Good day and welcome everyone to the Lockheed Martin Third Quarter 2020 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 2020 earnings conference call. Joining me today on the call are Jim Taiclet, our President and Chief Executive Officer; and Ken Possenriede, 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.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 Jim.

Thanks, Greg. Good morning, everyone, and thank you for joining us today on our third quarter 2020 earnings call, as we review our financial and operational results, highlight some of our key accomplishments, and discuss our updated outlook for 2020 and trend information for 2021. I do hope this call finds you and your family safe and healthy. The coronavirus outbreak remains an ongoing global pandemic, and we're all working to mitigate its impacts. Our priorities at Lockheed Martin remain ensuring the health and welfare of our employees and their families, continuing to perform and deliver for our customers and our national security and using our resources and leadership as a company to assist our communities, our country, and our allies. We are continuing to take actions to address issues brought on by this virus: maintaining robust health and safety protocols in the workplace, delivering personal protective equipment to frontline workers, and donating over $20 million to COVID-19 charities. We have continued expediting payments to our supply chain and have hired over 12,000 employees since the pandemic began. I thank all of the men and women of Lockheed Martin for their dedication and commitment during these trying times as they perform with excellence for our customers and their important missions. I'd also like to take a moment to express my sincere sympathies to those across our nation affected by the recent hurricane and wildfire disasters. We hope that our employees and other citizens of the affected communities recover quickly from the devastation caused by these events. Moving to Lockheed Martin's results, as our press release illustrates, we delivered another strong quarter across the board financially, strategically, and operationally. Ken will discuss our financial results in more detail and provide preliminary trending data for 2021, but I'd like to begin by…

Thanks, Jim, and good morning, everyone. As I highlight our key financial accomplishments, please follow along with the web charts that we included with our earnings release today. So let's begin with Chart 3 and an overview of our results for the quarter. Sales, segment operating profit, cash from operations and earnings per share remain strong. And as Jim noted, we achieved record sales in the quarter. We generated $1.9 billion of cash from operations, and we continued our cash deployment actions in the quarter, returning $757 million of cash to our shareholders through a combination of dividends and share repurchases. In addition to these results, we again increased our backlog to $150.4 billion, representing the ninth consecutive quarter of record backlog. And based on the strength of our performance to date, we have updated our financial outlook for 2020 and are also providing our 2021 preliminary financial trends. Turning to chart 4, we compare our sales and segment operating profit in the third quarter of this year with last year's results. Sales grew 9% compared with last year to a record $16.5 billion, continuing the strength we had in the first two quarters, while segment operating profit increased 6% over last year's level to nearly $1.8 billion. On chart 5, we'll discuss our earnings per share in the quarter. Our EPS from continuing operations was $6.25, an increase of $0.59 or 10% higher than last year, driven by a $100 million increase in segment operating profit and additional FAS/CAS income, partially offset by an increase in the effective tax rate. On chart 6, we review our year-to-date cash from operations. Through three quarters, our cash from operations is $6.4 billion, a 10% increase over the same point in 2019. This performance does include $1.4 billion of CARES Act benefits,…

Thank you. And ladies and gentlemen at this time, we are opening our lines for questions. [Operator Instructions] And first from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Thanks so much, and good morning Jim and Ken.

Good morning.

Revenues have grown 30% since 2017, and if we exclude the F-35, volumes are up 17%, so high single-digit growth per year. What programs or product areas do you think decelerate the most in your view from these high-single-digit levels to 3% implied trend line for 2021? And then is this something of a new normal we should be thinking about or do we transition from platform programs to less quantifiable opportunities that could reshape the growth curve? Thank you.

Thanks Sheila. I'll tell you what, I'll kick it off and then I'll ask Jim if he's got some color at the end. So, it's probably best we start with how we got to this trend data. So, if you think of our planning process over the last couple of months, we've been going through our long-range plan, working with our business areas, and then working with the corporation on assumptions regarding tax or pension assumptions et cetera. We then review that with our Board, and it's primarily a reaffirmation of our 2020 numbers and then the long-range plan for 2021 through 2023. Do that in the late September time period. The quarter closes, we then do an assessment to come up with what we think our trend data will be. And I'll just remind everybody and we've said it in our prepared comments, Jim and I we did take our guidance up $1 billion for 2020. So if I could go around the horn. I'll do sales go around the horn, and then I'll give you some -- my perspective on some opportunities out there and then hand it over to Jim. So we start with Aero, and we look at 2021. Right now, we're seeing low-single-digit growth year-over-year for the portfolio. And specifically, if you talk about F-35, we're seeing growth similar to the overall Aero growth of low-single digits. Right now, we see production and development flat and we see primarily the growth coming from sustainment as our fleet expands. On F-16, we see solid growth as the program continues to ramp up production activities and also the modernization programs that we have going on at -- for F-16. Air mobility sales surprisingly are flattish. We've been talking about a slight decline, but they are stable going…

Sure Ken. That was a great summary of some of the detailed line items that go into 2021. But Sheila, I would just add and extend from what Ken said on some themes for growth over the next -- not only the next year, but the next number of years. So the way I'm looking at it is that as Ken said, there's high demand for our signature products already both domestic and international whether it's F-35, F-16, CH-53K, et cetera. And we are going to drive some mission systems content into those as we move forward and technology, insertion and upgrades as was mentioned briefly. But those are some really big themes. We don't know exactly what customer and what order and what version they're going to be seeking and what the quarter, but I assure you these themes are going to continue. The next theme, I would offer is, there's some new technology ramps to production that Ken alluded to, but when we speak of hypersonics, I think there's a very big upside there, because there's a very big threat that's getting worse out of Russia and China and the U.S. and its allies are going to have to meet it both on offensive and defensive hypersonics systems, which I believe we're the leader here. The classified space arena is really a wide open field. Our Space business is again the clear leader in this area. And we're putting out some really fantastic products, I think that are unmatched in our industry. And then there's Future Vertical Lift as Ken said. And keep that in mind because as we go to network-centric operations, which I just alluded to a couple of examples that we've already implemented – as we go to that network-centric approach more widely, it's really…

Our next question is from Myles Walton with UBS. Please go ahead.

Thanks, good morning. First one is just a clarification for Ken and your remarks on backlog. You mentioned some of the opportunities, but I didn't hear if you thought it would end the year flat up or down. And then Jim, if we take everything that Ken laid out from a cash and capital deployment with respect to the $1 billion share repurchase and then debt retirements about $1 billion a year, you'll have maybe $6 billion this time next year and a business that requires $1.5 billion to $2 billion on hand. So it's going to continue to raise the question of how you're progressing looking at potential opportunities, particularly in the M&A arena. So hoping you can give some perspective there as you've looked a little bit deeper from your time. Thanks.

So – hey, Myles. Good morning. So first question on the backlog. We are right now planning on growing our backlog in the fourth quarter. There is one binary event that has to happen and that is the closure on Lot 15 production. We're in the midst of negotiations with the customer right now. I think there's agreement on both sides to try to get this done by year-end. But if it doesn't happen, it doesn't happen and it rolls into next year. But if it does happen, we will continue the growth in the fourth quarter of backlog increase.

And so Myles to speak to M&A approaches, I think we actually have to take two levels up and speak first to the strategy for the company. The executive team and I and the Board agree on what we call our 21st century warfighter concept, which has four pillars to the strategy. And I'll go through them really briefly. But first of all it's lead. We want to lead the acceleration of 21st technology – century technologies into the national defense space, not just by doing it ourselves but by teaming with commercial industry and things like AI, 5G, edge computing, autonomy, additive manufacturing et cetera. So we're planning to lead that acceleration into 21st century technologies. We're going to innovate as a second pillar internally along with that. So we're going to innovate in both the realms of science such as directed energy, hypersonics, I mentioned earlier, as well as in this networking innovation and bring capabilities to our platforms and frankly our – ultimately our competitors' platforms to be able to make them all more effective on behalf of our customer. The third pillar of all of this is driving operational excellence. And so that's really about while doing all this increasing Lockheed Martin's margins and ROI, while reducing the total life cycle cost for our customers because for them to afford what they need to do in the future our industry actually has to get more efficient at the same time. And then lastly, and this is where we get into more of capital allocation, we believe in this business and we're seeking to invest in it for growth. So growth of our asset base, our capabilities is sort of the fourth pillar and that's going to provide solutions to our customers that they're going to need…

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

Jim, Ken, Greg, good morning.

Good morning.

So a space question with about three parts. Margins at Space were a bit weaker than I thought. And I'm guessing, there was an issue there at ULA. So I thought you might discuss that. Next, we're talking about 2021. I thought you might discuss the competitive dynamics in the Space business. Does SpaceX represent a challenge to your plans? And given the remarks you just made, do you think contested space is a growth area next year? Finally, here Jim, I thought you might expand on the opening remarks about the new satellite constellation. And if it's applicable discuss generally the long-term space opportunity set here? And if the 21st century warfighter program you just mentioned is involved.

Okay. Hey, Rich, that sounded like a four part question. I'm not good at math. So, yeah regarding the margin reduction on Space. It's based on a couple of things. One, we had one less event on ULA. There was a slip in one of the launches. So that was the main driver. But you also had lower risk retirements on advanced EHF and fleet ballistic missile in 2020 compared to 2019. Regarding SpaceX and then I'll let Jim chime in. We at ULA – we Boeing and the United Launch Alliance leadership team we have seen SpaceX as an emerging threat. I mean, they are more than an emerging threat right now. But what I would say is of the recent competitions we've had with them, we've actually been pleased with the outcome of where ULA landed relative to SpaceX. So I think going forward, we're confident that we certainly have the mission capable abilities, but we also think we now have a price point that is compelling to customers that will allow ULA to get its fair share of awards over SpaceX. I don't know, Jim, if you want to talk about the next two.

Sure. When it comes to test and space all I'll say is that, there are kinetic and non-kinetic emerging threats to space on orbit space assets and even ground stations and the links between them. And so as a prudent national defense, I think our government is going to need to understand and work with the industry on how to address those kinds of threats and so I'll leave it there. But those threats are emerging and they're becoming more material. When it comes to the new satellite constellation, this is to me coming from the telecom and technology sector, the real cracking open up the door of having a multi-layer, multi-lateral survival communications system that can enable a 5G.MIL concept that we're working with. So I think it was a real breakthrough for Rick Ambrose and his business to win a big part of that it's called the transport layer as I said. And what that does is put a low-orbit constellation similar to what you're hearing about in the commercial sector that we'll be able to transmit 5G speed, capacity and latency signals between really all domains now. So it'd be into upper space orbits down to aircraft in the air to ground troops and vehicles to ship-borne operations and theoretically and potentially even to undersea. So this transport layer is sort of one of the first elements of what we would envision in the future as 5G.MIL architecture and so we're right in the middle of designing that now with our customers. So yeah, it's an important piece. There'll be more competition. This will be a competitive space, but we want to get out in front of it. And I think the Space business area of Lockheed Martin gives us a huge advantage over really anyone else in taking the lead in this.

And next we'll go to Noah Poponak with Goldman Sachs. Please go ahead.

Can you hear me?

Yes. Hi, Noah.

Okay. Hello. Ken, I thought you had been pretty consistent for a while here that MFC would remain the fastest-growing segment of the company through – for a few more years. And you've just – recognizing that the dispersion of the growth rates you just guided to for revenue in 2021 by segment is pretty tight you didn't guide it to be the fastest-growing segment and it's a meaningful deceleration from 2020. So what's changed there if anything, or do you just have conservatism built into that? And then on the margin in that segment following that coming down for a few years now with the mix shift. Is that bottoming in 2020, or any color on the margin going forward in that segment would be helpful as well.

You bet. Thanks Noah for the question. Yeah there's a couple of things. Let's talk top line, there's a couple of things going on. So as I mentioned, when Sheila opened up the call with the question on where we saw slowness of growth some of it is just – some of our tactical strike missile programs are at capacity right now. So think of Hellfire and GMLRS. You have a little bit of a timing issue with THAAD. But going forward, we see growth with THAAD. The growth opportunities for Missiles and Fire Control down the road will be PAC-3, and precision fires for the most part, because of the – they are not at capacity and we are seeing extremely strong demand internationally and domestically for that product. And what we didn't talk about in the development phase still is the large classified program that we have. We will start to see in the next four to five years that go into a limited rate production and then ultimately into production and you will see a large increase there as well. So I think – I think you see – I think you see at least in the short term some of the areas are going to be capped by capacity, but we'll work with our customer based on the strong demand that we see does it make sense for – to us to increase our capacity for say Hellfire’s for example. Regarding margins, for 2021, we actually do see it's a slight decline to margins in 2021 and I do mean slight. And as we've talked about it before and I just mentioned it with that development program as it continues to grow at the topline, we'll see dilution there. That's the main reason. But -- so think of margins as a slight dilution in 2021.

And next we go to the line of Ron Epstein with Bank of America Merrill Lynch. Please go ahead.

Hey, good morning, guys.

Good morning.

Jim I just have a quick question for you back on the technology stuff. Back in -- it was a couple of weeks ago DoD announced their 5G experimentation and testing at five different installations. And I was surprised to learn that Lockheed wasn't part of that given what you've been saying lately. Can you talk about that like what you think about that? And is that an area that Lockheed would be interested in or is that just something that the company is not interested in?

Well, there's two concepts around 5G. One is standard communications activity. So, terrestrial, if you will commercial communications. So, what is generally going on in the programs awarded that you're referring to is certain bases or ranges are going to have a standard terrestrial 5G implementation on those bases and ranges. That's not so much what we're interested in. We're interested in operationalizing the technical capabilities of 5G wave forms and technology software and hardware to improve our defense products and our defense products' performance in an inter-related way. So, that's a derivative of having the network in place. At a base level that's not going to really deliver what we're looking for. We need a global 5G connectivity platform and that's why space is so important an element of this. It's also why our airborne platforms will likely have a big role as well because we need edge compute nodes and edge transmission points to be able to get into battle outside of the bases if you will. So, we're really talking more about how do you go to war on a battlefield and bring with you and have available to you the throughput of data, the latency benefits, and the ability to do software-defined networks and manage spectrum dynamically on a battlefield. That's really what we're after and that will improve our national defense.

And next we'll go to Cai von Rumohr with Cowen. Please go ahead.

Yes. Thank you so much for all the great information you're given us. So, cash flow, you expect cash flow from ops up $100 million next year even though it looks like you have a headwind in pension of about $1 billion, you have a headwind in terms of payroll tax deferrals looks like $500 million. Sort of what are the drivers to get you up? What's happening to CapEx? How much is that going to come down? And maybe give us some color if you could in terms of the relative direction in 2022. Thanks.

You bet Cai. Good morning. Yes, so we've been embarking on what I'll call a culture of cash for quite some time now and we are actually starting to see the fruits of that effort Cai. And to your point what we're seeing in 2021 as I stated in my prepared comments I gave you all some color on 2021, 2022 on our last call. So, here's what we're seeing now. It's -- obviously the farther out we go the little less granular it is. But to the best of our abilities by doing long-range plan, balance sheets, and cash flow statements what we're seeing right now is as you stated $8.1 billion of cash from operations in 2021 which as we stated is $300 million above the outlook we talked about earlier. Right now we're seeing CapEx in 2021 at about $1.7 billion. That's fairly consistent with what we're seeing this year. And as you mentioned we've got the payroll tax holiday this year. It's a tailwind of $460 million. And we're also getting the benefit of about $750 million $800 million by the end of the year of the acceleration of the progress payment rate from 90% -- excuse me 80% to 90%. We are going to accelerate all of those benefits that we got from the government to our supply chain. So, we will be whole -- we'll have the government whole in 2020 with those benefits we received. So, we do have -- with that payroll tax we do have a headwind. 50% of that $460 million gets paid next year. So, that is a headwind. And then the other half gets paid out in 2022. As you state, we do have $1 billion pension contribution next year. In the following year, what we're seeing in…

And our next question is from Doug Harned with Bernstein. Please go ahead.

Thank you. Good morning.

Good morning.

I have a two part question on the F-35. When you look at the President's budgets, they keep taking down numbers for the F-35 Congress keeps adding some back and at the same time you've got some growing international opportunities, which you've talked about. But those don't come immediately. So one would think a more stable trajectory would be helpful here. So how do you plan production around this kind of scenario? And as we see more growth coming from sustainment, how do you think that will affect your margin trajectory on the F-35?

So I’ll take that, Doug. Yes, so right now because of COVID impacts, we've started the year, roughly we thought we were going to deliver about 140 aircraft this year. They are predominantly Lot 12 airplanes, so that's the first lot of our block buy. So right now, the team is forecasting rough numbers 120 to 125. It's still a little bit in flux, but that's our outlook right now. Right now based on what we're seeing and working with our supply chain and working with our production operations team, we're out looking roughly 140 aircraft deliveries out in 2021. We think based on the demand we have with Lot 12, 13, 14 and ultimately I talked about the Lot 15, production lot order that we're hopeful we'll get at the end of this quarter, we see about 169. So let's just round up to 170 aircraft delivered out in the 2022 time period. And then out in 2023, we see similar about 170 aircraft. That's basically predicated on the United States government program of record. Earlier year, we had some to your point congressional adds, but we're not assuming any congressional adds at least today once you get beyond 2021. There is still pent-up demand with our partner countries, our FMS customers demand. And then as you stated Doug, out in that time period, there are other interests for the airplane with our partner countries, existing FMS countries and there are some new potential FMS countries that potentially will buy aircraft, but it'll be beyond the 2023 time period. So I think we have a pretty good handle out to about 2022, 2023 where we think our production is going to be. Regarding margins, it really comes down to the PBL. Right now just based on how the customer is buying, sustainment they are, it is dilutive to the overall F-35 portfolio. Where we do see opportunities is in production. We do think if we continue to perform, continue to weed out inefficiencies and hopefully negotiate a deal where the customer rewards us for that. There is production opportunities, but it comes down to the PBL. And we do believe, we are starting to get more and more interest from the customer for a PBL or performance-based logistics concept and that would have us taking on investment as the industry taking on investment risk and it would then give us the opportunity assuming we perform and hit the service level agreements we'll sign up to -- for that to be margin-accretive.

And next we'll go to Jon Raviv with Citi. Please go ahead.

Thank you and good almost afternoon. Question about sort of CapEx environment you're operating in. As you can see there's a lot of focus on your growth rates especially deceleration from 2020 growth to 2021 growth at least how you see it now. But at the same time, CapEx is remaining at this $1.7 billion level, you said 2021, '22 '23. So even though there seems to be an assumption that growth rates and opportunities are slowing down you're still spending a lot more CapEx than you were almost ever. So how do we sort of square those two things? And is the industry or the customer I should say offering you enough certainty to be spending that CapEx such that you now have the long-term payoff that we're all looking for?

Thanks. Hi, Jon. Almost good afternoon. So I'll -- it's Ken, I'll take that. So if you go around the portfolio, we are still seeing demand for CapEx. And then there's one point I'll make and I'll hand it to Jim because he may have a comment on this as well. But if you think Aeronautics, we have slowed down our capitalization spend on F-35 because of COVID. But if we're still going to ramp up to those higher quantities that I described when Doug asked me the question on F-35, we are going to have to still build out our capacity on F-35. The same with F-16. Jim mentioned our backlog right now is 130 aircraft. We're going to deliver our first airplane roughly beginning of 2022. Rough numbers we'll do about eight a year. And then ultimately by the time we get out to the middle of this decade, we'll be delivering three to four F-16s a month. So we will have to build out that capacity. And then we've talked about the classified win in Palmdale, we still need to build the building out there. And we are hopeful that performing on that program, there are other customers that have a keen interest in that program and that's one of the opportunities I talked about when Sheila asked the question. There are opportunities out there for us that just frankly aren't planned right now. If you look at Missiles and Fire Control, we are still building out capacity for PAC-3 though we're not building it out for say Hellfire or GMLRS. We'll talk to the customer. We feel very good about the PAC-3 build-out for example. We do see opportunities for 500-plus PAC-3s per year and potentially significantly more than that. The question then is does -- is it the right time for us to continue building out in excess of the 500 per year that we are going to build out. Space, we have the state-of-the-art Gateway Center. And there are some other opportunities out there where we have to spend capital. And then RMS, they've done a very nice job of portfolio-shaping. That is the place we really don't see a lot of facilitization or increased capital. One thing Jim has tasked us on and we're in the middle of doing this not just for capital, but IRAD and then other investments are there low-hanging fruit if you will where it does it make sense for us to spend that capital or our IRAD. And then are there places where we should be investing regarding 21st century warfighter, the digitalization effort that we're trying to take on. So though we may stay at the same level, the balance or the mix of our spend may change over time.

Just the one comment I'd add to that is, we are raising the capital expense decision-making process a level and we're going to be looking across all the business areas simultaneously and doing the rank ordering at that level, which will may result in some adjustments as Ken suggested. And also, I would highlight the digital transformation side of this which is both in the factory offices and functions. That's going to help us meet our customers' needs on one hand, but it's also going to help us improve margins on the other hand and be more efficient internally as we do all of this. So, there's investment upfront for that as well. But it's going to have a dual benefit.

And our next question is from Seth Seifman with JPMorgan. Please go ahead.

Thanks very much and good morning. I think, Ken, you mentioned a little bit earlier the profitability expectation for Missiles and Fire Control in 2021. Can you just walk us through the other segments real quick?

You bet. Thanks, Seth. I think, we're at the afternoon now. Yes so, at Aeronautics, we're actually -- we expect a slight improvement in margins from 2020, which we're very pleased with. F-35 margins and the balance of our compact -- combat air margins are expected to increase and that's consistent with our overall margins. And we expect fairly consistent margins in 2021 on air mobility. The combat air and air mobility margin improvements more than offset the dilution because you would expect just where the Skunk Works is that they would be dilutive. And I mentioned Missiles and Fire Control, so I'll move on to RMS. We're happy to see returns to double-digit margins this year and we expect a slight improvement in 2021 which we're very pleased with, so all that integration work that we've talked about. We talked about the portfolio shaping that we're doing at RMS. We're starting to see the results there. Sikorsky is the primary driver. They'll have year-over-year improvements on production programs. Think of those set as Blackhawk VH-92 and CRH. And then lastly at Space, we'll see a little bit of an erosion in margins in 2021. And that's very similar to Missiles and Fire Control. You're seeing dilution due to the OPIR development program and also increased development content at strategic missiles and missile defense portfolio. Think of that as hypersonics and then the next-generation interceptor. So, thanks for the question.

So it's Jim. I'll end the session today by reiterating that Lockheed Martin completed another quarter of strong financial and operational performance. And with that robust backlog, focus on our program execution and strong demand for the portfolio of products and services we have -- we're positioned for a successful closure of 2020 and continued growth in 2021. So, thank you all again for joining us today. We look forward to speaking with you on our next earnings call which will be in January. That concludes the call. John, thank you.

Yes. Thank you. Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.