Earnings Call Transcript - LMT Q3 2020

Operator, Operator

Good day and welcome everyone to the Lockheed Martin Third Quarter 2020 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.

Greg Gardner, Vice President of Investor Relations

Thank you, John, and good morning. I'd like to welcome everyone to our third quarter 2020 earnings conference call. Joining me today on the call are Jim Taiclet, our President and Chief Executive Officer; and Ken Possenriede, our Chief Financial Officer. Statements made in today's call that are not historical fact 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.

Jim Taiclet, President and CEO

Thanks, Greg. Good morning, everyone, and thank you for joining us today on our third quarter 2020 earnings call, as we review our financial and operational results, highlight some of our key accomplishments, and discuss our updated outlook for 2020 and trend information for 2021. I do hope this call finds you and your family safe and healthy. The coronavirus outbreak remains an ongoing global pandemic, and we're all working to mitigate its impacts. Our priorities at Lockheed Martin remain ensuring the health and welfare of our employees and their families, continuing to perform and deliver for our customers and our national security, and using our resources and leadership as a company to assist our communities, our country, and our allies. We are continuing to take actions to address issues brought on by this virus: maintaining robust health and safety protocols in the workplace, delivering personal protective equipment to frontline workers, and donating over $20 million to COVID-19 charities. We have continued expediting payments to our supply chain and have hired over 12,000 employees since the pandemic began. I thank all of the men and women of Lockheed Martin for their dedication and commitment during these trying times as they perform with excellence for our customers and their important missions. I'd also like to take a moment to express my sincere sympathies to those across our nation affected by the recent hurricane and wildfire disasters. We hope that our employees and other citizens of the affected communities recover quickly from the devastation caused by these events. Moving to Lockheed Martin's results, as our press release illustrates, we delivered another strong quarter across the board financially, strategically, and operationally. Ken will discuss our financial results in more detail and provide preliminary trending data for 2021, but I'd like to begin by providing a few financial highlights from the quarter. Sales this quarter were a record and exceeded last year's third quarter by 9%. Year-to-date, we are 10% over our 2019 results. Our business areas grew segment profit by 6% over the 2019 third quarter and year-to-date were 7% over 2019. We had a strong quarter of cash generation, achieving $1.9 billion of cash from operations. We now have brought in nearly $6.4 billion of operating cash year-to-date, keeping us on pace to deliver at least $8 billion in cash from operations in 2020. We won approximately $17 billion in orders, resulting in another high watermark for our backlog and our ninth consecutive quarter of backlog growth. And in cash deployment actions during the quarter, our Board of Directors approved a dividend increase of over 8% to $2.60 per share and $10.40 annually. Providing outstanding returns to shareholders through a strong dividend remains our cash deployment priority, and this action marks the 19th consecutive year that we have increased our quarterly dividend. Our outstanding year-to-date results and record backlog enabled us to again increase our full-year 2020 outlook for sales, operating profit, and earnings per share. Our team continues to deliver exceptional performance and operating results with a portfolio that is well aligned to our customers' priorities. Turning briefly to budgets. You'll recall that the Bipartisan Budget Act of 2019 was enacted into law last year and established spending levels for discretionary defense budgets, with a total fiscal year 2021 national defense spending target of approximately $740 billion. Lawmakers continue to work on authorization and appropriations bills, and in the interim, the federal government is operating under a continuing resolution for fiscal year 2021 through December 11. While we do not expect impacts to our 2020 financials should the continuing resolution be extended beyond December 11, 2020, we could experience some level of impact to our 2021 trending data depending on the duration of the CR. Similarly, Section 3610 of the CARES Act, which was passed in March to provide authorization for federal contractors continuing to support government initiatives despite COVID-19 disruption was also extended through December 11. To date, no additional funding has been provided for issues introduced by the coronavirus. As with the DoD appropriations bill, we do not anticipate a material impact to our 2020 financial results should a delay in CARES Act funding continue, and we remain engaged in discussions with the Defense Department regarding a macro settlement for issues caused by the virus. Turning to our portfolio. I'd like to highlight a few of our notable strategic achievements that demonstrate the solid demand for our signature platforms and their relevance to next-generation war-fighting capabilities. In our Aeronautics business area, the Department of Defense announced a foreign military sale for a total of 90 new F-16 fighter aircraft to the countries of Taiwan and Morocco. Aero received an award of nearly $5 billion, adding to recent orders from Bahrain, Slovakia, and Bulgaria and bringing the F-16 backlog to nearly 130 jets. This 90-airplane award is part of a new $62 billion indefinite delivery, indefinite quantity contract vehicle put in place to facilitate F-16 FMS sales to international customers, taking advantage of standardized contracting to expedite the process for future awards. And I can tell you, I flew a Block 70 last year, and it is an awesome airplane. Our Space business area was awarded a new contract that represents an opportunity to bring together an array of high-tech platforms into one cohesive network that spans every domain for unmatched situational awareness powered with 5G technology. Last month, the Space Development Agency awarded our team one of two contracts for approximately $200 million to develop initial data transport capabilities for the first generation of the National Defense Space Architecture. The award represents an important step toward building an interoperable, connected, and secure mesh network of satellites that links ground, sea, and air capabilities to sensors in space. The Space Transport Layer contract initiates the design and development of the system, the launch of a constellation of 10 small low Earth-orbiting satellites, and this network will be capable of sending and receiving secure wideband data directly to the warfighter and to weapon systems. This interoperability and inter-service networking will communicate and analyze data seamlessly to enable a force multiplier that's flexible and formidable, so that those in battle can effectively perform joint all-domain operations. Future sensors, data collectors, and communication payloads can be incrementally added to this constellation to create a web that will link the most time-critical intelligence and tracking data. We are very pleased to be part of this opportunity and look forward to the launch of the satellites and the demonstration of the initial mesh network in just two years. In our Missiles and Fire Control group, our integrated air and missile defense team achieved two important mission success events. These demonstrated our commitment to innovation and a network-centric focus at Lockheed Martin. Most recently, we successfully conducted a test at White Sands, just after the close of the quarter, where a PAC-3 MSE missile intercepted an incoming target using location data provided by the Terminal High Altitude Area Defense network or THAAD weapon system. This demonstrated a critical capability to expand the defended area through integration of existing systems. In July, the U.S. Army, U.S. Air Force, and Lockheed Martin together demonstrated the ability to integrate F-35 intelligence surveillance and reconnaissance track data with the U.S. Army's integrated Battle Command System, during an Orange Flag Evaluation near Edwards Air Force Base, California. This evaluation just demonstrated the value of utilizing data from the F-35 to enable enhanced integrated air and missile defense such as PAC-3 engagements. This accomplishment is one of the first instances of demonstrating our 5G.mil concept. With the F-35's compute and data storage capabilities enabling that F-35 to serve as an edge node of a network-centric operational architecture. This concept and the ability to share data across platforms is another example of our commitment to adopting a joint all-domain operations mindset to maximize the collective value and power of our customers' highly capable assets and our platforms. Networking every sensor with every shooter across the services and across domains will provide real-time data to maximize the effectiveness of our total force. These few strategic highlights represent just a few of how we will pursue a strategy to help our customers meet emerging threats with 21st-century capabilities as well as create a powerful deterrent to future military conflicts. We continue to engage industry as well as technology leaders from the commercial sector to explore collaboration and align technology road maps for transformational solutions for our men and women in uniform. With that, I'll turn it over to Ken.

Ken Possenriede, Chief Financial Officer

Thanks, Jim, and good morning, everyone. As I highlight our key financial accomplishments, please follow along with the web charts that we included with our earnings release today. So let's begin with Chart 3 and an overview of our results for the quarter. Sales, segment operating profit, cash from operations, and earnings per share remain strong. And as Jim noted, we achieved record sales in the quarter. We generated $1.9 billion of cash from operations, and we continued our cash deployment actions in the quarter, returning $757 million of cash to our shareholders through a combination of dividends and share repurchases. In addition to these results, we again increased our backlog to $150.4 billion, representing the ninth consecutive quarter of record backlog. And based on the strength of our performance to date, we have updated our financial outlook for 2020 and are also providing our 2021 preliminary financial trends. Turning to chart 4, we compare our sales and segment operating profit in the third quarter of this year with last year's results. Sales grew 9% compared with last year to a record $16.5 billion, continuing the strength we had in the first two quarters, while segment operating profit increased 6% over last year's level to nearly $1.8 billion. On chart 5, we'll discuss our earnings per share in the quarter. Our EPS from continuing operations was $6.25, an increase of $0.59 or 10% higher than last year, driven by a $100 million increase in segment operating profit and additional FAS/CAS income, partially offset by an increase in the effective tax rate. On chart 6, we review our year-to-date cash from operations. Through three quarters, our cash from operations is $6.4 billion, a 10% increase over the same point in 2019. This performance does include $1.4 billion of CARES Act benefits, which were more than offset by $1.8 billion of accelerated payments to our suppliers. Moving on to chart 7, we provide our revised outlook for 2020. With just one quarter left in the year, we are now providing point estimates of results for the entire year versus the ranges we have provided in previous quarters. We expect sales to be approximately $65.3 billion for the year. That's above the high end of the guidance range we provided last quarter. At $7.1 billion our forecasted segment operating profit is also above the high end of the guidance range last quarter, maintaining a 10.9% margin. This puts our sales approximately 9% above our 2019 results and segment operating profit approximately 8% last year. Our FAS/CAS pension adjustment remains unchanged at a little less than $2.1 billion. Earnings per share is expected to be approximately $24.45 above the high end of our previous guidance range driven by additional sales volume and the continued performance across our business. And cash from operations remains at greater than or equal to $8 billion, which assumes no contributions to our pension trust in 2020. Chart 8 shows our new outlook for sales by business area for the year. In total our point estimate for sales outlook is approximately $1 billion above the midpoint of our last guidance and that's driven primarily by Aeronautics. On chart 9 we provide a similar view of our new outlook for segment operating profit by business area for the year. Like our sales, segment operating profit is $150 million above the midpoint of the guidance range from last quarter and that's driven primarily by Aeronautics and RMS. On Chart 10, we provide a preliminary look at our 2021 trends. As we look ahead, we expect our 2021 sales to be greater than or equal to $67 billion, a 3% increase over our current outlook for 2020. We expect our segment operating margin will be between 10.9% and 11.1%, showing continued strong performance on our legacy programs in all business areas. And as you recall from last quarter, we expected 2021 cash to be at least $7.8 billion, including a $1 billion contribution to our pension trust. We are now pleased to increase that estimate by $300 million to $8.1 billion still including the same $1 billion pension payment. We also plan at least $1 billion in share repurchases, the same level as we anticipate in 2020 and that's more than offsetting any expected share issuances in the year. And additionally we have a debt maturity coming due next year of $500 million. Moving to our FAS/CAS outlook. We expect our net 2021 FAS/CAS adjustment will be approximately $2.1 billion and that's similar to the adjustment for 2020. This estimate assumes a discount rate at the end of the year of 2.5% or 75 basis points below the 2019 rate. And based on our performance to date, we are assuming a 7% return on our assets for 2020 and we are maintaining that same rate of 7% per year for our long-term asset return assumption. And finally on chart 11, we have our summary. We have seen growth and strong performance from all our business areas this year with increased backlog and sustained cash generation throughout the year. Our updated 2020 financial metrics anticipate strong full-year results and we expect to see continued operational performance and increased cash flows in 2021. Based on our portfolio of legacy programs, new wins, and strategic investments in key growth areas, we have continued to grow our backlog, deliver value to our customers, and return cash to our stockholders. And with that, we're ready for your questions. John?

Operator, Operator

Thank you. We are now opening our lines for questions. First, we have Sheila Kahyaoglu with Jefferies. Please go ahead.

Sheila Kahyaoglu, Analyst

Thanks so much, and good morning Jim and Ken. Revenues have grown 30% since 2017, and if we exclude the F-35, volumes are up 17%, so high single-digit growth per year. What programs or product areas do you think decelerate the most in your view from these high-single-digit levels to 3% implied trend line for 2021? And then is this something of a new normal we should be thinking about or do we transition from platform programs to less quantifiable opportunities that could reshape the growth curve? Thank you.

Ken Possenriede, Chief Financial Officer

Thanks, Sheila. I'll begin and then I'll ask Jim to share his insights afterward. First, let's discuss how we arrived at this trend data. Over the past couple of months, we've been working on our long-range plan and collaborating with different business areas and the corporation to establish assumptions related to taxes and pensions. After that, we review everything with our Board, which primarily reaffirms our 2020 numbers and outlines the long-range plan for 2021 through 2023. We typically do this in late September. After the quarter closes, we evaluate our trend data. As we've noted in our prepared comments, Jim and I have raised our guidance by $1 billion for 2020. Now, let me go through the different segments and then I’ll share my thoughts on potential opportunities before handing it over to Jim. Starting with Aero in 2021, we expect low-single-digit growth for the portfolio. Specifically, the F-35 shows growth similar to the overall trend. Currently, production and development are flat, with growth driven mainly by sustainment as our fleet expands. The F-16 program is experiencing solid growth as production and modernization ramp up. Interestingly, air mobility sales are steady; we anticipated a slight decline, but they remain stable as we head into 2021. For Aeronautics, we expect strong double-digit growth in our Skunk Works and classified Advanced Development Programs due to recent awards. Moving to Missiles and Fire Control, we also see low-single-digit growth, following several years of strong gains as we approach production capacity for key missile programs like Hellfire and GMLRS. Demand remains robust, but year-over-year growth appears more stable than before. We're seeing significant contributions from programs like PAC-3, which is expected to grow double digits. Precision fires will grow in the mid-single digits, while growth in THAAD programs will be affected by timing related to procurement costs under multi-year contracts. For RMS, we also predict low-single-digit growth at this time. At Sikorsky, growth is low-single-digit and reflects the production mix as life cycles shift. Programs like the Combat Rescue Helicopter and CH-53K are expected to ramp up with double-digit growth, partly offsetting declines in VH-92 and Canadian military helicopters, as well as a modest decrease in Black Hawk volumes even though it remains a strong contributor. In IWSS, we foresee a slight decline in 2021. However, our Aegis franchise anticipates high-single-digit growth driven by international opportunities. We are experiencing reductions within our Radar business with declines in TPQ, as we await the next-gen programs like Sentinel and TPY-X, and we expect lower volumes on the Littoral Combat Ship program in 2021. A positive surprise in RMS comes from our training solutions, projected to see solid double-digit growth due to increased digital training events in an international pilot training program. Finally, in Space, we currently identify it as our fastest-growing area, expecting mid-single-digit growth, largely driven by our strategic missile defense initiatives and anticipated awards for next-generation interceptors, although legacy MIL space programs like SBIRS, Advanced EHF, and GPS are down in the mid-single digits due to life cycle factors. As we approach January, we will spend the next three months finalizing the second phase of our plan. Before providing guidance, we'll review how we finished 2020, reassess our orders plan for 2021, and determine its impact on top-line sales growth. We'll also evaluate our backlog and the likelihood of converting it to 2021 sales. Before I pass it to Jim, I'd like to highlight some order opportunities. We continue to see demand for additional capabilities in F-35, which may not materialize in 2021 but could grow in the future, especially with other countries showing interest. For F-16, we've received the first contracts part of the IDIQ agreement and we foresee many opportunities, as well as for C-130. The classified sector in Aeronautics presents numerous possibilities. In Missiles and Fire Control, the future TLVS program is promising for Germany. CH-53K holds potential for international markets, along with Future Vertical Lift discussions. In space, there are classified projects, and many of these are focused on platform programs. Other areas of focus will include mission systems. Jim will provide more details about our 5G work and the interconnectivity of our product solutions.

Jim Taiclet, President and CEO

Ken provided a great overview of the detailed aspects that will impact 2021. I want to build on his insights regarding growth themes for not just the next year, but for several years to come. As Ken mentioned, there is a strong demand for our key products both domestically and internationally, such as the F-35, F-16, and CH-53K. We will incorporate more mission systems content into these products as we advance, along with technology updates that were briefly mentioned. These are significant trends that will persist. I also want to highlight new technology production ramp-ups that Ken referenced, particularly in hypersonics. There is substantial potential in this area due to increasing threats from Russia and China, which the U.S. and its allies must counter with both offensive and defensive hypersonics systems, where we hold a leadership position. The classified space sector presents vast opportunities as well, with our Space business leading the industry in delivering outstanding products. Another vital point is Future Vertical Lift, as Ken noted. As we embrace network-centric operations, which I touched upon with a few implemented examples, it will enhance our positioning with key platforms. Consider systems like Aegis, F-35, and Future Vertical Lift—these will serve as critical edge computing nodes and core networks going forward. Our platforms are well-positioned for the 5G.mil initiative we're pursuing, which will open new revenue opportunities. This includes networking-as-a-service and subscription models for our customers, akin to what you experience with cellphone plans. You may not see all the components involved, but every morning it functions seamlessly with the latest technology. We are preparing to explore these avenues, even though it may require some additional time to realize.

Operator, Operator

Our next question is from Myles Walton with UBS. Please go ahead.

Myles Walton, Analyst

Thanks, good morning. First one is just a clarification for Ken and your remarks on backlog. You mentioned some of the opportunities, but I didn't hear if you thought it would end the year flat up or down. And then Jim, if we take everything that Ken laid out from a cash and capital deployment with respect to the $1 billion share repurchase and then debt retirements about $1 billion a year, you'll have maybe $6 billion this time next year and a business that requires $1.5 billion to $2 billion on hand. So it's going to continue to raise the question of how you're progressing looking at potential opportunities, particularly in the M&A arena. So hoping you can give some perspective there as you've looked a little bit deeper from your time. Thanks.

Ken Possenriede, Chief Financial Officer

So – hey, Myles. Good morning. So first question on the backlog. We are right now planning on growing our backlog in the fourth quarter. There is one binary event that has to happen and that is the closure on Lot 15 production. We're in the midst of negotiations with the customer right now. I think there's agreement on both sides to try to get this done by year-end. But if it doesn't happen, it doesn't happen and it rolls into next year. But if it does happen, we will continue the growth in the fourth quarter of backlog increase.

Jim Taiclet, President and CEO

And so Myles to speak to M&A approaches, I think we actually have to take two levels up and speak first to the strategy for the company. The executive team and I and the Board agree on what we call our 21st century warfighter concept, which has four pillars to the strategy. And I'll go through them really briefly. But first of all it's lead. We want to lead the acceleration of 21st century technologies into the national defense space, not just by doing it ourselves but by teaming with commercial industry and things like AI, 5G, edge computing, autonomy, additive manufacturing et cetera. So we're planning to lead that acceleration into 21st century technologies. We're going to innovate as a second pillar internally along with that. So we're going to innovate in both the realms of science such as directed energy, hypersonics, I mentioned earlier, as well as in this networking innovation and bring capabilities to our platforms and frankly our – ultimately our competitors' platforms to be able to make them all more effective on behalf of our customer. The third pillar of all of this is driving operational excellence. And so that's really about while doing all this increasing Lockheed Martin's margins and ROI, while reducing the total life cycle cost for our customers because for them to afford what they need to do in the future our industry actually has to get more efficient at the same time. And then lastly, and this is where we get into more of capital allocation, we believe in this business and we're seeking to invest in it for growth. So growth of our asset base, our capabilities is sort of the fourth pillar and that's going to provide solutions to our customers that they're going to need in the future that we can't necessarily deliver today. So when we take those four pillars and say, okay, well what are we going to do with capital allocation and all that cash that this really fantastic business is generating as you said, it's really first of all to support our strong dividend. We're going to continue to do that. And secondly, we're going to keep investing in organic capital expenditures to build capacity to deliver on our core business. Much of what we spent this year is on classified programs in both Aeronautics and Space that are growing relatively rapidly. And so we're going to continue to do those organic investments every time we can. Thirdly, alongside those CapEx investments, we're going to invest in R&D to sustain our technological leadership. And again, both in traditional or defense-centric areas, such as hypersonics and also in more commercially introduced areas such as networking. So those are the first three: it's a dividend, CapEx, and R&D. But we're also going to seek acquisition and joint venture opportunities to deepen our capabilities in things like mission systems, as Ken said, and to add technological firepower to our existing company. For example, we just bought a business called i3 that gives us a novel capability and thermal management for hypersonic glide bodies, which is something we wanted to bring in-house and again accelerate our own potential for developing that piece of the technology that's so absolutely critical. And so we're going to be looking for opportunities in the M&A space and the joint venture space and even partnerships that are commercial to thicken our portfolio and also to bring in the technologies faster into the company that we think are going to be crucial for the future. So we plan to be active but we also plan to be very, very prudent. In my last business experience, we were fairly active on the M&A front but we turned down actually quite a few more opportunities than we went through with. So we'll continue to have that discipline here at Lockheed Martin, but we do want to invest in this company and grow and use our cash flow to do that when we can.

Operator, Operator

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

Rich Safran, Analyst

Jim, Ken, Greg, good morning.

Jim Taiclet, President and CEO

Good morning.

Rich Safran, Analyst

So a space question with about three parts. Margins at Space were a bit weaker than I thought. And I'm guessing there was an issue there at ULA. So I thought you might discuss that. Next, we're talking about 2021. I thought you might discuss the competitive dynamics in the Space business. Does SpaceX represent a challenge to your plans? And given the remarks you just made, do you think contested space is a growth area next year? Finally, here Jim, I thought you might expand on the opening remarks about the new satellite constellation. And if it's applicable discuss generally the long-term space opportunity set here? And if the 21st-century warfighter program you just mentioned is involved.

Ken Possenriede, Chief Financial Officer

Okay. Hey, Rich, that sounded like a four part question. I'm not good at math. So, yeah regarding the margin reduction on Space. It's based on a couple of things. One, we had one less event on ULA. There was a slip in one of the launches. So that was the main driver. But you also had lower risk retirements on advanced EHF and fleet ballistic missile in 2020 compared to 2019. Regarding SpaceX and then I'll let Jim chime in. We at ULA – we Boeing and the United Launch Alliance leadership team we have seen SpaceX as an emerging threat. I mean, they are more than an emerging threat right now. But what I would say is of the recent competitions we've had with them, we've actually been pleased with the outcome of where ULA landed relative to SpaceX. So I think going forward, we're confident that we certainly have the mission-capable abilities, but we also think we now have a price point that is compelling to customers that will allow ULA to get its fair share of awards over SpaceX. I don't know, Jim, if you want to talk about the next two.

Jim Taiclet, President and CEO

Sure. When it comes to test and space all I'll say is that, there are kinetic and non-kinetic emerging threats to space on-orbit space assets and even ground stations and the links between them. And so as a prudent national defense, I think our government is going to need to understand and work with the industry on how to address those kinds of threats and so I'll leave it there. But those threats are emerging and they're becoming more material. When it comes to the new satellite constellation, this is to me coming from the telecom and technology sector, the real cracking open up the door of having a multi-layer, multi-lateral survival communications system that can enable a 5G.MIL concept that we're working with. So I think it was a real breakthrough for Rick Ambrose and his business to win a big part of that it's called the transport layer as I said. And what that does is put a low-orbit constellation similar to what you're hearing about in the commercial sector that we'll be able to transmit 5G speed, capacity and latency signals between really all domains now. So it would be into upper space orbits down to aircraft in the air to ground troops and vehicles to ship-borne operations and theoretically and potentially even to undersea. So this transport layer is sort of one of the first elements of what we would envision in the future as 5G.MIL architecture and so we're right in the middle of designing that now with our customers. So yeah, it's an important piece. There'll be more competition. This will be a competitive space, but we want to get out in front of it. And I think the Space business area of Lockheed Martin gives us a huge advantage over really anyone else in taking the lead in this.

Operator, Operator

And next we'll go to Noah Poponak with Goldman Sachs. Please go ahead.

Noah Poponak, Analyst

Can you hear me?

Ken Possenriede, Chief Financial Officer

Yes. Hi, Noah.

Noah Poponak, Analyst

Okay. Hello. Ken, I thought you had been pretty consistent for a while here that MFC would remain the fastest-growing segment of the company through – for a few more years. And you've just – recognizing that the dispersion of the growth rates you just guided to for revenue in 2021 by segment is pretty tight you didn't guide it to be the fastest-growing segment and it's a meaningful deceleration from 2020. So what's changed there if anything, or do you just have conservatism built into that? And then on the margin in that segment following that coming down for a few years now with the mix shift. Is that bottoming in 2020, or any color on the margin going forward in that segment would be helpful as well.

Ken Possenriede, Chief Financial Officer

Thank you for the question, Noah. There are a few factors to discuss regarding our top-line growth. As I mentioned earlier, some of our tactical strike missile programs are currently operating at full capacity, particularly Hellfire and GMLRS. We also have a timing issue with THAAD, but we anticipate growth with THAAD moving forward. The growth opportunities for Missiles and Fire Control will mainly be in PAC-3 and precision fires, as they are not at capacity and we are seeing strong demand both internationally and domestically. Additionally, we are in the development phase of a large classified program, which we expect to enter limited rate production in the next four to five years, leading to a significant increase in that area. In the short term, some areas may be limited by capacity, but we will assess the strong demand with our customers to see if it makes sense to increase capacity for programs like Hellfire. Regarding margins, we anticipate a slight decline in 2021 due to the development program growing at the top line, which will cause some dilution. Therefore, you can expect a slight dilution in margins for 2021.

Operator, Operator

And next we go to the line of Ron Epstein with Bank of America Merrill Lynch. Please go ahead.

Ron Epstein, Analyst

Hey, good morning, guys.

Jim Taiclet, President and CEO

Good morning.

Ron Epstein, Analyst

Jim, I have a quick question for you regarding the technology aspect. A couple of weeks ago, the Department of Defense announced their 5G experimentation and testing at five different installations. I was surprised to find out that Lockheed wasn't involved, especially considering your recent comments. Can you share your thoughts on this? Is it an area that Lockheed is interested in, or is it not a focus for the company?

Jim Taiclet, President and CEO

Well, there's two concepts around 5G. One is standard communications activity. So, terrestrial, if you will commercial communications. So, what is generally going on in the programs awarded that you're referring to is certain bases or ranges are going to have a standard terrestrial 5G implementation on those bases and ranges. That's not so much what we're interested in. We're interested in operationalizing the technical capabilities of 5G wave forms and technology software and hardware to improve our defense products and our defense products' performance in an inter-related way. So, that's a derivative of having the network in place. At a base level that's not going to really deliver what we're looking for. We need a global 5G connectivity platform and that's why space is so important an element of this. It's also why our airborne platforms will likely have a big role as well because we need edge compute nodes and edge transmission points to be able to get into battle outside of the bases if you will. So, we're really talking more about how do you go to war on a battlefield and bring with you and have available to you the throughput of data, the latency benefits, and the ability to do software-defined networks and manage spectrum dynamically on a battlefield. That's really what we're after and that will improve our national defense.

Operator, Operator

And next we'll go to Cai von Rumohr with Cowen. Please go ahead.

Cai von Rumohr, Analyst

Yes. Thank you so much for all the great information you're given us. So, cash flow, you expect cash flow from ops up $100 million next year even though it looks like you have a headwind in pension of about $1 billion, you have a headwind in terms of payroll tax deferrals looks like $500 million. Sort of what are the drivers to get you up? What's happening to CapEx? How much is that going to come down? And maybe give us some color if you could in terms of the relative direction in 2022. Thanks.

Ken Possenriede, Chief Financial Officer

You bet, good morning. We've been working on a culture of cash for quite some time now and are starting to see the benefits. In 2021, we're seeing $8.1 billion in cash from operations, which is $300 million above our earlier outlook. CapEx for 2021 is projected at about $1.7 billion, consistent with this year. This year, we're benefiting from a payroll tax holiday worth $460 million. Additionally, we're expecting about $750 million to $800 million by the end of the year due to an acceleration in the progress payment rate from 80% to 90%. We plan to transfer all these benefits from the government to our supply chain, and we'll be whole on those in 2020. However, there’s a headwind from the payroll tax as 50% of that $460 million will be paid next year and the other half in 2022. Next year, we have a $1 billion pension contribution. For 2022, we now estimate cash from operations closer to $8.2 billion, which is a $300 million improvement from the previous $7.9 billion. We anticipate CapEx to remain at about $1.7 billion in both 2022 and 2023. There will be another headwind from the payroll tax and the pension payment of approximately $1.7 billion in 2022. Pre-pension payment, our cash from operations for 2022 is around $10 billion. Another factor we’ve discussed is the change in R&D tax assumptions, which means we will be amortizing R&D spending instead of expensing it starting in 2022. This change would reduce our cash from operations in 2022 by $2.1 billion. For 2023, we expect cash from operations to be at least $8.3 billion, an increase of $100 million from 2022. We also see CapEx remaining around $1.7 billion, and the R&D impact will decrease from $2.1 billion to about $1.8 billion during that period. We have made significant efforts to improve our working capital, particularly in contract assets, and we believe there are still opportunities to enhance these numbers.

Operator, Operator

And our next question is from Doug Harned with Bernstein. Please go ahead.

Doug Harned, Analyst

Thank you. Good morning.

Ken Possenriede, Chief Financial Officer

Good morning.

Doug Harned, Analyst

I have a two-part question on the F-35. When you look at the President's budgets, they keep taking down numbers for the F-35 Congress keeps adding some back and at the same time you've got some growing international opportunities, which you've talked about. But those don't come immediately. So one would think a more stable trajectory would be helpful here. So how do you plan production around this kind of scenario? And as we see more growth coming from sustainment, how do you think that will affect your margin trajectory on the F-35?

Jim Taiclet, President and CEO

I’ll address that, Doug. Given the impacts of COVID, we initially anticipated delivering about 140 aircraft this year, mainly from Lot 12, which is the first set of our block buy. Currently, the team is forecasting around 120 to 125 deliveries, though this number may change. Based on our assessments and coordination with our supply chain and production teams, we are aiming for approximately 140 aircraft deliveries in 2021. Looking ahead, we project deliveries of about 170 aircraft in 2022, supported by demand from Lots 12, 13, 14, and the potential Lot 15 order we hope to secure by the end of this quarter. For 2023, we expect similar numbers around 170 aircraft, based primarily on the U.S. government's program of record. Although there were some congressional additions earlier, we do not expect any beyond 2021. There remains significant pent-up demand from our partner countries and FMS customers, and as you mentioned, there are additional interests for the aircraft from existing and potentially new FMS countries, though these are likely to emerge after 2023. Therefore, we have a solid understanding of our production outlook for 2022 and 2023. Regarding margins, it primarily depends on the PBL. Based on current buying patterns for sustainment, it is negatively impacting the overall F-35 portfolio. However, there are production opportunities if we can enhance our performance, eliminate inefficiencies, and negotiate terms that reward us for those improvements. We are noticing increasing interest from customers in a performance-based logistics concept, which would require us to take on some investment risk, but could offer margin benefits if we meet the service level agreements we establish.

Operator, Operator

And next we'll go to Jon Raviv with Citi. Please go ahead.

Jon Raviv, Analyst

Thank you and good almost afternoon. Question about sort of CapEx environment you're operating in. As you can see there's a lot of focus on your growth rates especially deceleration from 2020 growth to 2021 growth at least how you see it now. But at the same time, CapEx is remaining at this $1.7 billion level, you said 2021, '22 '23. So even though there seems to be an assumption that growth rates and opportunities are slowing down you're still spending a lot more CapEx than you were almost ever. So how do we sort of square those two things? And is the industry or the customer I should say offering you enough certainty to be spending that CapEx such that you now have the long-term payoff that we're all looking for?

Ken Possenriede, Chief Financial Officer

Thank you. Hi, Jon. Good afternoon. It's Ken, and I'll address that. Throughout our portfolio, we continue to see demand for capital expenditures. One point I'd like to highlight before passing it to Jim is regarding Aeronautics. We have reduced our capital spending on the F-35 due to COVID. However, to meet the higher quantities I mentioned earlier when Doug asked about the F-35, we still need to expand our capacity for it. The same applies to the F-16. Jim noted that our current backlog stands at 130 aircraft, and we plan to deliver our first airplane around early 2022, targeting roughly eight per year. Ultimately, by the mid-decade, we aim to deliver three to four F-16s each month, necessitating further capacity building. We're also advancing on the classified project in Palmdale, where we need to construct the facility. We are optimistic that our performance on that program will attract interest from other potential customers, which is one of the opportunities I referenced in response to Sheila's question. There are additional prospects for us that aren't currently planned. In Missiles and Fire Control, we are increasing our capacity for PAC-3, although not for Hellfire or GMLRS as of now. We feel confident about the PAC-3 build-out, seeing potential for over 500 PAC-3s annually, with possibilities for even more. The key question is whether now is the right time for us to expand beyond the 500 per year that we are already planning. In Space, we have the advanced Gateway Center and other opportunities requiring capital investment. Regarding RMS, they have effectively reshaped their portfolio, and we do not foresee much increase in facilities or capital there. Jim has challenged us to identify low-hanging fruit for spending capital or IRAD, and to determine areas where investments should focus on the 21st-century warfighter and our digitalization initiatives. Although our overall spending may remain consistent, the distribution of that spend may vary over time.

Jim Taiclet, President and CEO

Just the one comment I'd add to that is, we are raising the capital expense decision-making process a level and we're going to be looking across all the business areas simultaneously and doing the rank ordering at that level, which will may result in some adjustments as Ken suggested. And also, I would highlight the digital transformation side of this which is both in the factory offices and functions. That's going to help us meet our customers' needs on one hand, but it's also going to help us improve margins on the other hand and be more efficient internally as we do all of this. So, there's investment upfront for that as well. But it's going to have a dual benefit.

Operator, Operator

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

Seth Seifman, Analyst

Thanks very much and good morning. I think, Ken, you mentioned a little bit earlier the profitability expectation for Missiles and Fire Control in 2021. Can you just walk us through the other segments real quick?

Ken Possenriede, Chief Financial Officer

You bet. Thanks, Seth. Now that we're in the afternoon, I want to mention that at Aeronautics, we expect a slight improvement in margins from 2020, which we're very pleased with. The margins for the F-35 and our other combat air programs are anticipated to increase, aligning with our overall margin expectations. We foresee relatively stable margins in 2021 for air mobility. The improvements in margins for combat air and air mobility will more than balance any dilution expected from the Skunk Works. Regarding Missiles and Fire Control, I'll move on to RMS. We're pleased to see returns to double-digit margins this year and anticipate a slight improvement in 2021, which we are very happy about, thanks to all the integration work we've discussed. The portfolio shaping at RMS is starting to yield positive results. Sikorsky is the main driver for this, with expected year-over-year improvements in production programs such as Blackhawk, VH-92, and CRH. Lastly, in Space, we expect a slight erosion in margins in 2021, similar to what we see in Missiles and Fire Control, due to dilution from the OPIR development program and increased development content in our strategic missiles and missile defense portfolio, including hypersonics and the next-generation interceptor. Thanks for the question.

Jim Taiclet, President and CEO

It's Jim. I'll conclude today's session by emphasizing that Lockheed Martin has achieved another quarter of strong financial and operational results. With a solid backlog, a focus on our program execution, and strong demand for our range of products and services, we are well-positioned for a successful end to 2020 and continued growth in 2021. Thank you all for joining us today. We look forward to our next earnings call in January. That wraps up the call. Thank you, John.

Operator, Operator

Yes. Thank you. Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may now disconnect.