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 Taiclet, our Chairman, President and Chief Executive Officer; and Ken Possenriede, our Chief Financial Officer. Statements made in today's call that are not historical facts 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 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 customer, 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…

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 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 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 and Mission Systems segment, we are able to increase our outlook for the year for all key financial metrics. And turning to Chart 4, 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 the 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 5 shows our earnings per share for first quarter 2021. Our earnings per share of $6.56 was $0.48 above our results last year, driven by volume and, as Jim mentioned, includes $0.18 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 $0.10 in severance charges from previously announced actions taken to improve efficiency and lower total cost for our business. On Chart 6, we will discuss in more detail the cash…

[Operator Instructions]. And first with the line of Rob Spingarn with Credit Suisse. Please go ahead.

I 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 subsegments, so satellite, strategic and defensive missiles and space transport over the next few years ex the AWE 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 start-ups 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 is aware, if you look at the last couple of 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, 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 of years, we're going to see some nice opportunity from a growth standpoint there that - that program will be developing and demonstrating JATO 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 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 omni space 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 LM-100 initiative. This is a midsized satellite bus that can support missions to both LEO and GEO. And that will be joining our fleet of the LM-50 and the LM-2100 series. And some of those investments in advanced payload technologies and demonstrations, we'll 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're on the - largely commercial team, led by Blue Origin and 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 a franchise position on Orion. And Orion is 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 omni space or others, Blue Origin, SpaceX, whatever makes sense for us from a partnership/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 where 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 JPMorgan. Please go ahead.

Thanks very much and good morning. Your sort of vision for the company that you talked about would seem to require maybe some changes in the way that the department interacts with contractors. I guess, 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 kind of really drive the 21st century warfare strategy? And what's the plan for getting those?

Sure. Let me just frame up the strategy quickly for everyone on the call. And then for each of the sort of 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 we - it's imperative. Again, we established 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…

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

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 can give us your perspectives on this issues? 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 have been spoken to Israeli pilots, and our own test pilots here at Lockheed Martin, and also those in serving in the military today in the United States, this aircraft is 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 the head of even my thinking in making sure that the F-35 would be ultimately a hybrid-based station or a mobile compute 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. 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 has already achieved the goal of $80 million F-35A, and we're $1million or $2 million below that these days. So production is in good shape. We're going to keep working on it. For modernization, this airplane, because of this evolving threat and the speed of 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 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 right level of funding for spare parts, etc., and really clearly defined 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 team. 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.

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 they're 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 administration on the international award front? Thanks.

Hey, thanks. Good morning. So yes, from an order standpoint, you're right, Peter. We think if you look book-to-bill, it will be by the end of the year, it will be above 1, and we should be close to about $150 billion. 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 - 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%. And 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 CH-53K. That's Lot 5. 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 will just be timing, the joint program office, and us get alignment on pricing. And in fact, just - 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 rationales 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 down to the - that benefit down to the business areas and into their forward pricing rate. 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.

And 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 year 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 is 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 national security cadre of leaders, lifetime professionals, many of them in this space, and they know exactly what they're dealing with and how to make it work. And then fourth, yes, there's going to be some process alignment between the White House, the Department of the State Department of Defense and Congress on how to actually conduct all of 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 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. Good morning. Yes, the main driver of why Aeronautics was flat, frankly, was - and this is non-COVID related. We had a sizable couple of 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. That 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 yes, 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 there - 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.

So in the quarter, Ken, you talked about 10.8% segment margins. I think a couple of 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, yes, 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 growing, and I'll get into that in detail. But 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 size, relatively speaking, decent-sized piece of the portfolio. It's going to be cost plus, so dilutive, but 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 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 the opportunity is there. We have to perform, and 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 will continue to grow. I mean, we're going…

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

So 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?

Okay. Hey, Rich, it's Ken. Hopefully, this will resonate with you, but 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 rationales 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. 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 we'll - this - again, we'll 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 has 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 Mallard, 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 deemed to be very successful. And we will opportunistically, in the next three quarters, buy back stock where it makes sense. And think of that as anywhere from $500 million to $1 billion in the next three months. We have the balance sheet to do everything I just described, and we'll continue evaluating that. And I'll hand it over to Jim to talk about if there's any other investments in - 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 with 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 will be thoughtful. It will 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 made in other sectors or of other business models. So just one last point on this, some of that's already going to invest in low-orbit at scale production for commercial uses, well, maybe we could tap into some of that - 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 ABLs agreement.

And our next question is from Kristine Liwag with Morgan Stanley. Please go ahead.

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, Kristine, it's Ken. We really didn't make an investment in ABL. What we basically agreed to is to commit to a range of launch vehicles. And think of this for lower-level satellites that don't require the horsepower of, say, our United Launch Alliance. The only investment we do have is it's in our Ventures group. And think of that as this is more for the technology that they bring to make our products better. And it's a relatively modest - that's a relatively modest investment. So I'm not sure I would look at it as something that from an acquisition standpoint. And the question you asked for when do we look at getting out of those type investments? So 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 back, 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 just 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.

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 - I mean that growth engine is still healthy in there?

Sure. I'll take that, Ron. Good morning. I think a little bit goes back to what George was asking me in terms of the first quarter versus the rest of it. So I would say on production, we're down - it's - 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 is 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 let's, for year-over-year, call it, flat production. just based on - 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. 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 this year. And we're fairly confident - we're 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 sales are going to 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 - 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 well 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 adds 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 Skunk Works and then the bedrock, if you will, will be the modest growth that we're going to have going forward on production.

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.