Lockheed Martin Corp (LMT) — Q4 2019 Earnings Call Transcript

Thank you, John, and good morning. I'd like to welcome everyone to our fourth 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 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 Marillyn.

Thanks, Greg. Good morning everyone. I hope you had a good start to the new year. Welcome to our fourth quarter 2019 earnings call as we review our results, strategic new business activities, key accomplishments, and our outlook for 2020. I will begin by expressing my gratitude to our entire Lockheed Martin team for a remarkable 2019. Over the course of the year, the corporation achieved extraordinary sales growth, earnings performance, strong cash generation, and record backlog and it was through their dedication and commitment that we were able to deliver these results. Ken will discuss our financials in more detail and provide our outlook for 2020, but I'd like to begin by discussing a few of the highlights from 2019 that drove our strong performance. Notably, for the second year in a row, all four of our business areas grew sales, earnings, and backlog with each contributing to our record cash from operations. Sales in the fourth quarter exceeded last year's fourth quarter by 10% and pushed 2019 growth to 11% over our 2018 results. Missiles and Fire Control had the highest overall growth in 2019, exceeding the prior year by 20%. Deliveries of tactical and strike weapons, development work on new hypersonic and classified programs, and PAC-3 missile production were the strongest contributors to the increase. Aeronautics also saw strong sales growth in the quarter and year with 2019 annual sales finishing 12% above 2018, led by our F-35 program which grew 14% in 2019. In space, the next-generation Overhead Persistent Infrared or next-gen OPIR contract, the GPS III satellite production program, and recent hypersonic wins continue to provide increased sales volume as the business area exceeded their 2018 topline by 11%. And Rotary and Mission Systems finished the year 6% over 2018, driven by increases in shipbuilding, radar and logistics programs. Our segment profit grew nearly $700 million year-over-year, resulting in a segment profit margin of 11% and earnings per share of $21.95, which was another high watermark for the corporation. This quarter, our backlog increased $6.6 billion and is now approximately $144 billion, reaching a record level for the fifth consecutive year. And we had a strong quarter of cash flows allowing us to use $1 billion to prefund our required 2020 pension contribution and a portion of our 2021 payment and still generate over $7.3 billion of cash from operations for the entire year. Had we not made this discretionary payment to our pension trust, we would have delivered over $8.3 billion in operating cash, well in excess of our greater than $7.6 billion objective. 2019 was an extraordinary year across the corporation with our team achieving record results in sales, earnings, EPS, cash from operations, and backlog. The strength of our portfolio has us well-positioned to continue delivering mission success for our customers and outstanding value to our stockholders. Before reviewing significant accomplishments from each business area, I will start with an update on the F-35 program, which had an especially successful quarter and year. During the fourth quarter, our F-35 team delivered 51 fighter jets, bringing the total deliveries in 2019 to 134 aircraft, exceeding our joint government and industry target of 131 aircraft, a nearly 50% improvement from last year and a 200% increase from 2016. Since the program's inception, we have delivered 491 production aircraft with 347 jets being provided to U.S. forces and the balance of 144 planes being delivered to our partner nations and international foreign military sales customers. Keeping with the F-35, we are pleased that we finalized our agreement for lots 12 and 13 this quarter, recognizing orders of approximately $5 billion and adding 112 aircraft to our backlog, bringing our backlog to 374 planes. We anticipate finalizing lot 14 in early 2020. Our joint industry and government team has established a long-standing objective of offering the F-35A model at a flyaway cost of $80 million in lot 14, and we were able to improve on that target one year ahead of schedule. The lot 14 unit price is now below $78 million, which allows us to offer this remarkable fifth-generation fighter at a price equal to or lower than legacy fourth-generation aircraft. Internationally, we were very excited to see Norway declare initial operational capability with its fleet of F-35 conventional takeoff and landing aircraft. Since the first F-35 model arrived at Ørland Main Air Station in 2017, the Norwegian Air Force has conducted a rigorous operational testing program in unique winter and northern environmental conditions and has deemed it ready for combat. Norway is the third European country and the fifth international customer to declare.

Thanks, John.

Hi, this is Greg Gardner, apologies for the technical difficulties. Thank you for your patience. We're going to commence again with the call, pick it up with Marillyn talking about the F-35. Thank you. Marillyn?

Thanks, Greg. So I'll just pick up again some of this. I'll just repeat it's very short but I just want to cover all of the F-35 update before I move into the other operational highlights. So I'll start with an update on the F-35, which had an especially successful quarter and year. During the fourth quarter, our F-35 team delivered 51 fighter jets, bringing the total deliveries in 2019 to 134 aircraft, exceeding our joint government and industry target of 131 aircraft. A nearly 50% improvement from last year and a 200% increase from 2016. Since the program's inception, we have delivered 491 production aircraft with 347 jets being provided to U.S. forces and the balance of 144 planes being delivered to our partner nations and international foreign military sales customers. Keeping with the F-35, we were pleased that we finalized our agreement for lots 12 and 13 this quarter, recognizing orders of approximately $5 billion and adding 112 aircraft to our backlog, bringing our backlog to 374 planes. We anticipate finalizing Lot 14 in early 2020. Our joint industry and government team has established a long-standing objective of offering the F-35A model at a flyaway cost of $80 million in Lot 14. And we were able to improve on that target one year ahead of schedule. The Lot 14 unit price is now below $78 million, which allows us to offer this remarkable fifth-generation fighter at a price equal to or lower than legacy fourth-generation aircraft. Internationally, we were very excited to see Norway declare initial operational capability with its fleet of F-35 conventional takeoff and landing aircraft. Since the first F-35A model arrived at Ørland Main Air Station in 2017, the Norwegian Air Force has conducted a rigorous operational testing program in unique winter and northern environmental conditions and has deemed it ready for combat. Norway is the third European country and the fifth international customer to declare IOC, a critical milestone for Norway and the entire F-35 team. Also this quarter, the Dutch Armed Forces welcomed the arrival of their first F-35 to sovereign soil in a celebration attended by more than 4,000 people at Leeuwarden Air Base. The Netherlands has been a key partner in the F-35 program and including the 8 aircraft still stationed in the U.S. for training and testing purposes, has now taken delivery of 9 CTOL jets in total. The Netherlands program of record is currently to procure 37 F-35 with the opportunity for an increased order as last October the Dutch government announced plans to purchase 9 additional jets, bringing the total to potentially 46 aircraft. Turning back to our business areas, I'd like to highlight a few of the notable new business wins and follow-on awards that have helped position us for long-term growth. Rotary and Mission Systems received an award of nearly $2 billion for the detailed design and construction of 4 multi-mission surface combatant ships for the Kingdom of Saudi Arabia. This ship is a version of the Freedom variant which were a combat ship, we have been delivering to the U.S. Navy and will provide the Kingdom with the capabilities needed for both shallow water and open ocean naval operations. We are honored to support the Kingdom in their Saudi Vision 2030 objectives. In Missiles and Fire Control, the U.S. Air Force announced the finalization of the $1 billion contract for the air-launched rapid response weapon effort, we were previously awarded. Our hypersonics portfolio experienced tremendous growth during 2019 with the total potential value the corporation has received now exceeding $4 billion. Missiles and Fire Control also booked a $770 million order for PAC-3 missiles to provide additional interceptors and ground support equipment to the U.S. Army and the United Arab Emirates, continuing the growth in our air and missile defense line of business. Moving on to Aeronautics, our air mobility team was awarded their third multiyear contract for the C-130J transport aircraft approving the delivery of 50 new planes over the next few years. The finalization of this contract added an incremental 35 aircraft and over $2 billion to our backlog in the fourth quarter, with the overall value for all 50 planes expected to exceed $3.4 billion. This award comes as the aero team celebrated the delivery of the 2600 C-130 airlifter since the program began over 60 years ago, with over 450 planes being the current J model. We are proud to be able to continue producing this venerable aircraft for our war fighters and those of the 70 nations currently operating it around the world. And in space, we were awarded a $3.3 billion 10-year IDIQ contract for the combined orbital operations, logistics and resiliency, or COOLR program, to provide support services on several military communications satellite constellations, including our advanced extremely high-frequency spacecraft. These satellites provide nuclear-hardened anti-jam global communications to the White House, the State Department and military users, supporting the nation's nuclear command and control system. And we are proud to be able to support the ongoing mission of this critical element of our national security. These announcements reflect the strength of our legacy programs, both domestically and internationally, as well as the impact of our continued investments in forward-looking technologies to drive long-term growth. Turning briefly to budgets. The fiscal year 2020 Department of Defense Appropriations Act was signed into law last month and finalized defense spending for the current fiscal year. Total defense budgets have been approved for approximately $738 billion, consistent with the levels passed earlier in the Bipartisan Budget Act of 2019 and over $20 billion above FY 2019 enacted amounts. Our programs garnered strong support across all business areas, with the legislation including nearly $3.5 billion of increased funding beyond the presidential budget request, including $2 billion for 20 additional F-35 fighter jets for a total of 98 aircraft; over $800 million for nine additional C-130J transport aircraft for a total of 20 planes; and increased funding for our long-range hypersonic weapon, Orion and OPIR contracts, as well as increases for several rotary aircraft programs and other initiatives across the corporation. We believe our portfolio is well positioned to address important security needs for our nation, with the increasing defense budget and these additional appropriations actions supporting continued growth opportunities into the future. Moving on, I would like to highlight several key accomplishments from across the corporation that demonstrate our commitment to developing new technologies, as well as expanding the reach of our heritage solutions. I will start with Missiles and Fire Control, who passed an important milestone on a prospective new business opportunity. Our tactical missiles team successfully tested its next-generation long-range precision missile for the U.S. Army's Precision Strike Missile or PrSM competition. The Missiles and Fire Control team launched PrSM from the Lockheed Martin High Mobility Artillery Rocket, or HIMARS, system, successfully demonstrating accuracy and range of flight, validating HIMARS' interfaces and testing system software performance. We are excited by the prospects of this enhanced surface-to-surface system and look forward to building on our long-running Army Tactical Missile System legacy as we progress through the upcoming procurement decision. Moving to RMS, our integrated warfare systems and sensors line of business was selected by the Japanese Ministry of Defense to produce two solid-state radar antenna sets for their Aegis Ashore system. Our SPY-7 radar offers enhanced detection range and sensitivity from previous legacy radar systems and will provide continuous protection of Japan from ballistic missile threats. Our RMS team has continued to invest in new technologies while leveraging current solutions and this new radar is a direct derivative of our long-range discrimination radar solution, a missile defense agency program of record. Variants of the SPY-7 radar will also be incorporated into other U.S. and international solutions. And to-date, this technology has been selected for 24 systems ushering in the next-generation of maritime and ground-based advanced radar technology. Moving to Aero, this past November marked the official start of F-16 production at our Greenville, South Carolina location. Fabrication activity began for components of the center fuselage, one of the first steps in building new F-16 aircraft for the growing demand from new international customers. The first delivery for our Bahraini customer will roll off this line in late 2021, and we look forward to increasing production as new orders are added to the backlog. I will close with our Space business area which delivered the Mars 2020 Rover Aero Shell to Kennedy Space Center in December. The Aero Shell will encapsulate the Mars 2020 Rover during its deep space mission to Mars and protect it from the intense heat as the entry system descends through the Martian atmosphere. This Aero Shell marks the latest heat shield ever used and will protect the vehicle from temperatures up to 3,800 degrees Fahrenheit. Lockheed Martin has built every Aero Shell entry system for all of NASA's 40 years of Mars explorations, and we are proud to continue this legacy as we work towards a July 2020 launch. Before I turn the call over to Ken, I'd like to reiterate my appreciation to the entire Lockheed Martin team for their contributions to an outstanding year and for helping to build a differentiating portfolio.

Thank you, Marillyn, 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 year. Sales, segment operating profit, cash from operations, and earnings per share closed ahead of our expectations with record highs. We generated $7.3 billion of cash from operations after a $1 billion discretionary contribution to our pension trust this quarter. And we continued our cash deployment actions returning $3.8 billion of cash to our shareholders through a combination of dividends and share repurchases. We again grew our backlog to $144 billion, a new record high watermark. In summary, it was an outstanding year for the business. Turning to Chart 4, we compare our sales and segment operating profit this year with last year's results. Sales grew 11% or $6 billion compared with last year to $59.8 billion, continuing the strong performance over the first three quarters, while segment operating profit increased 12% or $700 million over last year to nearly $6.6 billion. On Chart 5, we compare sales by business area with last year's results. And as Marillyn mentioned, all four of our business areas experienced strong sales growth in 2019, led by Missiles and Fire Control of 20%, which was driven by a production volume in tactical and strike missiles and air and missile defense. And for the first time, all four business areas delivered sales above $10 billion. On Chart 6, we'll discuss our segment operating profit by business area. Following sales, all four of our business areas also increased profit in 2019 and the corporation ended the year with total segment operating profit 12% above 2018 levels. Chart 7 shows our earnings per share for 2019. Our EPS of $21.95 was up $4.36 or 25% higher than our results last year, driven primarily by operational performance. Moving on to Chart 8, and as previously noted by Marillyn, backlog has increased again to a record high for the fifth consecutive year. All four business areas increased backlog in 2019 with the largest increases coming from space, driven by strategic missiles and at Missiles and Fire Control, driven by air and missile defense. We had a strong book-to-bill ratio of 1.4 for the quarter and 1.2 for the year. On Chart 9, we will discuss the cash return to our shareholders in 2019. Subtracting our capital expenditures from approximately $7.3 billion of cash from operations, our free cash flow is greater than $5.8 billion. We increased our dividend by 9% and exceeded our share repurchase objective by $200 million in the fourth quarter. This brought our total cash return to shareholders to $3.8 billion for the year or 64% of free cash flow, providing strong returns consistent with our historical cash deployment actions. Moving on to Chart 10. We provide an update to our 2020 trending data with our revised outlook for the year ahead. Our outlook for sales ranges from $62.75 billion to $64.25 billion, which is an increase from the $62 billion we first indicated last quarter. The midpoint of this range represents a 6% increase over 2019 results. The range of segment operating profit is estimated to be between $6.8 billion and $6.95 billion. Our estimated FAS/CAS pension adjustment is just above $2 billion. Our estimated range for 2020 earnings per share grows to between $23.65 to $23.95 per share. The midpoint of this range represents a 7.7% increase over 2019 results. Cash from operations is now projected to meet or exceed $7.6 billion and I'll discuss this in greater detail on the following chart. On chart 11, we will walk through our future cash expectations, folding in the $1 billion discretionary pension payment we made last quarter. Strong operational cash performance and a continued focus on working capital management allowed us to increase our cash outlook for 2020 to greater than or equal to $7.6 billion, a $100 million increase to the combined 2019 and 2020 outlook we provided in October. And we now see approximately $7.7 billion of cash flow from operations in 2021, a $700 million increase bringing our three-year expectation to $800 million greater than our prior assessment. On chart 12, we break down our sales and segment operating profit outlook by business area. All four business areas are positioned for continued sales growth in 2020 led by Missiles and Fire Control at 10%. Segment operating profit growth is projected to grow at approximately 5% in the aggregate with our largest growth in aeronautics at 8%. And finally on Chart 13, we have our summary. We believe 2019 was an exceptional year for Lockheed Martin. Our key results exceeded previous highs and have positioned us well for continued growth and value creation in 2020. And as we discussed earlier, our focus on innovation and investment has resulted in strategic new business opportunities and a robust legacy of programs. And with that we're ready for your questions. John?

Thanks so much. Good morning.

Good morning, Rob.

Good morning, Rob.

Quick question for Marillyn. On the F-35. You mentioned in the release that your guidance had a bit of a caveat regarding Turkey. I was wondering if you could give us an update on the progress in allocating those Turkish delivery slots. And also realigning the supply chain?

Sure. Thanks for the question, Rob. I would just say, we've been working with the U.S. government for several months on addressing how we're going to manage the eight aircraft that were slotted for Turkey that have been delivered for Turkey as well as looking at alternate suppliers for the Turkey suppliers. And so in terms of the Lot – the upcoming lots, we have a lot of demand for the aircraft as you are well aware and we've had the congressional ads that will offset those needs from Turkish – the Turkish aircraft delivery. So I think we've got it well solutioned. Anything you want to add to that Ken?

Yes. Just – Rob just from the revenue side, Marilyn's got it right. So the United States government for the ones we've delivered in sub to date, which would be the Lot 10 Lot 11 aircraft. There are earmarked for the United States government. In lot 12 through 14, the block buy each of those lots eight aircraft were earmarked for Turkey for a total of 24. The congressional adds for the most part we'll take care of that. So we're in good shape with the block buy. We'll now work Lot 15. We just got the RFP from U.S. government. So I think from a revenue standpoint, we're in great shape. We have other customers that are coming in. Japan as you recall, want to order an additional 105, we have Belgium. We're in a competition for Finland, Switzerland and Canada. We feel good about those, especially as Marillyn mentioned, the $80 million aircraft, we got there a year ahead of time. And you probably saw in the press that Poland wants to buy 32 aircraft. So I think from a revenue side, it's well in hand. From a supply standpoint, almost all supply out of Poland will – excuse me, out of Turkey will be removed by March of 2020. There'll be a handful of suppliers that we'll continue to work with – through December 20th. And as I mentioned, we got the Lot 15 RFP, so we'll sort all that out post-2020 as we go on. But I think we're in a much better spot now than we were with the Turkey situation.

Thank you very much.

Thanks and good morning. Can you laid out the 3-year cash outlook the update with the $800 million of incremental. I'm just curious, could you give us the backbone on the net pension recovery in there? And how much change you mentioned contributions came down, but it also looks like your CAS recovery came down. So just trying to piece out of that $800 million, how much is from your operations? Thanks.

Certainly, Myles. To start, we concluded the year with sufficient cash that enabled us to make a voluntary pension contribution. By the end of the third quarter, our working capital had increased by $1.2 billion. However, in the fourth quarter, we decreased our working capital by $500 million. Overall, for the year, we experienced an increase in working capital of nearly $700 million. Due to strong cash generation in the fourth quarter, we decided it was wise to contribute $1 billion to the pension. Looking ahead to 2020 and beyond, you may also want to note our Lockheed Martin investment, which performed better than we expected in October and earlier in the year, achieving 20% returns on assets by year-end. As a result, our cash contributions for 2020 totaled just under $2 billion, and no pension contribution is required this year. We project our CAS recoveries to be about $2 billion in 2021. Previously, we estimated our pension contribution for this year at $2 billion, but after making the $1 billion contribution, which eliminated the required contribution for 2020, we have now reduced our 2021 pension contribution estimate to below $1 billion. Looking forward to 2022, we anticipate CAS recoveries to be around $2.2 billion, and the previously discussed $2 billion pension contribution has now been adjusted to approximately $1.7 billion to $1.75 billion. This improvement is driven by better volume and margin across the business, as well as favorable returns on our pension investments from the past.

Hi good morning.

Good morning.

Marillyn, Ken you both went through a lot of detail on the international successes on aircraft and ship platforms. And Marillyn you sort of previewed the question, I want to ask when you talked about Japanese Aegis, but I wanted to talk about your recent modernization wins at DoD. They're sizable. You've had things like hypersonics and AM260 at MFC, Central Radar at RMS. And I wanted to see how these might translate to even greater longer-term market share internationally, or are they too strategic to export?

That's a great question, Rob. We consistently collaborate with the U.S. government, evaluating which systems can be offered to our allies to enhance their defense capabilities. Without detailing each specific system you mentioned, I believe the Aegis Systems serves as a strong example. Our enhancements in systems like PAC-3 and FAD, as well as developments in radar capabilities like Long Range Discriminating Radar, are all part of our strategic planning. When we partner with the U.S. government, we ensure to consider the international implications of these systems. Our robust backlog of approximately $144 billion not only enables us to fulfill existing commitments but also allows us to invest in new technologies and capabilities. Over the years, we have focused on radar technologies, hypersonics, directed energy, and various systems to equip our clients with a competitive edge over adversaries. We are always looking ahead to invest and support our international customers effectively.

Yes. Good morning.

Good morning.

Good morning.

I was wondering if we could just walk through a little bit. When we think about the F-35 program, as we go into 2020 and maybe even beyond, how you think about the mix between OE and sustainment? I mean, there's been a lot of, I guess, press about the sustainment going from something like the total flight hour cost at $35,000 per hour going down to $25,000 per hour. I mean, how does that impact the program? And how should we think about as we model F-35 in the 2020 and beyond, the mix between OE and sustainment?

Sure. In 2020, we expect strong year-over-year growth for the F-35 program, with sales anticipated to increase by approximately 8%. Most of this growth will come from production, which will also rise around 8% compared to last year. Despite the winding down of System Development and Demonstration (SDD), we still expect development work to grow by about 10% from 2019 due to follow-on modernization and various development activities. From a sustainment perspective, we are maintaining our annualized buys and establishing new bases, and we anticipate high single-digit growth in sustainment as we proceed with these buys. Over time, sustainment is expected to become the fastest-growing segment of the F-35 program, potentially doubling in sales over the next five years and even tripling over the next decade. The performance-based logistics proposal we are discussing with our customer aims to reduce the cost per flight hour for maintaining the aircraft to a more affordable level while increasing aircraft availability to match that of fourth-generation aircraft. The risk would lie with the industry, which would invest in the necessary infrastructure to meet agreed service levels and expect a return that reflects the contract type. We are optimistic about negotiating this deal in 2020. In the near term, however, production growth will remain the focus until we reach peak capacity around 2023 or 2024.

There is ongoing demand globally, and we are now offering the aircraft at a very competitive unit price. As long as we can manage the development costs associated with upgrades and reduce sustainment costs, we foresee significant opportunities for the aircraft worldwide.

That's right.

Hello everyone.

Hey.

Hey, how are you doing, Noah?

Doing well. How are you Ken?

Okay. Thanks.

I wanted to continue the discussion on multiyear cash flow. I understand the investor question about whether it grows in 2021 because of the contribution step-up moving to 2022 with the contribution step-up now being year-over-year. Can you grow cash from operations year-over-year in 2022? You also have a five-year internal planning, so could you address whether you can grow cash flow every year during that five-year period? This is an important question for investors. Additionally, given the pension aspects, could you also discuss capital, as that was a bit lower for the year? That would be very helpful. Thank you.

Thank you, Noah. To clarify, we look at the current year plus three years ahead. I can give you some insights on 2023 and onward, although I don't have a precise figure for you. I believe you wanted to discuss 2022 since I provided information up to 2021. This is particularly relevant now not only due to pension funding and capital expenditures, but also regarding cash generation dynamics, including pre-funding and our focus on working capital. This suggests that cash from operations in 2022 will likely exceed our 2021 figures. We foresee a potential of over $7.7 billion. There is one important issue to address, which is a remnant from the Tax Reform Act of 2017. This law includes a provision that begins in 2022, requiring research and development expenses to be capitalized instead of expensed. Currently, the law is somewhat vague regarding the exact definition of R&D. I have reviewed the legislation myself and noticed some ambiguity. In the interest of transparency, it's worth discussing this now. If the IRS determines that the law applies to all R&D expenses, it might reduce our cash number. This would turn expenses we currently have into amortized ones over five years, bringing our cash from operations in 2022 down to around $6.5 billion. However, we believe it’s unlikely that this was the legislators’ intent, and if it only applies to a specific subset of R&D, we anticipate still exceeding $7 billion. To summarize, we expect more than $7.7 billion if things remain as they have historically. If the R&D tax bill is fully applied, we would estimate about $6.5 billion, and if it’s limited to a subset, we project still exceeding $7 billion. Operationally, we anticipate strong cash generation and a continued focus on working capital. Regarding capital expenditures, you are correct that they came in slightly lower this year at roughly $1.5 billion, largely due to ongoing building projects. We expect capital expenditures in 2023 to be around $1.7 billion, remaining comparable. Based on what we know today, we expect them to taper down to below $1.7 billion afterward. Lastly, as for 2023 and beyond, particularly with Sikorsky, you'll start to see many programs going into production, including the F-35. We'll continue to reduce contract assets, and while I don’t have a specific number, we anticipate strong cash flow generation during that time.

Hey, thanks everyone. I won't ask you about 2025 and beyond if that's okay. I spare you from that for now. But in the context of all that cash coming in what about cash going out? Leverage is noticeably low; you highlighted returning 64% of free cash flow to shareholders. It's been higher in years past, but I know your stock's been lower in years past. So just how do you think about capital allocation going forward given all these dynamics?

Let's begin with 2020. For planning purposes, we're estimating share repurchases of about $1 billion and anticipating an increase in the dividend to $0.20 per quarter, totaling $0.80 per share, similar to what we did in 2019. This represents an increase of over eight percent in the dividend. We have another tranche of debt maturing in 2020, which is $1.250 billion, related to Sikorsky. For planning purposes, we are assuming we will allow it to mature and then pay it back. Our treasury team continuously evaluates whether it makes sense to refinance or to reassess our entire debt on the balance sheet, including considering a debt exchange. We will analyze this throughout the year and be opportunistic, similar to our approach in the fourth quarter of last year when we executed our first accelerated share repurchase program successfully. As you may remember, in 2018, our stock price was down, not due to our fundamentals but because of the market situation. We took advantage of that at the time, and we will see where it is feasible to repeat that strategy going forward. We haven't discussed inorganic growth yet; Marillyn has meetings at least eight times a year with the senior leadership team to evaluate pipelines for potential investments or divestments. Additionally, we have the financial capacity to pursue these opportunities. Importantly, we received a credit rating upgrade from all three agencies, so with low debt costs, if any inorganic opportunities arise that align with our portfolio strategy, we would be interested in pursuing them.

But I would just remind you that we really are happy with our current portfolio. We don't see any gaps right now. But we'll as Ken said, constantly keep a screen on it as we always do.

Yes, good morning.

Good morning.

Hi, George.

A couple of questions. MFC and space backlog were up well north of 20%. Why isn't the growth rate greater in 2020? And then also if you can just go through the balance sheet a little bit. There was a big increase in inventories maybe partly offset by contract assets. And likewise accounts payable were way down maybe offset a little bit from liabilities. Maybe just walk through what's actually going on in the balance sheet as well? Thanks.

You bet, George. It’s Ken. I’ll handle that. So you asked about Space and Missiles and Fire Control and you're right. So our – we overachieved our orders planned this year by north of $20 billion. And two of the big drivers were exactly that Space and Missiles and Fire Control. But I think what you need to do is look at the detail of what some of those programs are. So at Missiles and Fire Control, a big driver of what went into backlog would be THAAD KSA and PAC-3 Poland. And those will be multi-year programs going forward. So you will not see a burn down like some of the tactical strike weapons programs. Integrated air and missile defense backlog will take longer to convert to sales. Same with Space. Space is a platform business. And you have – recall I talked about in the past the, the multi-year, the three years of AWE we got. So we will not get an order this year on AWE. We also got some big orders on Orion and OPIR which would take longer to convert to sales. Regarding the balance sheet, you're right George. We did have some inventory growth in 2019. But the way we look at it, I kind of look at contract assets and inventory and frankly, put them together. So we actually had contract assets decrease in 2019 by roughly $400 million. Inventory for the year roughly grew $600 million. So I would say from an asset standpoint, we had 11% sales growth. Think of that as roughly $6 billion of sales growth from 2019 to 2020. We grew contracted assets and inventory by only $200 million. Going forward, we do see contract assets increasing in 2021. And we see working capital in 2020 growing by rough numbers it will be comparable, a little bit more than this year. But remind you, we're growing sales by roughly $3.5 billion. So that's in-line with what we've had in the past. And then 2021, we see a marked improvement from a working capital standpoint. We will only grow working capital by say, $200 million. This is our plan today, but we'll continue to try to perform on that. And with our focus on working capital one of the main places that we will work is in contract assets in 2020 and 2021.

Yes. Thanks so much. Everybody has talked about cash flow. I'm more interested in kind of what you do with it because your net debt-to-cap is now 1.4, if you increase your dividend 10%. If you buy $1.5 billion in stock every year, you're basically going to burn through like $4 billion in debt. So, where are we going here over the next couple of years? Do you want this net debt-to-cap ratio to go below one, or are you going to deploy the cash? And if so, what are your relative priorities? Thanks.

As I mentioned earlier, our priority is to pay off the debt on the balance sheet as it matures. We will certainly evaluate whether refinancing makes sense in this low interest rate environment. We will also engage with our shareholders this year to understand what type of dividend increase would keep them interested in our stock. Over the last couple of years, we've planned for $1 billion in share repurchases and have actually exceeded that amount by buying back more stock than planned. There's a chance we will continue this trend. We’ve expressed our satisfaction with our portfolio, but if a compelling acquisition opportunity arises, we have the resources to pursue it. It's worth noting that we received a credit rating increase from all three agencies, so with low debt costs, we are open to any inorganic growth opportunities that align with our portfolio strategy.

But I would just remind you that we really are happy with our current portfolio. We don't see any gaps right now. But we'll as Ken said, constantly keep a screen on it as we always do.

Thank you. Good morning.

Good morning, Doug.

I wanted to return to the F-35 sustainment topic to ensure I understand how the numbers add up. Generally speaking, if we set PBL aside for now, I think about sustainment activities being somewhat proportional to the fleet size. Currently, since you're still establishing depots, I would assume there's an increase in sustainment work at this time. Considering you need to reduce costs per flight hour over the next few years, how do you anticipate achieving a doubling or tripling of sustainment revenues in the next five years? I'm trying to understand how this all fits together.

Okay. You bet, Doug. So, yes, a lot going on. So, just for completeness this year, we see sustainment growing, not quite double digits, but close to double digits. So, there are roughly 21 bases that are stood up. We still have quite a few to stand up. We have a large number of 491 aircraft out in the fleet through year-end. We're going to deliver 140 aircraft this year, rough number's 160 next year; '22, 165 and then we'll start getting up to the 170, 175, 180 aircraft delivered. We'll continue, as you said, drive down the price per flight hour from roughly $35,000 to $25,000. What I'd like to remind you though is, half of that is the government cost, half of that is our cost, but you will still continue to need sparing. Marillyn mentioned the modernization work that is continuing. You will start to see, from a sales or revenue standpoint, more modernization sales and sustainment, once we have these depots up and sparing rather than the cost of standing up the depot. So, going forward, you will see a sizable ramp in modernization cost, where the customer working with us deems which aircraft it makes sense to modernize and then the spare of the fleet.

Okay. Thanks very much and good morning.

Hi, Seth. Good morning.

Can you mention the outperformance on the orders this year? I guess, first of all, where do you expect to exit the year in terms of backlog relative to last December 31? And then, in Missiles and Fire Control, when do you anticipate that the margin rate there would stabilize and then maybe start to move in the other direction?

We anticipate our backlog will grow by about $3 billion to $4 billion this year. While our orders might not be as strong as they were in 2019, we do have some significant orders coming in. This year, we expect to receive three F-16 production orders for Bulgaria, Taiwan, and Morocco, and we will finalize F-35 Lot 14. In the fourth quarter, we'll see F-35 Lot 15 orders and various hypersonic awards, along with the Indian Navy MH-60R Seahawk program. We expect our book-to-bill this year to be just above 1, around 1.06, leading to a backlog of approximately 1.47 to 1.48. Regarding Missiles and Fire Control, we have a classified development program that will continue to grow over the next few years. Some risk retirements we had previously discussed may not happen this year but are likely to occur next year or the following year, which should help stabilize our margins. Additionally, new prototype programs in hypersonics, particularly strike hypersonics, are being developed, although we haven't seen any orders for counter hypersonics yet. It wouldn't be surprising if contracts for counter hypersonics come in this year, but those could negatively impact margins as well.

Hey John, this is Greg. We're at the top of the hour. So, I think I'll turn it back over to Marillyn for some final thoughts.

Thanks. Let me wrap it up and conclude the call today again by thanking our 110,000 Lockheed Martin employees for their remarkable efforts over the course of 2019 because it was a year that we delivered outstanding strategic operational and financial performance. Our corporation continues to excel and attributes we most value and that's providing critical solutions to our customers and returning value to stockholders. So, thank you again for joining us on the call today. We look forward to speaking to you with you at our next earnings call in April. John that concludes our call today.