LMT
#Thanks, <UNK>
Good morning, everyone
And thank you for joining us on the call today
All of here, hope your New Year is off to a good start
Let me begin by saying that I am extraordinarily proud of our Lockheed Martin team
Their dedication and focus enabled us to achieve outstanding program and financial performance during a dynamic year of transition and I want to thank them for their efforts
Our performance as a corporation allowed us to exceed all of our full year goals and has positioned us for future growth and to continue to deliver value to customers and stockholders in 2017. While <UNK> will cover the financial results in detail a little later, I want to highlight a few noteworthy 2016 financial accomplishments from my perspective
2016 was an exceptional year of achievement, with all of our financial metrics exceeding our expectations and in the case of sales, earnings per share and cash from operations exceeding our previous historical high watermarks
I was especially pleased with our performance in maintaining our focus on new business wins and building backlog
We received almost $19 billion in order bookings in the fourth quarter, which resulted in our achieving a quarterly book-to-bill ratio of 1.4 and a year-end backlog of over $96 billion
This represents over $1 billion increase from 2015 year-end level and reflects the broad demand for our products from both domestic and international customers
Significant awards included $7.2 billion for our F-35 LRIP 10 and definitized contract action agreement, a $1.5 billion award for PAC-3 missiles defense capabilities for United States and allied military forces and $1.2 billion from the Republic of Korea Air Force to upgrade 134 of their F-16 aircraft
Our strong and growing backlog has positioned us [Technical Difficulty]
Sorry for the interruption there [inaudible] (03:57)
Our strong and growing backlog has positioned us to deliver expanding sales level and outstanding financial results as we move forward
Another area where we are, it sounds like somebody is not on mute
Let me just continue
Another area where we were successful with our strategic focus on cash and cash deployment, in 2016 we generated nearly $5.2 billion in cash from operations, reflecting the commitment focus of our team in executing on contracts for our customers on a daily basis and we expect to exceed our initial three-year $15 billion commitment we originally laid out in October of 2014 by $1 billion
This strong cash generation also enabled us to continue our longstanding cash deployment strategy
In 2016, we returned 100% of our free cash flow to stockholders through our competitive dividend and ongoing share repurchase activity
Keeping with cash deployment our 2016 share repurchases exceeded $2 billion and coupled with the shares retired earlier in the year as part of our divestiture of the IS&GS business allowed us to reduce our year-end outstanding share count to below our target one full year ahead of our stated goal
These achievements reflect our ongoing commitment to perform with excellence for our customers and stockholders
Looking beyond 2016, our 2017 guidance outlined today shows that we are expecting solid organic growth and continued strong cash generation, and <UNK>, will provide a detailed review of the guidance and assumptions in his comments and webcharts
I'd like to turn now to the status of DOD budget
Currently, the DOD is operating under a continuing resolution through April 28th for fiscal year 2017 with funding constrained to prior FY16 levels
While this will cause funds to be limited for certain DOD programs and likely delay expansion in others, we do not believe our 2017 sales, earnings or cash flows will be affected by this delay in receiving the full appropriations bill
We forecast that prior year's appropriation levels will support our current plans as our broad portfolio of long cycle programs remains well-aligned with our customers’ needs
Further support for this conclusion is that the continuing resolution also allows for a limited set of exceptions, which include the ability to additionally fund two of our programs, advanced procurement for new multiyear Black Hawk helicopter contract and sufficient funding to maintain the Orion Multi-Purpose Crew Vehicle program launch capability and schedule
While we believe the possibility of a full-year CR still exist and would not be in the nation's best interest, we are hopeful that a resolution can be reached to maintain our country's readiness and strength
Separately, the 2017 National Defense Authorization Act was signed into law last month and reflected bipartisan agreement that defense budgets should not return to amounts defined by the Budget Control Act or sequestration levels
I am personally encouraged by that fact, but there is recognition from both parties that global security threats are not decreasing and that in fact we do need to continue to put resources toward our national security and our interoperability with our allies around the world
We look forward to the upcoming submission of the new administration's budget proposal and continued congressional support for a strong defense and future recapitalization actions both in FY 2017 and beyond
We look forward to working with the new Pentagon team as we collectively look to provide our armed forces with the capabilities needed to perform their crucial missions
I would like to continue my remarks with a few highlights from the fourth quarter that illustrate the continued upward momentum we have in our operational performance as we delivered daily on the commitments to our customers
Starting with the F-35 Joint Strike Fighter, we delivered 16 aircraft in the fourth quarter, including the first planes for customers beyond our original eight partnered nations, Japan and Israel
These countries represent our ninth and 10th international customers, and along with South Korea show building international interest and the capabilities of this remarkable plane
In November, Luke Air Force Base welcome the arrival of its first Foreign Military Sales or FMS aircraft as Japan took ownership of its first F-35, where it will be used to train an elite cadre of Japanese air self-defense pilots and maintainers
In December I traveled to Israel to attend the delivery ceremony for the first pair of Adir F-35 stealth fighters for the Israeli Air Force
The IAF has embraced the technologies and capabilities of this fifth-generation fighter and believe it will become a powerful accelerator for their entire air force
Also during the fourth quarter our F-35 backlog grew as we received an undefinitized contract for LRIP 10, which added 90 planes to our flow
This brings our total F-35 orders to-date up to 373 planes
Just as significantly, our 2016 deliveries of 46 jets brought our total deliveries to 200 aircraft at the end of 2016. We expect 2017 to be another inflection point in our production cycle as we now anticipate delivering 66 planes, an increase of over 40% from our 2016 level
As many of you know, I have the opportunity to meet with President Trump on two occasions prior to his inauguration to discuss our F-35 Joint Strike Fighter program
We along with our partners share his strong interest in producing this unparalleled aircraft at affordable prices for our warfighters and taxpayers
We believe we are on this path and I'd like to take a moment to give you a quick status of the program
At this time, I'll ask you to turn to the third page in the webcharts that we have provided
This chart depicts the F-35A model per unit price, which is the Conventional Takeoff and Landing or CTOL variant
The chart also depicts the F-35 program order quantities
The bar graph portion of the chart shows our historical and projected orders
You will also observe a dark descending line on the graph, which shows the per unit price of our CTOL variant in each LRIP as notated by the axis on the right
You can see from our latest status on our LRIP 9, our current F-35A is now around $100 million apiece and drops below $100 million for LRIP 10. The LRIP 10 price is currently proposed with represented reduction of over 60% from the first LRIP 1 aircraft and this demonstrates a learning curve as efficient as any achieved on any modern tactical fighter aircraft
The chart also includes a red dotted line, which represents the government program offices annual budget estimate to Congress of the F-35A unit price
This selected acquisition report or SAR is submitted annually to Congress as part of the yearly budgeting process in advance of our contract negotiations for each lot
As you can see we have had eight consecutive years of achieving settlement unit prices below the internal government expectations, showing our ongoing commitment to producing this aircraft with increasing affordability
You will also see the rapid ascent and quantities on the chart
It is with this anticipated trajectory and production that we can continue to see the efficiencies in touch labor, manufacturing techniques and supply chain operations that we project will allow us to meet our stated goal of offering the CTOL version for $85 million by 2019. We believe this will result in the best combination of capability and price of any aircraft ever offered, while at the same time growing valuable job opportunities for our American workforce
Turning to our Space Systems business area, I'd like to highlight another example of one of our innovative products and the benefits that can be derived from our long-term commitment to technology, our customers and their missions
In November, we successfully delivered the Lockheed Martin built GOES-R satellite to Cape Canaveral Air Force Station in Florida
The spacecraft was launched on a United Launch Alliance Atlas V rocket and placed into geostationary orbit 22,000 miles above the earth as the first of four in a next-generation weather satellite constellation
We are excited to be leading the GOES-R program, a collaborative mission between NASA and NOVA, which will provide major improvements to quality, quantity and timeliness of critical weather data
This constellation will improve the detection and observations of meteorological events that directly affect public safety, protection of property and ultimately economic health
I'm especially pleased that the company's Advanced Technology Center in Palo Alto, California contributed key instrumentation that will fly aboard each spacecraft, including the Geostationary Lightning Mapper or GLM
The GLM will take hundreds of images every second, mapping lightning activity on the earth surface and in the atmosphere
Scientists are hoping to use data from the GLM and GOES-R satellites to provide citizens and public safety officials early warning of severe storms and tornado activity
Finally, I'd like to take a moment to congratulate our Sikorsky team for delivering the 1,000th H-60M Black Hawk helicopter this past quarter at a ceremony in our Connecticut facility
This version of the Black Hawk dating back to 2007 has been consistently enhanced with more powerful engine, improved airframe and modern avionics, and it is a key element of the Army Aviation Modernization Plan
The Black Hawk has been noted as the workhorse of army aviation and including the entire Black Hawk family, Sikorsky has delivered over 4,000 Black Hawk helicopters, which have blown over 9 million flight hours
We are honored to be part of this heritage and look forward to continuing this proud legacy
In closing as I reflect back on our accomplishments over the past year, we completed our strategic actions to better align the business for operational and financial success, and long-term value creation
We increase sales, grew our backlog and had strong cash generation, while continuing to perform with excellence for our customer
Looking to the future, I am enthusiastic about our corporation’s broad portfolio and the growth opportunities that it provides both domestically and internationally
I'll now turn the call over to <UNK> to review our financial performance in more detail, outline our 2017 financial guidance and then we'll open up the line for your questions
Thanks for the question <UNK>
I will take that on and <UNK> do you have anything to add you’re certainly welcome
On LRIP 10 we are very close to a deal as some of may have seen in the media I expressed that after my discussions with President Trump recently
We are very close to a deal that would allow us to close LRIP 10 in the near-term and so I expect that will be very soon
On LRIP 9, basically we are not under any pressure to do anything further on LRIP 9 at this point
We are just going to continue to look at our options on LRIP 9. Anything do you want to add <UNK>?
Thank you
Thanks for your question <UNK>
I will just start with Brexit question and in terms of U.K
defense spending, I haven't had any impact and input from the U.K
MOD that they're going to move off of their strategic defense plan, they have a strategy and their normal review that they will continue to spend on their defense spending
So we haven't seen any impact from that
No indication that that’s going to change
I think just like most countries their national security is first and foremost for them and so they are going to continue to focus on that
In terms of other international customers and any reaction to the change administration
I frankly haven’t had any dialogue back from that as well
We ---+ as we bring in ---+ as we have an orderly transition of power in the United States of America, we have new leaders in the administration, they each ---+ they have different policies they might put forward, but it hasn’t impacted our demand for our international products, a lot of our growth on international ---+ in the international marketplaces in the F-35, it’s in missile defense, it’s an opportunity for F-16 and C-130J, opportunities for C4ISR, Space awareness, things of that nature and that continue ---+ there continues to be a demand for those
And I ---+ as I ---+ as we continue to move forward in dealing with our international customers we’re not seeing any retrenchment at all
Good morning
Let me take that on since I have been a lot of discussions with President Trump
I only just going to frame it for you, I tried to express after those meetings, some overview of the meetings themselves, but I’ll just give you a little bit more color on it
Basically President Trump recognizes that the F-35 is a very large program, its largest program in the Department of Defense
He wants to make sure that that the American taxpayer is getting the lowest possible costs on the program and we share, we understand his concerns about affordability, we certainly share that
The meetings that we've had have been very productive, with very good dialogue
He asked excellent questions and he is really focused on making sure that that the cost comes down on the program and it is not about slashing our profit, it's not about our margins when we have those discussions about how we get the cost of the aircraft down today and in the future
So I have welcome the opportunity to talk to him, because it gives me an opportunity to share with him what we have been doing in terms of bringing the cost down as you saw on the chart that we put in our deck today that we have been driving the cost down on the program that we have invested as ourselves and our industry partners in what’s called blueprint for affordability and we're moving forward on sustainment cost reduction initiatives, so that we can continue to take cost out of the supply chain, to take cost out of our manufacturing and produce ability and materials we use as we’ve moved along on this program
And as we've done that we’ve ---+ I’ve also have the opportunity to share with him things that the Department of Defense can do and how they might buy the aircraft differently in the future that would help continue to drive the cost down, he open that discussion
The other thing is very important that I'm happy to have the opportunity to chat with him about is the capabilities of the F-35 brings to our minimum and uniform, I mean, it’s basically a game changer, it brings for our country, for our military, as well as for our allies around the world unmatched capability, absolutely unmatched
And recognizing that his focus is on how do we drive the cost down aggressively and we ---+ I think we are ---+ us along with our industry partners are right in line with him on doing that, we’ve got a lot of ideas on how we can do that in the future
In the meantime, we will continue on the current negotiations to come down that curve that you saw on the chart that we shared with you to continue to drive the cost down
Well, first of all, what I was discussing was the sustainment cost reduction initiatives, just like on blueprint for affordability which was focused on production costs, we along with Northrop Grumman and BAE committed some investment up front to help with getting projects underway that will continue to drive the cost down and production
We have similarly invested upfront to support the U.S
Government in driving sustainment costs down in the near-term over the next five years to drive that cost down
So that was what I was referring to
Now your question about sustainment itself, I mean, we do look at these programs in terms of their overall lifecycle costs, which is not just the development and production but it’s also sustainment and our goal is that the overall cost for the program would continue to come down
Thanks for the question, <UNK>
As I said in my prepared remarks on the front end, I think, we're extremely well-positioned for long-term success
Yes, last year was a challenging year in terms of transitioning the divestiture of IS&GS and really moving very far along in our integration with Sikorsky and that I would say a great tribute to the team is that despite those major efforts that we had going on in the business we exceeded all of our financial commitments, as well as actually hit some new records, I mean, I think, that's a true measure and our operational performance was outstanding in terms of how we are performing for our customer, so I'm extremely pleased with that
In terms of strategically as we look forward, having Sikorsky as part of our company now, it opens up a lot of opportunities for us, we are currently in the development phase for a number of helicopter program, so we are going to move into production, so as you look at the CH-53K at the Presidential Helicopter, the work we've been doing on the Canadian Maritime Helicopter program, the combat rescue helicopter that we’re working, all of those programs, as well as what <UNK> mentioned, we continuing on with the Black Hawk and getting into the next year multiyear Black Hawk is excellent growth area for us that will continue to bring good cash generation and continued growth for us as the company
And then we do expect at some point the commercial business will come back, we are at a lull right now with the oil and gas prices, but it’s another opportunity for growth for us and one of the elements of the company that we’ll look forward to continuing to grow
And so, Sikorsky has been a great asset that we brought into the company and I see great growth opportunities
We’ve talked about 35 at length, you can see, certainly it is a growth engine for our company and we continue to see growing international demand for it, so it’s not just a program of record that we have with the U.S
Government on the services that are buying the aircraft, but and the international partners that have already signed up, but many other countries are showing interest in the program
And then across the portfolio from our missile defense to the work we are doing in mission systems and training to all the elements of our fire control capability, our space systems and satellite and spacecraft
I think if you look holistically at our portfolio we are very strong in all of those areas and represent a leader in and virtually every one of those markets
So from a competitive advantage standpoint I think our goal is to continue to perform with excellence on the programs that we have today and to continue to look for opportunities to keep our portfolio relevant to continue to invest in research and development and innovation so that we stay on the forefront
I think innovation for us is the lifeline of this company
What we’re doing in our independent research and development, what we’re providing to our current customers and what we’re looking at and providing for long-term investments for the long-term and things like hypersonic and directed energy and other things
And then as you're probably aware we set up a venture fund where we’re also taking positions in companies that we see is another seeding of our innovation into our company
I would lastly say that from a competitive advantage standpoint my view is that that it is the talent in this company that is the competitive advantage
We have the best talent in the industry in my view from and that in my view sets us apart
So that couple with the technology and the outstanding portfolio, I think, sets us up very well for continued success and continued growth
Thanks for the question, <UNK>
And I guess, I would step back from his yesterday and what you’ve heard from him in his campaign is that his focus is on not having work go offshore to be produced and then brought back into the United States that are ---+ and have the company have the advantage of producing it elsewhere
So if you take the Lockheed Martin, I mean, we are not, we produce our products in the U.S
, predominantly of our roughly [ph] 98,000 (48:04) employees over 90,000 are here in the U.S
This is where we produce our products and then we deliver them around the world
And those that are producing another parts of the world whether it’s in the U.K
or in Canada or Australia, the work that we might be doing there is not being imported back into the U.S
So I don't see that this border taxation issue affects us as a company and I think it’s more geared toward commercial companies that might decide to do the production offshore and then sell their products back into the U.S
Good morning
Thanks for the question, <UNK>
I guess, I will just give you my opinion because that's really all I can do at this point is pretty unpredictable as we go forward and as you indicated
My opinion is though that there's appears to be bipartisan support for eliminating sequestration
As I’ve said in the past, we have a lot of independent dialogues with various members of Congress, every one I've ever spoken to [Technical Difficulty] they don't think it's good policy and they want to get rid of it
So I think now with the current Congress and the new administration that it probably opens up the opportunity for really getting that done and I'm very encouraged that the dialogue has been around eliminating the defense sequester, just removing it altogether and there's also a strong discussion around increasing defense spending, because we have for the last few years allowed our ---+ with that budget caps et cetera, we have not been investing like we need to in recapitalization and then and readiness and a lot of things that you hit directly from our customers, our services telling Congress and telling the new administration that they need
So we are very supportive of our defense customers and being a voice around that, because we do think it's important to eliminate the sequester and the budget caps associated with it to allow them to do, to address the national security strategies and to provide a right capability for minimum and uniform
In terms of where it might come into play, I mean, I ---+ again, I'm encouraged by the fact that there is some discussions around supplemental to the FY17 budget, there's some discussions around getting after this whole issue of sequester and eliminating the budget caps
So whether it’s in ’18 request or in the early ’17, it’s hard for me to predict, but I think it will be near-term and longer term, because everyone that I speak to has recognized and certainly President Trump has recognized that it's something that needs to go away and we need to get on with spending the appropriate amount, having adequate budgets to support our national security
Let ---+ <UNK> why don’t you walk through and then if I have anything to add on
Thanks for the question, Rob
I guess, the first question on sustainment, sustainment is a separate contract from the LRIP 10, so it isn’t part of the discussion at all in LRIP 10 negotiations nor would be the upgrade work for Block 4 going forward…
Actually no we treat them separately as separate contracts, we look at what the sustainment contract is versus the LRIP 10, I mean, there are just, the separate LRIP 10 is pretty straightforward, as we look at our assessment of the costs associated with LRIP 10 and offer that we put forward based on the cost of the aircraft and the terms and conditions associated with that contract
It doesn't include sustainment
So with that ---+ with our last question let me conclude the call today
I want to end up the call by just reiterating that 2016 was truly an extraordinary year of transition and success, and our team performed exceptionally well in all phases, strategically, operationally and financially
As we look into 2017, our strong backlog and solid portfolio have the corporation positioned for bright future of topline growth and increasing cash flows
Thank you again for joining us on the call today
We look forward to speaking you at our next earnings call in April
Stephanie, that concludes our call today
