Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

Terrific. It looks like we are officially live. So thank you this morning for everyone joining us. My name is Peter Arment. I'm the senior aerospace and defense analyst here at Baird. We are very excited to be hosting Lockheed Martin here this morning. And with that, we are hosting Jim Taiclet, who is the President and Chief Executive Officer; Ken Possenriede, the Chief Financial Officer; and Greg Gardner, Vice President of Investor Relations. Gentlemen, thank you very much for joining us. And Greg, I'm going to kick it over to you, so we make sure we get the forward-looking statement in, please.

I think I'll hand it to Jim. I think he can take care of this.

Yes. Thank you, Peter. It's great to be part of your conference this year in a virtual way. I hope next year, we can do it in person. I just want to take that quick moment, as you said, to refer to our forward-looking statements, then we can get into the conversation. So we posted a chart on our website and on the conference website regarding the forward-looking statements. I want to just start with a reference to that. Because as you know, I may be saying some things today, as well Ken, that are more forward-looking in nature, and they may not reflect actual results. And we'll try to highlight the things that you need to know as investors in those forward-looking statements, so I refer everyone to our SEC filings as well. That should cover it, Peter, and I'm ready to get right into your questions and content.

Thanks very much, again, and welcome, and thanks for being here, Jim. And yes, I echo your comments. Hopefully, next year, we'll all be live. This has been quite an eventful year for numerous reasons, but not the least of which was you taking the helm at Lockheed Martin as CEO, I guess, a little bit more than 5 months ago. Certainly, you've had a long successful -- very successful tenure as CEO of American Tower, and investors have really appreciated that. It seems though with your 2 last Lockheed Martin earnings calls and multiple interactions that you've had with us and investors since you arrived, you really do seem like a long-term A&D veteran as well.

So I think a good place to start for us is to hear how you see Lockheed Martin's current position in the A&D sector. And more importantly, what we should be looking for strategically as the company goes forward under your leadership.

Well, sure. I mean I'm really pleased to succeed Marillyn Hewson as CEO of Lockheed Martin. And it goes back to my earliest days of my career. I flew the Lockheed C-141B Starlifter. I've got 5,000 hours in the airplane, super reliable. We introduced a low-level training and tactical departure and arrival system into the Air Force using the C-141, feel like a fighter jet in those regards. We did air refueling at night and during the day, and it was a great, great airplane. And I happen to be 1 of the 4 airplane package that took the first troops into Dhahran on the first night at Desert Shield in a C-141. So I'm really committed to the company as an ex Air Force pilot and a Gulf war veteran. And I've watched it over the years and was really honored to be on the -- asked to join the Board a few years back and really pleased when Dan Akerson and Marillyn Hewson asked me to consider succeeding her. So that's, my view of the company. I actually frankly and thoroughly believe that it's the leading aerospace and defense company in the world based on its innovation, its current capabilities. It's -- as Dan described it to me, our lead director, it's a national asset, and he's absolutely right. And so what I'd like to do with Lockheed Martin is to bring it as a bridge to the U.S. commercial technology and telecom industry and accelerate our advancement as a country and as a defense enterprise more broadly into the 21st century using technologies that we can link to our platform position at Lockheed Martin to really make that a huge success. So in my mind, perhaps, we deliver the most essential product anywhere, which is deterrence. And I really look at Lockheed Martin as a deterrence company. And if we can augment what this company can do today, with the best and brightest of U.S. technology, whether it's 5G, artificial intelligence, edge computing, et cetera, it will really be a valuable thing for the country and a valuable thing for the shareholders.

That's very helpful. This probably just seems like a good time to kind of delve into your 21st Century war fighting strategy a little bit. We've heard some of that a little bit on the earnings call, but maybe a little more details, how would you describe this concept or vision that you're kind of laying out?

Sure. So if you first look at the adversaries that are developing their own capabilities, and primarily, it's China with Russia, Iran and North Korea involved, they are endeavoring to catch up to or maybe even exceed our ability to conduct our defense and protect our national interest in the interest of our allies. And their approach is to actually bring their technology, telecom and defense industries together very seamlessly with their military or operations and organizations. And I don't necessarily see us facing them toe to toe, so to speak, slugging it out in a future warfare scenario. But what I think they'll endeavor to do is advanced in asymmetric warfare and exploiting the scenes and weak links, not necessarily in our platform specifically, but in our systems and our interrelated interoperable defense posture. So that's the place they're going attack. And again, I think Lockheed Martin is really well positioned because we have platforms, so to speak, in every domain whether it's undersea with our submarine combat systems all the way up to geosynchronous orbit with our satellites and everything in between. We can actually link together our own platforms first in a seamless way that protects those scenes and strengthens those weak links and bolsters our defense posture with the Lockheed Martin portfolio. And then I think if we can work with the tech industry to establish standards, we could actually expand this to other OEMs and link their platforms into this network as well. So that's kind of the concept. And it's driven by our adversaries' aggressive posture and what I think our defense enterprise needs to do to match and defeat that. The benefit for shareholders here will be is if you followed the telecom industry in its development, say, 5G or AI is another example, those that set the standards in the standards bodies and get the patents that create the interfaces and establish the consistencies needed for these kinds of things are awarded economically for that. And again, I think we're in a full position to be able to drive that forward and get the economic benefit as well and work with our customers to do that.

Yes. That's helpful understanding the kind of bigger picture. What goes into really the making the 24th Century war fighter vision more a reality for Lockheed Martin.

So I was really pleased to see that many of the elements are already in process here. So for example, our space business does do extensive communication and especially in the classified spaces that I was able to learn more about when I joined management full time. We've got a lead there, I would say. And we can extend that lead into the aerospace domain through the F-35, for example. We're already doing it with the U-2. The Air Force announced a successful trial that we did with them there very recently. And we can extend it into ground and surface and subsurface, both on land and at sea. So we've got all the elements and have made advancements in many of those. And 1 example I can give you that we did announce and we're able to because it was unclassified was that we really -- we recently, in an exercise in the Pacific theater with our customers, demonstrated to them that we could extend the range of PAC-3 missiles using band radars and processing -- core processing to basically expand the defensive perimeter of the Patriot battery, which to the war fighter is just 1 example of how you can network separate systems in an integrated fashion and not only protect the seams that you have or the weak links that might be in your control system and your interoperability between services, but you can actually turn those into an advantage. So what we're building here at Lockheed Martin, and we've got a really terrific Chief Engineer, Rod Makoske, who's been at the company a very long time, and he's complemented by our Chief Technology Officer that works with him and who's, by the way, recently ran DARPA. And so Steve and Rod are together building this road map with our portfolio that will bridge our customer to mission capabilities that they don't have today and to expanding the envelopes like I just described that they don't have today. And we will be building prototypes and demonstrations and participating in exercises along that road map to link these together. Now this is going to take years to do, but I think we can get a leadership position and driving it out forward. And then the second piece of it is also then -- and we're well on our way on this process, is to bring some of the leading U.S. tech companies into our team to help us accelerate the adoption of, say, the 5G standard and the adaptation of the 5G standard to 5G.MIL standard that I've been talking about to get us there much more quickly than we could do as a defense industry ourselves. So there's the platform and connectivity piece that we can drive ourselves, augmented by the alliance and integration of the U.S. tech industry and building sort of a world-class alliance, if you will, to deliver on this vision in a faster fashion. Those are the 2 biggest pieces.

Understood. How do you view the capital deployment folding into this strategy at Lockheed Martin?

Well, I'll just tee it up and turn it over to Ken on how we would implement. But he and I are of one mind in that we will, first of all, allocate capital to support our dividend, which is the strength of the company. And then after that, we're going to look at cash flow per share and ROIC in tandem and across the available opportunity set, whether it's CapEx, IR&D, M&A and ultimately share repurchase and use our $8-plus billion a year of cash flows that we bring -- we drive to this company in the most optimized way across that portfolio of opportunities. So Ken, I'll turn that over to you for a second.

Sure. So yes, Peter, and it starts with cash generation, and we have been very pleased with our process and the outcomes that we have seen up to this point. And I gave a little color on the last call. Just based on what we see right now, we'll generate greater than or equal to $8.1 billion next year, and that's after $1 billion pension contribution. And we see a trajectory north of that for '22 and '23. And as Jim stated, we do a holistic look at our CapEx spend. We ensure that there is a return on invested capital for that investment. And then the next priority for us is our dividend, 16 years in a row of double-digit growth. We're very pleased with the yields we have. We just recently announced an 8% increase for the next 4 quarters, which should make our investors proud. And then it comes down to share repos. Right now, we're thinking about $1 billion to the year that would ensure that our share count does not dilute and stays basically where it is. And we then, frankly, from a balance sheet standpoint, we believe we have the firepower to complement the strategy that Jim described, organic investments or inorganic investments and do that by taking cash off of our balance sheet. And the last point I'd make is we are not going to allow cash in the future to grow on our balance sheet. We will opportunistically look for ways to spend that money, whether it's organic, inorganic growth or returning money back to the shareholders.

Thanks for that, Ken. I think that's really helpful for investors. Jim, I wanted to circle back to you on -- you mentioned 5G. The company certainly has had a long history in innovation and technical leadership, and this concept seems to play right into your strength. So the company seems to embrace kind of network-centric, you mentioned 5G elements, and it looks like you might have some recent successes in this area. So maybe if you could just highlight some of those, that would be great.

Sure. And the analogy here is that in the commercial telecom and tech space, we're already working on an ultimate 5G network. And that has to include artificial intelligence capability and distributed computing in addition to the 5G telecom transmission standard. But what all those things do in combination is they allow you to drive bandwidth per Hertz at a much, much higher level. So the throughput of your mobile signal is on the order of 10 to 100x greater than it is in 4G. And also, there's a latency benefit, meaning the signaling time in between, transmit and receive, goes from at best maybe 10 to -- between 10 and 50 milliseconds to 2 or 3 milliseconds, which is a huge benefit. So the latency and throughput benefits and then the spectrum management and network slicing you can do with 5G actually enable autonomy at scale at one level. They enable burst transmissions with significant -- multi-gigabit throughput per second. So from a defense perspective, if I'm flying an F-35, I don't want to have my data transmitter on nonstop because that makes me a target. But if I've got 5G on the airplane, in a second, I can get a gigabit of data that can then give me my next mission leg. And I turn that off, again, within that second, and I can fly safely. So there are a lot of benefits, including autonomy at scale, which is what this commercial network is going to be designed to do for driverless cars and things, where we can apply them directly to mission requirements and elevate our deterrence capabilities by using these technologies. So those are some of the ways to go about it. And I think there's real benefit to the customer. We're working with them at a senior level, too, to try to get them to understand what the opportunities are in this area to fast track these technologies into platforms that we have today and we'll have tomorrow.

Yes. We -- those of us on the outside had heard of 5G. But 5G.MIL, you certainly put that on the map for us. So we'll look forward to seeing how that evolves and what Lockheed Martin will be doing on that front. Maybe if I could switch over to maybe a little bit of bigger picture on the defense budgets. The 2020 election, I think, officially is now behind us. We have a change in administration and likely a split Congress. The defense budgets are always a hot topic, and I guess even today more so. So after several years of budget growth appears a top line and the budget will be flattening. How do you view Lockheed Martin position to grow profitably while delivering affordability in this environment?

Sure. Well, our long-range plan, which goes out 3 years and that Ken has been articulating, it assumes a flattening defense budget. And we intend to continue to drive our sort of premier programs forward in that budget. And we actually did a downside scenario. This is a planning exercise that demonstrated if priorities happen to change within that budget, that Lockheed Martin, it turns out, will be still in very good shape based on our long-range plan. So I'll let Ken speak to that a little bit. But we expect a flattening defense budget, we did pre-election, no matter which party ends up actually maintaining the White House. And in 2021, this is our expectation. We're ready for it, and we plan for it. Ken?