breadth of our products and services, and the focus we all have on delivering value to our customers and stockholders. We continue to deliver these results in spite of the ongoing difficulties presented by the COVID-19 pandemic. And my thanks go to the men and women of Lockheed Martin, for their outstanding contributions during these challenging times. I'll begin today with a quick update on the strategic acquisition of Aerojet Rocketdyne that we announced in December, a transaction we believe will enhance Lockheed Martin's ability to develop and supply advanced products in support of national security and our civil space objectives. We also plan to strengthen Aerojet Rocketdyne's capabilities as a merchant supplier with improved offerings for all of its industry and government customers, which is a critical component of closing our acquisition business case. Last month, Aerojet stockholders approved the merger agreement, with over 99% of votes cast being in favor of the transaction. Also this quarter, as expected, both companies received a request for additional information, or a second request, from the Federal Trade Commission as part of the regulatory review process. The second request extends the waiting period pursuant to the Hart-Scott-Rodino Act. We're working cooperatively with the FTC and continue to expect resolution of the regulatory review process by the latter part of 2021. Moving to our financial and operational results, Lockheed Martin got off to a strong start for the year. Ken will discuss our financial results in more detail and provide an update to our 2021 financial outlook which increases key financial metrics across the board, but I'd like to continue by providing a few highlights right up front. First quarter sales increased 4% over the year-earlier period, with rotary and mission systems growing 10% due to the delivery of an international pilot training system and ramping production of Sikorsky aircraft. Segment operating profit increased as a result of our sales performance, and earnings per share also saw strong growth. Our EPS benefited from gains in our Lockheed Martin Ventures Fund. LM Ventures makes strategic investments in early-stage companies developing disruptive, cutting-edge technologies, and it supports our technology roadmaps and growth strategies. Ken will give a little more color on this in a few moments. Our cash generation remains outstanding, driving over $1.7 billion of cash from operations this quarter, which includes the nearly $1.4 billion downward impact of accelerating payments to our suppliers, including thousands of small and vulnerable companies that are especially stressed due to COVID-19 impacts. Altogether, these results reflect the high level of execution being achieved across the company. Our outstanding cash generation and strong balance sheet also provide us the flexibility to complete a $1 billion accelerated share of purchase agreement this quarter to opportunistically buy back stock. We expect our cash generation to remain strong, and we plan to continue our balanced cash deployment actions by investing in innovative technologies, executing our 21st century warfare strategy, providing our customers with enhanced capabilities, and returning cash to stockholders. Turning to federal budgets, as a reminder, the fiscal year 2021 budget cycle marked the final year of the Budget Control Act that was originally enacted in 2011. The Department of Defense appropriations approved as part of the FY 2021 Omnibus Funding Bill resulted in a fully funded national defense budget of approximately $740 billion. The White House recently released their preliminary budget proposal for fiscal 2022 targeting an approximate $11 billion top-line increase for the Department of Defense, an indication of the desire for continued stability in national security funding and in line with our expectations. Similarly, the President issued an Interim National Security Strategic Guidance Document, which incorporates key elements such as diplomacy, economic development, innovation, and modernizing our military capabilities. into a broad framework for addressing accelerating global challenges. This guidance document places emphasis on deterrence, investments in emerging technologies such as artificial intelligence and secure next-gen 5G infrastructure, as well as the need for having strong defense and intelligence capabilities. We believe this vision is well aligned with our 21st century warfare strategy and plays to the strength of our broad portfolio and our culture of innovation at Lockheed Martin. Also in the quarter, the American Rescue Plan Act of 2021 stimulus package was enacted into legislation. This bill extended the CARES Act Section 3610 provision until September 30, 2021, enabling federal agencies to continue to reimburse contractors for the cost of keeping employees and subcontractors in a ready state as a result of the global pandemic. Importantly, this legislation also contained cash funding relief provisions affecting single employer pension plans, the primary reason for our increase in our cash outlook. Ken will discuss this further during his remarks. Turning to our business areas, I'd like to touch on several notable achievements demonstrating our focus on operational performance, strategic growth initiatives, and the strength of our portfolio. I'll begin with Aeronautics, where our team participated in this year's Orange Flag exercise. That's the U.S. Air Force's annual event to assess integration maturity of their warfighting platforms. This year's Orange Flag featured a broad, network-centric demonstration showcasing the integration of the F-35 and other legacy aircraft, including the F-22 and the U-2. with land-based long-range fires, naval fires, and space-based sensors. This exercise demonstrated a fully functional Internet of Things, or IoT, architecture, integrating a number of our nation's most advanced weapons systems. Our team was on the vanguard of this effort, enabling F-35s and F-22s to pass data to a U-2, all Lockheed Martin aircraft, with the U-2 then relaying the information to a ground-based control center. Targeting data was then transferred using machine-to-machine data sharing with an Army engagement operations center as well as to Navy ships. By providing data via fifth-generation aircraft to multiple command and control nodes, that information could be used for real-time targeting. This exercise demonstrated Lockheed Martin's readiness to provide unmatched situational awareness and to rapidly field capabilities today in support of our customers' joint all-domain operations concept. In rotary and mission systems, the CH-53K King Stallion was selected by the Israeli Ministry of Defense as the winner in their heavy lift helicopter competition. Upon contract award, our Sikorsky line of business will provide new CH-53Ks to replace the Israeli Air Force's current fleet of legacy Sikorsky 53D aircraft. Israel will become the first international customer for our new 53K variant And we look forward to working with the Israeli Defense Force and the U.S. government to finalize the agreement. In our Missiles and Fire Control business area, the U.S. Army awarded our Precision Fires Team a $2.8 billion contract for additional Guided Multiple Launch Rocket Systems, or GMLRS, products and services that continue a relationship that's lasted for over 40 years. This quarter, MFC also delivered the 50,000th GMLRS system another sign of the enduring demand of our signature programs. Moving to our space business area, the Missile Defense Agency down-selected our space team for the Next Generation Interceptor Program, awarding a $3.7 billion five-year contract for technology development and risk reduction activities. This award leverages our internal investments and experience from our THAAD and other programs to deliver the capability to respond to multiple threats with a single interceptor. NGI will be a key element of homeland defense of our country against ballistic nuclear missiles, and we're extremely proud to be selected to pursue this opportunity. Our space team also announced a strategic interest agreement with telecommunications firm Omnispace to explore collaborating on a hybrid communications network using both satellites and ground-based wireless technologies. Tying together space and terrestrial systems into a seamless 5G network has the potential to greatly enhance military applications and help manage complex information-centric warfare in all the operational domains. We continue to explore opportunities like this one with the goal of accelerating the benefits of commercial telecommunications technology into our 5G.mil initiative to rapidly increase the capabilities of our soldiers, sailors, and airmen in the 21st century. I'll close by again highlighting our space team and their contribution to the recent successful Mars Perseverance landing. Lockheed Martin Space designed and built the Mars 2020 aeroshell, which encapsulated both the Perseverance rover and the innovative Ingenuity drone helicopter, protecting them during entry and descent through the Martian atmosphere. Lockheed Martin also designed and built the Mars helicopter delivery system, which transported Ingenuity on the rover and successfully deployed the helicopter for its historic first flights on Mars. We've built aeroshell systems for every one of NASA's Mars rovers and landers, and we've been part of every NASA Mars mission, beginning with the Viking program in the 1970s. We continue to incorporate innovative technologies and decades of experience into each new spacecraft, and we're excited to continue our Mars heritage with the Perseverance program. These many achievements highlight the breadth of our portfolio, our focus on innovation and next-gen technologies, and our commitment to providing the United States and its allies with 21st century capabilities to support crucial national security missions. And with that, I'll turn the call over to Ken.

Thanks, Jim, and good morning, everyone. As I highlight our accomplishments, please follow along with the web charts that we've included with our earnings release today. Let's begin with chart three. and an overview of our results for the quarter. We saw strong results in sales, segment operating profit, cash from operations, and earnings per share this quarter, while maintaining our backlog of $147 billion. We generated $1.7 billion of cash from operations, and we continued our balanced cash deployment actions, including the execution of our $1 billion accelerated share repurchase program this quarter. returning a total of $1.7 billion to our stockholders, including our quarterly dividend payments. With these results and strong performance from our rotary emission system segment, we are able to increase our outlook for the year for all key financial metrics. In turning to chart four, we compare our sales and segment operating profit this year with last year's results. Sales grew 4% compared with last year to $16.3 billion, continuing our expected growth of the business, while segment operating profit was $1.7 billion. We had a segment operating margin of 10.8%, consistent with our expectations, as we did not record any equity earnings this quarter due to no launch events in our ULA joint venture at space. Chart five shows our earnings per share for first quarter 2021. Our earnings per share of $6.56 was 48 cents above our results last year, driven by volume, and as Jim mentioned, includes 18 cents of a gain from investments in our Ventures Fund. And I'll discuss this a little more in a subsequent slide. This was partially offset by 10 cents in severance charges from previously announced actions taken to improve efficiency and lower total costs for our business. On chart six, we will discuss in more detail the cash return to our stockholders this quarter. Subtracting our capital expenditures from approximately $1.7 billion of cash from operations, our free cash flow was nearly $1.5 billion. By executing our planned share repurchases of $1 billion in the first quarter, as well as providing our dividend of $2.60 per share, we were able to return 119% of free cash flow to our stockholders this quarter. And moving on to chart seven, as we noted, we are increasing our outlook for the current years for sales, segment operating profit, earnings per share, and cash from operations. On chart eight, we show the increase to our sales guidance range of $200 million and reflected in our estimated sales range for rotary and mission systems. This increase reaffirms our growth for 2021, projected to increase year over year by 4%. On chart nine, we show our outlook for segment operating profit by business area. And consistent with sales, we have increased our RMS and our outlook by $25 million. On chart 10, we take a closer look at our increased guidance for 2021 earnings per share. As I noted a moment ago, we recorded a $68 million gain on strategic investments we hold in our Lockheed Martin Ventures Fund, which translates to approximately 18 cents in earnings per share. As Jim noted previously, these investments are part of our growth strategy, focused on innovative technology and early-stage companies and their valuations may fluctuate over time. Moving on, reduced tax expense as a result of the American Rescue Plan Act and the timing and execution of our share repurchases have also favorably impacted our outlook for EPS, as has the increased earnings we noted from rotary emission systems. There is an offset to incorporate the non-recurring severance charge we discussed earlier. In total, our full year earnings per share outlook has increased by 40 cents at the midpoint of the range. On chart 11, we will look at our increased cash flow forecast for 2021 with increases also estimated for 2022 and 2023. With the passage of the American Rescue Plan Act, we are no longer planning to make a $1 billion discretionary pension contribution in 2021. This benefit is partially offset by reduced pension tax deductions, with the net increase to cash estimated to be about $600 million. The net impact also improves our anticipated cash flow in 22 and 23. This change allows us to recover the entire $8.3 billion of existing CAS pre-funding credits by 2026. And based upon this change in law, and our current estimates and assumptions for future pension asset performance, we do not believe there will be a required pension cash contribution before the year 2026 and minimal contributions thereafter. In total, this change in legislation increases our three-year cash flow estimate by $1 billion and, combined with reduced future CAS expenses, will improve our cost competitiveness and our affordability to customers going forward. I should note, as I did on our last call, that this outlook and trends are prior to an R&D tax deduction impact from the 2017 Tax Cuts and Jobs Act that's effective in 2022. And to conclude on chart 12, we have our summary. We believe that the first quarter of 2021 has laid the foundation for a strong year. Our backlog remains robust, and our key programs continue to deliver growth and sustained performance. We have increased our full-year outlook for sales, operating profit, earnings per share, and cash from operations. And as a result of a change in legislation, our three-year cash flow expectations have grown by $1 billion. And with that, John, we're ready to begin the Q&A.

Certainly. And ladies and gentlemen, if you wish to ask a question, please press 1, then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. And if you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, you may press 1, then 0 at this time. And first, we have a line of Rob Spingarn with Credit Suisse. Please go ahead.

Hi, good morning. Morning, Rob. I was hoping we could... Good morning wanted to dig into space, a little bit two part question one for each of you and I thought i'd start with Ken. And just wondering how we think about top line growth for the three space sub segments so satellites strategic and defensive missiles and space transport. Over the next few years X the aw fade, particularly now that we have some budget details from NASA. And then, Jim, while we're on the topic of space and NASA and with the Artemis HLS award to SpaceX last week and all of the other startups we're seeing, the new space crowd is coming on strong, and I wanted to ask you how you think about that from Lockheed's perspective. Thank you. Sure.

Hey, Rob. It's Ken. I'll start off with your long-term question regarding top-line growth. So everyone's aware, if you look at the last couple years, we've had a very strong order book in our space business. Some of it planned, and frankly, some of it nice surprises. So if you go around the horn, if you look at our national security space segment, I'd say probably the biggest growth opportunity we have there is in our classified space area. We are seeing an enormous amount of opportunities out there, a lot of them planned, and frankly a lot of them that we are helping shape. And so I'd say long-term there's a lot of opportunities there in national security space. From a strategic and missile defense standpoint, I would start out with what Jim described as a very nice win for us, which was the NGI contract. I think over the next couple years we're going to see some nice opportunity from a growth standpoint there. You know, that program will be developing and demonstrating JADO-enabling systems, and they'll be ready for operational use as early as today. So some opportunities there. I'd say the second area of large top-line growth opportunity is our hypersonics business. So if you think about hypersonics today, we're going to do about $1.5 billion rough numbers of sales in our hypersonics area, and roughly about two-thirds of that is in our space business. Think of that as CPS. So I think some strong opportunities there. And then commercial space, probably not as robust growth today. as the other two business segments, but we do see some opportunities there, and that's in light of Homeland Security. I'm also going to mention the one initiative with OmniSpace that Jim brought up. I think there's some exciting opportunities there, not just in the government arena, but also in the commercial arena that will help shape with them. And then I think the last piece I'll talk about is our LM100 initiative. This is a midsize satellite bus that can support missions to both LEO and GEO. And that'll be joining our fleet of the LM50 and the LM2100 series. And some of those investments in advanced payload technologies and demonstrations will be using that bus that can yield some future growth. So I think there are a lot of exciting opportunities there for us in space. It really is an opportunity-rich environment.

And Rob, when it comes to space from a strategic standpoint, I think the important framework to start with here is that 80% or more of our space operations revenue comes in national security space and strategic missile defense. So the remaining 20% is where sort of the action is on exploration. And we're playing right in the middle of that. So we were on the largely commercial team led by Blue Origin, the national team, on the moon lander. That our team did not particularly be successful in this didn't mean we weren't participating. We were part and parcel of the new order, if you will, in civil space and teamed up with Blue Origin. On the other hand, we've got We've got a franchise position on Orion, and Orion's the actual crew compartment spacecraft that will be used for the Artemis missions going forward. So we've got a great position there. We'll continue to work with, whether it's Omnispace or others, Blue Origin, SpaceX, whatever makes sense for us from a partnership-slash-competition perspective. We're going to play, and we're going to be there. But again, 80% of our system... Space systems net revenue is going to be coming from, again, franchise situations and strategic missile defense and national security space. I'm not seeing those newer firms play at the level where they can compete with us.

Our next question is from Seth Seifman with J.P. Morgan. Please go ahead.

Thanks very much, and good morning. Great. sort of vision for the company that you talked about, which would seem to require maybe some changes in the way that the department interacts with contractors. I guess, you know, after being in the role for a year, what would you say are the top one or two changes that you need from the department to, you know, kind of really drive the 21st century warfare strategy, and what's the plan for getting those?

Sure. Seth, let me just frame up the strategy quickly for everyone on the call, and then for each of the four or five main areas, I'll make a point as to what we hope to encourage and work with our government customer to do on their side. So overall, our objective is to lead our national defense enterprise, which is industry and government and the military services, toward a higher and faster trajectory of development. This is essential to meet the challenges, I think, in an area of resurgent great power competition. So this isn't just a business strategy. I think it's a national strategy that's an imperative. And at Lockheed Martin, we're in a great position to try to lead that with our customer base. And there's really four or five elements. And so I'll hit each element and say, well, what do we hope to get along with our behavior from our government customer and the military services to work with us on this? First of all, I think it's imperative, again, we establish what we call a 5G.mil network architecture. So something that is a standards-based architecture with interfaces, frequencies we're going to use, bands we're going to employ, ways to do hierarchies and use intellectual property from numerous companies inside and outside the defense enterprise. to actually create an architecture just like you see being done in, say, 5G in the telecommunications world. I think we can lead that for a number of reasons, but we're going to absolutely have to have our government customer involved with us. And when you look at exercises like Orange Flag, that demonstrates that they see the need as well. And ultimately, we're going to have to have an ability to work with our customer base to have new acquisition and appropriations processes so that we can speed things up and get things done faster in the kind of world we're talking about. One of the things that, frankly, is core competency of Lockheed Martin is dealing with the federal acquisition regulation, and I do feel we can be a bridge during this sort of changeover period, if you will, to commercial tech. We can license with them on one hand the way they're used to working, and we'll deal with the federal government as far as the contracting goes on that side. I think we could be a great bridge for that. But the first thing we need to do is establish that architecture and have cooperation with our government customers to do it, and we are. The second thing is we really intend to partner with these leading companies in the telecom and technology space because we need as a defense enterprise to accelerate our adoption of those 21st century technologies and capabilities. So again, we'll try to be the pivot point for that, linking the two industries with our customer. But we're going to have to, again, have an interest in adapting procurement processes and speed to the kind of speed that the commercial companies are used to. There's an interesting model for this, the intelligence community. There are some budgets that are handled at the DNI level, which have a lot more flexibility than a standard DOD budget line would have. And so that's just one idea, but we need to start working with our customers more closely on some of those fast-track kind of initiatives. The next piece of what we're going to do at Lockheed Martin is we're going to enable eventually all of our major platform programs in airspace, maritime, and land domains to seamlessly connect into this architecture. And then on the customer side, We're going to have to work with them to make sure that they're comfortable using the standards that we come up with and some of the software-defined network protocols that we intend to use. We're going to have to work with them on that. Now, why that's important is because currently the sequential design test paradigm that the Department of Defense uses to develop weapons systems is too perfectionist and too slow to actually do this. We want to work with our government customers to use a more rapid development process. So, for example, on hypersonics, we're already using it. We look for 80%, 20% kind of splits on success on all the test points and metrics, and we move on to the next test. We don't strive for 99% to 100% because that will be too slow to get this done. So there's a sequential design test paradigm change, frankly, Seth, that that we have to work with our customers to achieve there too. And at the end of all this, why are we doing this? I think at the end of it all, our customers are going to achieve greater deterrence capability and operational abilities by moving towards this direction. And our shareholders are going to benefit too because we're going to be a stronger and more resilient growth machine and engine for our business. So there's benefits to shareholders, there's benefits to government, and we hope to lead the charge on this.

And our next question is from Rob Stallard with Vertical Research. Please go ahead.

Thanks so much. Good morning.

Hey, Rob.

Jim, there's been some commentary out of Congress over the last month or so about the F-35 and the operating cost of the aircraft. I was wondering if you could give us your perspectives on this issue and what the obstacles could be to getting this operating cost down to an agreeable level. Thank you.

Sure. So what I'll start with is an ex-Air Force pilot and having spoken to Israeli pilots and our own test pilots here at Lockheed Martin and also those serving in the military today in the United States. This aircraft's the most capable fighter plane ever developed in history. It's got a lot of leading-edge technology with it. Just the propulsion system alone integrated with the stealth technology is pretty groundbreaking. It enables this airplane to do things that no other one can do and survive in the process of that. The other piece of it is Lockheed Martin was ahead of even my thinking in making sure that the F-35 would be ultimately a hybrid base station or a mobile compute station. node for the battlefield. And so we've got the sensor capability, the computer processing power, and the communication linkages from that airplane to the network, again, that makes the airplane much more than just a single purpose fighter. So having said all that, it's an expensive machine, and it's expensive to maintain in large part because of the stealth technology that's more advanced than anywhere else. Having said all that, we are working on all three dimensions of affordability with the customer very closely, myself included. And that is on production, where we've already achieved, the company's already achieved the goal of $80 million F-35A, and we're a million or two below that these days. So production's in good shape. We're going to keep working on it. For modernization, this airplane, because of the evolving threat and the speed at which that's happening, is going to have to continually modernize. And if we can employ some of these commercial technology practices into our own modernization program, we'll be able to get some efficiencies out of that. And then sustainment is also key. And what we need to do is have a joint strategy and develop it with our joint program office and our services through the end customers that have to actually fix this aircraft and maintain it in the field to get the optimal sustainment strategy, the the right level of funding for spare parts, et cetera, and really clearly define roles and responsibilities for the depot system, for frontline maintenance, and for the OEM and our supply chain. I think that's a very doable thing, and we're embarking on that led by the Joint Program Office and the service chiefs. So I think we're going to address all three dimensions and that the goals that the government has put in place for us at $25,000 a flight hour, if we work with them in tandem, is achievable.

And next we'll go to Peter Arment with Baird. Please go ahead.

Yes, good morning, Jim and Ken. Ken, maybe just a high-level one on the backlog. Your target, I think, of $150 billion in 2021. Maybe if you could just walk us through some of the key moving pieces that you think are going to allow you to get there and anything to call out on the international front. And just, Jim, related to that, if you could also just comment if you're seeing any kind of changes in the new administration on the international award front. Thanks.

Hey, yeah, thanks. Good morning. So, yeah, from an order standpoint, you're right, Peter. We think, you know, if you look book to bill, it'll be by the end of the year, it'll be above one, and we should be close to about $150 billion. You know, a couple of the key awards that will get us going forward, there's a variety of... F-35 orders. I'd say probably the one worth highlighting or the two worth highlighting is if you recall lot 15 for F-35, we deferred the booking of that last year and we moved that into this year. That's a big order. And in there, there is, you know, just sticking with the international theme, there is a good size of not just U.S., airplanes, but also partner countries and FMS countries. The other big F-35 order, which is in the fourth quarter, would be lot 16 production. And think of that as just ballpark $9 billion. And similar to lot 15, it's got U.S. airplanes, it's got partner airplanes and FMS airplanes. In fact, when you start getting out Into that time period, the partner and FMS percentage of aircraft starts getting close to roughly 50%, so we still see continued demand there. We have a handful of other international aeronautics orders out there. There's a few F-16 orders. There's a few C-130 orders. Another key one will be the next tranche of CH53K. That's lot five. We're expecting that order this year. There's a bunch of PAC-3 fiscal year buys that we're expecting this year. There is a reasonable size span order for the space business, which is Australia. There's a few special programs out of space. So I would say we are extremely comfortable with our orders profile. I would say the only one that possibly could move out to the right would be the lot 16 production order. And again, that'll just be timing. Can the joint program office and us... get alignment on pricing. And in fact, I'll just bring up the point. I'm sure someone's going to want to talk about the pension change. But one of the rationale for us to quickly declare why we're going to implement the CAS adoption to 2022 was for us to get that into our forward pricing rates into 2022 and beyond. Because in fairness to our customers, they're not going to conclude negotiations with us until we push that benefit down to the business areas and into their forward pricing rates. So that was one of the key reasons we made that declaration now and started in 2022, because that will help with the Lot 15 negotiations that are going on now and many other large negotiations we have going on now.

Peter, it's Jim. When it comes to the current administration's approach to international defense, I think there's really four important points to make. One is the Biden administration clearly recognizes that we're all in the era of this resurgent great power competition and regional disruptive powers that are out there as well, like Iran and North Korea. That's a world that's not going to get any more peaceful anytime soon, most likely, and so strong national defense is a priority of the administration, I believe, based on their own statements. Secondly, the Biden administration has reinforced and elevated the criticality of alliances to actually meet this kind of situation, and that, again, is a positive for international defense cooperation. The third item that I note is that there's a very – experienced and capable foreign policy and national security cadre of leaders, lifetime professionals, many of whom in this space, and they know exactly what they're dealing with and how to make it work. And then fourth, yeah, there's going to be some process alignment between the White House, the Department of State, Department of Defense, and Congress on how to actually conduct all this. But I do see strong opportunities going forward under this administration for international defense cooperation, and that would benefit Lockheed Martin, I expect.

And next we'll go to George Shapiro with Shapiro Research. Please go ahead.

Yes, good morning. Ken, I wanted to pursue aeronautics a little bit. I mean, sales were flat in the quarter. How much of that was due to having one less week in the quarter? Deliveries were like 17 versus 22 for the F-35, and you lost some revenues from taking the development contract down. So do we... Do we make up the shortage of revenues in the fourth quarter when we pick up the week? And if you could just get into a little bit more of the detail like I was just asking.

Sure, George. Hey, good morning. Yeah, you know, the main driver of why aeronautics was flat, frankly, was, and this is non-COVID related, we had a sizable couple hundred million dollar vendor invoice that we anticipated to hit in the first quarter, George, that actually hit. It hit already, so it hit in the month of April, so it was just, that was a timing event, so I'm not so certain 12 weeks versus 14 weeks is going to have that much of an impact. It was really more of a delay in the invoice from the first quarter to the second quarter, but Just to give you a little color in the first quarter, basically F-35 was generally down, and that's mainly due to development being down. I'd say production on the whole was relatively flat and sustainment was up modestly. And then to your point, we're going to continue to see momentum in the quarter, in the upcoming quarters. And in fact, to your point, the largest quarter for aeronautics is the fourth quarter. So yeah, you will see some of that continue going into the fourth quarter. So I think it's fair just to say it was the vendor payment slip into the second quarter. Second quarter is a little less than the third and the fourth, but all three of them are, I would say, somewhat considerably higher than our first quarter. So thanks for the question.

Our next question is from David Strauss with Barclays. Please go ahead.

Thanks. Good morning. Good morning. So in the quarter, Ken, you talked about 10.8% segment margins. I think A couple years back, the corporation was doing 12%, north of 12%. So I wanted to ask about how you view the potential opportunity for mix and productivity to improve segment margins in a more difficult budget environment from here. Thanks. Thanks, David.

You want to talk about beyond 2021, I assume?

Exactly.

Okay, so... Yeah, I think it's probably best we go around each of the four business areas. So if you look at the mix at aeronautics, F-35 is still going to be a dominant piece of aeronautics, regardless of how quickly the rest of the segments of that business area are growing. And I'll get into that in detail. So if you just peel the onion on F-35, Jim mentioned when he answered the sustainability question, if you look at the three elements, a nice, pleasant surprise for us, which is a good news story, is there is a demand still for added capability, added technology on the airplane that we and our partner companies are working on. So we still see development being a decent-sized relatively speaking, decent-sized piece of the portfolio. It's going to be, you know, cost-plus, so dilutive, but, you know, we'll take it, which then takes us to production, which is still going to be the lion's share of that piece of the portfolio. And, you know, I've said this before. If we perform on our current contracts, as we believe we should be able to, and we're able to get acceptable deals on our future LRIPs, there should be some margin opportunity there. The only thing I'd caution is we're looking at our performance on lot 12 through 14 now, and whether we do a risk retirement later this year, we want to see some more improvement there before we do that. So I think the point I just made is valid, that You know, the opportunity is there. We have to perform, and, you know, we're just keeping a close eye on that. And then sustainment is going to be the fastest-growing piece of this part of the portfolio, and it'll continue to grow. I mean, we're going to continue to stand up bases. We're going to continue to need sparing. We will back on the follow-on modernization work we're doing in development and We'll have to retrofit some of those aircraft that are already in the field. But today they're cost plus, and our customer is buying on an annual basis, which is, you know, the argument Jim made is inefficient. There's going to have to be, we believe there's a better way to procure, and that's why we offered that performance-based logistics concept. And we'll, you know, see where that goes if that morphs into something. And if industry is prepared as we are, to take on the investment and take on the risk and sign up to a service level agreement, and we perform. There should be some profit opportunities there. F-16, we've got 128 aircraft in backlog, five customers. We see a lot of interest out there internationally from many, many countries. We're going to deliver eight aircraft next year, and we will basically, by the middle of this decade... ramp up to about three, three and a half airplane deliveries per month. There should be, and they're all FMS contracts. That's the way the customer is procuring them today. There should be some margin opportunity there for us. And then the last piece of aeronautics is our skunk works. And it is our fastest growing piece of aeronautics, likely will be in the foreseeable future, but a lot of those contracts are classified. A lot of them are cost plus. Again, maybe margin erosion, but I'll take the top line growth with the added profit any day. So that's aeronautics. Missiles and fire control, I think we have the opportunity to keep the margins where they are today. We do have a little bit of a mix. The issue is we should continue to see strong demand for PAC-3s, into the foreseeable future. We're continuing to build out real estate to continue with the needed demand out there. And then the other piece that is going to continue to be quite large and continue to grow is in the classified area, which today is cost plus, will be in the foreseeable future, which will have a dilutive effect on margins, but we'll take that any day. And ultimately, that should morph into production and fixed price and allow us to grow margins there. At RMS, I think it's probably best to talk about Sikorsky. We're starting to see the CH53K go into production. Jim, in his prepared comments, talked about some of the international opportunities, specifically Israel we have there. which will be a great opportunity for us. A lot of these other helicopter programs are now into production. And then ultimately, we'll have the down select on FLORA and FARA, and we're bullish on those. And by the end of this decade, you know, they'll start out as development programs. By the end of this decade, they'll be in production as well and hopefully see some margin improvements there. And then lastly, space. Space, you know, if it wasn't for AWE, they would be our fastest growing business area this year at 7%. And we should see, you know, with our core space business, we should continue to see growth there. It will be a mix between cost plus and fixed price. United Launch Alliance is alive and well and will continue to be and will give us a nice equity earning stream. But I see some, you know, based on where we are today, I see some margin upside there as well based on where they are today.

Our next question is from Rich Safran with Seaport Global Securities. Please go ahead. Thanks.

Jim, Ken, Greg, good morning. How are you?

Good, thanks.

So, you know, given the accelerated share repurchases, I wanted to ask you again about capital deployment and just how you're thinking about it. Does the accelerated share repurchase infer any change in how you're thinking about the balance between dividends, buybacks, and M&A? And on that topic, is there any intent to continue to or make larger investments in businesses and technologies like ABL?

Hey, Rich, it's Ken. You know, hopefully this will resonate with you, but, you know, I think it's a consistent story. First and foremost, we're going to generate as much cash as we can. And that was one of the rationale of why we decided to start deferring our ERISA funding in 2021 from an economic standpoint. That made the most sense. But first and foremost, we're going to invest in our business, whether that's organic or inorganically. You know, we have... Still some decent-sized capital outlays this year of rough numbers, about $1.8 billion. We're at record levels of IRAD spend this year, and we'll continue to do that. And this, again, will focus on organic. And then inorganically, in Jim's prepared statements, we talked about Aerojet Rocketdyne. That's on track. We just got our second request from the FTC, which is no surprise. Nothing's changed. We're still very bullish about that, for that to come to resolution in the fourth quarter of this year. And then it comes down to the excess cash. What do we do with it? We are focused on our dividend strategy. That would be the next in the batting order. We're going to, in the third quarter... Jim and I will go see the board with our treasurer, John Mollard, to make a recommendation on what's the appropriate increase in our dividends, and it should be deemed favorable to our shareholders. And then lastly, it's share buybacks. And frankly, Rich, what we saw in the first quarter where our stock was trading, we thought it was grossly undervalued, and we went into this accelerated share buyback plan and uh deemed to be very successful and we will opportunistically in the next three quarters um buy back stock where where it makes sense and you know you know think of that as anywhere from 500 million dollars uh to to a billion dollars uh in the next uh three months we have the you know the balance sheet to do everything i just described and uh we'll continue evaluating that. And I'll hand it over to Jim to talk about if there's any other investments. And I think you mentioned ABL and other type opportunities out there.

Yes, Rich. And going back to that overall strategic framework that I outlined earlier, you hear a lot in there about partnering with leading technology companies. leveraging commercial industry research and development investments they've already made or are making to reduce our costs that we then transmit to our customer. So we want to use the full range of transactional options inclusive of our defense industrial-based colleagues that we're used to dealing with, but well beyond that, right? So ABL is more of a kind of a bulk buy option type commercial agreement, for example, which is maybe the lowest on the spectrum of what you might do, all the way up through partnerships, which are like-for-like contributions, joint ventures, which are actual equity agreements with different companies like we have with ULA, for example, and then full-on acquisitions like Aerojet, Rocketdyne, or i3, which is a smaller tech company that we bought last year. So we're going to use that full range of transactional options to pursue the strategy that I talked about. So you'll see us be, I think, a little more creative at times, a more open aperture. But it'll be thoughtful. It'll all fit within the batting order that Ken just described. But we're going to make sure that we're being widely viewing the options so that we can take advantage of cost reduction, of R&D that's already been made in other sectors, or of other business models. So just one last point on this. someone that's already going to invest in low Earth orbit at scale production for commercial uses, well, maybe we could tap into some of their production for military and defense uses and, again, let them do the CapEx investment and we'll just commercially buy off what we need from them, which is similar to ABL's agreement.

And our next question is from Christine Lewag with Morgan Stanley. Please go ahead.

Hey, good morning, everyone. Morning. How has the relationship with ABL evolved since initially investing in the company? And also, what does an exit of an investment look like at LM Ventures? Will you eventually acquire them, sell your stake or IPO? How do you look at that?

Hey, Christine, it's Ken. We really didn't make an investment in ABL. What we basically agreed to is to is to commit to a range of launch vehicles. Think of this for lower-level satellites that don't require the horsepower of, say, our United Launch Alliance. You know, the only investment we do have is it's in our ventures group. And, you know, think of that as this is more for the technology that they bring to make our products better. You know, it's a relatively modest – that's a relatively modest investment. So I'm not sure I would look at it as, you know, something that – you know, from an acquisition standpoint. And the question you asked for, you know, when do we look at getting out of those type investments? So, you know, we did, as you heard, we did have some investments that actually went public that allowed us to make a gain. Some of those are SPACs, which we're going to be required to hold. and then we'll make a determination whether it makes sense for Lockheed Martin to get out of those ventures, but then to continue to utilize that technology. And just as an example, ABL, we would do something very similar. And again, I'm not suggesting that whether they're public or not, we would just make a determination when it makes sense for that modest investment in them that we have, whether it makes sense for us to get out or not and continue to utilize their technologies.

John, this is Greg. I think we have time for one more.

And that will be from Ron Epstein with Bank of America. Please go ahead.

Yeah, hey, good morning, guys. So help me think about this. In the quarter, right, F-35 volume was down and F-22 volume was down. And I think about those as kind of the underlying foundation of the company. how can we get comfortable that that's not going to be a trend, that that growth engine is still healthy and there?

Sure. Sure. I'll take that, Ron. Good morning. You know, I think it a little bit goes back to, you know, what George was asking me in terms of, you know, the first quarter versus the rest of it. So I would say on production standards, We're down, I'm going to call it flat, Ron, just because it's down year over year, $25 million. But what we're basically looking at on development on the whole, and this goes back to the earlier conversation, this in some ways for Lockheed Martin is a good problem to have. We continue... to have that demand out there for increasing technology. But I don't see development growing. So, you know, let's for year over year call it flat. Production, you know, just based on, you know, if you think about production revenues, it's really not for the most part, it's really not for the deliveries we're making this year, which are lot 12 and lot 13. It's really for the deliveries we're making next year. You know, we're building those aircraft out now for next year, and then we're doing the buy ahead, if you will, for the following year. That's generally where the sales are coming for for this year, and we're fairly confident, or very confident, I should say, in the stream and the flow of what's going on. So think of Production is going to grow this year low single digits, and I've been relaying that, that sales are going to, you know, continue to grow at a relatively slow pace for production. The growth is in sustainment, and in the quarter, we did see growth in sustainment, and we will see growth for the year in the, you know, close to the almost 10%. range. So I don't think that's a concern. I think F-22, I'm not sure you called that the linchpin or the bedrock of the business area. I'd say, Ron, relatively speaking, F-16 is almost double the size of F-22. I think that's more of the parameter of where the rest of aeronautics is going, including the skunk works. I would say F-22 is going to continue to be flat and declining, as will C-130. And the pleasant surprise on C-130 is it's not declining as quickly as we thought it was. The team has done a nice job of getting congressional ads from the United States government and international – customers for that great workhorse, and that's going to be flat over time. So I'd say your big drivers going forward for growth at aeronautics will be sustainment on F-35, F-16, and then the skunkworks, and then the bedrock, if you will, will be the modest growth that we're going to have going forward on production.

Hey, John, this is Greg. I think we've come up on the top of the hour here, so I will turn it back over to Jim for some final thoughts.

Thanks, Greg. Lockheed Martin had a strong first quarter, delivering outstanding performance operationally for our customers, providing continued growth and value for you, the stockholders, too. And I want to just close by reiterating my thanks to the Lockheed Martin team for their dedication and commitment to excellence during a difficult time for everyone. And thank you again for joining us on the call today. We look forward to speaking with you on our next earnings call in July. And that concludes the call for today. Thanks again, everybody.