Earnings Call Transcript - LMT Q2 2020

Greg Gardner, Vice President of Investor Relations

Thank you, John, good morning. I'd like to welcome everyone to our second 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 Chief Executive Officer

Good morning, everyone, and thank you for joining us today. It's a pleasure to be here on my first Lockheed Martin earnings call, and I look forward to working with all of you. I hope this call finds you and your families safe and healthy. The world continues to combat the coronavirus outbreak while striving to recover and sustain economic activity. Our primary objective at Lockheed Martin is to ensure the health and welfare of our employees and their families, our teammates, customers, and communities. We remain vigilant taking the necessary steps to help protect our workforce while producing the products and solutions our customers need to achieve their important readiness objectives. Our business areas have taken actions including implementing alternative work schedules, health and safety checks at our facilities, and telework wherever possible. Most recently, our Aeronautics team established a rotational facility plan for our F-35 production line, allowing us to continue manufacturing the aircraft while practicing social distancing and completing regular deep cleanings. The corporation also continues to support our critical industrial base suppliers, frontline medical workers, and our local communities with COVID-19 relief and response. In March, the Department of Defense announced it would increase progress payment rates to large businesses from 80% to 90%, accelerating payments for the completion of work in recognition of the challenges posed by COVID-19. The DoD’s expectation was that prime contractors would flow these accelerated payments to the supply chain. Through the second quarter, Lockheed Martin has flowed all of the accelerated payments the corporation has received from the Department of Defense, totaling $1.3 billion to our supply chain. In this process, we've given priority to small and vulnerable suppliers as we continue our efforts to promote a healthy and sustainable defense industrial base. We've also continued to support our local communities and to date have made substantial donations to nonprofit organizations involved in COVID-19 related relief and assistance, with an emphasis on veterans and military families. As a global organization employing thousands across the world, we are supporting related initiatives in 15 different countries, including donations to food banks, healthcare facilities, distance learning, and research efforts to help combat this disease. This corporation has hired more than 9,000 new employees across the United States since the crisis began and is advertising for another 3,000 positions. We remain on track with plans to hire approximately 12,000 employees during 2020. Across the country, we produced more than 65,000 protective gowns and 30,000 face shields, and we've donated PPE at 174 locations where frontline medical workers are caring for COVID-19 patients and others at risk. Through all these initiatives, Lockheed Martin remains committed to supporting our employees, our suppliers, and the communities in which our company operates throughout this ongoing pandemic. Ken will review our first quarter financials and updated full-year outlook in more detail in a few minutes. As you've seen from our press release, we had a very strong quarter financially despite the effects of the coronavirus. Mitigation plans put in place by each of our business areas, their teammates and supply chain, the international community, as well as strong support from the Department of Defense and broad U.S. government actions have allowed us to minimize the financial impacts on our company. This coupled with outstanding operational performance has enabled us to increase our full year outlook for sales, earnings, EPS, and cash from operations. Sales in the quarter were 12% greater than last year, as all four business areas increased from 2019. Our segment operating profit results were also strong, growing 15% year-over-year, driven by both higher sales growth and an increase in segment profit margin to 11%. We had a strong quarter of cash generation, bringing in over $2.2 billion of cash from operations and executing our balanced cash deployment strategy. Moving to new business activities, we received nearly $22 billion in orders this quarter, raising our backlog to over $150 billion, a new high watermark. Our Aeronautics business area led the company with over $9 billion of orders, including $7 billion of total orders booked for the F-35. We were able to add 84 jets to the program with the finalization of two Lot 14 production contracts, bringing the current number of planes in our backlog to 411 aircraft. Our F-35 team also added approximately $1 billion in combined sustainment and development awards this quarter as well. Missiles and Fire Control also had a strong quarter, with the Defense Department announcing several PAC-3 awards, including one for over $6 billion to supply PAC-3 MSE interceptors, launcher modification kits, and associated equipment to support the United States and foreign military sales customers across multiple contract years. These awards demonstrate the global demand for PAC-3 MSE interceptors and to meet that demand this year, we began work on an 85,000 square foot building expansion at our Camden, Arkansas facility, which is expected to be completed by the fourth quarter of 2021, with operations beginning in the first quarter of 2022. Our Rotary and Mission Systems secured orders of over $1 billion to support and supply 24 MH-60 Romeo helicopters to the Government of India. These Sikorsky SEAHAWK aircraft will provide Maritime Anti-Surface and Anti-Submarine Warfare capabilities to India, as well as cargo, utility, and search and rescue missions. Our Space business area added multiple orders including a classified award for over $1 billion. In total, the corporation grew orders 23% above the second quarter of 2019 and achieved a companywide book-to-bill ratio of nearly 1.4 for the quarter. I'll touch briefly now on the Department of Defense budgets as both the House and Senate Armed Services Committees have completed their respective markups of the fiscal year 2021 National Defense Authorization Act. Each version adheres to the Bipartisan Budget Act of 2019 spending targets and equal approximately $740 billion for national defense. Appropriation committees from each chamber are in the process of drafting the funding legislation to accompany the authorization. There are encouraging elements for our portfolio, as the Senate version confirmed that the national defense strategy remains the roadmap for the armed services, and the bill was passed with strong bipartisan support. Our portfolio was well supported in the Senate version for the recommended increase of 16 F-35 aircraft above the President's request, additional funding for Missile Defense priorities including an 8 THAAD battery, and increased funding for the Homeland Defense Radar-Hawaii program. Congress will continue with the authorization and appropriation phases. We look forward to the finalization of the process and supporting our warfighters' needs. Moving on, I’d like to highlight several significant events that occurred across the corporation during the past quarter. Beginning with Aeronautics, the F-35 team achieved another operational milestone, as our United Kingdom partner celebrated the initial carrier deployment of its 617 Squadron. This legendary unit, known as the Dambusters from their exploits in World War II, is now aboard the HMS Queen Elizabeth aircraft carrier. The Squadron will now begin a series of flight trials demonstrating the jets' ability to defend the carrier through Combat Air Patrols, rapid deployment, and interoperability with other U.K. Naval assets. This is all in preparation for their second embarkation later in the year, when the Squadron will join the carrier and her task group for a large multinational training exercise with U.S., European, and NATO partners. The ship will then set sail again next year for her maiden Global Carrier Strike Group 21 deployment. We're proud to provide this unrivaled fifth-generation aircraft to help support our U.K. partner in the security of their nation. Moving to RMS, our radar surveillance systems team achieved two notable milestones this quarter. In April, they successfully completed the Sentinel A4 Radar Program preliminary design review, following successful system requirement and system functional reviews, which took place earlier this year. So just four months after the initial contract award, the Sentinel team has already achieved several key milestones as it progresses the critical design review phase later this year, and then into fabrication, demonstration, and testing. The Sentinel A4 Radar replaces the current A3 variant and will provide improved Air and Missile Defense against low flying unmanned aerial systems, cruise missiles, drones, and other threats. For the program of record of approximately 200 systems plus international partnerships, the Sentinel Program alone has a total potential contract value of over $3 billion. RMS also delivered to the U.S. Army, the first AN/TPQ-53 radar system, which is equipped with Gallium Nitride to provide additional power and enhanced counter-fire target acquisition capabilities. The TPQ-53 radar locates and tracks enemy indirect fire, either in 360-degree or a 90-degree mode, and it was first deployed in 2010 to Iraq and Afghanistan, where it delivered outstanding performance and reliability to defend our troops. We are currently in production to provide approximately 190 units with a contract value of $1.6 billion. Both the Sentinel A4 and the TPQ-53 are part of Lockheed Martin's open scalable radar architecture, the cornerstone of each of these systems' design, which allows for upgrades that will not only extend the lives of the radars but evolve their capabilities over the next 40 or so years. In Missiles and Fire Control, our Air and Missile Defense line of business marked the delivery of the 500 FAD interceptor to the U.S. Army. The FAD program is a key part of the U.S. Missile Defense System and has been selected by multiple international partners to support their national security. MFC continues to expand our production facilities to accommodate that demand. This quarter, our space business area, as part of the Blue Origin National Team, was down-selected for the next phase of the human landing system for NASA's Artemis program. The Artemis program is the country's ambitious endeavor to land humans on the moon in 2024 and return them safely to Earth. Leveraging designs and technologies used on our Orion program, Lockheed Martin will produce the crew ascent element, the vehicle which will transport astronauts from the lunar surface to begin their journey back to Earth. We look forward to supporting this remarkable mission and continue our long-standing legacy of supporting NASA missions. Before I turn over the call to Ken, I'd like to take a moment to thank Marillyn Hewson for her years of leadership and express how honored I am to have the opportunity to lead Lockheed Martin, a company that I consider a national asset. My experiences as an Air Force pilot, flying Lockheed Martin aircraft in Operation Desert Shield helped shape my belief that helping to provide for the defense of our nation and its allies is one of the most important endeavors that one can undertake. When presented with the opportunity to become President and Chief Executive Officer here, I viewed it not as a job offer but as a call to service. Moreover, Marillyn and her Executive Team have positioned the company for even greater success for the future, and I'm eager to deliver on that prospect. Since becoming CEO about a month ago, I've met virtually with a significant number of our key government customers to introduce myself, reaffirm our commitment to performance and affordability, and get their feedback. I've been pleased with the broad response of confidence in Lockheed Martin as a key partner, but also the candid discussions on the challenges we jointly face in National Security. There's great appreciation for the technologies and solutions we provide. We have a long heritage of innovation for our customers. I plan to continue this legacy as well as pursue a long-term strategy to deliver enhanced capabilities to support what I call the 21st century warfighter concept. That concept endeavors to bring relevant lessons and the latest technologies from the broader tech sector to the defense industrial base. I believe Lockheed Martin is uniquely positioned to address this and other evolving security needs of our nation and its allies. I'm excited to have this opportunity. I've also had the chance to meet with many of you in our Investor Community in recent weeks to engage in conversations, and I look to continue that dialogue. As you can tell, I'm quite convinced that we can further leverage our key platform positions and broad portfolio to drive long-term value to our shareholders while furthering both National Defense and Scientific Discovery. With that, I'll turn the call over to Ken.

Ken Possenriede, Chief Financial Officer

Well, thank you, Jim, and welcome aboard, and good morning to everyone. As Jim noted, I also hope that each of you are doing well and staying safe. As I highlight our key financial accomplishments, please follow along with the web charts that we've included with our earnings release today. So let's begin with Chart 3 and an overview of our results for the quarter. We saw strong results and year-over-year growth in sales, segment operating profit, cash from operations, and earnings per share this quarter. We delivered $16.2 billion in sales, $1.8 billion in segment operating profit, and $5.79 in earnings per share, which included a non-cash charge related to an international joint venture that we are now exiting. We generated $2.2 billion of cash from operations, and we continue to execute our balanced cash deployment plan for 2020, returning almost $1 billion to our shareholders. We achieved a new record backlog of greater than $150 billion, exceeding our all-time high for the corporation for the eighth consecutive quarter. We have updated our full-year guidance, increasing our estimates for sales, earnings, and operating cash flow as COVID-19 mitigation plans and our outstanding performance have minimized our year-to-date impacts. Overall, it was a strong quarter for the business in challenging times. Turning to Chart 4, we compare our sales and segment operating profit this year with last year's results. Sales grew 12% to $16.2 billion, led by volume in Aeronautics and Missiles and Fire Control, while segment operating profit increased 15%, led by earnings growth in Aero and RMS. The resulting segment operating margin was a strong 11% for the second quarter. These results include impacts caused by COVID-19 and reflect the proactive efforts of Lockheed Martin and our customers to mitigate these disruptions, particularly as they apply to our supply chain. As we have closely monitored this evolving situation, it has become apparent that some of the impact we anticipated will be realized in the second half of 2020 versus being contained primarily in 2Q. Chart 5 shows our earnings per share for 2Q, 2020. Our EPS of $5.79 was up $0.79 over results of last year, driven by our sales volume increase, favorable performance, and additional FAS/CAS income, and excluding the $0.34 for the impairment of the international joint venture we are exiting, the second quarter earnings per share would have been $6.13. On Chart 6, we will discuss in more detail the cash returned to our shareholders this quarter. We also had a strong quarter of cash flow generating $2.2 billion in cash from operations. We continue to invest in capital projects to support long-term growth, which resulted in over $1.8 billion of free cash flow. We paid out dividends of $2.40 per share and repurchased $259 million worth of shares. Year-to-date, we have now repurchased over $1 billion in shares fulfilling our 2020 outlook. Our ability to consistently generate strong cash flow allows us to continue with our long-standing balanced cash deployment strategy. Let's move on to Chart 7; strong operational performance in all business areas has allowed us to increase our outlook for all financial metrics as we continue to implement mitigation actions to combat the coronavirus. We are now projecting full-year sales growth of 7% over 2019 with consistent segment profit margins, and we've increased our cash flow by $400 million to greater than or equal to $8 billion. On Chart 8, we will break out the increased sales guidance by business area. We have adjusted our estimates for Aeronautics, Space, and RMS, increasing the midpoint of our sales range by $1.125 billion. Based on our current assessment of the full year, while COVID-19 has caused disruption in our supply chain and at some of our key locations, we have had non-COVID performance that has offset the impacts, giving us confidence to increase our 2020 outlook. On Chart 9, we show the corresponding increases to segment operating profit by business area, again led by Aeronautics, Space, and RMS. In total, we have raised the midpoint of our segment operating profit guidance by $100 million. To conclude, on Chart 10, we have our summary. We had a strong quarter, both operationally and financially, and we have increased our full-year outlook for all metrics. We had another quarter of backlog growth, our eighth in a row, reflecting the strength provided by our broad portfolio. We continue to closely monitor the environment and evolving conditions in our business related to COVID-19. We remain committed to providing long-term value to our customers and our shareholders. And with that, John, we are ready to begin the Q&A.

Operator, Operator

We ask you to please limit yourself to one question. If you have any follow-up questions, you can place yourself back into the queue. And first, we have David Strauss with Barclays Bank. Please go ahead.

David Strauss, Analyst

Thanks, good morning.

Jim Taiclet, President and Chief Executive Officer

Good morning.

David Strauss, Analyst

Hey, Jim, to follow up on some of your comments, I wanted to ask you how you see Lockheed's portfolio positioned to perform relative to peers. If you look out at potentially a tougher budget environment over the near term, how are you thinking about sustaining the company's peer-leading growth into the longer term, if you could take this both from an R&D perspective as well as how you will evaluate investment decisions from a return perspective? Thanks.

Jim Taiclet, President and Chief Executive Officer

Sure, David, good morning. This company to me is incredibly well positioned for any reasonable range of outcomes in defense spending in the economy over the next few years as well as a breadth of product and service that is really essential to the National Defense strategy. So when you put the two things together, I think the company, vis-à-vis peers, is incredibly well positioned relative to others. The backlog of $150 billion includes equipment and services that the customer needs, and they've already signed up and budgeted for. There are ways to solve both opportunity sets. One is if there's a rising defense budget or a stable one, we can continue to deliver on that backlog just as it’s contracted. If it changes, those requirements are still going to need to be met. Because of our platform position, David, we can extend and broaden the capabilities of existing platforms, ensuring that their life can be extended while at the same time being upgraded to whatever standard is required at that point in time. I think the breadth of the company's portfolio of products, services, and domains that we operate in is going to position us well even during a downturn, frankly. Secondly, regarding long-term growth, the threats aren't going away. Defense is going to have to be supported, especially if those people are in positions of responsibility, no matter what party they may come from. I view that defense has to be an important priority for the country. Going forward, there may be a mix change, but it's still going to be a priority. The benefit of coming in the door here is the existing portfolio position of the company across the services, domains, international space, etc. That broad platform is a risk mitigator in my opinion, to a downturn in defense spending trajectory. So on the upside, the innovation gene at this company is fantastic. By applying that innovation framework to the broad portfolio that we have, I hope to bring in some tech industry practices and maybe some new partnerships and technologies to augment that, which I believe will yield tremendous upside for long-term growth. If we can convince our customers that certain types of independent research and development should be compensated for in new ways by the government, companies like ours and others can take risks to bring in partners that are willing to take risks, knowing they may have a path to compensation at the end, and then we will be able to accelerate our growth. We're in a great position to work in any environment, I think, whether it's defense spending, technology deployment— I've got an idea called 5G.mil that we're going to try to figure out how to create and drive performance at this company as a result.

David Strauss, Analyst

And Jim just a quick follow up there. How do you, based on your time at American Tower, measure success from a financial perspective? I think there you really emphasized free cash flow and free cash flow per share, and return on invested capital. Are you going to apply the same kind of framework at Lockheed?

Jim Taiclet, President and Chief Executive Officer

Yes, I'm pleased to say that Ken's already applying it as we speak and before I got here, so I was really glad to see that that's how capital allocation decisions have historically been made here. I think that my experience at American Tower is relevant here as we used a wide variety of vehicles to deploy capital, getting others to do it on our behalf and in partnership with us. We can add some of those elements here, and some might be pre-existing relationships in the tech sector and telecom to join us in some of this investment profile. I do think we can continue to drive cash flow per share growth here and ROIC stability or expansion simultaneously, as was done at American Tower over a 20-year period, and I think we can do it here too.

Operator, Operator

Our next question is from Robert Spingarn with Credit Suisse. Please go ahead.

Robert Spingarn, Analyst

Well, good morning.

Jim Taiclet, President and Chief Executive Officer

Hi.

Robert Spingarn, Analyst

Welcome, Jim. Very nice first quarter out of the gate. I have a couple of quick things for Ken on the guide. So Ken, MFC was the one segment where you didn't change the guidance, you had this good bookings quarter, and I guess growth declines a little bit in the second half. Is this a result of COVID? Is it just where the business is? When would it re-accelerate to double-digits? And then just separately, I wanted to ask you what you've got embedded in the guide for F-35 production sustainment and development?

Jim Taiclet, President and Chief Executive Officer

You bet.

Ken Possenriede, Chief Financial Officer

Good morning, Rob. Yes, Missiles and Fire Control is the one where we did not adjust guidance. You’re right; it is still our fastest-growing and most profitable business area. Just to remind everybody, our biggest concern from a COVID impact standpoint was clearly at Aeronautics, and clearly the main driver is the F-35. We’ve done a good job of anticipating that in the quarter and hence the results you saw. We had really strong results at Missiles and Fire Control in the second quarter, frankly, and in the first half. We’re holding guidance. We do see COVID impacts. This is a very high-volume business, so we are starting to see some pressure on Hellfire deliveries and ATACM deliveries, mainly driven by COVID. But we’re going to be up year-over-year with mid-single-digit growth in the second half, so I’m still pleased with the trajectory of where the business is going. Regarding your second question on guidance for F-35, yes, in the second quarter, we saw strong growth across F-35. Follow-on modernization received some awards in the quarter that resulted in strong sales growth year-over-year. In fact, we’ll see that into the second half of the year. Production had a slow start in the first quarter due to timing of supplier payments to us that picked up in the second quarter. We're seeing strong production growth in the second quarter and sustainment is up as well. For the year, we’re looking at double-digit growth for F-35. Overall, we’re seeing development up really strong, sustainment really strong, and production mid-single-digits, which is higher than what we thought.

Operator, Operator

Our next question is from George Shapiro with Shapiro Research. Please go ahead.

George Shapiro, Analyst

Yes, good morning.

Jim Taiclet, President and Chief Executive Officer

Good morning.

George Shapiro, Analyst

Ken, I wanted to pursue a little bit more Aeronautics. In the F-35, you had an incremental margin of like 18.5% in the quarter. So obviously, it must have raised the margin; if you can share how much the margin went up. And then my second question, if you look at your implied guidance at the high end, the second half of the year has only 3% growth in aero, way down from 15.5% in the first half. And the margin is implied at about 10.6%. So is that just being conservative, or are we starting to really see some slowdown there? Thanks.

Ken Possenriede, Chief Financial Officer

Thank you, George. Yes, in the quarter, F-35 was up very strong on the top line growth; production was up strong, and sustainment was strong, as I mentioned in the previous question. If you look at margins from a production standpoint, they were strong double-digit. We had some risk retirements on a few of our production lots, which affected some previous lots still open. We saw strong quarter margins from a production standpoint, and the development on FCD has wound down, which was a low-margin business for us. Now, we’re embarking on follow-on modernization with our customer and are expecting stronger margins. For the second half, we’re not anticipating the risk retirements we had in the quarter, and we do see risks, specifically in Texas and our supply chain due to COVID, which may affect a couple of hundred million dollars on F-35 production in the top line due to COVID risks. To your question, is that being conservative? It's only conservative if COVID does not happen, but if it does, we feel comfortable with our midpoint and high-end guidance.

Operator, Operator

And next we go to the line of Jonathan Raviv with Citi. Please go ahead.

Jonathan Raviv, Analyst

Thank you and welcome Jim, looking forward to working with you hope everyone is well.

Jim Taiclet, President and Chief Executive Officer

Thank you.

Jonathan Raviv, Analyst

Just thinking about capital allocation, I know you guys have reiterated your balanced capital strategy. When I think back to the last time this industry faced the potential political change, high deficits, potential budget pressure, the capital allocation strategy looked to get a little bit imbalanced. Can you give us more perspective on how capital allocation strategy can shift and flex if the situation changes, and what might be different today versus, let’s say, 10 years ago, when you’re having to repo a pretty big dividend on a relative basis while CapEx fell significantly? So think about capital allocation in a pressured budget environment. Thank you.

Ken Possenriede, Chief Financial Officer

Thanks, Jon. Hi, good morning. So I'll take that, Jon. We're committed to providing a still significant portion of our cash flow to our shareholders, irrespective of what happens. But, I'll start with cash. We just took our cash projections up to greater than or equal to $8 billion this year. We have some tailwinds, and this year we have some headwinds, and with that balance in what we see with our working capital improvements, we are comfortable doing that. One thing I'll say going out to the future and based on our strong backlog, I’ll call it our culture of cash; I've mentioned in the past that we're comfortable right now even with the headwinds we expect in 2021. We’re comfortable raising our cash flow expectations. We've talked about capital this year, which will be the highest spending we’ll have; rough numbers, about $1.07 billion. There could be an appetite to spend more at the business areas but for now, we’re forecasting $1.07 billion and probably the same next year, which gives us still very strong free cash flow. We remain committed to the dividend; that's our priority, and we don’t see that changing. Jim and I will go to the Board to recommend a change to our dividend rate in the September timeframe for the next four quarters. Based on what we see today, for planning purposes, it should be a high single-digit increase—I think for planning purposes. That said, it's important to note that repurchases have a place for us. We've talked about a $1 billion this year, we've done about $1.01 billion through July, and we are going to pause that in the near-term due to the COVID environment. For planning purposes, we should assume $1 billion in 2021 and 2022. Think of that as preventing dilution in our share count. Jim has also mentioned other investments we need to make, and we have the balance sheet to do that we have the cash flow; you saw in the second quarter, we did flow $1.150 billion in debt. We did that opportunistically and got a great yield on that money. We will continue to look at whether it makes sense to go into the debt market, whether for organic or inorganic investments.

Jim Taiclet, President and Chief Executive Officer

So Jon, this is Jim. Ken just gave you a great landscape picture of the whole scenery here, and I can pick up on one thing he did say about what we would do different in a downturn on capital allocation. Just to recap, dividends will grow, and I believe the Board would agree with us on that. In a downturn, we also see opportunities for M&A and other investments. Adding together Lockheed Martin's scale in cash flow, clearly defines the backlog which extends over time, and the strength of our balance sheet, could allow us to act during times when asset prices are more attractive. In prior experience, this could be beneficial for us to acquire targets or enter into joint ventures or whatever. It's about leveraging our cash flow growth to get the value you want consistently.

Operator, Operator

Next, we’ll go to Richard Safran from Seaport Global. Please proceed.

Richard Safran, Analyst

Thanks Jim, Ken, Greg, good morning. How are you?

Jim Taiclet, President and Chief Executive Officer

Good. Rich, good morning.

Richard Safran, Analyst

If you mentioned this in your opening remarks, I apologize, but I missed it. Hopefully, we have a fiscal ‘21 budget in place by the start of the fiscal year. What I wanted to focus on was— and what I wanted to ask you was about the global settlement you've mentioned, and I’m sure you’re aware that there's been chatter about additional stimulus funding. I'm just curious if there's any risk to your cash flows and sales guide if there isn’t a global settlement endorsed or stimulus funding, kind of what are the assumptions embedded in the new guide and what you're expecting from the settlement?

Jim Taiclet, President and Chief Executive Officer

Yes, good morning, Rich. I'll take that. So you're right. We have provided the Department of Defense with inputs based on what we see as impacts to Lockheed Martin and its supply chain, which go out to September. We’ve had a few internal conversations, starting outreach to customers since that is already stale. It may make sense for us to update that rough order of magnitude and perhaps extend it beyond September. Regarding what we’re assuming from a sales and margin standpoint, in general, what we’re seeing, Rich, is these impacts are farther out than we thought about three months ago and may extend more into 2021. If there isn’t a grand deal or a settlement, our next course of action would be to work individually with our respective customers to negotiate on a case-by-case basis what the impacts are and what they are not. The issue will be the available funding. If there’s not funding, these are all allowable costs. The question becomes – we put that into our forward pricing rates, and there might be some modest impacts to a couple of our programs, but that would be more at the profit level, not at the top line. Right now, we don’t see that playing out as advertised. So it’s a fluid situation and we’re working through it with our customers.

Ken Possenriede, Chief Financial Officer

Seems like the summary is that the 2020 guidance is not greatly affected in either direction, whether the stimulus goes through or not.

Operator, Operator

Our next question is from Cai von Rumohr with Cowen & Company. Please go ahead.

Cai von Rumohr, Analyst

Yes, thank you very much. Jim, you come from a tech background. You talked about seeing opportunities to adopt some practices from commercial technology at Lockheed Martin, potential for partnerships. A program you mentioned, 5G.mil, could you expand a bit on how you would bring commercial technology into the company and what you would expect to gain from it?

Jim Taiclet, President and Chief Executive Officer

Sure, Cai. There are several approaches to this. In my previous experience, we were embarking on this for commercial 5G applications, particularly with the Internet-of-Things at scale, including autonomous land and air vehicles. In the tech sector, there are 5G standards, computing is moving toward storage and processing of data on the edge and intermediate locations from data centers. The infrastructure for edge devices is what we call them in the tech side. These devices include driverless cars, etc. So, it’s happening in the tech sector now. The practices can be brought over to the defense industrial base, but quickly only if our customers come along with us and change some of the procurement practices, and how we can get paid for things. There’s a licensing regime in the telecom space that enables global standards to be built; that’s how we can get 2G, 3G, 4G, and 5G done in less than 20 years, compared to the much longer timeframes in defense programs. That’s the kind of practices I believe we can migrate over with some of the partners working on these things on the commercial side. This is a long cycle initiative and will require cooperation with our customer. The only risk to the defense industrial base is by implementing these technologies in a different way if they’re unsure they will get paid. We have a lot to do, but frankly, in my past company, we endeavored to change the industry by converting transmission sites for telecom networks into performing assets for commercial companies. This can be done, but it will take time. What Lockheed Martin has is a strong backlog on a product-centric approach that allows us time to conduct these changes while performing our core missions.

Operator, Operator

Our next question is from Seth Seifman with J.P. Morgan. Please go ahead.

Seth Seifman, Analyst

Thanks very much, and good morning.

Jim Taiclet, President and Chief Executive Officer

Good morning.

Seth Seifman, Analyst

Ken, I wanted to just follow up quick, maybe on Rich's question about a settlement. The industry has been fairly vocal about this being an important issue; you guys have mentioned that there's not very much impact one way or the other on the guidance for 2020. Should we think about it, then as you know, if it is important, and it's not important for 2022—is it correct to say that we should think of it as an important issue for 2021? If you could explain to us a little bit about the mechanics of how this works? If there is a settlement, is that cash that the company has been missing out on this year that would come at some point, perhaps next year? How should we think about the mechanics of how that all runs through the P&L?

Ken Possenriede, Chief Financial Officer

Yes, whether it hits this year, next year, or all years, it is important. It's important to the industry, and it's not just Lockheed Martin; it would be across our entire supply base. As I mentioned, this is fluid, and it has a lot of moving parts. It probably will modestly affect the second half of the year but more likely hit the supply chain in the first half of 2021. Mechanically, if it was a big settlement, we still have to go through the details. The expectation would be that the budget would be structured to flow costs into those respective programs. There will be some clip level from a dollar threshold we would utilize in negotiations. Assuming there's no grant deal, our approach would be to deal with each program on a case-by-case basis, and it would have a sales impact, cash impact, and EBIT impact across each respective program. But you’re talking about a $65 billion company. It’s not going to be that material to our bottom line if spread over multiple years. We will see where this goes, but this process could take some time to play out.

Operator, Operator

Next, we'll go to Noah Poponak with Goldman Sachs. Please go ahead.

Noah Poponak, Analyst

Hey, good morning, everybody.

Jim Taiclet, President and Chief Executive Officer

Good morning.

Noah Poponak, Analyst

So you've heard a number of questions on what your business could look like for your capital deployment in the hypothetical situation that the defense budget declines. I wanted to ask, do you think the defense budget will decline? We can all have our views based on visible inputs, but I’m assuming you all have more insight into the geopolitical landscape, what both sides of the aisle are thinking right now and in the committees, but also potential presidential platforms. Beyond just the narrative that the world is a dangerous place, what is your view on whether defense spending goes down, and if it were to actually grow, what specifically could make that happen from here?

Jim Taiclet, President and Chief Executive Officer

Noah, it's Jim. I try not to speculate on the behavior of people making independent decisions that are unpredictable. We’re just getting the company ready for either scenario, frankly. If it’s a stable, slightly rising, or moderately rising defense budget, we know how to handle it, but if there’s a declining defense budget, we’re planning for that too. All of our business areas are evaluating their programs and working under the guidance of Ken to integrate these plans. It’s a contingency plan that says to the customers: if the budget is x minus y, this is what we think you should do with our products and programs. With the backlog and orders tracking production lines, it takes two to three years for defense budget cuts to impact the production in the defense industrial base. There is time to work with customers to ensure they can formulate their contingency plans.

Operator, Operator

Next, we'll go to Myles Walton with UBS. Please go ahead.

Myles Walton, Analyst

Great, thanks. Good morning.

Jim Taiclet, President and Chief Executive Officer

Good morning.

Myles Walton, Analyst

Jim, I'm curious: if you look at, from an operating segment level, where do you think your leadership might have the most impact from what you're bringing to the table—technology partnerships, lessons learned, vertical integration from an M&A perspective? How would that manifest—would it be faster growth, better margins? Where do you think you could have the bigger impact, perhaps one level down in the organization?

Jim Taiclet, President and Chief Executive Officer

By operating segment, each of those businesses with the corporate support they’ve had already are great at what they do. I probably won’t make a better missile design than people in Missiles and Fire Control can make; what I think my benefit is might be cross-cutting those business areas in a manner that hasn't been done before in Lockheed Martin or anywhere else. Linking them with a customer to provide solutions that are literally what they need across services. How can I have satellites signaling from an F-35 that then connect to a ground-based Missile Defense System to address incoming threats to our installations? That’s what they want. Not a single one of our business areas or our competition can provide them that solution. We're working with our recently hired CTO, who was previously running DARPA, to look horizontally across the missions that the DoD and our allies need to perform. Which business areas do we have resources, technical capabilities, and time to provide those horizontal solutions? Typically, we’ve provided what I call vertical solutions—products, platforms, and services to one service—F-35 as an exception—but we need to link better across services, and with our allies to make that happen. That's what this network solution is about in my mind. I think we can bring our tech partners along for this and collaborate with U.S. and other allied companies to make this better horizontally. That's where you're going to see the biggest impact.

Operator, Operator

Our next question is from Peter Arment with Baird. Please go ahead.

Peter Arment, Analyst

Yes, thanks. Good morning, Jim. Ken, can I ask you a question on just the order environment? You had a really strong quarter. I think Jim mentioned $22 billion in orders of a 1.4 book-to-bill, but could you highlight some of the international pursuits that are still in front of you? Are you seeing any kind of delays or chatter because of COVID-19, and how do you expect to still come in this year in 2020? Thanks.

Ken Possenriede, Chief Financial Officer

Thanks. Good morning, Peter. Yes, we still see some great opportunities out there, specifically internationally. We're not seeing much that's slipped to the right; the only thing may be some requests for proposal solicitations are moving, but they are holding firm to the end dates. Some of the large orders we have out there include the indefinite quantity and delivery F-16 order. Key customers include Taiwan, and another country is expected to announce orders later this quarter; think of that as an additional 90 aircraft for F-16. There is a C-130 order from Indonesia we’re anticipating later this year. We expect some follow-on work for the recently announced India Navy’s MH-60R program. Those are probably the main highlights. Additionally, we anticipate an order from Japan later this year, and there are various F-35 production orders we’re planning to book later this year; about 40% of those quantities will be of an international nature. Going into next year, there's estimated strong demand for F-16, with integrated air and missile defense systems. We’ll also continue to pursue the CH-53K order in Germany and Israel and anticipate some award competition sometime next year. There are a lot of international opportunities, and we're not seeing much slowdown from an order-book standpoint.

Jim Taiclet, President and Chief Executive Officer

John, I think we have time for one more question.

Operator, Operator

Great, and that will be from Robert Stallard with Vertical Research. Please go ahead.

Robert Stallard, Analyst

Thanks so much, and good morning.

Jim Taiclet, President and Chief Executive Officer

Good morning.

Robert Stallard, Analyst

As you described it, can you elaborate on the challenges in national security? Are these challenges around resources, or is it about the need for capabilities the U.S. will need to address national security threats going forward? Also, if you could elaborate a bit more on that. Thank you.

Jim Taiclet, President and Chief Executive Officer

I would characterize the challenges as the pursuits that China and Russia are taking to regain status as peer competitors to the United States in this field. When you get into the depths of what’s going on, it's concerning from someone who has been in this space my whole career. This includes aggressive actions and aspirations, and significant investments in capabilities from China. Some are symmetric and some asymmetric, aiming to find our vulnerabilities in our traditional defense operations. This pressing need for investment in technology to fortify these vulnerabilities as part of our defense posture is what I characterize as the biggest challenge. Russia, while not the great land army it was in the 1980s, has funded significant technological threats, such as hypersonic missiles, and reestablished itself as a key player on the global scene. So, it's about technology investment in defense systems that are becoming increasingly sophisticated.

Greg Gardner, Vice President of Investor Relations

And gentlemen, just past the hour, so I think I will turn it back over to Jim now for some final thoughts.

Jim Taiclet, President and Chief Executive Officer

Sure, as I conclude the call today, I want to thank the employees of Lockheed Martin for their contributions and dedication during this global pandemic. They have performed excellently while supporting our customers and their important missions. I’m extremely proud of them and to be part of the Lockheed Martin team now with 110,000+ other teammates. Thank you again to everyone on the call today for joining us. We look forward to speaking with you on our next earnings call in October, and have a great rest of the week.

Operator, Operator

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