Lockheed Martin Corp (LMT) — Q1 2019 Earnings Call Transcript

Thank you, John, and good morning. I'd like to welcome everyone to our first quarter 2019 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. 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. 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.

Thanks, Greg. Good morning, everyone, and thank you for joining us today in our first quarter 2019 earnings call. As today's release illustrates, we had exceptionally strong results this quarter, financially, strategically, and operationally. These results reflect the quality of our workforce, the strength of the corporation, and the focus we all have on delivering value to our customers and stockholders. My thanks go to everyone in the company for their contributions in driving this outstanding performance. This performance from across the corporation and expectations for the remainder of 2019 enable us to increase our full year outlook for sales, operating profit, earnings per share, and cash from operations. Our first quarter results and increased full year outlook reflect the execution of our entire team as each of our four business areas was able to contribute to our improved financial outlook. Our backlog grew to a new record level, another sign of the strength provided by our broad portfolio of products and services. Ken will discuss our financial results in more detail, but I would like to begin by highlighting a few of the elements that drove our exceptional performance. Sales this quarter exceeded last year's first quarter by 23%, with each business area growing revenue significantly from the first quarter of 2018. The growth was led by Missiles and Fire Control as deliveries of tactical and strike weapons, particularly in our Precision Fires organization, and our PAC-3 missiles grew from last year. Our Aeronautics business area also saw strong sales growth as we continue to increase production of our F-35 Joint Strike Fighter and delivered 26 aircraft this quarter compared to 14 in last year's first quarter. Our segment operating profit increased by more than 30% year-over-year as strong performance across the board contributed to the growth. Missiles and Fire Control experienced outstanding operational performance over multiple programs, which allowed them to complete the retirement of risk items planned for later in the year. Similarly, in Space, our government satellites team producing the fifth and sixth spacecraft in the advanced extremely high frequency constellation was able to complete crucial testing milestones ahead of schedule as well as achieve program efficiencies to increase margins this quarter. These strong results in sales and earnings and our focus on maximizing cash returns also allowed us to increase our full year outlook for cash from operations. Our team continues to drive growth and performance in all financial metrics with a portfolio of products, technologies, and services that are in great demand by our customers and continue to provide value to our stockholders. I'll touch on some significant performance milestones in just a moment, but I want to first highlight a few of the notable new business items that demonstrate the lasting importance and strength of our deep legacy portfolio. In Aeronautics, our F-16 team received two notifications from the State Department for the approvals of F-16 Foreign Military Sales to Morocco. The first is for a potential sale of 25 new F-16 Viper aircraft and related equipment with an estimated value of $3.8 billion. The second State Department approval will allow us to upgrade Morocco's existing 23 F-16 aircraft to the modernized Viper configuration. This opportunity has a total estimated value of nearly $1 billion, and once definitized, Morocco will be the fifth international customer to upgrade its legacy F-16 fleet to this enhanced version of the Fighting Falcon. These notifications, coupled with the recent announcements from Bahrain, Slovakia, Bulgaria, and Greece on planned future new F-16 aircraft production and upgrades, show the enduring support for this venerable fourth-generation fighter. In Missiles and Fire Control, we received a contract award for over $1.1 billion from the U.S. Army for lot 14 of Guided Multiple Launch Rocket System munitions and associated equipment. Demand for this program has increased significantly, both domestically and internationally, and we now anticipate that we will deliver nearly five times the number of rockets and launcher pods this year than we did just two years ago. Rotary and Mission Systems saw continued strong interest from several international customers this quarter. RMS received a $200 million award from the Japan Maritime Self-Defense Force for development and integration of the Aegis Weapon System on new Japanese ships. RMS has already delivered the Aegis Combat System to four of Japan's Kongo-class and two of their Atago-class destroyers, and we will now provide this capability for an additional two Atago ships, continuing a relationship that began over 30 years ago. RMS' Sikorsky line of business was awarded a contract from Poland to build four S-70Is, our international BLACK HAWK helicopter variant, for the country's special operations forces missions. The award announced by the nation's prime minister at a signing ceremony inside the Sikorsky production center in southern Poland follows delivery of two S-70Is to the Polish national police in November of last year and continues our 10 years of Sikorsky helicopter production in Poland. Keeping with Sikorsky, the State Department announced a potential $2.6 billion Foreign Military Sale to India for 24 MH-60R SEAHAWK helicopters. This Romeo version of the BLACK HAWK is the world's most advanced maritime helicopter, and this contract, once definitized, will allow us to deliver unparalleled anti-submarine warfare and anti-surface weapon capabilities to the government of India. In our Space business area, the United Kingdom's Ministry of Defense awarded us a contract worth approximately $3.6 billion to oversee the operation of the MOD's atomic weapons establishment sites for another three years. We are honored to continue to support the U.K. government's important mission as part of the AWE Management Limited venture with our strong focus on security and safety. These announcements reflect continued demand both domestically and internationally for our portfolio of products and services. Our legacy platforms remain vibrant, and our focus on innovation and new technologies provides us with growth opportunities for the future. Moving briefly to the defense budget, the President submitted the FY '20 presidential budget in March with a total defense request of $750 billion. Included in this request is $718 billion for DoD total funding, an increase of nearly 5% from the 2019 enacted appropriation level. The FY '20 submission continues to focus on missile defense, nuclear, space, cyber, joint lethality, and intelligence capabilities in support of a national defense strategy, and we have demonstrated that our portfolio remains well aligned with these priorities. To achieve the funding objectives contained in the administration's request, Congress will ultimately need to pass legislation to raise the Budget Control Act ceiling, which are still in effect for discretionary defense spending in FY '20 and FY '21. We are encouraged by recent congressional support for raising the spending caps. However, we expect significant discussions to take place before the budget process is finalized. We have seen strong bipartisan support for national security initiatives and the recapitalization of our nation's armed forces over the past several budget cycles, as well as for our programs in general, and we are hopeful the fiscal year '20 process will result in a similar outcome. Moving on, I would like to highlight several significant events that occurred across the corporation during the past quarter. Beginning with an update on our F-35 program, we saw several important milestones and accomplishments take place this quarter that spotlight the program's maturity and the continuing support we see from the international community. First, a truly significant event took place in February as the Department of the Navy declared initial operational capability, or IOC, for its fleet of carrier-variant F-35, deeming the F-35Cs ready for combat. Beginning with the U.S. Navy's receipt of its first F-35C test aircraft, the joint government and industry team embarked on a rigorous path to IOC, including participation by two carrier vessels, three squadrons, multiple sea trials, and significant logistics and support efforts, which resulted in 10 F-35C jets from the Strike Fighter Squadron 147, the Argonauts, being declared ready for operations. Preparations can now begin for the first carrier deployment aboard the USS Carl Vinson, and this achievement will mark the first time in over half a century the U.S. Marine Corps, Navy, and Air Force will all be mission-ready and combat-capable with the same family of fighter jets, a tremendous achievement for the entire F-35 team. Keeping with the Joint Strike Fighter, I was proud to attend the ceremony this January to celebrate the rollout of the first operational F-35A, or conventional takeoff and landing variant, for the Royal Netherlands Air Force, becoming the third overall plane to be delivered to the Dutch. The Netherlands has been an F-35 partner since the plane's inception and continues to be a strong advocate for the program. The first two conventional takeoff and landing aircraft were delivered in 2013, and we are concurrently supporting operational testing, and this latest addition to the Dutch fleet will ferry to Luke Air Force Base to be used in pilot training. The Netherlands Air Force, with its plan to acquire 37 jets and its role as a sustainment hub in the European region, is a key partner in the F-35 community, and we are honored to help support their national security objectives. Moving to Missiles and Fire Control, we are very pleased to see the first and second tranche of orders from the Kingdom of Saudi Arabia to procure our Terminal High Altitude Air Defense, or THAAD air and missile defense system. In March, we received the initial order for over $900 million for initial tooling and front-end procurement items. On April 1, just after our quarter closed, we were awarded a second order for approximately $2.5 billion to supply interceptors and equipment to support KSA and U.S. government THAAD batteries. These orders are the most recent actions following the U.S., Saudi Arabia announcements in 2017 and support the beginning of the development and deployment of the seven planned Kingdom of Saudi Arabia THAAD battery installations. In Rotary and Mission Systems, our Sikorsky team celebrated a key milestone with the first flight of the SB>1 DEFIANT helicopter, a revolutionary aircraft developed jointly by our Sikorsky organization and Boeing. The DEFIANT is designed to fly at twice the speed and with twice the range of conventional helicopters, taking advantage of our innovative X2 Technology and coaxial rotor blade design. The SB>1 is currently participating in the U.S. Army's joint multiple role technology demonstrator program, helping to define the requirements for medium-lift utility helicopters for the Army's Future Vertical Lift program. I'll close with our Space business area, which received an order for over $800 million from the U.S. Navy to design, develop, build, and integrate technologies to support the flight test demonstration of a new hypersonic boost glide weapon system. Lockheed Martin Space was awarded the Navy's conventional prompt strike weapons contract and will provide flight articles and support equipment for the system's flight test. This order follows three previous awards the corporation has received on hypersonic weapons: the Tactical Boost Glide contract, the Hypersonic Conventional Strike Weapon program, and the Air-launched Rapid Response Weapon program. These wins are being performed in three of our four business areas with a cumulative value of our hypersonic strike weapon awards now exceeding $2.5 billion across the corporation. Air and missile defense and hypersonic weapons are key priorities of the Department of Defense's national defense strategy and missile defense review, and we look forward to continuing to lead the development of these emerging technologies in support of the customers' missions. With that, I'll turn the call over to Ken.

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. So let's begin with Chart 3 and an overview of our results for the quarter. Sales and segment operating profit were both higher than our expectations for the quarter, which also drove additional cash. We returned over $900 million to our stockholders in the quarter, nearly two-thirds through dividends and one-third in share repurchases. We also achieved another quarter of record backlog totaling $133.5 billion. Based on the strong first quarter results, we have increased our outlook for sales, segment operating profit, earnings per share, and cash from operations for the year. We had a tremendous start to the year, and we will discuss these metrics in more depth on the upcoming charts. On Chart 4, we compare our sales and segment operating profit in the first quarter of this year with last year's first quarter results. I'll note for comparison purposes that each quarter of this year has 13 weeks in the accounting period while last year's first quarter had 12 weeks. This will reverse itself in the third quarter, which last year had 14 weeks in the accounting period. However, even without the extra week in the first quarter, our results well exceeded our expectations. Sales grew 23% compared with the same quarter last year to $14.3 billion while segment operating profit increased 31% over last year's level to $1.7 billion. On Chart 5, we show the sales growth for the first quarter by business area as compared to last year's first quarter. All the business areas experienced double-digit growth. Aeronautics and Missiles and Fire Control experienced the highest growth in the quarter with 27% and 40%, respectively. Aeronautics sales growth was driven primarily by F-35 production and sustainment volume while Missiles and Fire Control was driven by multiple programs, including precision fires, PAC-3, THAAD, and hypersonics. Rotary and Mission Systems had 17% growth with contributions from all lines of business. Space also had strong growth of 13% driven by government satellite programs and new starts, including next-gen OPIR. On Chart 6, we compare segment operating profit by business area in the first quarter of 2019 versus our results in the first quarter of 2018. Segment operating profit was up considerably in the quarter compared with last year's results. Here, Missiles and Fire Control had the largest increase in operating profit, 60% higher than last year. This increase reflects volume related to the sales I just discussed and the timing of risk retirements across the tactical and integrated air and missile defense portfolios. Aeronautics grew its operating profit by 23% due to higher volume on F-35 production contracts and risk retirements. RMS grew operating profit by 22% due to higher volume on mission systems at Sikorsky and risk retirements at IWSS, slightly offset by a reserve taken on a ground-based radar program. Space also increased operating profit by 27% mainly due to risk retirements on AEHF and volume on government satellite programs. Turning to Chart 7, we'll discuss our earnings per share in the quarter. Our EPS of $5.99 was 49% higher than last year's results driven by a few items: first, the higher segment operating profit that I just discussed. In addition, it reflects the benefit of a lower tax rate that includes additional tax deductions for the foreign-derived intangible income that we highlighted as an opportunity in the fourth quarter of 2018. I will talk more about this on a later slide. Lastly, a one-time noncash earnings benefit from a property sale that had previously occurred. Turning to Chart 8, we'll discuss the cash returned to our shareholders in the quarter. Subtracting out our capital expenditures from approximately $1.7 billion of cash from operations in the quarter, our free cash flow was approximately $1.4 billion. We returned nearly 70% of our free cash flow to our stockholders in the quarter between share repurchases and dividends. As I mentioned, we are increasing our full year cash from operations outlook from greater than or equal to $7.4 billion to greater than or equal to $7.5 billion now that we have greater visibility into the year and a quarter of strong performance. We are on track for our continued investment in the business through capital expenditures with $1.7 billion planned for the year, which, as usual, is proportionately higher in the second half of the year. For the full year, we are progressing toward our cash deployment goals. Chart 9 provides our updated guidance for the year. We are increasing our sales outlook by $1 billion based on higher expectations for all of our business areas for the rest of the year. We are increasing our segment operating profit outlook by $100 million due to higher sales volume across all four business areas. There is no change to our net FAS/CAS adjustment. We are increasing earnings per share expectations by $0.90. I will provide more detail into this increase on the next chart. For cash from operations, we are increasing our outlook by $100 million to greater than or equal to $7.5 billion. Chart 10 provides a reconciliation of our current and prior earnings per share outlook for the year. Our segment operating profit improvement drives a $0.27 increase in our EPS. Updates to our revised estimated effective tax rate from approximately 17.5% to 15.5% for the year, along with miscellaneous items, drive a $0.50 addition in EPS. The property sale from a prior period that we've noted in our press release adds $0.13, resulting in a total increase of $0.90 and a new EPS outlook of greater than $20, with a range of $20.05 to $20.35. On Chart 11, we show our revised sales outlook by business area. As I discussed on a prior chart, we increased our sales outlook in all of our business areas: an increase of $425 million in Missiles and Fire Control; $225 million in RMS; $200 million in Aeronautics; and in Space, $150 million, for a total increase of $1 billion above the outlook we provided on our last call. Chart 12 provides the updated segment operating profit outlook by business area. And consistent with our sales outlook, each business segment increased their operating profit for the year: Missiles and Fire Control by $40 million, $25 million each for RMS and Space, and $10 million for Aeronautics, totaling an increase of $100 million above last quarter's outlook. Finally, on Chart 13, we have our summary. We're off to a very good start in 2019 with strong financial performance across our portfolio. We continue to see strength in our current level of our backlog as well as our future growth prospects across the entire portfolio. Based on the results of the quarter, we increased our full year outlook for sales, segment operating profit, earnings per share, and cash from operations. With that, we're ready for your questions.

Even without the extra week, I believe your sales growth was around 14%, the highest in 15 years based on our records. I'd like to focus on MFC, which appears to be the growth leader and likely had the easiest comparison for the year in the first quarter. I understand you're aiming for a 15% growth target for the year, the highest among the segments. Marillyn, you and Ken mentioned several programs fueling this strength. However, some of these recent wins, like Saudi THAAD, may not be reflected yet, and there seem to be additional opportunities with the Army, including a new PAC-3 interceptor and PrSM, the mobile medium-range missile, among others. How should we view MFC's growth in light of all these opportunities and recent achievements? How sustainable is this growth beyond this year?

Rob, it's Ken. That's an interesting question. We've mentioned our capital expenditures this year are $1.7 billion, which is significantly higher than in previous years, and we expect that growth to continue, especially next year. A large portion of this increase is tied to our capacity expansion at Missiles and Fire Control, particularly within the strike weapons business. We have collaborated closely with our customers during this capacity development. We anticipate strong growth in Hellfire, JASSM, and IAMD. Regarding PAC-3, we also foresee significant growth. You noted the THAAD order for Saudi Arabia; you are correct, we have just booked that. Marillyn highlighted our booking of the front-end obsolescence component. In the second quarter, we will book the interceptors for Saudi Arabia along with Lot 11 interceptors. In the second or third quarter, we expect to book the localization work for Saudi Arabia. By 2021, we will finalize bookings for the remaining interceptors, including the seven batteries, as Marillyn mentioned. For at least the next couple of years, we anticipate continued strong growth at Missiles and Fire Control.

Good morning and great quarter. Just to follow up maybe a little bit more on Missiles and Fire Control. We saw the strong profitability in the quarter. When we look back in the period, kind of 2012, 2013, 2014, kind of seeing upper teens type margin from that business, and I think our understanding was always that the mix toward new programs was going to push that into the 14%, 15% range, more in accordance with your guidance this year. But maybe if you could talk about the sustainability of the Q1 profitability and why we shouldn't think that, that margin is going to be significantly higher going forward.

Seth, it's Ken. I'll take that. In the first quarter, we had several factors at play. We experienced significant profit increases and risk retirements during this period. We also reassessed some risk retirements planned for later in the year and determined it made sense to implement those in the first quarter. Reviewing our portfolio, it's clear that the first quarter results prompted us to update our profit outlook for PAC-3 and THAAD, primarily due to performance and volume. For our tactical and strike missiles portfolio, while some growth stemmed from performance and volume, a significant part was strictly from volume. With new initiatives in this section, especially hypersonics, we expect continued growth, although this will affect margins negatively. We are beginning to see volume growth in the classified program we previously discussed, which will also dilute margins in the future. For the remainder of the year, we project Missiles and Fire Control to maintain a margin slightly above 13%, which differs from what we saw in the first quarter for the reasons I mentioned.

Ken, I would like to follow up on your comments about margins and the dilution you're experiencing from new development programs. You mentioned that this would be dilutive moving forward, but I am curious if this suggests future growth and margin expansion. Are there other aspects of cash that provide you with confidence going ahead? Additionally, with the growth from new programs, what does that indicate for your long-term cash flow outlook?

Thanks, Rich. We have had a concerted effort on our working capital. You did see some of the benefits of that this year, so we feel good about what we're doing to manage the balance sheet from a working capital standpoint. We still feel good about where we're going in the future for next year and the year after, at round numbers, about $7 billion each in 2020 and 2021. We're also working the international angle, and we should see some potential advanced payments in the future. We do see some upside from a margin standpoint going forward.

Just to add to that, too, Ken. I mean as we see these development programs, as they go through their longer cycle and get into production, we'll see margin improvements.

We'll see margin expansion as well. Thank you, Marillyn.

Marillyn, you mentioned in your prepared remarks about hypersonics and what is going on there for the company. I understand a lot of that is classified so you're limited in what you can say, but can you give us a broader feel about how that market's developing? And maybe more color on how it's developing for Lockheed?

Sure. Thanks for the question, Ron. The first thing I would say is that we've been investing in hypersonics for many, many years. As a result of that, I think that's why we're leading in this front end of being able to bring capability forward. In terms of how the market is developing, it's basically threat-driven. If you look at what was in the national defense strategy, what's in the missile defense review, and you are seeing our near-peer competition with China and Russia; it's clearly a growing need for us to be able to not only address hypersonics but counter hypersonics as well. We are investing in both of those areas. We're bringing capabilities forward in both of those areas. As I expressed in my earlier remarks, it's across three of our four business areas. The fourth business area will work on some of the communications elements of that as well. Frankly, it's an important investment area for us for many years as a corporation. As we collaborate across our business areas and across our corporation, I think we're bringing the best solutions forward to our customers.

I wanted to switch over to F-35. You're seeing good growth there, but when you look at where the 2020 budget is, it cuts numbers back to 78. But then on the other hand, you've got a letter from 103 house members wanting to raise that to 102. We've got the issues around the Turkey order and then maybe some risks around Italy and Canada. What I'm trying to understand is when you look at the plan that you have for taking production rates up over the next few years, how important are these potential shifts up and down? How do you think through where this could end up on the high end or on the lower end when you plan?

Let me start with that, and then, Ken, you can add to my comments. The first thing I would say, Doug, is that we are continuing to see increased opportunities for the F-35. There is strong international demand. Domestic demand from U.S. services is also robust, and the Department of Defense has made it clear that they intend to maintain their full procurement plan for that jet. They have no plans to reduce their commitment, so we anticipate this will continue. The management of year-to-year purchases remains challenging as they evaluate their overall needs against budget constraints. However, the list of interested countries is expanding. Recently, Admiral Winter, the Program Executive Officer, mentioned Poland and Romania, among others, that are actively competing and have shown interest in the program moving forward. Continued interest is evident, and even existing partners like Japan are expanding their needs. There are many countries actively pursuing opportunities, which presents a significant chance for us to meet this rising demand. We have substantial capacity for this program, with facilities ready to produce over 180 aircraft annually. We are well-prepared for this and see many opportunities beyond the current program plan of around 3,300 aircraft, which is also growing. I have no concerns in that area. The Joint Program Office will need to manage what aircraft they purchase and when, particularly as countries navigate their procurement decisions or adjust due to changes among our partners. However, I believe they are handling this risk effectively, and demand remains strong. Ken, do you want to add anything?

Yes. The only thing I'd say, if you think about the countries you describe, Doug. Turkey, an important ally of ours at least today, if I remember this right, in the block buy, it's eight aircraft per lot. Right now, Canada is not even in those numbers. Italy is an important ally. We're hopeful that they do continue on the program. But in the grand scheme of things, not a material number of aircraft. I think the frustrating piece for us is the United States Air Force. We'll continue working with our customer and with representatives in the government on what's the right path forward there, and we'll also continue to drive the price of the airplane down. We see a path to hit below $80 million an aircraft for the A variant by LRIP 14, which will be ordered in 2020 and delivered in 2022. We'll continue driving down sustainability costs to where we get to $25,000 a flight hour by 2025. We're confident about hitting those numbers.

I think it's $25,000.

Sorry, $25,000, excuse me, by 2025.

Ken, on the F-35, you clearly raised the margin on that program. Can you tell us which block and where we might be on that? On the $50 million charge of the ground-based radar that you alluded to, what was that? Have there been other charges on that program in the past?

Yes, George, you're correct. We did increase margins on the F-35, particularly looking at LRIP 10, the block buy, and some of our sustainment programs. Moving forward, we’re examining steps on additional production programs, including LRIP 11, and we'll evaluate our performance in that area. Regarding the radar program from our RMS business, we’ve encountered some challenges related to software verification, fixes, installation, and test integration. This isn't our first write-off for this program. However, we feel optimistic about the future. This year, we will focus on software verification and completing integration and testing. We'll also deliver a secondary array later this year, aiming to have our radar ready by the end of 2020. Overall, we are confident about our progress on this program.

So DoD is increasingly using classified orders to buy equipment to enhance security. Can you give us a rough sense in terms of what percent of your revenues or your backlog is classified? Any color you might be willing to offer regarding in what areas of your business do you have more classified programs?

Cai, it's Ken. It will be difficult for us to specify how much of that is in our backlog. However, you should consider that it's spread across our portfolio. We have a strong presence in Space and in Missiles and Fire Control. It’s also important to mention that ADP, our Skunk Works, is significantly involved in classified work, which is growing and is a crucial part of our portfolio.

Ken, I wanted to just come back to the guide and the performance in 1Q. Obviously, a good start to the year. It seems like you're highlighting a good portion of the strength to be timing-related. Can you just talk a bit more about why that is? I mean it seems like you're maybe expecting just a lot lower growth in the back half of the year. Are you being conservative? Are you concerned about budget? Just some more color there to get comfortable with the path ahead.

Yes, if you look around the business, I'll mention our surprise isn't so much year-over-year but particularly with ARROW, which has shown strong performance, primarily with the F-35. As we look to the second half of the year, we needed to raise our guidance, mainly in Aeronautics due to the F-35. Some of the growth we observed in ADP and our classified sector is dilutive, which is why we only increased our profit by $10 million and our sales by $100 million. Recently, considering Aeronautics and the F-35, we feel confident about the guidance we are providing for the F-35 at this time. There may be some potential upside, which we will better understand in the next couple of quarters, but for now, we're optimistic about Aeronautics. I've already mentioned Missiles and Fire Control, where we see solid growth, but it will be lower in the second half of the year, and we'll address that later. From an RMS perspective, we raised our guidance, mostly driven by radar programs. We're also witnessing stronger growth at Sikorsky, but I should point out that helicopter deliveries this year, particularly for BLACK HAWK, are absent for both MH-60 and CH-53, which means Sikorsky's sales are still down year-over-year. In terms of Space, at the year's start, we viewed them as flat, but we now anticipate around 2% growth, mainly in new initiatives like OPIR, GPS III, and space missile defense. However, most of that growth is happening in the front end rather than the back end, and we will reassess this in the second quarter.

I noticed in the risk section of the press release that you provided more details on delays caused by government policy, particularly the congressional notification delays to Saudi Arabia and the UAE for the first time. It clearly hasn't hindered your performance as sales and bookings appear strong. I'm curious whether you're currently experiencing this issue or if you expect it in the future. Does this affect both military sales and the commercial sales process?

Myles, I'll take that. It's Ken. So we're not seeing it today, so it probably would be more in the future. So pick C-130Js for Saudi Arabia. We've been in conversations with the Kingdom for probably over the last two years. They have a desire to buy 23 variants of the C-130J aircraft. It still has not been approved by the United States government; however, it has been approved by the United States government, but we are still sorting out when that can happen. I think it's more anticipatory than what we have seen in the past.

If I could just add on to that. We did get congressional notification get through that some years ago. To Ken's point, it's been a number of years ago, and they've only bought two of the 25 they were authorized for. We're in discussions with them. Thinking about some of the risk of sanctions against some of the munitions or something along that line, we conform with the policies of the U.S. government. Any changes in quantity they might purchase will line up with U.S. policy. As Ken said, we currently have orders on the books, and we're looking to fill those orders, and we don't see any changes to that guidance right now. Just acknowledging to a stockholder that there is risk, but we're not seeing that risk materialize yet.

On the F-35, you mentioned how the aftermarket had contributed in the first quarter. I was wondering what your expectation might be for F-35 support revenues this year and what that program could grow to over time.

Sure. Rob, it's Ken. I'll take that. Yes, we do see sustainments going to grow this year, and it'll grow double digits. I don't think there's any question about that. I do believe, based on conversations with the customer, we will continue to see growth in our sustainment. We'll continue to stand up bases in order to support the needs of having available aircraft out there. You'll see spares and parts continue to grow. We've talked a lot about the modernization of the F-35 program, so you'll start seeing aircraft that are in the field, deployed out in the field, will start to be modernized. Yes, in the foreseeable future, we continue to see growth in the sustainment of the F-35 program from a sales standpoint.

Just broader picture, going back to the growth question, the expectation of 6% to 8% top line growth for the year. You're still growing at impressive mid-teens rate on an adjusted basis in the quarter. How do we think about the multiyear outlook in terms of growth? What's changed? Are there any new program wins? Any international wins? Or is it a delta versus what you're seeing in outlays on the budget?

Thank you for the question, Sheila. I’d like to start by highlighting the main growth areas we anticipate, and then Ken will provide some additional insights. First, I previously mentioned the growth potential of the F-35, which we view as a significant engine for our future expansion. Regarding international growth opportunities, nearly half of our orders over the next five years are expected to come from international markets, with several countries we hadn’t anticipated joining in since last year. Air missile defense remains a crucial growth area for us, particularly with PAC-3, THAAD, our Aegis Combat Systems, and our initiatives in Germany with MEADS as part of the TLVS project. Sikorsky is also experiencing growth, driven by numerous development programs, such as the CH-53K, combat rescue helicopter, presidential helicopter, and prospects in Future Vertical Lift. We are seeing a resurgence in our F-16 program, not only in terms of new sales but also with upgrades, and more customers are expressing interest in purchasing F-16s. There is significant potential in India, with the possibility of nearly 400 opportunities for F-16s among the countries we're currently engaging with. Additionally, we aim to maintain our growth with the C-130, focusing on both multiyear contracts and opportunities in the Middle East and other regions. Our Space business and fields related to space situational awareness are also poised for growth, alongside our radar systems and sensors. Ken has extensively discussed our activities in Missiles and Fire Control. Importantly, we have a record backlog exceeding $130 billion, which positions us favorably for the upcoming years. This backlog reflects our existing booked business and should instill confidence in our growth and the opportunities we are identifying that have yet to be captured in the backlog. Ken?

You hit every point I was going to make, so thank you.

I want to follow up on that because the bookings and revenue projections from you and the consensus seem quite different. For 2017, the book-to-bill was 1.2; in 2018, it was 1.45; and for this quarter, it stands at 1.2. You've mentioned that the second quarter of this year would be your strongest, and that much of the booking strength for 2018 isn't actually translating into 2019. Historically, bookings have been a good predictor of revenue in this business. What am I missing that makes me doubt the guidance suggesting that the top line organic revenue growth rate will decelerate to 5% to 6% for the rest of the year, as well as the consensus for 2020 and 2021? Shouldn't the outlook resemble the strong performance of the first quarter, excluding the week, and remain in the double digits, reflecting the booking strength we've seen for some time?

Yes. No, it's Ken. I'll take that. If you go back to last year, our bookings last year were almost $79 billion. Think about the block buy of $23 billion of bookings last year, the omnibus work that we got for 36 aircraft, the economic order quantity bookings we got. That's great that they're all in backlog. The issue is from a capacity standpoint, where we are with the F-35. A lot of those orders were not just LRIP 12 but for LRIP 13 and 14. The front end of procurement for those orders will take us a while to convert to cost and sales. For the second quarter, we're going to hopefully get the block buy definitization in the second quarter, which will be a sizable order in this quarter. But from a sales standpoint, that's not going to happen for the next couple of years.

As we highlighted in my remarks, Ken, just to add to that, we did book the three-year award on AWE, which typically in the past we haven't been doing those at a three-year tranche. That was a good solid unexpected award to get three years under our belt in the first quarter as well.

I'd like to discuss the Orion program for a minute. It feels like this human space exploration initiative has had a lot of starts and stops over the last 15 years or so. You guys have noticed some top line strength there now for two quarters in a row. The question is what is the proving point on this program where it kind of becomes too hard to cancel ahead of the next period of budget pressure?

I'll provide a high-level overview, and then Ken can add any additional insights. This administration is heavily focused on leading in space, not just in terms of exploration, which is Orion's mission, but also due to the competitive challenges we face from adversaries in space. Over 70 countries have activities in space. We have our space launch pads, along with national security and weather satellites, showcasing a wide range of capabilities in our Space business. On the exploration front, there is significant eagerness to reach the moon and beyond. Orion is set to be the next spacecraft that will transport astronauts to both the moon and Mars. This aligns with what the U.S. government has been investing in, demonstrating resilience across budgets due to strong bipartisan support for exploration initiatives. Coupled with the administration's and NASA's vision for space exploration, there is strong momentum, which I believe will persist.

The only other thing I'd add is think where Orion is from an exploratory mission one and two. If you look at exploratory mission one, the crew module's complete. They're moving into testing. They're going to make the crew and the service modules soon. In the summer, that's going to get transported to NASA's Plum Brook Station in Ohio for integrated environmental testing, and the launch on the SLS is driven for 2020. EM-2, the exploratory mission two is right behind it in 2022. There is enough momentum on this program that it's alive and well and well thought of.

Marillyn and Ken, sort of bigger-picture question here in terms of execution and investing. Clearly, there's big growth and a lot of opportunities to come. So part A is how are you executing on this big growth and aligning incentives just as you encounter some charges here and there? How are you investing at the opportunities? Specifically, how do you choose between what opportunities you pursue and which opportunities you do not pursue?

That's a great question, Jon, and we consistently focus on our performance and execution as a company. Overall, we are performing extremely well. We closely monitor our performance in supporting our customers on our programs, and we set high standards with stricter requirements for cost, schedule, quality, and technical performance than our customers do, which allows us to identify potential issues early. We also maintain a strong emphasis on our suppliers, as they are crucial to our overall performance. About 60% to 70% of our revenue comes from our supply base, so we depend significantly on them. Our subcontract management team collaborates closely with suppliers to ensure they meet their performance commitments, enabling us to fulfill ours as well. Although we do face challenges, particularly in a business with a range of programs at different stages, including new and complex high-tech projects, we have established processes to address these hurdles. Our program-assist teams work closely at the start of programs to help resolve issues. Our performance aligns with the incentives we set for our teams. This alignment is a long-standing practice within our company, which is why we perform well overall and meet our commitments. We acknowledge that we are not perfect and do encounter issues. However, when challenges arise, we proactively address them by allocating the right resources and we are committed to not walking away from our responsibilities to our customers.

John, this is Greg. I think we've come to the top of the hour here. I'll turn it back over to Marillyn for final thoughts.

Thank you, Greg. Let me conclude the call today at the same place that I began the call, and that is by thanking the employees of Lockheed Martin for their contributions and dedication. The company has performed with excellence, and we continue to be well positioned to deliver growth and long-term value to our customers and our shareholders. Thank you again to all of you that joined us on the call today, and we look forward to speaking with you at our next earnings call in July. John, that concludes our call for today.