Ladies and gentlemen, thank you for standing by, and welcome to the Lockheed Martin First Quarter 2020 Earnings Results Conference Call. [Operator Instructions]. I'll turn the call now to Mr. Greg Gardner, Vice President, Investor Relations. Please go ahead, sir.

Thank you, John, and good morning. I'd like to welcome everyone to our first quarter 2020 earnings conference call. Joining me today on the call are Marillyn Hewson, our Chairman, President and Chief Executive Officer; and Ken Possenriede, our Executive Vice President and Chief Financial Officer. With safety and caution in mind during these unusual times, we are using a more virtual approach in exercising social distancing while conducting this call. 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 Marillyn.

Good morning, everyone, and thank you for joining us today. I hope this call finds you and your family safe and healthy as we collectively work to address the many issues brought on by the coronavirus outbreak. Our nation and the global community have seen the dramatic effects of the COVID-19 crisis. We are all saddened by the rise in illness and the tragic loss of life that has resulted from it, and our Lockheed Martin family has not been spared from this pandemic. The world continues to battle this disease, with experts predicting improvements will be seen in the coming weeks and months. And while this is certainly encouraging, we must remain vigilant to ensure progress is achieved. The corporation is taking necessary steps to help combat this virus and keep our employees safe while assuring our customers can achieve their important readiness and mission requirements. We are beginning to experience some issues in each of our business areas related to the coronavirus, primarily in access to some locations and delays of supplier deliveries, which have caused us to adjust our full year sales outlook, and we will discuss that later in the call. Our teams are successfully addressing many of the risks that have arisen due to the COVID-19 impacts. Our manufacturing facilities are open, and our workforce is engaged. The situation will evolve, and we will continue to monitor our business environment for areas of concern. The corporation remains committed to delivering the products and services needed for our customers and to maintaining a safe and healthy workplace for our employees. In recognition of this unprecedented situation, the U.S. government has taken several actions that continue to reinforce the importance of our nation's defense industry. The Department of Homeland Security deems the defense industrial base to be…

Thanks, Marillyn, 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. Let's begin with Chart 3 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. We generated $2.3 billion of cash from operations, and we continued our balanced cash deployment actions, returning $1.4 billion to our shareholders. Our backlog closed just above $144 billion, exceeding our all-time high for the corporation. And we have updated our outlook to include impacts from COVID-19, which we will discuss in greater detail in a moment. Overall, it was still a strong quarter for the business during uncertain and unique times. Turning to Chart 4, we compare our sales and segment operating profit this year with last year's results. Sales grew 9% compared with last year to $15.7 billion, continuing the consistent growth of the business, while segment operating profit was $1.7 billion. The resulting segment operating margin was a strong 11% ahead of our expectations. Chart 5 shows our earnings per share for the first quarter of 2020. Our EPS of $6.08 was up $0.09 over our results last year driven by FAS/CAS income and favorable operational performance. On Chart 6, we will discuss in more detail the cash return to our shareholders this quarter. Subtracting our capital expenditures from approximately $2.3 billion of cash from operations, our free cash flow was greater than $2 billion. We maintained our dividend to $2.40 per share, and we repurchased $756 million worth of shares. This brought our total cash return to shareholders to $1.4 billion for the quarter or 72% of free cash flow. And we see no change to…

[Operator Instructions]. And first, with the line of Joe DeNardi with Stifel.

Okay. Ken, there's language in the release and you kind of alluded to in your prepared remarks regarding the guidance and kind of reflects your current view on COVID-19. Can you talk about how sensitive the guidance is to duration? Maybe help us a little bit more with kind of what you're assuming for what a return to normalcy looks like. Do you see the effects of this in terms of fixed price contract costs increasing your ability to recover that? Just trying to understand your perspective on how this impacts kind of earnings power and cash flow power longer term.

You bet. Thanks, Joe. So it's probably helpful we start with, once this started, what our processes were. Think of this as our battle rhythm. So once this began, we started a weekly COVID-19 impact tracking process. We put together a template, and this was generally across the board, included all the business areas. We had data that we collected that supported various internal and external reporting. In fact, we're now in a rhythm where Marillyn is now sending a memo to the SAEs, think of those as the service acquisition executives. And this is done on a weekly basis. That basically lays out all the impacts that we see, all the actions that we're taking to minimize those impacts. And think of these inputs as at the contract program level, so across the corporation. It's about 600 line items, and it's tracking real and potential Lockheed Martin supplier- and government-driven impacts. The COVID impacts that we're seeing are reflected within this weekly template. And unfortunately, they're predominantly risk-related. Think of them as travel restrictions and site access that are most likely the common cited driver of impact. We're seeing increases in supplier shortages. And in our sites, we're seeing some absenteeism impacts. There are some opportunities that we do see that exist, Joe. From a cash flow standpoint, the customer altered the progress payment rate from 80% to 90%. And also a small nuance but important, they changed some conditions regarding progress payment rates, which will be advantageous to us. And we are now flowing this -- as Marillyn mentioned, we are flowing this all down to our supply base. Starting with our small suppliers and our vulnerable suppliers, we have a process where we work with supply chain. They tell us who those suppliers are. We work with…

And next, we'll go to Hunter Keay with Wolfe Research.

I guess I'm tempted to ask that cash question, but I'll let somebody else do it. I'll ask what I was going to ask you before. Can you talk about the F-16? I'd like to talk about how that move to Greenville is going for one and how you think about the F-35 in the context of the F-16 sort of a growth versus replacement-type situation, both near and medium and long term.

Hunter, we'll give Marillyn a break since it's her last earnings call. So I'll take that. So it's going well. So as everybody is aware, I believe, we moved the F-16 program out of Fort Worth a couple of years ago. Frankly, no home because we didn't have any orders of record and Bahrain was our first customer. We moved the line to Greenville, going very well. Right now, we have Bahrain. You saw we just announced Bulgaria. We have Slovakia. We're in the throes of working with the United States government and Taiwan for them to buy 66 aircraft. There is an African country that is interested in F-16. So we're hopeful that will happen. South American country, and then there are some Southeast Asian countries that are interested in F-16 as well. So we think the program is doing very well. The MOD programs are doing very well. Just in the spirit of COVID, we're not seeing many impacts at all on the F-16 program. So I think this is a good fourth-generation aircraft for those customers that can't afford the F-35 or, frankly, can't at this time buy the F-35. And it might be a good intermediary step for customers to go from the F-16 to F-35. So we see it frankly as complementary and not competing against themselves.

The next question is from Doug Harned with Bernstein.

First, Marillyn, it's been great working with you over the years. So just wanted to wish you all the best in the transition. I wanted to ask about international sales. And particularly, when you look at the Middle East, I thought it was encouraging that you got this award from Saudi Arabia. But when you look at oil prices where they are today, in the past, we have seen budgets contract when oil prices come down. How are you thinking about the Middle East right now given the oil price environment? And even expand that to say with coronavirus issues in other markets and budgets that may be under pressure, what are you seeing internationally in your export sales?

Well, first of all, Doug, thank you for the question. And I would say at the outset that regardless of what's happening with oil prices and other things, the threats continue to accelerate around the world. So we still have that challenge anywhere in the world. I mean it's the first order of any country that they have to protect their citizens. So a lot of the systems we sell into the Middle East are clearly defensive systems. And more than ever, that's more complex, volatile and unpredictable than it's ever been before. So that's a necessary condition that they have that national security, and I expect that will continue. We will continue on our side to drive affordability across all of our product lines to make sure that what we do offer is the best value to those countries and -- but we aren't seeing a pullback from the needs that they have today in the Middle East.

And next, we'll go to Sheila Kahyaoglu with Jefferies.

Marillyn, you've had an amazing career, and it's apparent in Lockheed success in both the top line and operations. I guess as you exit on top, how do you think about the challenges for Jim in areas you would have liked to spend more time with on Lockheed and position better for the next 5 years? How does Lockheed continue to grow over the next decade?

Well, thank you, Sheila, for your kind comments. I would first start by saying that I think this is the right time for a transition in our company because our company is very strong and stable. We've got solid performance. We've got a very strong robust growth strategy, even again this year continuing to grow. We finished out last year with a record year, and we've had a series of a very strong record for the past few years. And we're set up well with a $144 billion backlog, which I think outlines -- that's the booked work that we have and a strong financial position. I think as Jim steps into the role -- he's been on our Board for over 2 years, as Ken said, and he has a military background. He's worked in the industry, in Pratt & Whitney and Honeywell. He's got a lot of strong experience around our industry, our markets, our business. And so he brings that, plus the insights he's gained on our Board for the last couple of years in our strategy, our long-range plan. So I think you will see that he will continue to drive the success that we've had over the last few years. He fits very well into our culture, and we're really looking forward to -- he brings a strong acumen -- business acumen because, of course, he's himself been a CEO for the past 17 years. In terms of priorities, we will continue to strengthen our focus on our customer. That has what's driven the success of this business is aligning with their priorities and listening to them and understanding what they need and then driving sustained profitable growth around that and delivering them the performance that they expect because they do depend on us. As we said earlier, we're an essential industry sector, and that is clearly because of the national security products and capabilities we produce. And so we know that performance and innovation for our customers has got to be continued. And then lastly, I would just say, keeping a focus on the people in this company. We have a strong culture of -- an innovative culture of people that make the difference. And I know that as Jim comes in with his style of a value-based leader as he is and a collaborative leader that he will continue that forward. So I think you could -- that you can just look at us as being very well positioned for the future as we -- as I turn over the reins to Jim in mid-June.

And our next question is from Pete Skibitski with Alembic Global Advisors.

Congratulations, Marillyn, on a great career. On the COVID-related sales reduction in Aerospace, I just want to make sure I understand. Was the guidance lowered there due to the international F-35 sites, Italy and Japan sites? And why were the other segments not impacted?

Sure. Pete, it's Ken. I'll take that. So let's talk Aeronautics, and then I'll go around the other business areas. So Aeronautics, we looked at -- we started seeing that it is likely there is going to be -- and I'd say it's probable that there's going to be some supply chain disruption. What we're seeing is there's local distancing requirements that are being more stringently applied across the globe. There's workforce disruption. There are likely impacts that are happening throughout their supply tier hierarchy. There are shipping constraints. We've actually had some issues with shipping constraints. We're also finding there's likely going to be some production impacts at our site. And based on that, the analysis to date had given us concern. So we reduced our guidance at Aeronautics. And specifically, it's F-35 production. There's more analysis that we're going to do over the next couple of weeks working with our supply chain and our Fort Worth production line and our customers to set -- to determine, if any, impact, to what extent it will be on the program, including deliveries. In fact, last night, I got some feedback from the supply chain team, and this is specific to F-35 and specific to production. We're seeing some pressure regarding supplier performance-based payment invoices. So this is -- these are invoices that they could deliver to us after they completed a milestone. There are a couple of suppliers that are going to be delinquent in April. Some of them are for administrative reasons. We'll work through that. So that's just timing. But some of them -- and some are domestic, U.S.-based, and some of them are international, that it is due to them not achieving their milestones. Some of it is going to be COVID-related, probably most of it is…

Next, we'll go to David Strauss with Barclays.

Congrats and well done, Marillyn. I'll take the bait, Ken, on cash. I think you were talking about a little bit more than a $700 million working capital headwind or increase this year. How are you thinking about that now on the back of COVID-19? And maybe comment on Q1, you saw a big increase in your payables balance.

You bet. Thanks, David. So yes, we -- like I said, we feel good about cash flow this year. And I'll say it again. If it wasn't for COVID-19, we were very comfortable with taking our cash from operations up -- our cash from operations number of greater than $7.6 billion. So yes, going into the first quarter, we did increase payables. We did pay down payables in the fourth quarter. Part of the reason why Aeronautics and a couple other business areas did so well was, frankly, we got invoices -- from a timing standpoint, we got invoices in -- late in the quarter that ended up being payables, so we had abnormally high payables that also then flowed into inventory or into contract assets, which we do think is an opportunity going forward for us. So even with the COVID impacts, we do see, over time, working capital increases, specifically in contract assets, most of them in F-35, and we're working with the F-35. We think there's an opportunity there for us to reduce our contract assets. The other thing I would state is -- why we had the high payables in the first quarter is these COVID actions that Marillyn described of us flowing money down to the supply chain really didn't start happening for the most part until we got into the second quarter. So we'll continue to flow down that committed $450 million that we got certainly through the second quarter, but David, it's likely we're going to flow that down in the third and fourth quarter as well, and we will probably take our -- what I'll call our normal payables number down in the fourth quarter and accelerate payments to the small business base and our vulnerable suppliers.

[Operator Instructions]. And we'll go to Rob Stallard with Vertical Research.

Marillyn, all the best for the future, but I have a final question for you. And it's a little bit tricky. I was wondering what's your gauge of the political environment at the moment, whether it's, what you might say, politically acceptable for the companies to be buying back stock given the crisis the country is going through.

Well, thank you for your comments, Rob, and thanks for the question. The political environment today, I know, is very difficult, particularly for companies that basically have no demand. And when everything shut down -- and I'm very pleased to be part of the conversation on the President's task force and on some other task forces our company is so that we can work with governors and the President on looking at how best to get the economy back to work in a very safe and effective way. As you know, as we've talked about, we've been running all through this time. And so we're in a position where it's a matter of sharing how we're keeping our people safe, how we're keeping our operations running, we're dealing with supply chain, a lot of the things that Ken spoke of here. In terms of the political environment, where there are -- I think what you're referencing is where companies are going to get some kind of support from the CARES Act and other ways to help their business, and then as a result of that, would it be appropriate for them to destock buybacks. And I think you've heard all of them, at least all that I've heard, go publicly say, no, that's not their intention. They really need that funding today in order to address their business need, to address their cash needs, to address getting their folks back to work because, basically, their demand went to 0. I think it's very different than a normal company like -- that sets out the year with a plan on cash deployment, which would be through dividends, through stock buybacks, through capital investment, through the range of things that we all do with cash, and we -- in our case, we haven't changed our process at all. I mean we made a commitment in October that we were going to do about $1 billion in stock repurchases, and that's -- that we still are holding to that for this year. And so we're very different, I think, than those who have experienced a very significant impact to their demand. Ken, I don't know if you want to add anything on that front relative to our situation on...

You bet. Yes. So Rob, I'll give you just a little color of what we've done actually. So late last year, we entered into a 10b5-1, and think of that as an enhanced open market repurchase program. So we essentially went to the banks late last year and said, we want to buy $500 million to $600 million of stock back starting in January through July. So we're in this 10b5-1 through July. And in the first quarter, of that, we bought $256 million back of the $756 million that you heard me state we bought back in the first quarter. Early in the year, we thought it would be advantageous just to go on autopilot, if you will, and we signed up. This would be our second one, we did one in the fourth quarter of last year, an accelerated share repurchase program. And as you know, when you commit to that, you put the money upfront, gives the bank then the discretion to buy it back when they want to buy it back. So we fronted that money, if you will, in the first quarter. And that plan goes through the end of April. So think of that in 9 days, that program is over. So that's why you saw the amount we bought back was earmarked $756 million of repos in the quarter. As I stated, we reaffirmed -- and Marillyn just foot stomped that, we reaffirmed our $1 billion commitment, which basically will be on autopilot that will go through July. So think of us buying back another $244 million over the next couple -- next 2 months to get us to the $1 billion. And what we have done in the past, just frankly over the last couple of years, we've done this just to…

Next question is from Peter Arment with Baird.

Marillyn, congratulations on all your success. Ken, maybe just a backlog question. You have stable backlog, and I think the expectation was for 2020, you'd see growth of $3 billion to $4 billion, whether that -- is that still intact? And is there any kind of international awards that are key that we should be looking at that will impact that?

Yes. Thanks, Peter. Yes, the plan is we still think we're going to grow our backlog. I mentioned earlier for one of the questions, we're working with the -- I'll talk United States first, the United States customer. We're working with them where it makes sense for us to accelerate orders to get that into our backlog, to get that behind us. You already saw F-35 Lot 14 was in the second quarter. We got that order behind us. And that does actually have some international customers. Think of 35%, 40% of those airplanes will be going to international customers. But there are a bunch of international orders, and I'll go through them, that we generally feel pretty good about. So Bulgaria is behind us for F-16. We got those 8 aircraft behind us. We're working with Indonesia on some C-130 aircraft. We feel good about that. Working with India, you probably saw the announcement that the money is flowing from India to the United States. So we'll now work with the appropriate government agencies to get that under contract. That's for the MH-60R multi-role helicopter program. We have a Spain F-110 frigate program we feel good about. F-16, Taiwan, I mentioned, that's a third quarter order. We still feel good about that. We also have a couple of orders for F-16 that we're working to try to shape. There's a Norway contract out in the fourth quarter. So I'd say on the whole, we're feeling good about our order book. And in fact, because of some accelerations, we actually think we'll overachieve our orders planned this year by over $3 billion. And that's mainly driven by PAC-3, that's FY '21, where I think we're in a good spot with the customer to accelerate those orders.

Next question is from Carter Copeland with Melius Research.

Again, congratulations on all the accomplishments and the retirement. It's been quite impressive. So just want to kind of follow up a little bit on the award environment. And I think a little bit longer term, you hinted at it, Marillyn, on the plus ups and areas of emphasis and things that are in the NDS. And I just wondered if you might give us some color on how you see that influencing the opportunity pipeline that you've been talking about over the last several quarters, not just in hypersonics but also at MDA. And just anywhere you think that, that's unfolding in a way that's different as a result of the budget request.

Thanks for the question. Thanks for the comment, too, Carter. I appreciate it. Well, as I talked in my opening remarks about the FY '21 budget -- President's budget request that came out, and while the top line budget is not growing significantly, there's a little bit -- some slight growth, and so we're looking -- as we look at it. But Congress really is yet to weigh in on what's in that budget for our programs. Right now, they're well supported. But we -- often, Congress looks in and determines whether they want to do some ads and in certain areas as well. So for example, last year, they added 20 planes for the F-35. And we've seen some other areas of support from Congress over the years. So we feel good about what's in the budget request right now. As I mentioned, it does line up with the national defense strategy. And that's exactly the areas that are lined up with our particular portfolio. There's -- the budget submission has over $3 billion in it for hypersonics, which is we've shown that we are a strong leader in that. We continue to see as we look beyond that, there's also some upside for NASA, for Orion and for some of the Mars missions. I think there's over $3 billion that was put in increase for that. And then we continue to look at not only continued growth through the U.S. budget side but also on the international side. Now these would be FMS sales, but F-35, as you know, Poland has committed to 32 aircraft. We see opportunities with Finland, with Switzerland, with Spain potentially and other countries, we think, that are starting to show interest -- continued interest in the F-35 as a potential to meet their…

John, I think we have time for one more question.

And that will be from Ron Epstein with Bank of America Securities.

Marillyn, if you could speak to when you think about the impact that COVID's having on some of your international customers, meaning you've got F-35s potentially going different places in the world. And how do we think about the impact that, that could have on those deliveries of aircraft?

Well, on the international front, I think Ken talked a little bit about the fact that we have a couple of final assembly and checkout facilities on the international scene, so in Italy and in Japan. And early on, they did have some impact where they shut down for a few days or for a week, but they're back running again. We have suppliers around the world that support our F-35 program and other programs. So we watch how those suppliers are working in their various countries with whatever constraints they might have or safety protocols that are put in place. And so that's -- as Ken said, we do a very deep dive on our supply base on a weekly basis to make sure we're monitoring that, and we're addressing that. So that could potentially have some disruption for us. Similarly, we -- transportation is an area that we've been watching to make sure that we've got good transformation of the parts and components coming in. But I think in terms of countries, it goes back to my earlier comment. Countries are still -- need to address their national security needs. So I'm not looking at it so much from an impact on what they will buy because they are staying on their procurement plans, and despite the fact that things like COVID-19 will have some impact on their economic situation just as it has in the U.S. I think it's more really around the international supply chain that we're going to keep a bead on that to make sure that those suppliers around the world continue to operate. We -- as we talk about cash deployment to our suppliers, we are getting to those international suppliers as well because they're part of our supply chain. And so to…

Thank you. And ladies and gentlemen, you may now disconnect.