Good day, and welcome, everyone, to the Lockheed Martin First Quarter 2021 Earnings Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.

Thank you, John, and good morning. I'd like to welcome everyone to our first quarter 2021 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Ken Possenriede, our Chief Financial Officer. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www.lockheedmartin.com, and click on the Investor Relations link to view and follow the charts. With that, I'd like to turn the call over to Jim.

Thanks, Greg. Good morning, everyone, and thank you for joining us today on our first quarter 2021 earnings call. As today's release illustrates, we had strong financial results this quarter and continue to perform at a high level strategically and operationally. Our achievements reflect the quality of our workforce, the breadth of our products and services, and the focus we all have on delivering value to our customers and stockholders. We continue to deliver these results in spite of the ongoing difficulties presented by the COVID-19 pandemic, and my thanks go to the men and women of Lockheed Martin for their outstanding contributions during these challenging times. I'll begin today with a quick update on the strategic acquisition of Aerojet Rocketdyne that we announced in December, a transaction we believe will enhance Lockheed Martin's ability to develop and supply advanced products in support of national security and our civil space objectives. We also plan to strengthen Aerojet Rocketdyne's capabilities as a merchant supplier with improved offerings for all of its industry and government customers, which is a critical component of closing our acquisition business case. Last month, Aerojet stockholders approved the merger agreement with over 99% of votes cast being in favor of the transaction. Also, this quarter, as expected, both companies received a request for additional information or a second request from the Federal Trade Commission as part of the regulatory review process. The second request extends the waiting period pursuant to the Hart-Scott-Rodino Act. We're working cooperatively with the FTC and continue to expect resolution of the regulatory review process by the latter part of 2021. Moving to our financial and operational results, Lockheed Martin got off to a strong start for the year. Ken will discuss our financial results in more detail and provide an update to our 2021 financial outlook, which increases key financial metrics across the board. But I'd like to continue by providing a few highlights right up front. First quarter sales increased 4% over the year-earlier period, with Rotary and Mission Systems growing 10% due to the delivery of an international pilot training system and ramping production of Sikorsky aircraft. Segment operating profit increased as a result of our sales performance, and earnings per share also saw strong growth. Our EPS benefited from gains in our Lockheed Martin Ventures Fund. LM Ventures makes strategic investments in early-stage companies developing disruptive cutting-edge technologies and it supports our technology road maps and growth strategies. Ken will give a little more color on this in a few moments. Our cash generation remains outstanding, driving over $1.7 billion of cash from operations this quarter, which includes the nearly $1.4 billion downward impact of accelerating payments to our suppliers, including thousands of small and vulnerable companies that are especially stressed due to COVID-19 impacts. Altogether, these results reflect the high level of execution being achieved across the company. Our outstanding cash generation and strong balance sheet also provide us the flexibility to complete a $1 billion accelerated share repurchase agreement this quarter to opportunistically buy back stock. We expect our cash generation to remain strong and we plan to continue our balanced cash deployment actions by investing in innovative technologies, executing our 21st-century warfare strategy, providing our customers with enhanced capabilities, and returning cash to stockholders. Turning to federal budgets, as a reminder, the fiscal year 2021 budget cycle marked the final year of the Budget Control Act that was originally enacted in 2011. The Department of Defense appropriations approved as part of the FY 2021 omnibus funding bill resulted in a fully funded national defense budget of approximately $740 billion. The White House recently released their preliminary budget proposal for fiscal 2022, targeting approximately $11 billion top line increase for the Department of Defense, an indication of the desire for continued stability in national security funding, and in line with our expectations. Similarly, the President issued an interim national security strategic guidance document, which incorporates key elements such as diplomacy, economic development, innovation, and modernizing our military capabilities into a broad framework for addressing accelerating global challenges. This guidance document places emphasis on deterrence, investments in emerging technologies such as artificial intelligence and secure next-gen 5G infrastructure as well as the need for having strong defense and intelligence capabilities. We believe this vision is well aligned with our 21st-century warfare strategy and plays to the strength of our broad portfolio and our culture of innovation at Lockheed Martin. Also in the quarter, the American Rescue Plan Act of 2021 stimulus package was enacted into legislation. This bill extended the CARES Act Section 3610 provision until September 30, 2021, enabling federal agencies to continue to reimburse contractors for the cost of keeping employees and subcontractors in a ready state as a result of the global pandemic. Importantly, this legislation also contained cash funding relief provisions affecting single-employer pension plans, the primary reason for our increase in our cash outlook. Ken will discuss this further during his remarks. Turning to our business areas, I'd like to touch on several notable achievements demonstrating our focus on operational performance, strategic growth initiatives, and the strength of our portfolio. I'll begin with Aeronautics, where our team participated in this year's Orange Flag exercise. That's the U.S. Air Force's annual event to assess integration maturity of their warfighting platform. This year's Orange Flag featured a broad network-centric demonstration, showcasing the integration of the F-35 and other legacy aircraft, including the F-22 and U2, with long-range fires, naval fires, and space-based sensors. This exercise demonstrated a fully functional Internet of Things (IoT) architecture, integrating a number of our nation's most advanced weapons systems. Our team was at the vanguard of this effort, enabling F-35s and F-22 to pass data to a U2, all Lockheed Martin aircraft, with the U2 then relaying the information to a ground-based control center. Targeting data was then transferred using machine-to-machine data sharing with an army engagement operations center as well as to navy ships. By providing data via fifth-generation aircraft to multiple command and control nodes, that information can be used for real-time targeting. This exercise demonstrated Lockheed Martin's readiness to provide unmatched situational awareness and to rapidly field capabilities today in support of our customers' joint all-domain operations concept. In Rotary and Mission Systems, the CH-53K King Stallion was selected by the Israeli Ministry of Defense as the winner in their heavy lift helicopter competition. Upon contract award, our Sikorsky line of business will provide new CH-53Ks to replace the Israeli Air Force's current fleet of legacy Sikorsky 53-D aircraft. Israel will become the first international customer for our new 53-K variant, and we look forward to working with the Israeli Defense Force and the U.S. government to finalize the agreement. In our Missiles and Fire Control business area, the U.S. Army awarded our Precision Fires team a $2.8 billion contract for additional guided multiple launch rocket systems, or GMLRS, products and services that continue our relationships that have lasted for over 40 years. This quarter, MFC also delivered the 50,000th GMLR system, another sign of the enduring demand for our signature programs. Moving to our space business area, the Missile Defense Agency down-selected our space team for the next-generation interceptor program, awarding a $3.7 billion, five-year contract for technology development and risk reduction activities. This award leverages our internal investments and experience from our THAAD and other programs to deliver the capability to respond to multiple threats with a single interceptor. NGI will be a key element of homeland defense of our country against ballistic nuclear missiles and we're extremely proud to be selected to pursue this opportunity. Our Space team also announced a strategic interest agreement with telecommunications firm Omni Space to explore collaborating on a hybrid communications network using both satellites and ground-based wireless technology. Tying together space and terrestrial systems into a seamless 5G network has the potential to greatly enhance military applications and help manage complex information-centric warfare across all operational domains. We continue to explore opportunities like this one with the goal of accelerating the benefits of commercial telecommunications technology into our 5G.mil initiative to rapidly increase the capabilities of our soldiers, sailors, and airmen in the 21st century. I'll close by again highlighting our space team and their contribution to the recent successful Mars Perseverance landing. Lockheed Martin Space designed and built the Mars 2020 Aero Shell, which encapsulated both the Perseverance Rover and the innovative Ingenuity drone helicopter, protecting them during entry and descent through the Martian atmosphere. Lockheed Martin also designed and built the Mars helicopter delivery system, which transported Ingenuity on the Rover and successfully deployed the helicopter for its historic first flights on Mars. We've built aero shell systems for every one of NASA's Mars Rovers and Landers, and we've been part of every NASA Mars mission, beginning with the Viking program in the 1970s. We continue to incorporate innovative technologies and decades of experience into each new spacecraft and we're excited to continue our Mars heritage with the Perseverance Program. These many achievements highlight the breadth of our portfolio, our focus on innovation and next-gen technologies, and our commitment to providing the United States and its allies with 21st-century capabilities to support crucial national security missions. And with that, I'll turn the call over to Ken.

Thanks, Jim, and good morning, everyone. As I highlight our accomplishments, please follow along with the web charts that we've included with our earnings release today. Let's begin with Chart 3 and an overview of our results for the quarter. We saw strong results in sales, segment operating profit, cash from operations, and earnings per share this quarter while maintaining our backlog of $147 billion. We generated $1.7 billion of cash from operations and we continued our balanced cash deployment actions, including the execution of our $1 billion accelerated share repurchase program this quarter, returning a total of $1.7 billion to our stockholders, including our quarterly dividend payments. With these results and strong performance from our Rotary and Mission Systems segment, we are able to increase our outlook for the year for all key financial metrics. And turning to Chart 4, we compare our sales and segment operating profit this year with last year's results. Sales grew 4% compared with last year to $16.3 billion, continuing our expected growth of the business, while segment operating profit was $1.7 billion. We had a segment operating margin of 10.8%, consistent with our expectations as we did not record any equity earnings this quarter due to no-launch events in our ULA joint venture at Space. Chart 5 shows our earnings per share for first-quarter 2021. Our earnings per share of $6.56 was $0.48 above our results last year, driven by volume and, as Jim mentioned, includes $0.18 of a gain from investments in our Ventures Fund. And I'll discuss this a little more in a subsequent slide. This was partially offset by $0.10 in severance charges from previously announced actions taken to improve efficiency and lower total costs for our business. On Chart 6, we will discuss in more detail the cash return to our stockholders this quarter. Subtracting our capital expenditures from approximately $1.7 billion of cash from operations, our free cash flow was nearly $1.5 billion. By executing our planned share repurchases of $1 billion in the first quarter as well as providing our dividend of $2.60 per share, we were able to return 119% of free cash flow to our stockholders quarter. And moving on to Chart 7. As we noted, we are increasing our outlook for the current years for sales, segment operating profit, earnings per share, and cash from operations. On Chart 8, we showed the increase to our sales guidance range of $200 million, which is reflected in our estimated sales range for Rotary and Mission Systems. This increase reaffirms our growth for 2021 projected to increase year-over-year by 4%. On Chart 9, we show our outlook for segment operating profit by business area. And consistent with sales, we have increased our RMS in our outlook by $25 million. On Chart 10, we take a closer look at our increased guidance for 2021 earnings per share. As I noted a moment ago, we recorded a $68 million gain on strategic investments we hold in our Lockheed Martin Ventures Fund, which translates to approximately $0.18 in earnings per share. As Jim noted previously, these investments are part of our growth strategy focused on innovative technology and early-stage companies, and their valuations may fluctuate over time. Moving on, reduced tax expense as a result of the American Rescue Plan Act and the timing and execution of our share repurchases have also favorably impacted our outlook for EPS, as has the increased earnings we noted from Rotary and Mission Systems. There is an offset to incorporate the nonrecurring severance charge we discussed earlier. In total, our full year earnings per share outlook has increased by $0.40 at the midpoint of the range. On Chart 11, we will look at our increased cash flow forecast for 2021, with increases also estimated for 2022 and 2023. With the passage of the American Rescue Plan Act, we are no longer planning to make a $1 billion discretionary pension contribution in 2021. This benefit is partially offset by reduced pension tax deductions with the net increase to cash estimated to be about $600 million. The net impact also improves our anticipated cash flow in '22 and '23. This change allows us to recover the entire $8.3 billion of existing CAS prefunding credits by 2026. And based upon this change in law and our current estimates and assumptions for future pension asset performance, we do not believe there will be a required pension cash contribution before the year 2026 and minimal contributions thereafter. In total, this change in legislation increases our three-year cash flow estimate by $1 billion and combined with reduced future CAS expenses, will improve our cost competitiveness and our affordability to customers going forward. I should note, as I did on our last call, that this outlook and trends are prior to an R&D tax deduction impact from the 2017 Tax Cuts and Jobs Act that takes effect in 2022. And to conclude on Chart 12, we have our summary. We believe that the first quarter of 2021 has laid the foundation for a strong year. Our backlog remains robust and our key programs continue to deliver growth and sustained performance. We have increased our full year outlook for sales, operating profit, earnings per share, and cash from operations. And as a result of a change in legislation, our three-year cash flow expectations have grown by $1 billion. And with that, John, we're ready to begin the Q&A.

[Operator Instructions]. And first with the line of Rob Spingarn with Credit Suisse. Please go ahead.

I wanted to dig into space a little bit. Two-part question, one for each of you. And I thought I'd start with Ken. And just wondering how we think about top line growth for the three space subsegments, so satellite, strategic and defensive missiles, and space transport over the next few years excluding the AWE fade, particularly now that we have some budget details from NASA. And then, Jim, while we're on the topic of space and NASA and with the Artemis HLS award to SpaceX last week, and all of the other start-ups we're seeing, the new space crowd is coming on strong, and I wanted to ask you how you think about that from Lockheed's perspective. Thank you.

Sure. Hey, Rob, it's Ken. I'll start off with your long-term question regarding top line growth. So everyone is aware, if you look at the last couple of years, we've had a very strong order book in our space business. Some of it planned and frankly, some of it nice surprises. So if you go around the horn, if you look at our National Security Space segment, I'd say probably the biggest growth opportunity we have there is in our classified space area. We are seeing an enormous amount of opportunities out there, a lot of them planned, and frankly, a lot of them that we are helping shape. And so I'd say, in the long term, there are a lot of opportunities there in national security space. From a strategic and missile defense standpoint, I would start out with what Jim described as a very nice win for us, which was the NGI contract. I think over the next couple of years, we're going to see some nice opportunities from a growth standpoint there that will be developing and demonstrating JATO enabling systems, and they'll be ready for operational use as early as today. So some opportunities there. I'd say the second area of large top line growth opportunity is our hypersonics business. So if you think about hypersonics today, we're going to do about $1.5 billion, rough numbers, of sales in our hypersonics area. And roughly about two-thirds of that is in our space business. Think of that as CPS. So I think some strong opportunities there. And then commercial space, probably not as robust growth as the other two business segments, but we do see some opportunities there, and that's in light of Homeland Security. I'm also going to mention the one initiative with Omni Space that Jim brought up. I think there are some exciting opportunities there, not just in the government arena, but also in the commercial arena that will help shape with them. And then I think the last piece I'll talk about is our LM-100 initiative. This is a midsized satellite bus that can support missions to both LEO and GEO. And that will be joining our fleet of the LM-50 and the LM-2100 series. Some of those investments in advanced payload technologies and demonstrations, we'll be using that bus, which can yield some future growth. So I think there are a lot of exciting opportunities there for us in space. It really is an opportunity-rich environment.

And Rob, when it comes to space from a strategic standpoint, I think the important framework to start with here is that 80% or more of our space operations revenue comes in national security space and strategic missile defense. So the remaining 20% is where sort of the action is on exploration. And we're playing right in the middle of that. So we're on the largely commercial team led by Blue Origin and the national team on the moon lander. That our team did not particularly succeed in this, didn't mean we weren't participating. We were part and parcel of the new order, if you will, in civil space and teamed up with Blue Origin. On the other hand, we've got a franchise position on Orion. Orion is the actual crew compartment spacecraft that will be used for the Artemis missions going forward. So we've got a great position there. We'll continue to work with whether it's Omni Space or others, Blue Origin, SpaceX, whatever makes sense for us from a partnership or competition perspective. We're going to play, and we're going to be there. But again, 80% of our Space Systems net revenue is going to be coming from, again, franchise situations and strategic missile defense and national security space where I'm not seeing those newer firms play at the level where they can compete with us.

Our next question is from Seth Seifman with JPMorgan. Please go ahead.

Thanks very much and good morning. Your vision for the company that you talked about would seem to require maybe some changes in the way that the department interacts with contractors. I guess, after being in the role for a year, what would you say are the top one or two changes that you need from the department to kind of really drive the 21st century warfare strategy? And what's the plan for getting those?

Sure. Let me just frame up the strategy quickly for everyone on the call. And then for each of the sort of four or five main areas, I'll make a point as to what we hope to encourage and work with our government customer to do on their side. So overall, our objective is to lead our National Defense enterprise, which is industry and government and the military services toward a higher and faster trajectory of development. This is essential to meet the challenges in an era of resurgent great power competition. So this isn't just a business strategy. I think it's a national strategy that's an imperative. And at Lockheed Martin, we're in a great position to try to lead that with our customer base. There are really four or five elements. And so I'll hit each element and say what we hope to get along with our behavior from our government customer and the military services to work with us on this. First of all, I think it’s imperative that we establish what we call a 5G.mil network architecture. So something that is a standards-based architecture with interfaces, frequencies we're going to use, bands we're going to employ, ways to do hierarchies, and use intellectual property from numerous companies inside and outside the defense enterprise to actually create an architecture just like you see being done, in say, 5G in the telecommunications world. I think we can lead that for a number of reasons, but we're going to absolutely have to have our government customer involved with us. When you look at exercises like Orange Flag, that demonstrates that they see the need as well. Ultimately, we're going to have to have an ability to work with our customer base to have new acquisition and appropriations processes so that we can speed things up and get things done faster than the kind of world we're talking about. One of the things that frankly is a core competency of Lockheed Martin is dealing with the federal acquisition regulations and I do feel we can be a bridge during the changeover period, if you will, to commercial technology. We can license with them on one hand, the way they used to work and we'll deal with the federal government as far as the contracting goes on that side. I think we can be a great bridge for that. But the first thing we need to do is establish that architecture and have cooperation with our government customers to do it, and we are. The second thing is we really intend to partner with these leading companies in the telecom and technology space because we need as a defense enterprise to accelerate our adoption of those 21st-century technologies and capabilities. Again, we'll try to be the pivot point for that, linking the two industries with our customer, but we're going to have to again have an interest in adapting procurement processes and speed to the kind of speed that the commercial companies are used to. There's an interesting model for this in the intelligence community; there are some budgets that are handled at the DNI level, which have a lot more flexibility than the standard DoD budget line would have. So that's just one idea, but we need to start working with our customer closely on some of those fast-track initiatives. The next piece of what we're going to do at Lockheed Martin is we're going to enable eventually all of our major platform programs in aerospace, maritime, and land domains to seamlessly connect into this architecture. Then on the customer side, we're going to have to work with them to make sure that they're comfortable using the standards that we create and some of the software-defined network protocols that we intend to use. Why that's important is because, currently, the sequential design test paradigm that the Department of Defense uses to develop weapon systems is too perfectionist and too slow to actually do this. We want to work with our government customers to use a more rapid development process. For example, on hypersonics, we're already using it. We look for 80%, 20% splits on success on all the test points and metrics, and we move on to the next test. We don't strive for 99% to 100% because that will be too slow to get this done. So there’s a sequential design test paradigm change that we have to work with our customers to achieve. At the end of all this, why are we doing that? I think at the end of it all, our customers are going to achieve greater returns of capability and operational abilities by moving in this direction. Our shareholders are going to benefit too because we're going to be a stronger and more resilient growth machine and engine for our business. So there are benefits to shareholders and benefits to government, and we hope to lead the charge on this.

And our next question is from Rob Stallard with Vertical Research. Please go ahead.

Jim, there's been some commentary out of Congress over the last month or so about the F-35 and the operating cost of the aircraft. I was wondering if you can give us your perspectives on this issue? And what the obstacles could be to getting this operating cost down to an agreeable level? Thank you.

Sure. What I'll start with is an ex-Air Force pilot and have spoken to Israeli pilots, and our own test pilots here at Lockheed Martin, and also those serving in the military today in the United States. This aircraft is the most capable fighter plane ever developed in history. It's got a lot of leading-edge technology with it. Just the propulsion system alone, integrated with the stealth technology, is pretty groundbreaking. It enables this airplane to do things that no other one can do and survive in the process of that. The other piece of it is Lockheed Martin was at the head of even my thinking in making sure that the F-35 would be ultimately a hybrid-based station or a mobile compute node for the battlefield. We've got the sensor capability, computer processing power, and communication linkages from that airplane to the network. Again, that makes the airplane much more than just a single-purpose fighter. Having said all that, it's an expensive machine. It's expensive to maintain in large part because of the stealth technology that's more advanced than anywhere else. We're working on all three dimensions of affordability with the customer very closely, myself included. That is on production, where we've already achieved the goal of $80 million F-35A, and we are $1 million or $2 million below that these days. So production is in good shape and we're going to keep working on it. For modernization, this airplane, because of this evolving threat and the speed of which that's happening, is going to have to continually modernize. If we can employ some of these commercial technology practices into our own modernization program, we'll be able to get some efficiencies out of that. Then sustainment is also key, and what we need to do is have a joint strategy and develop it with our program office and our services through the end customers that have to actually fix this aircraft and maintain it in the field to get the optimal sustainment strategy, the right level of funding for spare parts, etc. Really clearly defined roles and responsibilities for the depot system, for frontline maintenance, and for the OEM and our supply chain. I think that's a very doable thing, and we're embarking on that led by the joint program office and the service team. I think we're going to address all three dimensions. The goals that the government has put in place for us at $25,000 a flight hour, if we work with them in tandem, are achievable.

And next, we'll go to Peter Arment with Baird. Please go ahead.

Ken, maybe just a high-level one on the backlog, your target, I think, of $150 billion in 2021. Maybe if you could just walk us through some of the key moving pieces that you think they're going to allow you to get there? And anything to call out on the international front? And just, Jim, related to that, if you could also just comment if you're seeing any kind of changes in the administration on the international award front? Thanks.

Hey, thanks. Good morning. Yes, from an order standpoint, you're right, Peter. We think if you look at book-to-bill, by the end of the year, it will be above 1, and we should be close to about $150 billion. A couple of the key awards that will get us going forward. There's a variety of F-35 orders. I'd say probably the one worth highlighting or the two worth highlighting is, if you recall, Lot 15 for F-35, we deferred the booking of that last year and we moved that into this year. That's a big order. In there, there is, just sticking with the international theme, a good size of not just U.S. airplanes, but also partner countries and FMS countries. The other big F-35 order, which is in the fourth quarter, would be Lot 16 production. Think of that as just ballpark $9 billion. Similar to Lot 15, it's got U.S. airplanes, partner airplanes, and FMS airplanes. In fact, when you start getting out into that time period, the partner and FMS percentage of aircraft starts getting close to roughly 50%. We still see continued demand there. We have a handful of other international aeronautics orders out there. There are a few F-16 orders. There are a few C-130 orders. Another key one will be the next tranche of CH-53K. That's Lot 5. We're expecting that order this year. There's a bunch of PAC-3, fiscal year buys that we're expecting this year. There is a reasonable size span order for the Space business, which is Australia. There are a few special programs out of space. I'd say we are extremely comfortable with our orders profile. The only one that possibly could move out to the right would be the Lot 16 production order, and again, that will just be timing, the joint program office, and us getting alignment on pricing. Just I'll bring up the point. I'm sure someone's going to want to talk about the pension change. But one of the rationales for us to quickly declare why we're going to implement the CAS adoption to 2022 was for us to get that into our forward pricing rates into 2022 and beyond. In fairness to our customers, they're not going to conclude negotiations with us until we push that down to the benefit down to the business areas and into their forward pricing rates. That was one of the key reasons we made that declaration now and started in 2022 because that will help with the Lot 15 negotiations that are going on now and many other large negotiations we have right now.

And Peter, it's Jim. When it comes to the current administration's approach to international defense, I think there are really four important points to make. One is, the Biden administration clearly recognizes that we're all in the year of this resurgent great power competition and regional disruptive powers that are out there as well like Iran and North Korea. That's a world that's not going to get any more peaceful anytime soon, most likely. Strong national defense is a priority of the administration, I believe, based on their own statements. Secondly, the Biden administration has reinforced and elevated the criticality of alliances to actually meet this kind of situation. That again is a positive for international defense cooperation. The third item that I note is that there's a very experienced and capable foreign policy national security cadre of leaders, lifetime professionals, many of them in this space, and they know exactly what they're dealing with and how to make it work. Then fourth, yes, there's going to be some process alignment between the White House, the Department of State, Department of Defense, and Congress on how to actually conduct all of this. But I do see strong opportunities going forward under this administration for international defense cooperation, which would benefit Lockheed Martin, I expect.

And next, we'll go to George Shapiro with Shapiro Research. Please go ahead.

Yes. Good morning. Ken, I wanted to pursue Aeronautics a little bit. I mean, sales were flat in the quarter. How much of that was due to having one less week in the quarter? Deliveries were like 17 versus 22 for the F-35, and you lost some revenues from taking the development contract down. So do we make up the shortage of revenues in the fourth quarter when we pick up the week? And if you could just get into a little bit more of the detail like I was just asking.

Sure, George. Good morning. Yes, the main driver of why Aeronautics was flat, frankly, was - and this is non-COVID related. We had a sizable couple of hundred million dollar vendor invoice that we anticipated to hit in the first quarter. George, that actually hit - it hit already, so it hit in the month of April. That was a timing event. I'm not certain 12 weeks versus 14 weeks is going to have that much of an impact. That was really more of a delay in the invoice from the first quarter to the second quarter. But just to give you a little color, in the first quarter, basically, F-35 was generally down. That's mainly due to development being down. I'd say production on the whole was relatively flat and sustainment was up modestly. We're going to continue to see momentum in the quarter - in the upcoming quarters. The largest quarter for Aeronautics is the fourth quarter. You'll see some of that continue going into the fourth quarter. I think it's fair to say it was the vendor payment slip into the second quarter. Second quarter is a little less than the third and the fourth, but all three of them are, I would say, somewhat considerably higher than our first quarter. Thanks for the question.

Our next question is from David Strauss with Barclays. Please go ahead.

So in the quarter, Ken, you talked about 10.8% segment margins. I think a couple of years back, the corporation was doing 12%, north of 12%. I wanted to ask about how you view the potential opportunity for mix and productivity to improve segment margins in a more difficult budget environment from here? Thanks.

Thanks, David. You want to talk about beyond 2021, I assume? Okay. Yes, I think it's probably best we go around each of the four business areas. If you look at the mix at Aeronautics, F-35 is still going to be a dominant piece of Aeronautics regardless of how quickly the rest of the segments of that business area grow, and I'll get into that in detail. If you just peel the onion on F-35. Jim mentioned when he answered the sustainability question, if you look at the three elements, a nice pleasant surprise for us, it's a good news story. There's still demand for added capability and added technology on the airplane that we and our partner companies are working on. We're continuing to see development being a decent size, relatively speaking, decent-sized piece of the portfolio. It's going to be cost-plus, so there may be some dilution, but we'll take it, which then takes us to production, which is still going to be the lion's share of that piece of the portfolio. I've said this before, if we perform on our current contracts as we believe we should, and we get acceptable deals on our future LRIPs, there should be some margin opportunity. The only thing I'd caution is we are looking at our performance on Lot 12 through 14 now. Whether we do a risk retirement later this year, we want to see more improvement there before we do that. So the point I just made is valid that the opportunity is there. We have to perform, and we're just keeping a close eye on that. Sustainment is going to be the fastest-growing piece of this part of the portfolio, and it will continue to grow. We're going to continue to stand up bases. We will need sparing. We will be back on the follow-on modernization work we're doing in development. We'll have to retrofit some of those aircraft already in the field. They are cost-plus, and our customers are buying on an annual basis, which is the argument Jim made, is inefficient. There must be a better way to procure, and that's why we offered a performance-based logistics concept and we'll see where that goes, if that morphs into something. Industry is prepared as we are to take on the investment and take on the risk and sign up to a service-level agreement. If we perform, this should create some profit opportunities. For F-16, we've got 128 aircraft in backlog, five customers. We have seen a lot of interest internationally from many countries. We're going to deliver eight aircraft next year. By the middle of this decade, we will ramp up to about three, 3.5 airplane deliveries per month. They are all FMS contracts, and that's the way the customer is procuring them today. There should be margin opportunity there for us. The last piece of Aeronautics is our Skunk Works. It is our fastest-growing portion of Aeronautics and will likely remain so in the foreseeable future. Many of those contracts are classified and cost-plus, which may lead to margin erosion, but I'll take the top line growth with the added profit any day. That's Aeronautics. For Missiles and Fire Control, I think we have the opportunity to keep the margins where they are today. We do have a little bit of a mix issue. We should continue to see strong demand for PAC-3s into the foreseeable future. We're continuing to build out real estate to meet that demand. The other piece that is going to continue to be quite large and continue to grow is in the classified area, which today is cost-plus and will be for the foreseeable future, which will have a dilutive effect on margins, but we'll take that any day. Ultimately, that should transition into production and fixed price and allow us to grow margins. At RMS, I think it's probably best to talk about Sikorsky. We're starting to see the CH-53K go into production. Jim, in his prepared comments, talked about some of the international opportunities, specifically Israel we have there. A lot of these other helicopter programs are now into production. We'll have to down-select on FLRAA and FARA and we're bullish on those. By the end of this decade, they will start out as development programs. By the end of this decade, they'll be in production as well and hopefully see some margin improvements there. Lastly, for Space, if it wasn't for AWE, they would be our fastest-growing business area this year at 7%. We should continue to see growth there with our core space business. It will be a mix between cost-plus and fixed price. The United Launch Alliance is alive and well and will continue to be, and give us a nice equity earnings stream. I see some margin upside based on where we are today.

Our next question is from Rich Safran with Seaport Global Securities. Please go ahead.

So given the accelerated share repurchases, I wanted to ask you again about capital deployment and just how you're thinking about it. Does the accelerated share repurchase infer any change in how you're thinking about the balance between dividends, buybacks, and M&A? On that topic, is there any intent to continue to or make larger investments in businesses and technologies like ABL?

Okay. Hey, Rich, it's Ken. Hopefully, this will resonate with you, but I think it's a consistent story. First and foremost, we're going to generate as much cash as we can, and that was one of the rationales of why we decided to start deferring our ERISA funding in 2021 from an economic standpoint. That made the most sense. First and foremost, we're going to invest in our business, whether that's organic or inorganic. We still have some decent-sized capital outlays this year of rough numbers about $1.8 billion. We're at record levels of IRAD spend this year, and we'll continue to do that. We'll focus on organic. As for inorganic, in Jim's prepared statements, we talked about Aerojet Rocketdyne. That's on track. We just got our second request from the FTC, which is no surprise. Nothing has changed. We're still very bullish about that resolution coming in the fourth quarter of this year. It comes down to excess cash and what we do with it. We're focused on our dividend strategy. That would be next in the batting order. In the third quarter, Jim and I will meet with the Board with our Treasurer, John Mallard, to make a recommendation on what's the appropriate increase in our dividends, and it should be deemed favorable to our shareholders. Lastly, it's share buybacks. What we saw in the first quarter where our stock was trading, we thought it was grossly undervalued, and we went into this accelerated share buyback plan and deemed it very successful. We will opportunistically, in the next three quarters, buy back stock where it makes sense. Think of that as anywhere from $500 million to $1 billion in the next three months. We have the balance sheet to do everything I just described, and we'll continue evaluating that. I'll hand it over to Jim to talk about if there's any other investments in — I think you mentioned ABL and other types of opportunities.

Yes, Rich. Going back to that overall strategic framework that I outlined earlier, you'll hear a lot in there about partnering with leading technology companies, leveraging commercial industry research and development investments that they've already made or are making to reduce our costs that we then transmit to our customer. We want to use the full range of transactional options that are inclusive of our defense industrial-based colleagues that we're used to dealing with, but well beyond that, right? ABL is more of a kind of a bulk-buy option type commercial agreement, for example, which is maybe the lowest on the spectrum of what you might do, all the way up through partnerships that are like-for-like contributions, joint ventures that are actual equity agreements with different companies like we have with ULA, for example. Full-on acquisitions like Aerojet Rocketdyne or i3, which is a smaller tech company that we bought last year, is on our radar. We're going to use that full range of transactional options to pursue the strategy I talked about. You'll see us be, I think, a little more creative, at times a more open aperture. But it will be thoughtful. It will fit within the batting order that Ken just described. We're going to make sure that we're widely viewing the options to take advantage of cost reduction of R&D made in other sectors or of other business models. Just one last point on this, some of that is already going to invest in low-orbit at scale production for commercial uses; maybe we could tap into some of their production for military and defense uses. Again, let them do the capex investment, and we'll just commercially buy off what we need from them, which is similar to the ABL agreement.

And our next question is from Kristine Liwag with Morgan Stanley. Please go ahead.

How has the relationship with ABL evolved since initially investing in the company? Also, what does an exit of an investment look like at LM Ventures? Will you eventually acquire them, sell your stake, or IPO? How do you look at that?

Hey, Kristine, it's Ken. We really didn't make an investment in ABL. What we basically agreed to is to commit to a range of launch vehicles. Think of this for lower-level satellites that don't require the horsepower of, say, our United Launch Alliance. The only investment we do have is in our Ventures group. This is more for the technology that they bring to make our products better. That’s a relatively modest investment. I'm not sure I would look at it as something that from an acquisition standpoint. The question you asked for when do we look at getting out of those type investments? So we did have some investments that actually went public, that allowed us to make a gain. Some of those are back, which we're going to be required to hold, and then we'll make a determination whether it makes sense for Lockheed Martin to get out of those ventures but then continue to utilize that technology. Just as an example, ABL, we would do something very similar. I'm not suggesting that whether they're public or not. We would just make a determination when it makes sense for that modest investment we have in them, whether it makes sense for us to get out or not and just continue to utilize their technologies.

John, this is Greg. I think we have time for one more.

And that will be from Ron Epstein with Bank of America. Please go ahead.

So help me think about this. In the quarter, right, F-35 volume was down and F-22 volume was down. I think about those as kind of the underlying foundation of the company. How can we get comfortable that that's not going to be a trend that - I mean that growth engine is still healthy in there?

Sure. I'll take that, Ron. Good morning. A little bit goes back to what George was asking me about first quarter versus the rest of it. Production is down; I'm going to call it flat, Ron, just because it's down year-over-year by $25 million. What we're looking at on development on the whole — this is for Lockheed Martin is a good problem to have — we continue to have demand out there for increasing technology, but I don't see development growing. If you think about production revenues, it’s really not for the most part, it's really not for the deliveries we're making this year, which are Lot 12 and Lot 13. It's really for the deliveries we're making for next year. We're building those aircraft out now for next year, and then we're doing the buy ahead for the following year. That's generally where the sales are coming for this year. We're very confident - we're really confident, I should say, in the stream and the flow of what's going on. Production is going to grow this year low single digits. I've been relaying that sales are going to continue to grow at a relatively slow pace for production. The growth is in sustainment. In the quarter, we did see growth in sustainment, and we will see growth for the year in the almost 10% range. I don't think that's a concern. I think F-22 - I'm not sure you called that the linchpin or the bedrock of the business area. I'd say, Ron, relatively speaking, F-16 is almost double the size of F-22. I think that's more of the parameter of where the rest of aeronautics is going, including Skunk Works. F-22 is going to continue to be flat and declining as well as C-130, and the pleasant surprise on C-130 is it's not declining as quickly as we thought it was. The team has done a nice job of getting congressional adds from the United States government and international customers for that great workhorse. It's going to be flat over time. The big drivers going forward for growth at Aeronautics will be sustainment on F-35, F-16, and then the Skunk Works and the bedrock will be the modest growth we’re going to have going forward on production.

John, this is Greg. I think we've come up on the top of the hour here, so I will turn it back over to Jim for some final thoughts.

Thanks, Greg. Lockheed Martin had a strong first quarter, delivering outstanding performance operationally for our customers, providing continued growth and value for you, the stockholders too. I want to close by reiterating my thanks to the Lockheed Martin team for their dedication and commitment to excellence during a difficult time for everyone. Thank you again for joining us on the call today. We look forward to speaking with you on our next earnings call in July. That concludes the call for today. Thanks again, everybody.