Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

Good morning, and thank you all for joining us today. I'm very excited to have with us again, Marillyn Hewson, the Chairman, President and CEO of Lockheed Martin. [Operator Instructions] At the end of this, to complete, there's a Procensus poll you should go into and do, and you'll get immediate access to the results of that poll. So I think that's very useful. I really encourage you to do it. Marillyn and I are going to be doing this one on audio rather than video because she's in a location right now that makes video difficult. So we're going to do this audio. I'm going to turn it over to Marillyn for -- to say a few words, and then we'll get into the fireside chat. So Marillyn, welcome, and it's yours for a moment.

Thank you, Doug, and it's really a pleasure to be part of your conference again this year. I just want to take a quick moment on our forward-looking statements, and then we can get right into the conversation. We've posted a chart on our website regarding forward-looking statements, and I want to start with a reference to that because, as you know, I'm going to be saying some things today that are more forward-looking and they may not reflect actual results. And we try to highlight the things that you need to know as investors in our forward-looking statements. So I refer everyone to our SEC filings as well. And you can look at what risk we see to achieving our forward-looking comments that I'll be making today. And that's it, Doug. That's all I wanted to start off with. Thank you.

Okay. Great. And again, thanks for joining us. I'm sorry that it can't be in person again this year, but I'm still really happy to have you with us. But on that topic, I'd like to start off with COVID-19. And can you give us a sense of what you're seeing at Lockheed Martin? I know you're maintaining your earnings guidance. You took sales reduction guidance a little bit in Aeronautics. So how do you see the COVID-19 impact for the rest of the year? And I'd say that as it relates to facilities, the supply chain, on the F-35, where you have some overseas production. How does it look now? And maybe even what have you seen in the last few weeks since you reported?

Well, thanks for the question, Doug. So first and foremost, on COVID-19, the first priority we have is the health and safety of our workforce. And we've taken a lot of steps to make sure that they have continued well-being as they come into the workplace. We are an essential business in terms of the work that we do for national security. And so we have been working through the -- since the outset of the pandemic, and our employees are on the job every day. Now those that can work remotely I've directed to work remotely because I want to minimize the risk for those that have to come into our labs and our production areas and our classified spaces. But we've implemented social distancing policies. We have alternate work schedules. We're doing teleworking wherever we can. We do require that everyone wear mask in our facilities, even in the manufacturing environment, such as we have on the F-35. And we're also requiring that they do a self-attestation that they have taken their temperature and that they've answered health-related questions before they enter our facilities. So I think we're doing all the right things to support our employees that are in the facilities. And those working at home, we're working with giving them the tools they need so that they can be productive and continue to do their important work from their home sites. And you were correct when you mentioned that we did have some impacts on the F-35 production and we reduced our outlook for Aeronautics slightly because of that. This was due primarily to supply chain deliveries and delays. We said in the call, in the first quarter call, that we anticipated -- we were starting to see some potential delays in our supply chain, so we started doing a really deeper evaluation. That was only roughly not quite a month into the pandemic. But certainly, we've got a very extensive supply base, both domestically and internationally. Different countries have different safety protocols. Some of our smaller suppliers can get impacted by COVID and have an impact on their production area. So all of those things we were -- we're watching very closely. We monitor our supply chain daily. And so we had some insight at that point, but we wanted to do a little more work. But we had enough insight that we sized the impact on our sales at approximately $375 million. So we took our sales outlook down about $375 million, which is just a bit above 0.5%. And again, all of that was in the Aeronautics business area. And all of that was attributed to the F-35 program. You may have seen that last week when we announced a temporary alternate work schedule for our F-35 production line employees in Fort Worth where they will go on a 2-week on, 1-week off rhythm. And we think this is a way that can help us then to keep the production line staffed and working but slow it down slightly, and at the same time, to retain the expertise that we need of this talented workforce. And it was proactive on our part. We saw this delay in deliveries. We believe that it helps the entire F-35 team to work through the pandemic. So we're tapering our production rate a bit over a 3-month period, and then we anticipate returning back to pre-COVID production levels by the fall of this year. All of that was contemplated in the $375 million that we took our outlook down early on. As for overseas production, we are seeing progress. If we -- I'll mention our FACO, for example, our Final Assembly and Checkout facility in Cameri, Italy. Leonardo, which is the prime contractor there, temporary closed that facility in March for some deep cleaning of its assembly plant. But today, they're back greater than 90% manned, and they're coming back. But as I look at all of these factors, at this stage, by slowing our workflow down, we think that we're going to have between 18 and 24 jets that we planned for this year that will not be delivered. So that's the impact of that on our deliveries for the year of slowing down for this roughly 3-month period and then turning back up on the rate. As you recall, we had said we were going to do about 140 aircraft this year. So it will be 18 to 24 jets less than that. We also said on the call that some of the other business areas are still in their ranges, and we still see that. But we mentioned that if there were any potential future impacts, we would expect it would possibly be in our Missiles and Fire Control business because they have a lot higher volumes in their production areas. So were they to have a supplier delivery or impact, then that could have some impact there. We don't see it yet, but I just highlight that for you as a potential. The other thing that was really positive, you mentioned the supply chain. At the very outset, because we have the financial flexibility and a strong balance sheet, we recognize that many of our suppliers are supporting both defense and commercial aerospace. And so we wanted to make sure they have the liquidity and the capability to continue to work through this very difficult time. So we immediately accelerated payments to them well ahead of our payments from the government to the tune of about $156 million in the first week or so. And then the Department of Defense, recognizing the importance of that, also changed their cash payment terms. And that's been implemented across the industry, and it's been a tremendous benefit. It benefited us with these interim payments, the progress payments, where they pay us and paid businesses in the defense at a rate -- they increased that rate that they flow to us. So we have already flowed to our supply chain $450 million from this legislation change, and it's helping quite a bit. And that was the initial tranche that we got through. And now just in the past couple of weeks, we flowed out another $300 million a week. And we're going to continue to do that. As we get an increase in cash payments through this DoD policy change, we will flow that to the suppliers as quickly as we can. Our cash generation was very strong in the first quarter. And I'm sure you and I will talk about cash later. But in general, it's certainly benefiting the supply base, first and foremost, because we want to make sure that we get that so that they can keep working and that they are strong and viable as they deal with the COVID-19 pandemic. So that's...

Go ahead.

I was just going to say, so that's sort of a broad brush on COVID-19, Doug. Hopefully, that answered the areas that you were most interested in.

No. It certainly does. And I wanted to move away from that over to the defense budget for a moment. And when we look at the budget, we've gone to the FY '20 budget and now the FY '21 budget that's in process. When we look at that, I mean -- the budget really is -- it's flattening. Can you give us a sense for how you see the budget, first, the prospects for getting this budget through this year? And then second, with all of the pressures coming from deficit pressures, threats are still out there, but when you put all those together, what's your sense in talking with people of any administration and Congress with that, how we should see this budget moving?

Okay. Great. Thanks, Doug, for the question. Well, the President submitted the FY '21 budget in February, as we've talked about. And it was just as everybody expected. It met the Bipartisan Budget Act of 2019 targets. And so that budget, that top line defense budget is about $741 billion. And that compares to last year's budget, which was about $738 billion. So you're right, pretty flat. I mean a very slight growth, but it's certainly where you would say that it's flattening. But -- and they are working through the budget finalization process, but it will probably see some timing impact because of the coronavirus situation. They are -- we are starting to see Congress weigh in a little bit. There is one bill that's been introduced, that's proposing that there'll be a $40 billion increase or additional budget over the FY '21. And then we see a different group of House members who are asking for a reduction from last year's budget. So you're seeing both of those sides coming to discussion right now. But what I'm most hopeful about is that the legislation that was passed last year will stand, and we can get to bipartisan authorization and appropriation bills just like we did last year because it's really critically important with the threats around the world and with the need for our modernization and our readiness of our men and women in uniform that we do that. Your question on timing is a good question. I mean we have an upcoming election. That will also add some complexity, just like the pandemic situation adds some complexity. And as Congress looks at that, we often have seen in the past that sometimes we have a continuing resolution. And that could possibly happen this year with a continuing resolution. But I wouldn't expect that to have much impact near term on Lockheed Martin because the total FY '21 budget request is not all that different from the FY '20 appropriations. And so we -- even if there's a CR and we weren't expecting a big increase anyway, I think, overall, that should be in line. I mean if you look at last year, for example, we had some plus-ups. We -- last year, F-35 quantities were increased by about 20 jets from FY '20 budget submission. And we've seen a lot of other areas of support for our portfolio in that budget request. So we're going to continue to work with our customers. We'll provide them information. We'll give them data, anything they need so that they can make their case to the legislatures. And you asked the question, could we grow at a greater rate than the budget increases? I actually think we can. I mean if I look at where we are, you look at -- we have a record backlog of about $144 billion, and that sets us up well for some near-term and medium-term growth. And then if you look past that, a lot of the budget increases, we've benefited from those over the past several years. But the elements that are in the budget really are ones that are aligned with the National Defense Strategy. And that's, frankly, the basis of that budget. And we, as a company, in our portfolio of products and capabilities, is very well aligned with that policy. And it includes things like air superiority, contested space, air and missile defense. All of those are areas that we have a leadership position in. If you look at what was submitted in the President's budget, there's $3.2 billion for hypersonics programs, which is a key area that we are focused in. You also probably saw that NASA was well supported with almost $3 billion more than last year for items like Orion and work on future Mars missions. And if it's [Technical Difficulty], we'll just have to see. You mentioned pressures. And I think the first order of any country is national security. For our company and for our industry, we also contribute to economic security because we have many jobs. And both for our country and other countries where we do business, the defense business brings high-tech, well-paying jobs with good benefits, et cetera. So it's good for the economic security as well. There's been a lot of stimulus that's been injected into the system, and that's been great. So that could likely introduce some budget pressures, both in our country as well as in other countries where we do business. But again, as I said, threat scenarios that are out there really have a big influence on budgets and we see those still as unpredictable and as accelerating. Sometimes countries take advantage and adversaries take advantage of the situation like a pandemic or other situations. So I think our members of Congress are going to stay on top of focus on national defense spending because they -- it is so important. And then, again, much of the future spending is meant to align with, as I said, the National Defense Strategy and the National Security Strategy. And that means that we've got to highlight -- it highlights these evolving threats. And when we talk about a shift to R&D and technology and less on procurement, we actually think that has some positive impacts for us as a company because we've been very successful in winning some new business in that arena recently. So these programs, you win them as they're in the R&D and technology side. And then that sets us up for continued growth in the future as these new programs come online and the older programs sunset. It's just the nature of our business. We understand it well. We are constantly investing in technology in order to be on the forefront with our customers, making sure that we are providing them the best technology as they address the changing threats that they have. And as we win that business, then that turns into longer-term programs. And so we think we're really well positioned for the future.

Well -- and just to get a sense of that, I mean you're guiding to 5% to 6% top line growth this year. We're looking at -- you've had big backlog growth, and that's very supportive of the top line growth. But if you look out 3 to 5 years and think of a flatter budget environment, can you give us a sense of the kind of growth you're expecting to see? I mean is something like a 5% to 6% top line sustainable?

Well, Doug, you're right on the mark that we really are in a pretty good growth cycle right now. I mean if you just look back a couple of years, I mean in 2018, we grew 8% over 2017. And then last year, we grew 11% over the year before. And this year, as you said, we're out looking about 6% sales growth over a very strong 2019. So that says we're in a growth cycle right now. Our backlog continues to grow. In our January call, we talked about the fact that we expected our backlog to grow from its year-end value, from $144 billion where it stands today to approximately $147 billion. But we also mentioned in that call, if we were to get the PAC-3 order, the multiyear order, that we would increase that backlog. Well, we did get that just a week or so ago. So if you put all that together, then we have a chance to approach $149 billion to $150 billion of backlog at year-end 2020 for a company that's roughly $63 billion. So you can see how much pretty good long-term growth that, that sets us up for. And normally, our backlog turns over fairly rapidly, but the composition of this current backlog goes out further than normal. We track that very closely. So I currently see significant opportunities in front of the company. As I mentioned, our portfolio is very strong. You've got the DoD budgets that are -- that have been on an upswing, and we have got the strong backlog. And a lot of things that we have are in a production mode and they're progressing well, like the F-35, like air and missile defense and tactical missiles. Now you asked about 3 to 5 years out. That's a little far to forecast because I can't really give you any specifics on that, but I do believe that we've got the potential to continue to grow as a result of our portfolio, continue to grow with this strong backlog of work that we have. We've got a very significant international component. 28% of our business is outside of the U.S. And we're going to continue to focus on engineering and innovation and all the work that we do to keep our portfolio relevant and bring new work online. So I think we've shown historically that we've done a good job of identifying opportunities and identifying the investments that we need that will then lead to those opportunities and bringing those forward. And we're going to continue to focus on technology. That's the lifeblood of our company, and we're going to continue to focus on that and continue to deliver growth as we go forward.

Well, we've got a couple of questions -- actually, a few questions coming in on the topic a lot of people are thinking about, and that's your leadership transition. Can you talk about how you thought about the timing of your stepping down and how you plan to ensure that this all goes smoothly? And then lastly, there's a couple of questions on what are your plans after you step down.

Well, first of all, Doug, just to get at the timing of it, I think it's absolutely the right time for a leadership transition. It's really pretty much in line with what you see at Lockheed Martin. We're -- we have a very disciplined approach to leadership transitions. If you recall, I took over in 2013 as the CEO, and so I'm in my eighth year. And Bob Stevens, before me, he served 8 years. So -- and we always -- we have a pattern of putting in an Executive Chairman alongside a new CEO so that we've got that support to the CEO transition, and that's what we're doing here. On June 15, Jim Taiclet will take over as President and CEO of the corporation, and I will move into the Executive Chairman role. And I'll serve in that role for several months, at least through the end of the year and beyond to support Jim as he's -- in his role as CEO. So we've got a very structured and smooth transition plan in place. Jim, as we've highlighted, is a tested and trusted CEO as he comes into the role, and he's been the Chairman and CEO of American Tower for 17 years. So he knows the CEO role very well and has performed extremely well, strong business acumen, great successful track record. But moreover, what he brings to the job is a military background. He was Air Force Academy graduate. He actually flew a C-141, which was one of the Lockheed Martin products when he was in the Air Force. He served in the aerospace and defense industry for a number of years. He headed up businesses in Honeywell and Pratt & Whitney. He knows our business. He knows our markets. A few years ago, I approached him about considering joining our Board. And he joined our Board about 2.5 years ago and immediately stepped in and became a potential candidate for CEO in that role, although he didn't know it. Certainly, other Board members were observing that as we always look internally and externally in looking at potential succession candidates. And he is coming in at a time when our company is strong, it's stable. In spite of the COVID-19 pandemic, we are very strong financially. We've got a lot of flexibility. We've got a seasoned leadership team that's been in place for many years. As I mentioned, this record backlog, a very vibrant workforce, we -- our portfolio is well aligned with our customers' needs. So I feel like it is the right timing. For me, personally, I've been with the company 37 years. And in my years as CEO, so a logical time to make the change. We are working closely, Jim and I, already. He has not stepped out of American Tower just yet until he comes to join our company. But because he's on our Board, he has already had insight for the last over 2 years into our strategy, into the inner workings of our company, the policy issues we face, the business issues that we face. And so he is now in the midst of getting some in-briefings from our leadership team on a variety of functional organizations that we have just to -- an area that -- just giving him a little deeper dive on direct reports to him. And we've been working on transition plans for his first several days in the job, from working with people like yourself and your team on introducing him to those in the investor community that don't know him, although many do because of his role as the Chairman and CEO at American Tower. Those in our industry may not know him as well. So we'll -- he'll be out on the road and we're on the virtual, whichever makes sense at the time, to introduce himself to you. We're also doing some transition with him on employees. We'll make site visits, meet with employees, his media transition, his work with customers, both domestically and internationally and with members of Congress and others. So we are doing all the right things to make it a very smooth transition. I think it should be, frankly, transparent to the investor community because, as I said, he's a -- got a strong track record. He's very trusted CEO today and will step into the role. Our Board has identified him. And I'm really grateful to our Board and I'm -- for selecting him to come into that role because he will -- he has that passion for our mission and our values and our people and our customers just as I do. And it's so critical for the top of a corporation like ours. So he fits right into our culture, and I think he's just going to do a fantastic job in taking the company to the next level.

Well, if I can switch for a minute to the F-35. So over the years, the F-35 has been a huge growth program for you. It's now close to 30% of your revenues. But as we look forward, we're heading to the point where we -- it looks like we're going to reach more of a steady-state production rate. The sustainment obviously is going to be an important role for you. But in sustainment, you're going to be reducing your -- at least targeting reducing your dollars per flight hour as we look at the next few years. How should we think about F-35 growth from here? Is this something that's sort of -- we see sort of flattening in terms of revenues? Or do you think there is still a significant growth trajectory over the next few years?

Well, let's kind of put the F-35 program in perspective. As you mentioned, we've got the production element, but we also have sustainment and development. I mean while we finished the initial development of the system design and development phase, we continue with programs, platforms like the F-35 to continually keep them modernized and upgraded as the threat changes, as we -- as new weapons come out to be integrated, as new software upgrades are needed. So there's really 3 elements, Doug. I'll start first with the production quantities. Yes, they will peak in a few years. They haven't peaked yet. And so we're going to continue to see sales growth associated with that. And then the development and sustainment piece will also contribute to sales on the F-35 program. So we expect to continue to grow in sales. And as you look at the ramp-up of sustainment, you look at continued development opportunities and activities that are going on with the program, this program is really in a solid situation of growth for -- and contribute to sales for many years to come. We -- if you just look at the opportunity selling new aircraft, we've seen continued strong international interest. Poland just completed an expedited procurement process for 32 airplanes, and they signed an LOA with the U.S. government, and then -- that's a letter of offer and acceptance. And then Belgium was added 2 years ago for 34 planes. Japan increased their desired purchase quantity. They added another 105 aircraft, taking them to 147. We're in the final stages of the Canadian competition, and that's an opportunity for 88 aircraft. And then Switzerland, Finland, Spain, they all have competitions that either are in process or planned as well as a number of other countries that continue to express interest in the program. So I think from a production side, while the rate may peak, we're going to continue to have production quantities grow from where the program is as a program of record of roughly 3,300 aircraft could continue to grow for some time. If you then look at sustainment, sustainment is -- that's a scope that's really pretty broad. I mean we are still standing up bases. We're only about 50% through standing up the bases for F-35s as they are going to various countries into the services. And we continue to manage the spares process. All these aircraft, we have about 520-plus that have been delivered. They need spares. They need to be -- some of the older ones that were delivered several years ago have to be retrofitted with the new upgrades and software and other things. And then we're going to be doing preventive maintenance on those as well. So when you think about that, we're going to continue to see continued growth on sustainment sales for some time, and it will still be strong. If you think about the next 5 years, we're going to have over 1,000 aircraft that have been delivered. And think about sustaining those with all of the spares and maintenance and upgrades and retrofitting that have to happen in the future. You mentioned the cost per flying hour. Yes, we are driving that cost down. We've taken a lot of actions in conjunction with the U.S. government on driving the cost per flying hour down. We've set a target of -- in the year 2025 to get down to $25,000 cost per flight hour. And the way we want to do that is through a performance-based logistics program where we get a 5-year contract to do the logistics support for the aircraft over 5 years. That allows us to invest and our suppliers to invest in process improvements and ways to continue to drive the cost down and to improve the mission capability of that aircraft. And if we get a longer-term visibility, then we can take more risk on the part of the F-35 team to make significant reductions in the ultimate cost to the customer. So on that PBL, as they call it, performance-based logistics, we're in the preliminary stages of discussions with the government. We're really very hopeful about it. They seem interested. It's not a new concept. It's been used on many programs in the past both with the U.S. government and other governments around the world and has a great track record. And we set this target of $25,000 per flight hour. And that's not unlike our goal that we set some time ago on the production side of an $80 million aircraft, which was a goal that many consider that couldn't be achieved in the past, and we achieved it a year earlier than we committed. So we have that same kind of focus for sustainment to continue to drive that down, to bring the innovation that we need to and the rigor and the automation and data quality and systems and ways to predict failures more quickly and be able to make changes before you have an issue and also to make it more affordable overall. So we see our sustainment sales. They've been growing at a high single rate -- high-single-digit rate for the past few years. And we expect that at some point, we're going to get into the double-digit territory. And the PBL would be a bigger help for us in terms of that side and getting -- improving our margins as we take that on. I just wanted to go back again to talk a little bit more about production quantities because I mentioned about the 18 to 24 aircraft, but I didn't want to say we are on a plan to grow to a higher rate on F-35 production. So while we'll have this temporary lull during the COVID for the next 3 months or so, we plan to grow at about 170 aircraft in 2022, and we have the capacity to build over 180 aircraft a year. We may have a little bit of additional tooling that we'd have to buy, but we could get up to 180 a year. So if we sell these additional international aircraft, you could see us getting up to that rate. And we know there's still a lot of demand out there. But again, I just want to reiterate that the 18 to 24 deliveries that we're going to not make this year that we gave guidance on in our financial metrics, it's already reflected in our sales, in our cash, in our earnings outlook. So it's not anything new. And I just want to make sure that's clear to the investment community. We don't -- we're not reducing our expectations beyond our outlook that we put out with our first quarter results. So that's a big picture on F-35. Hopefully, that answered your questions, Doug.

No. That's very helpful. But did you say that you expect that the growth rate of F-35 revenues, that you actually expect that to increase? Is that -- was that -- did I get that right?

Yes, yes. So we had originally planned to deliver 140 aircraft this year. And then we would continue to go up to 160 to 170 by 2022 and that we could -- we have the capacity to build over 180 a year. We're going to get back on that rate increase. We're just in a lull for about 3 months here while we let the supplier delays catch up and we get that back in place so that we don't -- we didn't shut down our production line. We kept it warm through this process to allow that -- those deliveries to get in. And then we'll get right back on that rate. And that rate continues to increase over the next few years.

Well, I want to go to -- we've got a few questions that came in on international, which, clearly, are very important. It's very important for you all in Missiles and Fire control and F-16, in addition to the F-35. But the questions are more about if you look at low oil prices in the Middle East, we've seen low oil prices affect Middle East defense budgets in the past. You've got in countries all around the world, they have their own spending pressures due to COVID-19, which could affect their budgets. What's your sense when you look at your international business how countries are thinking about their defense budgets and how it can affect you?

Well, we still see strong international demand, Doug. What -- could there be budget pressures downstream? Potentially. But as I said, the first order of any country is to protect their citizens. And we have not seen a backing off of expenditures on defense from our major customers around the world. In fact, you mentioned Missiles and Fire Control. I mean we're seeing -- expanding our production lines for some of our key capabilities like the Hellfire and PAC-3 and GMLRS and JASSM. And I mean a lot of that has to do with the U.S. government as well as our international customers who are replenishing their stockpiles of these systems so that -- so those orders continue. I mentioned the F-35. We see continued focus moving forward on fighter competitions on -- and even countries that already have F-35s looking at adding additional F-35. And so CH-53K, the heavy-lift helicopter, is really moving forward on looking at their competition for helicopters. And we think the CH-53K, there's a strong opportunity there similarly in Germany. And then I would just point to a really important program, and that's our F-16. We moved that production line to Greenville, and we're going to be delivering aircraft out of the Greenville, South Carolina. We're going to be delivering aircraft out of that line by late 2021. We got an order from Bahrain for 16 aircraft. But just to run that out, I mean we've got over 100 aircraft that are now in a position of F-16s in that line and their international customers. So Slovakia has given us an order for 14. Bulgaria finalized their buy for 8. And we could see getting to a steady rate of production. You could see 14 aircraft delivered a year off the F-16 line. And you probably heard us talk about some other potential customers like an African nation that's looking at new planes as well as upgrades. And there's a potential -- that's another 25 new aircraft. Taiwan is an opportunity to continue an opportunity there. They're doing upgrades, but we expect they are also looking at new F-16s to the tune of 66 aircraft. India is still -- we're offering them a customized F-16, the F-21. That competition could take place in the next year or 2. That's over 100 aircraft, and it's a special aircraft in that it's got some specific capabilities that address unique needs in the Indian Air Force like aerial refueling probe or cockpit upgrades, things of that nature. So it's an F-21. And -- but when you think about that, that's another 100 aircraft that -- of F-16 sales that we could potentially see. So when I look at F-35, air and missile defense, F-16, there continues to be a pull for our radars around the world and other things, it's because the threats are not receding. They're not diminishing. They're actually accelerating, and they're more unpredictable than ever. And I think countries will continue to buy -- international countries as well as U.S. countries, they'll have to make choices on budgets as countries always have to do. But I think national security is right in line with economic security. And so my expectation is they will continue on their procurement plans for defense.

Well, switching from that, there are a couple of questions that came in about space. And your backlogs in space have gone up a lot. We're seeing it's the fastest-growing part of the DoD budget this year in 2021, 2020. So you had sort of low growth for a while, but now it seems positioned to be quite different. The questions came in also, the formation of the Space Force. Does this impact your thinking there? So could you take us through what the growth opportunity looks like for Lockheed Martin in space now?

Sure. Well, space is getting quite a bit of attention these days. And I think one of the main reasons for that is the National Defense Strategy and the National Security Strategy, both of them highlighted space as an area of special emphasis. And when you look at our backlog, we increased it by $6 billion last year just in the space component of our business. That's more than 25% over the year before, over the end of 2018. We also -- when we look at it in our space business itself, we saw some growth because the AWE customer in the U.K., the Atomic Weapons Establishment customer, they gave us a 3-year authorization. And so we saw some growth there. And then we also saw some growth from some classified and hypersonic orders. So a lot of orders and backlog in the space part of our business. But I believe when you look at our portfolio, I believe it's really very well positioned given the national defense and national security strategies that I mentioned. But it's more than that. It's also -- when you add in this -- the emphasis on deep space exploration to Mars, I mean today is a historic day. We hope to see the launch today that SpaceX has. And -- but beyond that, the whole Artemis program that NASA has underway, we're a very important part of that with our -- for the lunar missions and missions to deep space explorations to Mars with our Orion vehicle as part of Artemis. And so that's a critical element of our business. And so we've seen -- we're going to see how things progress, but I really believe we have a leadership position in this area. Now you asked a question, could we continue to grow like we have in the past. If you look at OPIR, I mean that's an area where we do expect growth this year. And when we do our long-range plan, which we do in the fall of each year, we're going to get a better out-year perspective there. But I would think that it should continue to grow maybe at a slower rate, but we expect that to continue to grow. And as far as margins, we're hopeful to maintain our margins in the 10% range, but I'm not sure that we're going to exceed that level. So overall, look at space, the -- you mentioned Space Force, I think. How that impacts our thinking, I just think that's just -- it's just another indication of how important the space domain is by creating Space Force and having the focus of resources on that element of national defense. So we're right in line with that and supporting that. I think it makes a lot of sense.

Well, I want to -- just got a little bit left. And I wanted to finish up more kind of thinking about investment and cash. And -- but first, if you look beyond this crisis, beyond the pandemic, when you come out the other side, do you expect to see any shifts in your priority? And I would say -- priorities, I would say as they relate to cutting costs, to different ways you might invest. How do you see the other side of this from an investment standpoint?

Well, we're already looking at that. And we have, at the outset, I mean what this -- like every other company, this element of our -- where we've had people working remotely. And I directed people to work remotely who could so that those that have to go into the production spaces or classified spaces or labs or things like that to do the important work that they do that they can't do remotely, they have less risk during the pandemic. But we're learning through that, as I know a lot of companies are, on what work we can continue to do remotely. So does that mean that we don't need the same footprint? Does that mean that there is some work that doesn't have to be in a facility? And we're working on that as we speak. I mean it's not just a return-to-work plan for those who are working remotely that will ultimately come back in the workplace, but it's more stepping back and saying, "Well, what does the future of work look like? And how do we put in place the things that we need to continue to take advantage of this environment?" We have seen, by the way, obviously a reduction in travel. I find myself in a lot of meetings that are virtual with the Pentagon, with phone calls with members of Congress. I mean we've made this work. I won't say that it's ideal. Sometimes face-to-face is better, but it has taught us some ways that we can work to be more efficient. We're not going to be sponsoring air shows this summer that we typically do. So we can redeploy those resources to other parts of our business. We're looking at how we can continue to take our cost down. This is an ongoing thing with our business, Doug. I mean it's not something that is just all of a sudden. We are always looking at how we can continue to be cost effective and cost competitive so that we can win new business, and we'll continue to do that. But it has given us an opportunity to reflect on the way we work, and we'll continue to do that.

Well, and as you look forward, I mean you had said that had it not been for the virus, you probably would have increased your 2020 cash guidance. Can you give us a sense now, putting this COVID period aside and given the things you were just talking about, how should we think of growth in free cash flow over the next few years?

Well, we -- as we look at the cash situation, I already told you that we were in good shape where we could continue to accelerate cash. So I think you know that we -- we've seen a lot of good growth over the past 3 years. And it's been the earnings associated with that growth that has caused us to contribute to strong cash. But we've also been working hard, and I give a lot of credit to Ken Possenriede, our CFO, on reducing our working capital, especially as we get into 2021 where we have -- we got a pension payment that's required that was there even before the COVID impacts. But your question, can we grow free cash flow in the next 5 years, well, our planning process only takes us out a few years, but I can't go that far out. But I can say that we haven't changed our expectation for 2021 and 2022 that I commented on earlier. We are -- we do expect that we are going to have cash, a plan on cash going forward. And so we haven't taken that down. And everything points to continued growth in cash from operations. And there is a caveat that the Tax Cut and Jobs Act still has a law in place for recouping some of the tax cuts through tax on R&D. We're looking at that hard. We think that needs to be clarified. We don't think that the way it's written is what they intended. And so we'll continue to work that. But overall, we're in a very strong cash position, and we're staying true to point on our outlook for cash going forward.

And is M&A -- how are you thinking with the strong position in cash? We haven't -- there hasn't been much M&A since the Sikorsky time frame, but how do you think about that now?

Well, we always look at opportunities that would give us more capability, market access and things like that. So we always have an ongoing assessment of potential acquisitions. I think you know we have a ventures organization where we take positions in smaller companies for getting insight to their capability and that sort of thing. But in terms of an acquisition on the part of the corporation, we'll just continue to look at it. I frankly am very happy with the portfolio, as I said earlier. It's -- we have a very strong portfolio today. It's -- we're very well aligned with what we see as our customers' needs. And we'll continue to invest in our portfolio through research and development through some of the capital expenditures we're making and, through that, I think keeping our programs relevant and keeping them well aligned and investing in things like hypersonics and directed energy and autonomy and AI and a range of multidomain operations where we can support that ISR. All of those areas, we're going to continue to invest in, which keeps us well aligned. But I won't -- I would just say that we're always paying attention. We have a regular rhythm of looking at is there an opportunity that we think would broaden our company through an acquisition. And so we'll keep an eye on that. We certainly have the financial flexibility to do that if we really determined something that makes sense for us as a company.

Well, with that, I think we're about out of time. So I want to wrap it up by, first of all, I want to tell everybody that they should go and complete the survey, the Procensus poll at the end, and see the results. And then I want to thank you, Marillyn. It's been great having you join us, not just this time but over the years when we can do it in person. And I really appreciate you taking the time to do this. Thanks.

Thank you, Doug. Thanks for your kind comments, and it's been a real pleasure working with you, too. Thank you very much for the opportunity today.

Okay. Okay. Thanks. Take care. Bye.