Ladies and gentlemen, thank you for standing by, and welcome to the Lockheed Martin Fourth Quarter and Full Year 2020 Earnings Results Conference Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.

Thank you for your patience, and welcome to the Lockheed Martin Fourth Quarter and Full Year 2020 Earnings Results Conference Call. All participants are currently in listen-only mode. We will have a question-and-answer session later, and instructions will be provided at that time. This conference is being recorded. I will now hand it over to Greg Gardner, Vice President of Investor Relations. Please proceed, sir.

Thanks, Greg. And good morning, everyone. I hope you've all had a great start to the New Year and at this call, I find you and your family safe and healthy. Welcome to our fourth quarter 2020 earnings call. As we review our results, strategic new business activities, key accomplishments and our outlook for 2021. Before I begin, I'd like to take a moment to reflect on the loss of Michele Evans, our aeronautics business area leader, who passed away earlier this month. Michele dedicated 34 years of service to our company and touched the lives of countless people both inside and outside the corporation. I knew Michele for years and I can say that she was a life of strength and grace. And while we mourn our loss, we are also thankful to have had her as part of our Lockheed Martin family; we’ll miss Michele. As we look back to the year from a broader perspective, 2020 introduced personal and professional challenges to each and every one of us. I'll begin my summary of Lockheed Martin's results today by thanking the men and women of our company and their families for stepping up to deliver outstanding performance during an extremely difficult time. It was through their dedication and commitment that we were able to drive operational and financial results, which not only exceeded many of our expectations but also set records in several areas. The coronavirus outbreak remains an ongoing pandemic and we're continuing to take actions to mitigate its impacts. Vaccines are also becoming available to help combat this disease and we're hopeful for a return to a more normal business environment as we progress throughout the year. Our dedicated workforce and our resilient supply chain continue to perform with excellence during these demanding times, supporting our global customers and their important missions and I'm very proud of their accomplishments. Moving to our results, we delivered another year of outstanding performance in 2020, strategically, operationally and financially. Ken will discuss our financial results in more detail and provide our full-year 2021 financial outlook, but I'd like to provide a few highlights from the past year. A period in which we set high watermarks in sales, earnings and cash from operations. First, sales and segment profit each grew 9% over 2019 and our 2020 earnings per share increased by 11%. We had a strong year of cash generation, achieving $8.2 billion of cash from operations, even after a $1 billion voluntary pension contribution and after accelerating payments to our supply chain to help mitigate COVID impacts. We are continuing this practice, prioritizing our vulnerable and small business partners. We recorded over $68 billion in orders in 2020, growing our backlog by $3 billion, resulting in a robust $147 billion year-end total backlog. These results reflect a high level of execution being achieved across the company, providing critical security and deterrence solutions for our customers. As we look to 2021, our broad portfolio has us positioned for continued growth in all four of our business areas. We expect our cash generation to remain strong and we plan to continue our balanced cash deployment actions, investing in innovative technologies and strategic opportunities to provide our customers with enhanced capabilities while still returning cash to shareholders. Turning to defense budgets. For fiscal year 2021 National Defense Authorization Act has been passed into legislation and the Department of Defense Appropriations were approved as part of the FY '21 omnibus funding bill. Both of these congressional actions adhere to the Bipartisan Budget Act of 2019, which established spending levels for discretionary defense budgets with a total fiscal year 2021 national defense spending target of approximately $740 billion. Also, Congress passed a $900 billion COVID relief package, which extended section 3610 of the CARES Act to March 31, providing federal agencies with the authority to reimburse contractors who are temporarily unable to work due to facility closures or other restrictions. Lockheed Martin programs were well supported in the FY '21 appropriations bill with Congress adding funding of over $1.7 billion for 17 additional F-35 aircraft and other development and integration activities for the program, adding nearly $900 million for 9 additional C-130Js plus support work for that airplane. And over $400 million for Sikorsky programs including additional CH-53-K and Black Hawk helicopters. And also the initiation of an 8 THAAD battery for the US Army. Turning to our portfolio, I would like to touch on several notable achievements, demonstrating our focus on strategic growth and operational performance. As we announced last month, we have entered into a definitive agreement to acquire Aerojet Rocketdyne, an action that once finalized will bring long-term strategic value to our entire portfolio. As we commented then, our 21st-century warfare strategy includes enabling growth areas such as hypersonics, tactical and integrated air and missile defense and space systems domains. Aerojet's expertise in propulsion systems will benefit our existing hypersonic programs as they progress from development to production and will improve our tactical missiles and air and missile defense products while continuing Aerojet Rocketdyne's legacy as a merchant supplier to the entire industry. We believe this combination will deliver innovations and improve efficiencies that will offer more timely and affordable solutions for all of our customers, including the Defense Department, domestic manufacturers, and our international partners; and we're very excited about this transaction. Moving to the business areas. In aeronautics, our F-35 team finished the year strong, delivering a total of 120 F-35 aircraft. Our aero production organization, our partners, and teammates in the supply chain all worked to overcome manufacturing issues introduced by this pandemic. We've now delivered over 600 airplanes since the program's inception with nearly 360 jets still in backlog and domestic, as well as international opportunities ahead of us. Over two-thirds of the jets in the plan of record are still to be ordered, so the aircraft continues to perform well, operating from 26 bases and ships around the globe. The Royal Australian Air Force recently declared initial operating capability in December, becoming the seventh country to do so since the program began. Also in our aeronautics business, the US Air Force awarded a $900 million contract for us to provide sustainment and support services for F-16 aircraft, including maintenance and modification activities. Of course, the F-16 is one of our longest-running production programs and we will look to optimize the Air Force's F-16 fleet for greater capability, readiness, and performance via this new sustainment contract. Moving to our space business area, we recently won a $4.9 billion award for our next generation Overhead Persistent Infrared or OPIR contract. This award funds the production of three geosynchronous satellites and ground systems to provide initial warning of ballistic or tactical missile launches anywhere in the world. These new space vehicles will have more powerful sensors and greater resiliency to enhance our Nation's air and missile defense capabilities well into the 21st century. Keeping with our space organization, we're pleased to be selected for one of the awards to develop a prototype payload for the new evolved strategic satellite communication systems. ESS is designed to be the successor to the Advanced Extremely High Frequency constellation satellites, one of our signature programs that provide secure and survivable strategic communications for national leaders and tactical commanders alike. This OPIR satellites, the ESS Constellation is intended to provide improved resiliency, survivability, and increased capabilities. We look forward to participating in this opportunity as we work to enrich our platforms with more mission systems content, which is another key facet of our 21st-century warfare strategy. I'll close with our Rotary and Mission Systems and missiles and fire control business areas, which recently led Lockheed Martin's participation in an exercise Valiant Shield 2020, which is a bi-annual joint effort for the US Navy, Army, Air Force, and Marine Corps. Our combined team used the virtualized Aegis weapon system to conduct a pioneering joint multi-domain long fires demonstration. By delivering machine-to-machine interfaces across joint force systems, this effort accelerated the speed of decision-making and action. It demonstrated a primary premise of our 21st-century war fighting strategy by networking separate sensors, communication links, and weapons across multiple platforms. The result is more effective joint all-domain operations that provide enhanced capabilities and greater effectiveness to the commander in a field of operations. This achievement highlights our strategy to help address emerging threats with 21st-century capabilities, to invest in new and innovative technologies and leverage our signature programs to provide powerful deterrence to future military conflicts. That's our mission, and with that, I'll turn the call over to Ken.

Thanks, Jim and good morning, everyone. As I highlight our key financial accomplishments, please follow along with the web charts that we've included with our earnings release today. So let's begin with Chart 3 and an overview of our results for the year. Sales, segment operating profit, cash from operations and earnings per share from continuing operations close with record annual highs. We generated $8.2 billion of cash from operations after a $1 billion discretionary contribution to our pension trust this quarter and we continued our cash deployment actions, returning $3.9 billion of cash to our shareholders for a combination of dividends and share repurchases. While continuing to invest in the strategic growth of the business, including acquiring i3 and record investments in IRAD and capital expenditures. We also entered into a definitive agreement to acquire Aerojet Rocketdyne in the fourth quarter with the close expected in the second half of 2021. I will note that our 2021 outlook excludes all results associated with this transaction. While backlog declined approximately $3 billion in the quarter due primarily to the timing of the F-35 Lot 15 production order, 2020 represented the sixth consecutive annual increase in year-end backlog for the corporation. In summary, it was an outstanding year for the business and Lockheed Martin is well positioned for continued success in 2021. Turning to Chart 4, we compare our sales and segment operating profit this year with last year's results. Sales grew 9% in 2020 compared with last year to $65.4 billion, continuing the strong performance over the first three quarters, while segment operating profit also increased 9% over last year to nearly $7.2 billion. On Chart 5, we compare sales by business area with last year's results. As Jim mentioned, all four of our business areas experienced strong sales growth in 2020 led by aeronautics and missiles and fire control at 11%. Aeronautics growth was driven by development and sustainment increases on F-35 and F-16 as well as growth in advanced development programs. Missiles and fire control growth was primarily from production volume in Tactical Strike Missiles and air and missile defense lines of business. I will note that all four of our business areas achieved record highs for sales in 2020. Chart 6 shows our earnings per share for 2020. Our EPS from continuing operations of $24.50 was up $2.55 or 12% higher than our results from last year, driven primarily by increased volume and sustained performance. On Chart 7, we'll discuss our backlog. Driven by annual increases at three of our four business areas, we maintained a book-to-bill ratio above one for the full year of 2020. This continued backlog growth combined with further visibility of our 2021 orders provides additional confidence in our increased sales outlook for 2021. On Chart 8, we'll discuss the cash return to our shareholders in 2020. Subtracting our capital expenditures from approximately $8.2 billion of cash from operations, our free cash flow was greater than $6.4 billion nearly a 6% increase over 2019. This growth was achieved despite accelerating more payments to our supply chain and we received favorable DoD initiated progress payment increases and the deferral of payroll taxes under the CARES Act. We increased our dividend by more than 8% and executed our planned share repurchases for the year with $1.1 billion in total shares retired. This brought our total cash returned to shareholders to $3.9 billion for the year or 60% of free cash flow, providing a solid returns to the shareholders in 2020. Moving on to Chart 9. We provide our outlook for the year ahead. Our outlook for sales ranges from $67.1 billion to $68.5 billion. The midpoint of this range represents nearly a 4% increase over 2020 and improving from our October estimate, even after incorporating the impact of the UK March decision to insource contract support for the atomic weapons establishment. The $700 million sales reduction for this change is reflected in our outlook for the space business. Were it not for this decision, our estimated sales increase would have been approximately 5%, which is greater than the estimated 3% sales growth we discussed in the last earnings call. We have incorporated the known COVID impacts into our 2021 financial outlook. We will continue to work with our US government customers to monitor COVID risk to our operations in the supply chain and we will continue exploring potential paths to recovery of cost impacts, where appropriate to minimize future impacts. The range for segment operating profit is estimated to be approximately $7.4 billion to $7.5 billion. Our estimated FAS, CAS pension adjustment is approximately $2.3 billion. Our estimated range for 2021 earnings per share grows to between $26 to $26.30. The midpoint of this range represents approximately an 8% increase over 2020 results. Cash from operations is now projected to meet or exceed $8.3 billion and I will discuss this in greater detail on the following chart. On Chart 10, we will walk through our future cash expectations, folding in the $1 billion discretionary pension payment we made last quarter. Strong operational performance drove a reduction in working capital, which allowed us to increase our cash outlook for 2021 to greater than or equal to $8.3 billion. We now see approximately $8.7 billion of cash flow from operations in 2022, increasing our three-year cash generation estimate by $900 million over our prior assessment. As we sit here now, we see 2023 cash from operations of approximately $9 billion. I should note this outlook and trends are prior to an estimated R&D tax deduction impact from the 2017 Tax Cut and Jobs Act change that would impact 2022 cash by approximately $2.1 billion and lower 2023 cash by approximately $1.8 billion. On Chart 11, we break down our sales and segment operating profit outlook by business area. All four business areas are positioned for continued sales growth in 2021, approximately 4% for the corporation, led by aeronautics at 5%. Segment operating profit growth is also projected to grow at approximately 4% into aggregate, with our largest growth in Aeronautics at 6%. Finally, on Chart 12, we have our summary. We believe 2020 was an exceptional year for Lockheed Martin during these challenging times. Our team diligently worked to minimize the impacts of the pandemic to our business and our supply chain. We have increased our estimates for 2021 for all key financial metrics. Our results in 2020 exceeded the previous highs and have positioned us well for continued growth and value creation this upcoming year. We remain focused on cash generation and growth in 2021. We will continue to invest in discriminating technologies and strategic initiatives to deliver value to our customers while providing strong cash returns to stockholders. And with that, we're ready for your questions.

And our first question today comes from Ron Epstein with Bank of America. Please go ahead.

Thank you for the question. Jim, could you speak to your broader space strategy? And I appreciate your comments on Aerojet in your prepared remarks. But can you be more specific on how it creates value, particularly in the absence of maybe a broader strategy? Or is it actually part of a broader rollout strategy? I mean, are you guys thinking about doing more strategic actions in space and how are you thinking about space for Lockheed Martin?

Ron, I came into this role with Lockheed Martin being the leader in National Security Space, as it is. And the benefit of the position of the company is that we have a strong position in the - I would say classic large bus military defense satellites and intelligence community satellites. So we also have the ability to go downrange into medium and lower, but as well as geosynchronous. The whole playing field in national defense space is open to Lockheed Martin, and what we're doing in the business is we're introducing these 21st-century technologies and taking advantage of that space platform. And so you see us winning recently a low orbit transport layer contract, which is a pioneering initiative of the Department of Defense to start introducing 5G and other modern networking technologies into the space domain; we're part of that. What we've been able to do is to connect our space assets already using some of those newer technologies and AI and also distributed compute into our Aerospace, land, and sea forces, as well as the platforms that we deploy there. So we have a broad space strategy which is to take 21st-century networking, storage and compute technologies into our space domain as really a competitive advantage versus other defense contractors that don't have that asset available to them. The second part of your question is, how does Aerojet Rocketdyne create value in doing this? It really goes hand-in-hand with our hypersonic strategy, which is part of our 21st-century war fighting initiative. I view Lockheed Martin's benefit or role in defense enterprise as adding velocity to it. The world is moving faster, both kinetically, if you will, and in the networking and AI perspective as well and we need to speed up. Just taking one dimension of hypersonic missiles and countering hypersonic missiles requires a much better tighter integration of the propulsion system into the body of the missile. The heat generated by these hypersonic missiles is incredible and just managing that heat and thermal issue is one of the reasons we invested in i3 as well. So, we are selecting what we think are the most important defense platforms and connectivity capacities for the future of warfare and we're investing in those. Aerojet Rocketdyne is part and parcel of that investment strategy. Propulsion integration into hypersonic missile glide bodies is essential. The other benefit of us working more in a more integrated fashion with Aerojet Rocketdyne is we'll be able to bring our broad engineering expertise, our capital and our operational experience into Aerojet Rocketdyne and bring the best of Lockheed Martin to the propulsion side of missiles and space. So there are incredible synergies here. I know Ken can speak to a little bit more of that later, both revenue and costs, but given my long answer, I'll stop there.

And we do have a question from the line of Pete Skibitski with Alembic Global. Please go ahead.

Hey, good morning guys. Jim, can you talk about kind of your updated mid-term view of the DoD budget now that we have obviously new administration, but maybe even more importantly, a change of control to Senate. I'm just wondering what you're kind of seeing and hearing tea-leave wise in terms of the budget outlook? Thanks.

Sure, Pete. The administration hasn't unveiled its actual plan or trajectory for defense budgets. But I take solace in a couple of things. One is that the national security and intelligence and international affairs team, President Biden is proposing has brought on is experienced; they are professionals in that realm, many of them having decades of senior government experience dealing with these issues and so you're going to have - we believe a lot of continuity in policy and also in focus on how important strong defense is for this country. So I think the proposed team is a plus. And unfortunately, frankly, the threat outside against potentially the United States is growing. It's accelerating too by the way and when we look at the national defense strategy, it reorients itself and reorients our defense enterprise towards great power competition. It's something you cannot just sit still and watch go by, because we will be overtaken because of the aggressiveness of our potential peers. So, I'm taking solace in these trends as far as the defense budget goes that you have professional experienced people leading it for the administration and that threat environment is greater versus lesser; we feel that supports a stable defense budget going forward.

And we do have a question from the line of Joseph DeNardi with Stifel. Please go ahead.

Hi, thanks. Good morning. Ken, can you talk a little bit about the R&D tax impact? And I guess relative to the political backdrop, do you now see that playing out as more likely or is there still an outcome that's less onerous? I mean, are you now planning differently than you were a few months ago in terms of the potential cash flow impact from that? Thank you.

You bet. So yes, Joe, I have socialized with you guys as much as we could, once we concluded our view of what the tax law, the interpretation that was and as I stated a few times now, it looks like it's about $2.1 billion in 2022, $1.8 billion in 2023 and it will continue trending down. One of the reasons we are extremely focused on cash, you heard in my prepared comments, the amount of cash that we're generating in '22 and '23. I've stated we've taken - we took a pause for that roughly the second half of last year before we started talking to the key constituents about that impact. It is still our belief that we think there are some likelihood it will either be repealed or altered, so it just doesn't include entire research expenses, which would include our cost-plus contracts but would be just our research in our IRAD, our research and development costs, which would not be a material impact to our - to the outlooks I gave you. We still think there is a good likelihood that's going to happen because if you think about it, if in 2022, we have $2.1 billion less of cash, this is just Lockheed Martin and as you know, Joe, this is not just Lockheed Martin and not just A&D, this is all of industry. This is going to hit pharma hard, it's going to hit high-tech hard. These are dollars that we're not going to have the ability to plow back and invest into our portfolio and into our technologies. I think that is a compelling story and I think at the end of the day, that's going to rule the day. Now having said that, we are still generating large amounts of cash. In fact, as you know, we ended the year in excess of $3 billion cash on hand. Right now, assuming our dividend assumptions and our share repurchase assumptions for 2021, we're going to end 2021 with over $5 billion of cash. That number is going to continue to grow. And frankly, that's a good opportunity for us to do the things Jim described from an investment standpoint and then to continue our robust cash deployment strategy that we have historically had with our shareholders.

And we do have a question from the line of Hunter Keay with Wolfe Research. Please go ahead.

Hi, good morning. It's actually Mike Mogeri on for Hunter.

Hi, Mike.

Hi, so according to your filings from 2009 to 2017, square footage in your spaces that you lease or own fell 8.5 million square feet or 15% while you are still growing revenue. So I know that you have an investment in Palmdale coming up. But in the next budget down cycle, flattening whenever it should come facility consolidation, is that a lever you'd be willing to pull or able to pull again?

Yes, thanks for the question, Mike. It's Ken. So I think this year or 2020, we're going to end with roughly 72 million square feet and there's four pieces to that. One is, the space we actually own and a large share of that is going to be manufacturing space and that's about half of our real estate. And then the other half is a combination of leased space. GOCO, which is government owned contractor operated much like our Fort Worth facility and then GOGO, which is government owned government operated, which is AWE. And so there is a couple of just short term, there's a couple of puts and takes. Assuming the UK government does take over the management of AWE, we lose about 4.5 million square feet out of that 72 million. When we're successful with the Aerojet Rocketdyne acquisition, I believe they have about 3 million square feet that we would add back. You mentioned Mike, the Palmdale building that we're building, we also have a little bit of real estate that we're expanding in space and in RMS and in missiles and fire control and that nets about 1 million square feet. So at the end of the day, we're going to be down about half a million square feet. But now the opportunity comes, right now we have roughly half of our employees working remotely. Some of them are periodically coming in, but we have over the last couple of months, rolled out a plan frankly looking at Lockheed Martin forward, which is what we call-in and it's frankly the future of work. We are going to start looking at getting out of some of that leased space as our leases expire; you can expect us to reduce our footprint by at least a couple of million square feet in the next couple of years, if not more. We will go to more hoteling, we will allow people that where it makes sense for them to work from home and we'll make sure this is a competitive and strategic advantage for us.

And we do have a question from the line of Kristine Liwag from Morgan Stanley. Please go ahead.

Good morning, guys. Jim, maybe I'm following on the question on the new administration, but in a slightly different way. How do you think about opportunities and challenges regarding foreign military sales? With the new administration, do you see more headwind or more tailwind than before?

Good morning, Kristine. As far as international business, including foreign military sales, the team in the Biden administration has proposed is experienced; they are professionals in that realm, many of them having decades of senior government experience dealing with these issues and so I do think that will have a more open environment for FMS and indirect commercial sales to our international partners. The other benefit you've seen recently in the press is that we have some fantastic and unmatched products that are in great demand and highly desired by many countries. So you've seen F-16 sales coming back, F-35 was a pivotal element of the Abraham Accords we believe. That system is so highly desired by our allies in the United Arab Emirates and elsewhere that it actually helped provide a modicum of peace to the Middle East. Our products combined with the Biden administration's stated proclivity to enhance our alliances, I think we're in a better position going forward.

And we do have a question from the line of Carter Copeland with Melius Research. Please go ahead.

Good morning, gentlemen. A big figure, Q4 is probably the best time to ask a question like this, just to get some color on it. But classified has obviously been a big component of bookings and growth in your focus. I wondered if you might give us some more color if you can around how much classified grew in 2020 or some more color on bookings growth or if you can do that even relative growth versus the rest of the business. Just any kind of sense you can give us on the sort of seed corn projects that will fill out the revenue outlook in the next 3 to 5 years and beyond.

Sure. Hello, Carter, and I apologize for needing to be a bit vague, but I'll do my best to provide some insight. Our classified business has been growing faster than the overall company, both in terms of our order book and sales. Previously, I mentioned we secured a strategic program in Palmdale, and we're beginning to see interest from multiple customers in that system. We are also in discussions with an international partner of the United States regarding their interest in this system, which ties back to the capital growth we're seeing in Palmdale. There are additional developments happening that I'm unable to elaborate on, but we expect to benefit from them; some relate to hypersonics and other platforms. Regarding missiles and fire control, we’ve won a significant development program that is progressing well and is expected to continue growing, potentially at a rate comparable to or faster than the rest of the missiles and fire control segment. Another key area to mention is space, where we have won several major strategic programs in 2020 and are pursuing additional ones in 2021. Overall, our sales are growing faster than the top line of the business as a whole. However, from a margin perspective, the margins in aeronautics for the classified work in Palmdale are currently dilutive due to the nature of the contracts, which is also true for missiles and fire control. These programs are expanding quickly but will have a dilutive impact on margins. The positive note is that, contract-wise, they won't affect working capital, so we expect reasonable cash flow. In our space business, while some programs are fixed price, most are likely to be cost-plus, which will be slightly dilutive to the overall portfolio as well. Again, I apologize for the limited information I can share about the portfolio.

And we do have a question from the line of Robert Stallard with Vertical Research. Please go ahead.

Thanks so much. Good morning. Jim, a question for you. Given the recent share price performance and the valuation on the stock. And of course, very low interest rates here. Do you think it's the best use of the balance sheet to continue to pile up more cash or perhaps you should be more aggressive on the share buyback here?

Well, we are balanced in our cash application and always have been as a company and it's my legacy back at my prior company as well. There are many competing parts, right? So we have an opportunity to say and a desire to grow and we're pursuing that growth strategy while caring for cash deployment to shareholders. Again, to be a little cryptic, we've got all the keys on the piano at our disposal. We're going to work our way through some decisions and opportunities here in the near future. But yes, I may acquire the notion that when share prices below intrinsic value that you aggressively, to the extent that you can, buy it back based on regulatory and other matters involved. We're looking at opportunities that may be being considered or not and so, we'll work our way through all of those issues. But I can assure you that, if we're in the clear and intrinsic value is greater than the share price, you'll see Ken and I diving back in the market.

And we do have a question from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Hi. Good morning, Jim and Ken. Just give 3% to 4% EBIT growth this year versus 9% in 2020. How do you think about some of those drivers as it relates to your $9 billion OCF target in 2023? Is it sort of steady as it goes in terms of your earnings outlook? And then I guess the age-old question of, is there an opportunity where earnings growth exceeds revenue growth going forward, given the decelerating budget environment?

Hi, good morning. I hope you're doing well, you and your family. We see $8.3 billion in cash from operations in 2022 before the tax impact related to R&D, and then $9 billion in 2023. Margins are expected to remain steady at 11%. This reflects our commitment to a culture of cash across the entire corporation, not just a finance issue. Our production operations understand how delivery performance affects cash flow. We recognize the importance of managing the balance sheet, especially with contract assets and inventory to ensure growth is efficient. There are opportunities in government sales, particularly for cash advances. Regarding your second question, we anticipate the possibility of exceeding 11% margins as our programs mature. For example, the F-16 is in the early stages of production, with plans to deliver eight airplanes in 2022 and increase to significant double-digit deliveries in 2023 and beyond, which should improve margins. The F-35 also has margin potential in production, and we believe there are opportunities with PBLs, provided we meet service level agreements. We expect to transition hypersonics to limited rate production soon, along with several helicopter programs like the CH-53K and presidential helicopter, which are moving into production. These examples indicate potential for margin enhancement over time.

And we do have a question from the line of Doug Harned with Bernstein. Please go ahead.

Thank you. Good morning. Jim, earlier, you mentioned that the aim is to enhance your platforms with Mission Systems content. This reminds me of concepts I encountered during the times of Vance Coffman and Norm Augustine, which didn't succeed due to concerns from the Department of Justice and the Department of Defense. Now, as you pursue this, you also mentioned the benefits from the Aerojet Rocketdyne acquisition, along with Raytheon's acquisition of Blue Canyon, which produces components that may be beneficial to Northrop Grumman. Are we witnessing a shift in the industry structure towards greater vertical integration? Could you share your thoughts on this from a philosophical perspective?

Sure, Doug. If we look back to the primary idea that we are in a new era of great power competition, it is essential to examine not just our own defense industrial base but also those of our competitors, including China, Russia, Iran, and North Korea. We should assess how our defense capabilities stack up against these peer nations. Specifically, how does China organize its defense industrial base, and what are its capabilities and speed? From my perspective, concerns about vertical integration from a traditional antitrust viewpoint are overshadowed by the slow pace and the added costs stemming from our existing defense industrial structure, which is complicated by a fragmented supply chain. I believe it would be beneficial for the country and the defense sector to allow industries to propose logical integrations for Mission Systems, which includes the supply chain for major platforms, into a more cohesive organization. This is the underlying philosophy. However, we cannot predict the choices of individual regulators and those entering office. Nevertheless, it is crucial that these decisions consider the context of great power competition and how we measure up against China's defense industrial base.

And we do have a question from the line of Noah Poponak with Goldman Sachs. Please go ahead.

Hi, good morning everyone. How much revenue is your hypersonics franchise generating in the 2021 outlook? And then how much revenue could your hypersonics franchise be generating closer to the middle of the decade?

Okay Noah, I'll take that. You do like these long haul answers. So I'll do the best of my abilities on the second part. But if you look at our hypersonics portfolio through 2020, our total order book was north of $3 billion. We generated about $1.2 billion in hypersonics sales in 2020 and think of that is mostly development in cost-plus programs. And actually, we had a couple of risk retirements at the end of the year, so our programs are performing. For 2021, Noah, the best of our abilities; right now, we see hypersonics sales being about $1.5 billion and still dilutive margins just based on contract type and the type of work that's being done. We're going to have a handful of these programs will have first launch continued demonstration of capabilities this year and next year. As I've stated in the past, you will start seeing some of these programs neck down as you saw last year when we had one program terminated, but we actually saw the funding start to go to some of our other platforms. For us, really not a harm and intuitively made sense. By the middle of the decade, it's conceivable that, that number could be closer to $3 billion. You'll start to see some of these limited rate production programs happening and some of these programs will actually start going into full-scale production. So it's conceivable that our sales more than double by the middle of this decade, and also the contract type will start changing and they will either be fixed price incentive or fixed price contracts.

And we do have a question from the line of Richard Safran with Seaport Global. Please go ahead.

Jim, Ken, Greg, good morning. So, I want to ask you about international. We've known the Trump administration went to extensive measures to promote US Defense exports. I'm just wondering, maybe could dovetail off the comments you've made, coming from your government affairs people about the new administration. Do you see any changes with how the new administration is looking at exports? Do you think there's going to be continued growth there? And do you think this could be a benefit to you or to the international sales of air defense equipment?

Richard, it's Jim. Again, it's too soon to tell what individual policymakers are going to do since they haven't been named or confirmed in large part yet. But if you go back to first principles of the administration based on President Biden's campaign, jobs and economic recovery are incredibly important to him and to his administration. There are no better source of jobs than international military sales for this country, in large part, because these are engineering STEM, high salary and the manufacturing jobs also high wage, reliable, dependable jobs with companies that have strong benefits, etc. So if jobs in the economy are important, the promotion of international defense sales one would surmise; it would also be important. From that perspective, I expect we're going to get strong support, let alone from, as I mentioned earlier, the interest and desire to have increased collaboration and cooperation with our allies. As a former pilot myself, I can tell you that there is no better way to get a tighter bond with an ally than selling them jet aircraft, fighter aircraft because all the way back in the mid '80s, when I was in pilot training, we had Saudis in our class for example. And then when I was at Pratt & Whitney, we built an F-100 engine overhaul repair shop in Saudi Arabia that further cemented our collaboration with that country, just two tiny examples. You've got again the training, collaboration, doing exercises together, using the same cockpit avionics. Just goes on-and-on how you can increase your alliance stickiness if you will with major defense sales. I think on those two dimensions at least, we would expect some positive momentum.

And we do have a question from the line of Myles Walton with UBS. Please go ahead.

Thanks, good morning. Just a quick one on space. It looked like there was some implied margin erosion or compression sequentially into 2021. But I would have thought that AWE would have helped that. Is there something else that moved around in the mix that you point us to?

Sure. Hey Myles, it's Ken. Yes, the big driver is; if you look at United Launch Alliance, due to the mix of launches, we're going to see less profit next year, a ULA than we had in 2020; but you're right, unfortunately that more than offsets the ULA. I'm sorry, the AWE dilution.

And we do have a question from the line of George Shapiro with Shapiro Research. Please go ahead.

Yes. I wanted to go through some of the margins in aeronautics. I mean, you had an increase in C-130 profits, and it looked like revenues changed much, otherwise you would have spelled it out. And then you had a reduction in the F-16 margins and it looked like you had to have an increase in the production margin on the F-35 to get these big increases you had. So I just wonder if you could clarify that a little bit more?

Hey George, I got a clarifying question for you. Talking about fourth quarter of '20 or you want to talk about '21?

Talk about the full year 2020.

Full year 2020. It's probably just makes sense than to talk about the fourth quarter because that's the most current information. Just in aggregate, I'll talk top line and bottom line for aeronautics. So we saw development top line increases. Generally, they were mid-single digit increases, driven by follow-on modernization. I mean, we're still seeing a lot of success there, a lot of demand by our customer set for increased technology on the platform. Production was down in the quarter, year-over-year in the fourth quarter, George, and that was mid-single digit as well; that was probably more of a timing issue than anything else. Sustainment, we saw strong growth and we're going to see strong growth into 2021 that will be the fastest growing piece of F-35 in 2021. We saw strong increases on F-16, you're starting to see production kick-in, and you also had strong sustainment. C-130 sales were up 3%, so think of that as low single digits. ADP, the skunk works are strong double-digit increases there as well. I'll go to profit for you, so for the quarter, we were up 7%, roughly 10.8 margins versus 10.6. But F-35, to your point, was down. That was driven by production, so we had high single-digit margins. I mean it was almost 10%, but down a little bit versus last year, which were stronger double-digit margins and that was just frankly driven by a less risk retirements in the fourth quarter of 2020 than 2019. Sustainment was up a little bit; F-16 margins for the quarter George were up. Both were double-digit margins, but in the fourth quarter this year, we are almost 20% margins on F-16. That was because we had a risk retirement on an international sustainment program, C-130 margins were up in the fourth quarter as well. That's because we had risk retirements in our FIAC programs. ADP was up and most of that was volume, but we actually had some good news; had some risk retirements there as well. So hopefully that helps to give you some color.

Hey Brett, it's Greg. Before I hand it off to Jim, I've been informed that some listeners might not have heard the forward-looking statement at the beginning, so let me just reiterate for a minute that statements made in today's call that are not historical facts are considered forward-looking statements and made pursuant to the Safe Harbor provisions. So please check our SEC filings for more discussion on these risks and historical facts. And with that, I'll turn it over to Jim for closing comments.

Okay, great. Thanks. Look, our business performed exceptionally well in 2020 under extremely difficult circumstances. And again, I want to thank the men and women of Lockheed Martin for stepping up to that. We delivered outstanding program execution and operational performance for our customers and strong financial performance for you, the stockholders. So our robust backlog, our broad portfolio and our long-term strategic focus have us well positioned for continued growth we think. So we thank you again for joining us on the call today. We look forward to speaking with you on our next earnings call in April. And that concludes our call today.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T conferencing service. You may now disconnect.