Lockheed Martin Corporation

Good day and welcome everyone to the Lockheed Martin second 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 second quarter 2021 earnings conference call. Joining me today on the call are Jim Taklett, 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.lockeedmartin.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, Greg. Good morning, everyone, and thank you for joining us today on our second quarter 2021 earnings call. I'll begin my remarks this morning with a few comments on our financial results, which Ken will elaborate on in a few minutes. Our second quarter sales increased 5% over last year's second quarter, as each business area exceeded 2020 levels led by our space team. Our space business grew over 10% this quarter due to growth in hypersonics, next-generation overhead persistent infrared or OPIR satellite activities, and increased support provided to the UK Ministry of Defense's Atomic Weapons Establishment Program, which will close out our management of that activity. Our segment operating profit was impacted this quarter by a one-time charge associated with a classified program in our aeronautics business area. While the classified nature of this program precludes us from discussing this matter in depth, we can say that our customer is highly attracted to the capabilities that we are developing on their behalf, that we're committed to delivering these capabilities, and that the long-term potential of this solution is significant for the company. Our cash generation remains strong, driving $1.3 billion of cash from operations this quarter after making $1.4 billion of accelerated payments to our supply base, as we continue to mitigate the risks brought on by COVID-19 for our supply chain. Our cash generation and the strength of our balance sheet gave us the ability to complete a $500 million accelerated share of purchase agreement this quarter, in addition to the $1 billion ASR executed last quarter. thereby bringing our year-to-date repurchases to $1.5 billion. We remain confident in our ability to continue driving strong cash generation and supporting balanced cash deployment actions, including investing in key technologies to provide our customers with enhanced capabilities and returning cash to shareholders. Turning to budgets, the White House submitted their fiscal year 2022 budget proposal to Congress requesting $715 billion for the Department of Defense, an $11 billion increase from the FY21 enacted budget. Our programs continue to be well supported, including over $12 billion for the F-35 program, approximately $3.5 billion for our signature Sikorsky helicopters, and over $2 billion for hypersonics programs. The President's budget request prioritizes funding for innovation and modernization as well, in recognition of the need to invest in technologies and capabilities to address the great power competition the nation now faces. These include areas of strength within the Lockheed Martin portfolio, such as continued support for air and missile defense programs, THAAD, PAC-3, and our recent Next Generation Interceptor Award, space domain initiatives, including OPIR, and GPS-3 satellites, and the Space Development Agency's transport layer architecture. The Defense Department request also focused on investments in advanced capability enablers. We believe this vision of deterrence and innovation is well aligned with our broad portfolio and our 21st century warfare vision. In congressional marks to date of the FY22 defense budget request, we continue to see strong support from the Hill for all of our programs, which include increases for F-35, C-130, CH-53K, and UH-60 programs, and fully approved budget requests for many of our other systems. Turning to some strategic and operational achievements from this quarter, I'd like to begin by highlighting the company's participation in Northern Edge 21, a U.S. Indo-Pacific Command exercise in support of the Pacific Deterrence Initiative. This live exercise included multiple U.S. military services across a very wide geographic area with a goal of enhancing joint interoperability between the services and the various domains that they operate in. Signature programs from all four of our business areas participated in this event, and we successfully demonstrated joint all-domain command and control, known as JADC2. We demonstrated capabilities such as enhanced situational awareness by integrating sensors across land, sea, air, and space, for example. Among our successful demonstrations of JADC2 during the exercise was, one, enabling AEGIS and PAC-3 MSE integration for integrated air and missile defense against advanced threats. Also using the F-35 to provide real-time tracking and targeting data generated near San Diego during a flight, to the All Domain Operations Center in Alaska for prosecution and fire control. Also, facilitating space-based connectivity at the same time using the MUOS narrowband satellite communications constellation, and also supporting the Air National Guard's demonstration of a new data link capability with our LegionPod, which integrates our infrared search and track targeting sensor technology into that broader network. The Northern Edge exercise demonstrated our integrated offensive and defensive fires capability, our satellite communication links, as well as the ability to adapt joint battle management concepts in real time. One of my goals in the first year as CEO of Lockheed Martin was to actually demonstrate the benefits of network effects to our customers using existing platforms under our 21st century warfare concept. Our integrated performance in Northern Edge did exactly that, and we are just getting started. Moving to some specific business area highlights, in aeronautics, Switzerland's Federal Council announced its decision to purchase 36 F-35A conventional takeoff and landing, or CTAL aircraft, along with sustainment and training services as part of their Air 2030 modernization program. This is a significant win for Lockheed Martin with an initial value of $5.5 billion and a total value of approximately $15 billion over 30 years. The F-35 was selected over the F-18, the Rafale, and the Eurofighter because of its survivability, information superiority, and comprehensively networked systems. The Swiss Council also noted that the F-35 delivered outstanding value offering both the lowest procurement and operational costs across all those competing aircraft. Switzerland will become the 15th nation to join the program since its inception, and we're excited to welcome them into the F-35 community. In rotary and mission systems, the U.S. Navy awarded our Sikorsky team a contract for nine CH-53K heavy-lift helicopters for Production Lot 5, which was worth nearly $900 million, and we're continuing to drive costs down and provide reduced unit prices to our customer. The award also included the option for nine additional King Stallion aircraft for Lot 6, which when those are exercised would represent over $1.9 billion in order for the Lot 5 and 6 combined. Including the previous Lot 5 award, we've received orders for 3,353 Ks out of a Navy program record of 200. It's a long way to go. Over 80% of the domestic aircraft quantities are still in front of us. And interest from international customers is driving additional opportunities. Also in RMS, our C6 ISR team participated in a unique collaboration with the Air Force to integrate critical battle management capabilities from our command and control legacy product, the Theater Battle Management Control System, or TBMCS, into the Air Force's new Kessel-run all-domain operations suite. The TBMCS was first declared a system of record in 2000 and performs the planning and execution of air missions, interfacing with many other operations, intelligence, and C2 systems throughout the U.S. Armed Services. Our RMS team delivered a cloud-based architecture and delivery plan, to enhance capabilities and migrate TBMCS data into the Kessel Run operation suite in support of pilots and commanders executing joint air campaigns. It's another example of our 21st century warfare concept in action with our Air Force customer in this case. In missiles and fire control, our integrated air and missile defense line of business delivered the first PAC-3 missile segment enhancement, or MSE, interceptors to Sweden, providing a country with the world's most advanced air defense capabilities to defend against incoming threats. Sweden now becomes one of 10 international customers to choose PAC-3 MSC missiles. In addition, our space business area successfully launched two new satellites in support of critical national security space objectives. Our fifth space-based infrared system in geosynchronous Earth orbit or CIBRS-G05 satellite, successfully deployed from its United Launch Alliance Atlas V rocket and is now communicating with the operations team from the U.S. Space Force. CIBRS-G05 is the latest satellite to join the Space Force's orbiting early warning missile constellation, and it's equipped with powerful surveillance sensors to support ballistic missile defense and expand technical intelligence gathering and bolster situational awareness for the Guardians that are defending the U.S. and its allies. The SIVRS G05 satellite is the first military satellite built on an LM2100 combat bus. That's a more resilient, modernized, and modular space vehicle originally developed using Lockheed Martin internal investment. Also, the 5th Global Positioning System, or GPS-3 satellite, was also successfully launched this quarter. The GPS-3 Space Vehicle 5 is the 31st operational GPS satellite in the constellation, with significant advancements over previous GPS space vehicles, including three times better accuracy and improved anti-jamming capabilities. The GPS-3 and OPIR satellite constellations are both Lockheed Martin signature programs and represent key elements of our network-centric 21st century warfare concept. And lastly, our space business area was selected by NASA to build spacecraft for two separate missions to Venus. Lockheed Martin will design, build, and operate the Veritas Orbiter to investigate the surface and subsurface of Venus, and the DaVinci Plus vehicle to research the planet's atmosphere. These missions build on our legacy Magellan program for the exploration of Venus and will represent NASA's first return to the planet in more than three decades. These achievements from across the company highlight our focus on providing innovative solutions and the strength that our broad portfolio gives us to support our customers' missions and their all-domain objectives. I'll close my remarks today with a quick status on the strategic acquisition of Aerojet Rocketdyne that we announced last December, a transaction that we believe will enhance Lockheed Martin's as well as all of industry's ability to meet our future national security and civil space objectives when it comes to propulsion. We are committed to achieving the key DOD priorities of reducing cost, increasing the quality and speed of new products, in addition to enhancing Aerojet Rocketdyne's position as a leading merchant supplier to all of industry. We remain in the process of responding to the Federal Trade Commission's second request for information, which we received earlier in the year, a step in the review process that we had expected. We continue to engage with the FTC and Department of Defense stakeholders regularly as part of their review, and pending approval, we hope and expect to close the transaction in the fourth quarter of this year. With that, I'll turn it over to Ken.