Lockheed Martin Corporation

Good day and welcome, everyone, to the Lockheed Martin third 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 third quarter 2021 earnings conference call. Joining me today on the call are Jim Taklett, our Chairman, President, and Chief Executive Officer, and and John Mollard, our Acting 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, Greg. Good morning, everyone, and thank you for joining us today on our third quarter 2021 earnings call. In a few moments, John will provide a detailed review of our quarterly results, updated 2021 guidance, and trending information for 2022. But first, I will provide a five-year sales outlook and discuss our plans for accelerating capabilities to our customers and driving per share value to our shareholders over that time horizon. Last month, I led our executive leadership team as we completed our annual strategic and financial planning process. Given the scope of changes in our operating environment over the past year, we conducted a more in-depth and extended assessment of our financial forecast. Based on these strategic and financial reviews and the information available to us today, our current expectation is that sales in 2022 will decline slightly from our expected 2021 sales level. We then anticipate sales will increase slightly in 2023, with steadily increasing sales growth through 2026. This sales trajectory reflects a number of factors, including the continuing effects of the ongoing COVID pandemic and extended delivery timelines across our supply chain, moderating growth rates in the U.S. defense budget, shifts in customer priorities driven by recent events such as the withdrawal of U.S. forces from Afghanistan and the renationalization of the AWE program in the UK, and our recently completed agreement with the F-35 Joint Program Office on a re-baselining of aircraft deliveries under our production program. I'll address this significant agreement a little later in my remarks. As with all forward projections, our performance on current programs, our ability to win highly competitive new starts, the size of future defense budgets, and the global geopolitical landscape will all influence our ultimate growth rate over the coming five years. But as we look ahead, there are four primary areas that underpin our longer-term growth forecast. The first of these future growth areas is within our hypersonics portfolio. We are currently performing on six hypersonic programs across the company, and following the successful completion of ongoing testing and evaluation activity, multiple programs are expected to enter production between 2023 and 2026. The second growth area is within our classified activities. Three of our four business areas are engaged in significant classified development programs, and pending successful achievement of the objectives within those programs, we expect to begin the transition from development to production, again, between 2023 and 2026. The third area of expected growth lies in our current programs of record. Our portfolio is very well aligned with our customers' mission requirements, and as a result, we have multiple programs from each business area entering growth stages. This includes the CH-53K heavy lift helicopter, F-35 sustainment activity, increased PAC-3 production rates, and the modernization and enhancements to the fleet ballistic missile. And finally, we're in competition for several significant new business awards. including the Future Vertical Lift, FLORA and FARA competitions, the Next Generation Interceptor Program, and the KCY Tanker Program. These represent meaningful opportunities to accelerate our projected top-line growth profile with new long-term projects that are critical to our national defense. Now I'd like to discuss our strategy for driving strong returns for our shareholders in the near term while remaining well positioned for our expected return to growth in 2023. The central tenet of our value creation strategy is using a disciplined and dynamic capital allocation process. We will first reinvest capital into our business to meet our customers' requirements and drive organic growth. Concurrently, we will continue pursuing actionable inorganic growth opportunities that strengthen our core business. and we will return cash to shareholders through increasing dividend payments and a significantly expanded share of purchase program. To drive sustainable organic growth, we will continue making significant investments in our business areas. These investments include nearly $2 billion of annual capital expenditures and approximately $1.5 billion in independent research and development spending each year. These investments are being made in our signature platforms and systems to provide our customers with the high-value solutions they're going to need to execute their missions of deterring and, if necessary, defeating the pacing threats across all the domains of operation. Additionally, we are transforming our internal operations with a model-based engineering and enterprise architecture, and we are building digital factories of the future. These investments in state-of-the-art engineering, manufacturing, and sustainment tools and techniques will ensure our business areas can continue delivering outstanding performance levels on current programs while also positioning us to prevail in upcoming campaigns. After making these significant investments in our business to support our customers and drive organic growth, we expect to have substantial free cash flows available to return to you, the shareholders, through dividends and share of purchases. Last month, the Board increased our quarterly dividend by 20 cents, or approximately 8 percent, to $2.80 per share, and now $11.20 per share annually, providing shareholders, especially our yield investors, with strong returns. This action marks the 20th consecutive year that the Board has increased Lockheed Martin's quarterly dividend. Along with making an increased quarterly dividend payment, we will also provide additional value to shareholders by returning excess cash to them through a greatly expanded share of purchase program. As discussed in today's press release, we've already repurchased $2 billion of our shares through the first three quarters of 2021. And last month, on my recommendation, the Board increased our remaining share of purchase authority by $5 billion. bringing our current total share of purchase authority to approximately $6 billion. With our stock trading at a level well below what we calculate as the company's intrinsic value, we have significantly increased our planned share buybacks, and I anticipate that we will repurchase up to $6 billion of our shares over the next 12 to 18 months, if conditions warrant. As a final note on shareholder value, we are going to dynamically allocate capital to the highest return opportunities, prioritizing investments that lead to growing free cash flow per share. That's our new metric. We will remain opportunistic in pursuing accretive bolt-on acquisitions, evaluate additional increases to our current share of purchase authorization, and continue to reinvest capital into our business to drive long-term growth. We have the balance sheet flexibility and firepower to pursue multiple avenues of growth while returning significant capital to our shareholders. We built this balance sheet to use it, and we will do so, consistent with our focus on long-term shareholder value creation. Our strong balance sheet provides us with the capability to close on the Aerojet Rocketdyne transaction, provide robust returns to shareholders, and continue to invest in our portfolio to support our customers and drive future growth. The Aerojet Rocketdyne transaction continues moving through the regulatory approval process, and we now anticipate closing in the first quarter of 2022. Before I turn the call over to John, I'd like to highlight the efforts of the entire F-35 organization, including the government's joint program office, our teammates and suppliers, our aeronautics organization, and our international partners for establishing a new aircraft production baseline and delivery profile that will provide industry, government, partner countries, and FMS customers, as well as you, the investor community, with important visibility well into the future. The program is strong and stable, and we have opportunities ahead of us to add to that strength. The program has delivered over 700 production aircraft out of a plan of record of over 3,300 jets. including to all three U.S. services and nine international customers so far, and we look forward to continuing the successful program for decades to come. With that, I'll turn the call over to John, and I'll rejoin you to answer your questions.