Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

Okay. I think we should be live here. So I'm very happy to have with us Jim Taiclet, the Chairman and CEO of Lockheed Martin as well as Ken Possenriede, the CFO of Lockheed Martin. And I think to start with, it would be great, Jim, maybe to talk a little bit about -- you've now been CEO for about a year. And so as you've seen the company, I mean, you knew the company before, but as you've seen it close up, how have your views changed? What do you think are the big opportunities and challenges right now?

Sure, Doug. And great to be with you, even though virtually. I describe my first year at Lockheed Martin as incredibly encouraging, actually. I've been encouraged by the tremendous resilience of the workforce, delivering for the customers and investors throughout the COVID-19 pandemic. And we've got some sites where there's upwards of 20,000 people that were showing up to work in the worst of the pandemic and got the job done. So that was fantastic to see. I've been encouraged by the strength and breadth of the platform position across all the business areas. That was some of the classified committee in the past, and even there, I did not fully grasp the breadth of the strength of, say, our classified programs, among others that I've gotten more and more and more about. So the platform position is really strong. I've been encouraged as I learn more about the advanced technical and engineering capability of the company, too, Doug, because when you get into the engineering and signs that we're developing, it's beyond what I expected, frankly. And so with all that, I'm further encouraged as a result of our platform is this position which we've got with all the U.S. services and with a lot of our allies. We combine that with our tremendous technical skills here. We're really well positioned to execute on my 21st century [ forward-fighter ] concept that I developed before I arrive. It's really the reason I came. I think that this company is positioned to benefit the shareholders and the country and the Department of Defense by accelerating advanced technologies into the defense enterprise. And I think therein lies the opportunity for us, Doug, is to drive sustainable, resilient growth with that combination of great platforms and a technology plan that really accelerates the latest into what we're doing.

So on Friday, we saw the 2022 President's budget. Can you give us your thoughts at this stage about what that likely means for Lockheed Martin?

Sure, Doug. I'll start off by providing the framework and maybe let Ken speak to some of our individual programs. Given this geostrategic situation that we're all facing, and I anticipate that there's at least a nominally growing defense budget we can expect over the next few years. And the starting point is that FY 2020 budget that we alluded to. As released last week, it's up about $11 billion from last year, about 1.3% higher in nominal terms. Moreover, Lockheed Martin's approach, I just kind of outlined a few minutes ago, seems to be very much in sync with the new administration's priorities. They just also, along with the budget, released the interim strategic guidance document. It emphasizes the turns, investments in emerging technologies like artificial intelligence and secure 5G, modern weapon systems that are going to be survivable and a high-end future threat environment that we're going to be facing. So those all line up with Lockheed Martin's strategy and priorities as well. So with that, I think that the climate and the situation is very positive for the company. And I'll turn it over to Ken to describe how we fared in some of our programs on that initial budget.

You bet. Thanks, Jim. Doug, just a little housekeeping matter, so I don't get us all in trouble. We should be seeing a forward-looking statement coming up. And if it does, it doesn't look like it's coming up to that, so that's okay. So please refer to our -- our quarterly 10-Q that we just -- thank you, that we just submitted when we did our last call to check any risks or, frankly, any opportunities that we have out there that could alter what we're going to say today. So just back on the budget, as Jim mentioned, it's up $11 billion from last year. I'd say on the whole, our sense is it really is in line with what our expectations were. They asked for 85 F-35 sets, that's really what we saw was going to happen. C-130s were in line with where we thought things were going to be. The combat rescue helicopter, the Black Hawk, the heavy lift to helicopter CH-53K, in line with our expectations. And in space, actually, a nice surprise for us in space was the human space flight, I've mentioned in the past, we've done some sensitivity analysis on our long-range plan, just some scenarios assuming you had a democratic win for the White House, what the tax implications would be, what some of the program priorities were and in space, that was a nice surprise. And if I could go around the horn, looking at this year, we see Aeronautics and Missiles and Fire Control, roughly growing at about 5% a year, which we're pretty pleased with. We're going to deliver 133 to 139 aircraft for the F-35, and I'm sure you're going to want to talk more about F-35, so I'll leave it at that. Strong sustainment growth this year starting to see some momentum for F-16. In Missiles and Fire Control, our strong growth is in PAC-3 and in precision fires and also the classified program that we talked about. It's a development cost-plus program today. But we're hitting all of our key milestones. And what we saw in the budget, we were quite pleased with. From an RMS standpoint, I mentioned those programs at Sikorsky. We're also seeing some strong growth in our training business. And then in space, only grown 1% this year, but -- yes, but is AWE, as you know, in the middle of the year, is going to get terminated and moved back to be nationalized with the U.K. government. If it wasn't for that, space would be growing 7% this year, and we're seeing strong demand in classified, strong demand at OPIR, strong demand at GPS, and of course, our hypersonics programs there. So on the whole, we feel pretty good with what we saw from a budget standpoint.

Well, perhaps just to put that together, can you kind of refresh us on what your top line growth does look like this year, particularly if we -- say, if we did it organically and we pulled out the awe change?

Yes. So our growth with AWE out for half the year is that 4%? It wasn't for AWE, we'd be mid-single digits. We'd be at 5%. And 3 guys -- well, actually, they're all driving it. It would be space at 7% without AWE coming out; Aero and Missile and Fire Control, up 5%, respectively, and then RMS at 4%.

Okay. And then one of the things that seems to be going on with the President's budget, and we've actually seen it happen in the last 2 President's budget is somewhat of a shift away from foreign structure to advanced technologies. And so I think, Ken, to the point you made, some of those things like the 85 F-35s is kind of as expected, probably not as expected if we went back 4 years ago. And then Black Hawk's down a bit. And so how do you see this shift playing out for Lockheed Martin? This real shift from an emphasis on foreign structure in the past, more new technology like hypersonics and space, which are, obviously, very important for you all?

Yes. So I'll take it. And Jim, if you want to pile on. So if you look at the investments we've made in the past, and let's just pick hypersonics, I think this corporation has done a very good job in the sense, Doug, that we actually formed an integrated product team to address this issue for hypersonics. And it wasn't everybody, if you will, going out for a pass. It was really, especially in the strike hypersonics. Think of that as the offensive weapons. You had aeronautics, Missiles and Fire Control and Space working together, one face to the customer going to the Navy, going to DARPA, go into the Army, going to the Air Force to lay out a road map, to lay out a vision of where we thought collectively, as an enterprise, we could go. And I'm not suggesting we ran the table, but we won more than our fair share of programs going in that concerted way. I think if you look at now on the counter-strike weapons, we're doing the same thing. And now we're bringing RMS into the fold because, of course, they have a lot of the ballistic missile technologies and platforms that are going to help us be successful in that arena. And I'd say, moving on to whether it's sixth generation aircraft, or how we're going to interoperate, say, a THAAD with some of our other products in our portfolio, I think we've done a nice job of bringing together the corporation with our investments and with our human capital to be as successful as we could be. And Jim, I don't know if you want to pile on or not.

Sure. Ken, I would just add that we call this the "One LM Concept," Doug. So we're trying to get the corporation to work together more than just among individual business areas as they've done in the past. So that's already well on its way under Marilyn's tenure. What we're doing and what she asked me to take the baton from her to do was to take this "One LM Concept" to the next level, which is going to be essential for us if we want to deliver on this network-centric approach that we're taking, vis-à-vis a platform centric approach that the defense enterprise has taken in the past. So the hedge start that we've gotten through the hypersonics program, some of the space integration that we've done before my arrival in other areas where the businesses have cooperated and collaborated, we're just going to take that to the next iteration. And what we're going to be doing to implement that is this network-centric approach, meaning we're going to take our platforms that are already highly desirable, programs of record, either already deployed or in the process of production deployment like the F-35, and we're going to make each of those, in addition to the platform itself, an edge compute node in a network centric system. And what that will allow our customer to do will be to bring network effects to our national defense in our enterprise and make it more of a deterrent to conflict and more effective if the conflict is to happen. And I know you understand these points, but we can talk more about them later, but the company is in really a good position to lead this because our platform presence, broad presence across all the domains, all the way from space, cyber, air, land sea and undersea across all the services and our allies that I mentioned. We're in a unique position to take this "One LM Concept" and go to the next level and really do something that's a leadership role in our industry here.

Well -- and I do want to -- I definitely want to get into that in a minute, but I want to back up for 1 second to, Ken, what you were talking about on hypersonics. When you all have had the 3 sort of open initial platform -- I mean you've won them all, all the first 3 out there. And as you go forward, obviously, a huge effort in this area, a lot of classified work, a lot of your peers are investing in it. As you go sort of to the next level in hypersonic weapons, you made the decision to acquire Aerojet Rocketdyne. As part of this hypersonic strategy. Can you talk about how Aerojet Rocketdyne fits into that to allow you to go beyond what you do now? And then also, where does this deal stand? Because we know, not everybody is happy with this acquisition.

Doug, I'll start off as a degreed but the last engineer. There are incredible benefits to putting together the propulsion system, with the glide body and a hypersonic missile system, offensive or defensive, and largely because of the issue of thermal management in these products. The heat generated by the propulsion system, the electronics inside the vehicle and the skin of the vehicle that generates heat itself, traveling at those speeds is the biggest technical challenge to developing effective hypersonic platforms. With our ability then to control and co-manage the propulsion system, with those other 2 elements, electronics and glide body heat generation, we'll be able to develop these products faster, more effectively and less expensively than if Aerojet Rocketdyne was on its own, for example. So that's the technical baseline of why this makes sense for, not just like Lockheed Martin, but for our entire customer base. There's a couple of other quick dimensions, and I'll let Ken elaborate on these. But from an industry perspective, Aerojet Rocketdyne probably doesn't have the will -- under its current ownership, which is private equity owned, the will or the financial capacity to invest in these areas and others, including Space, where Aerojet and Rocketdyne's a key supplier. So not just like Martin or the U.S. government, too, but to our own peer group, as you said, in the Defense and Space industry. So we want and need, I think, all of us, a healthier Aerojet Rocketdyne. It's a great asset, but we can make it greater based on our ability to invest, our engineering expertise that we can deliver to it, our production system that we can work with and our digital transformation, which we can apply to Aerojet Rocketdyne. I'll kind of stop there, but there's going to be benefits to the end customer, which is broadly the government -- there's going to be benefits for our peer group, but most of the companies that you would think of who'd would see this as benefit clearly. And then thirdly, we're going to be a more effective producer of Space and Missile products based on this acquisition. Ken...

Yes. so -- yes, so the only thing I'd add, Doug, is it was clear once we started having conversations with Aerojet Rocketdyne, that we both came to the conclusion, Lockheed Martin would be the better owner of that portfolio. And a lot of that is -- Jim already amplified. I'd just say a couple of other things. We have a fee-on-fee conversation with them. It's clear there's going to be synergies from that. Since we're not going to put fee-on-fee on our products anymore. You also have, as Jim described, a quality aspect to this when we bring our engineering and their production group together, we believe we'll be able to enhance the quality of their product. There's other synergies we see there to take cost out that'll ultimately go to the United States government. And equally important, we're committed. Our business case was dependent on it. We're going to continue to be a great -- and I'd argue, a better merchant supplier to our peer group. It is our intent our commitment to do that because, frankly, our business case wouldn't close. And we're looking forward to getting through the endgame. We got our second batch of questions from the FTC. That was expected. We're going through that process now. And we're hopeful we'll get to a good conclusion, that the latter part of this year, fourth quarter of this year, we'll be able to close on that.

So you're -- you envision this. I mean, there have been -- there are issues about some specific capabilities, Aerojet Rocketdyne that are unique to that business. So you're -- you feel that you have a solution where that will be carved out in a way that your competitors can access it. And, I mean, how are you thinking about doing this? Maintaining the merchant supplier of some ability of some very specific capabilities. And at the same time, being able to leverage the competitive advantage you get with hypersonics?

Yes. So we -- to answer your specific question, Doug, we have stood up an integration team. We did that with Sikorsky. We're doing this now at Aerojet Rocketdyne. Senior leadership meets every 2 weeks with that team. So there's 2 teams. One is the regulatory team. So we meet with them every 2 weeks to make sure we're answering and anticipating where the regulatory process is going. And then we have a battle rhythm for the integration of the team and where they meet is exactly to that point, where do we think we could put Aerojet Rocketdyne, from a business standpoint, from an operational standpoint, that will serve all the right contingencies of where this business needs to go operationally, so we could perform successfully, but also comply with being the most effective merchant supplier we can be.

Yes. And there's also a history in the company, Doug, especially the buyer or controller where this business will land in our plan. And that there are sensors and other products that MFC makes, that can be consumed inside the Lockheed Martin, but are also very competitive and often used by our competitors' products as well. So we've got a business that's used to doing this already for years upon years. And so this isn't new to Lockheed Martin. We know how to do it. And we intend to do it in a way that complies to the regulatory requirements that come down.

Well, I'd like to go back to the 21st century war fighting strategy. Because I think this is -- it's particularly exciting area, but it's not an easy area. And we've discussed this in the past. But when you look at the vision, say, jet C2, that is kind of out there now. And a lot of the things that Jim, you've talked about being able to do a lot more integration, the network-centric concepts. If you got rolled back aways, we saw a lot of these efforts, I would argue, on a smaller scale back with future combat systems with jitters, those didn't fare very well. And partly technology, partly organizational within the pentagon. What's different now that can allow this kind of a network-centric effort to truly be successful.

Sure. Well, Doug, first of all, the threat is self-evident. And the major competitors or peers, if you will, China and Russia as well. My view is they're already moving in this direction, where they're taking the best of what they have as far as commercial telecom and tech sector technology and driving it into their defense enterprises. So the competitor is already doing this, and it's a near peer competitor, and those are 2 aspects that weren't visible or occurring in the past when this was attempted in the Department of Defense. The second is there's leadership to the very top. If you read or listen to Secretary Austin's speeches, Deputy Secretary, Kath Hicks' writings or speeches. If you hear the Chiefs and the Chairman speak in the uniformed side, they're all speaking with one voice, on occasion, network, high-tech imperatives that they're facing. They know they need to do this and the leadership's now at the top level and across the civilian and the uniform side. As you said, it's got many names and acronyms. You had C2. There's a Project-Over-Mach, Project Convergency service, which had a different flavor. ABMS is the Air Force version and ours is 21st Century Warfare Concept. But I believe, Doug, that -- I get right to this notion of differentiation, what's different? Leadership's different. The threat is different. And the technology available is also different, and there's an example in tech and telecom of going from 3G to 4G to 5G, inclusive of autonomy of scale. This is already being done in the commercial side, what's envisioned here and what's envisioned in the Department of Defense. The difference is, in my view, the past attempts at this in Defense were top down, "Let's define an overarching set of standards and requirements for industry to go figure out how to implement," and that's an impossible way to do this. The way it's being done in the telecom and tech space. And the only way I think it'll succeed here is by building a product and technology road map over a period of time that then by doing that, creates an architecture that's open source eventually, and it's something that can evolve. It's not defined once and laid on top of everything. That never will work. So I think that's a differentiator again. But where we play in this is the span of programs, product, services, allies that we're participating with in Lockheed Martin gives us a larger platform to start implementing this internally. Demonstrating it to the customers and building the product and capability road map and showing them how incrementally this will improve the deterrence capacity of the National Defense and the effectiveness if the turn should fail. And I've got a number of examples of how we're actually doing that over the past year, but I'll stop there. That's the concept, and that's the difference. This is the way that's proven in the commercial technology space to work. We're going to apply it here, I think, for the first time in an integrated way.

Well, yes, and I find this whole space. I mean, this is way out there, in my opinion, on both the opportunity, scale and the challenge -- scale of challenge for both DoD and for the industry. And right now, as I understand it, the last I saw there was something like 54 different companies that have received awards. Just related to JAD-C2, not counting other things. So a lot of complexity here . Kath Hicks, she saw this way back in the Run Cell days, live, too. So she should assume to be very aware of some of the pitfalls here. But when you think of it from a Lockheed Martin standpoint, clearly, you're in a lot of the key platforms that have to fit into this. But are you seeing your role as participating in making primarily each of those platforms work within a system or it's actually much more of an integrator role. And I know you've talked about the 5G.MIL that you would kind of play a key role at that higher level.

Right. So I think the platform integration leads to a network level set of standards, right? So in other words, it's not flipping. You don't set -- again, you don't set the standard set of requirements and then have everybody work to that. We're intending to demonstrate with real platforms in the field and exercises and orange flag, red flag, real operational environments that we can increase capability of our platforms by networking them together, okay? Now we'll be creating, for ourselves a, set of architecture standards, interfaces, frequencies. We're going to use to do that connectivity, et cetera. So we're going to do it and demonstrate it. And the example that I use is how Qualcomm in the 1990s. So that was part of that one. I was at McKinsey, actually, with one of their customers, where they actually drove a change from TDMA technology to CDMA technology. It's changed. And how mobile networks were developed, and it gives us the technical performance standards that we now have today at 4G and 5G. They changed the whole industry by -- and Irwin Jacobs was kind enough to give me an hour, a masterclass on how he did this. But basically, it's the strategy we're going to use. We're going to work inside our own company, where we control the variables and demonstrate with real products and platforms, in their case, a real network they've built. That the benefits of doing it this way are so much better than any way that's been tried before, that we'll earn our way into driving a standard set. And by driving the standard set, that means establishing, working operational network mission capability that we're going to provide to the defense department as we go along on a road map. It's not going to happen all at once. It won't be immediate, but that's how we're going to approach this. So let me just give you a couple of examples, Doug, on how this is really happening. So we're able to tie a PAC-3 missile battery and its interceptors and hit a target using data obtained in the fire control system managed by THAAD battery, right? Something you think might be automatic, but is not. And so therefore, we're able to expand the diameter of the defense perimeter of whether it's a ship or base by doing that. That's a real mission capability that we could deliver by this approach. We also did an integration, which actually was publicized, I think, for the Air Force, where we took a U-2 to put in -- basically made it into an edge compute node with data processing, servers, data storage on board and high-speed connection, data link connection, which then was able to tie together F-22s and F-35, which couldn't be done before, because guess why. Those 2 Lockheed Martin platforms were built under a set of specifications, which were different and not integrated. So we're starting to do these things now, which can increase the mission capability. And last thing I'll say on this is, think of it as train tracks coming together into the switching station. Right now, the Department of Defense has hundreds of train tracks that are designed in isolation. That ultimately need to be tied together. We'll tie together the F-22 and the F-35. We'll tie together the PAC and the THAAD. Eventually, those things will come together down the train tracks into the switching station. That's going to take years to do, but it's the only way to get it, I think, to work. So my explanation to your simple question, but this is how we're going to go about this, and that's why we have a platform position that I think really advantages the company.

Well, let me jump back to some of the -- from here to some of the business areas, which obviously tie into this. But Space -- and Ken, you had said ex-AWE, you're looking at about 7% growth this year. When you look longer-term at Space, how do you see Lockheed Martin position in terms of top line growth there? And I just want to put a -- just a comment on this, which is a lot of times, people look at Lockheed Martin as having, really, a legacy of really exquisite, high-end geos, satellites, less so perhaps the inexpensive LEOs that we're looking at today. So kind of in that context, how do you think of space growth? With -- how it fits with the priorities of this administration? Where are we headed here on the Space?