Lockheed Martin Corporation (LMT) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome, everyone, to the Lockheed Martin Second Quarter 2021 Earnings Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Greg Gardner, Vice President of Investor Relations. Please go ahead, sir.
Greg Gardner: Thank you, John, and good morning. I'd like to welcome everyone to our second quarter 2021 earnings conference call. Joining me today on the call are Jim Taiclet, our Chairman, President and Chief Executive Officer; and Ken Possenriede, our Chief Financial Officer.
James Taiclet: Thanks, Greg. Good morning, everyone, and thank you for joining us today on our second quarter 2021 earnings call. I will begin right my remarks this morning with a few comments on our financial results, which Ken will elaborate on in a few minutes. Our second quarter sales increased 5% over last year's second quarter as each business area exceeded 2020 levels led by our Space team. Our Space business grew over 10% this quarter due to growth in hypersonics, Next Generation Overhead Persistent Infrared or OPIR satellite activities, an increased support provided to the U.K Ministry of Defense's Atomic Weapons Establishment program, which will close out our management of that activity. Our segment operating profit was impacted this quarter by a one-time charge associated with a classified program in our Aeronautics business area. While the classified nature of this program precludes us from discussing this matter in depth, we can say that our customers highly attracted to the capabilities that we’re developing on their behalf that we're committed to delivering these capabilities and that the long-term potential of this solution is significant for the company. Our cash generation remains strong, driving $1.3 billion of cash from operations this quarter after making $1.4 billion of accelerated payments to our supply base as we continue to mitigate the risks brought on by COVID-19 for our supply chain. Our cash generation and the strength of our balance sheet gave us the ability to complete a $500 million accelerated share repurchase agreement this quarter, in addition to the $1 billion ASR executed last quarter, thereby bringing our year-to-date repurchases to $1.5 billion.
Ken Possenriede: Hey, thank you, Jim, and good morning, everyone. As I highlight our results, please follow along with the web charts that we have included with our earnings release today. Let's begin with Chart 3, and an overview of our results for the quarter. We saw solid growth in sales and earnings per share. Segment operating profit was comparable to last year's second quarter total due to the $225 million impact of a classified aeronautics program, while cash from operations was $1.3 billion exceeding our expectations for the quarter. For the second consecutive quarter, cash return to shareholders exceeded 100% of free cash flow as we executed another $500 million of share repurchases in addition to $721 million of dividends paid. Despite the issue of a single contract, we were able to increase our outlook for earnings per share and hold our full year outlook for all other key financial metrics. Turning to Chart 4, we compare ourselves and segment operating profit this year with last year's results. Second quarter sales grew 5% compared with 2020 to $17 billion, continuing our expected growth of the business, while segment operating profit remains at approximately $1.8 billion comparable to last year's results. Chart 5 shows our earnings per share for the second quarter of 2021. Our earnings per share of $6.52 was $0.73 above our results last year driven by volume, reduced share count and higher FAS/CAS income. On Chart 6, we will look at our cash generation and distributions for the second quarter. Subtracting our capital expenditures from approximately $1.3 billion of cash from operations, our free cash flow was $950 million. By executing additional share repurchases of $500 million in the second quarter as well as providing our dividend of $2.60 per share, we were able to generate -- excuse me, we're able to return 129% of free cash flow to our stockholders this quarter.
Operator: And first with the line of Doug Harned with Bernstein. Please go ahead.
Douglas Harned: Thank you. Good morning.
James Taiclet: Good morning.
Douglas Harned: Jim, I wanted to see if you could describe some of the things that would likely drive growth at Lockheed Martin. You talked some about the budget, but we're now in a fairly flat budget environment and Lockheed Martin's revenues have moved higher, but the backlog has really not grown during the last 18 months, as some legacy programs have naturally flattened. You highlighted some good growth areas like hypersonics and Space. But when you look at the next 5 years, do you believe you can get the mid single-digit, say top line growth in this environment, particularly given flat recent backlogs. I mean basically what should we look for that could take backlogs higher and drive enough growth to offset potential declines in mature programs?
James Taiclet: Good morning, Doug. With the resurgence of Great Power Competition with China and Russia, the defense enterprise overall is in an inflection point. And when I say defense enterprise, I mean government, military and industry. It needs to change. And where I think I can address your question is during that period of change, and it's very important and critical that we started now, the Lockheed Martin is in a position with its breadth of platforms and systems and its cutting edge technology to both drive and benefit from that needed change. And so, yes, over the next 5 years, we're going to strive for mid single-digit growth. And I'm energized and enthusiastic about working with our government military leaders, which we've already started. And with our defense sector and telecom and technology sectors, partners that we're going to have in the future to do this. And I'm convinced that our shareholders are going to benefit from our leadership here. We're going to benefit in a couple ways. And one of them is going to be by enhancing the value of our legacy programs, including the obvious F-35 is a much valuable, more valuable platform when you take advantage of the network effect that it can deliver by connecting sensors across domains, adding 5G.mil capability to our comm system so that we can communicate with satellites directly, etcetera, you end up getting a whole network effect with a value to the defense enterprise and the deterrent value is going to go up by implementing this across our technology roadmap over the next number of years, our existing systems. So I'm very energized about the growth prospect. I think we have a uniquely positioned capability to drive it. And that we've got a unique capability to interact with commercial industry in a whole number of sectors to help it happen.
Douglas Harned: If I can follow-up on that, when you talk about the inflection point, is this something that we should be looking for with respect to what Congress is doing, what the administration is doing? Or is it already embedded in the budget because the budget doesn't seem to set up for a lot of growth as it stands right now.
James Taiclet: The inflection point of need is here, Doug. But the system we will work within does not move abruptly, let's say. So it's got to migrate over a period of time in its way, if you will, and Congress will have a part in that. It's going to be a little bit more deliberate as far as the budget turns out. But within that budget, we intend to make our products platforms and services, the leading edge and therefore the most attractive ways to allocate that budget in all the domains that we serve. So we're actually not expecting our 21st century warfare concept to get funded independently. Rather, we're going to use that to make our current and putative and future platforms way more competitive, way more attractive, use a network effect to get more value for money for the government and see how the budget can shift our way, depending on -- and in fact, irrespective of how much the top line grows. Let me ask Ken to follow-up on that.
Ken Possenriede: Hey, Doug, if I could, I will give -- I will just give you a little more color that'll hopefully complement what Jim said. So, if you think about our portfolio and where we are and where we're going, so F-35, rough numbers 27%, 28% of our portfolio and you think about where we are and where we're going with that program. So we're right now for production in the midst of our product -- what's called a production rebaseline. And that's basically due to COVID and trying to get our technology Refresh 3 on Lot 15 and Block 4 onto Lot 16. The customer -- the joint program office is working with all the key constituents to look at what makes sense. As you recall, this year we're going to deliver anywhere from 133 to 139 aircraft. What makes sense next year and into the next couple years to make sure we maximize when we put that key technology on that aircraft. So you're going to likely see once that gets revealed and hopefully it'll be -- we'll be able to reveal that with the customer when we give trend data in October, but it's likely to show the plateau of production slightly pushed out to the right but also along aiding, if you will. So I think at least in the next couple of years, there is likely some opportunity there from a production standpoint. There is definitely opportunity for us in sustainment if you think about it, only roughly 40%, 50% of the bases are stood up. So we still have a lot of work to do there. We're also going to have many more aircraft in the fleet in the next couple of years. Think of in the next couple of years, we're going to have over 1,000 aircraft in the fleet which are going to require more sparing that modernization I just talked about working with the customer, we're also going to have to modernize some aircraft to put this new technology on aircraft that are already in the fleet. So that's one area. Sticking with that -- excuse me, sticking with Aeronautics, you have F-16 which is an international play that we have a backlog of 128 aircraft that is going to continue to grow top line as will Skunk Works. That's going to become a larger part of the Aeronautics platform. And just sticking internationally, we see strong demand for our integrated Air Missile Defense products. If you look at our helicopter programs, we're just starting to deliver CH-53 aircraft program, a record of 200 plus to Israelis, hopefully, it'll be a couple other countries that have an interest in that platform. And then there's future vertical lift, which will give us a huge uplift in the middle of this decade going forward, when we win those programs. And then there's Space. You mentioned hypersonics, that is going to be a nice complimentary part of that portfolio. I agree, it's not going to dramatically move the needle, but you're going to have those programs go into production in the middle of this decade, which will give us some uplift and then National Security Space, whether it's classified OPIR, NGI, we'll see some strong growth there. So we feel pretty good. Complementing what Jim said, we feel pretty good about our prospects going forward.
Operator: Our next question is from Cai von Rumohr with Cowen. Please go ahead.
Cai von Rumohr: Yes. Thanks so much and good overall quarter, given the classified issue. So you did a -- an ASR in the quarter. And then you had this classified adjustment. Did you know at the time, you did the ASR, this would happen? Because I would have thought, if you saw it coming, you would have waited to do the ASR.
Ken Possenriede: Hey, Cai. Good morning. Good to talk to you. This is Ken. I will take that. So if you think about when we did the ASR, we basically put that in place the day after, we were allowed to trade again, which would have been a day after earnings. And as I mentioned before, if you look at the large amount of cash that we have, our thought back then and it still remains today, we continue to have that cash on our balance sheet. And we believe we're going to continue to have that after Aerojet Rocketdyne, we're going to remain in the market. That was our thought process in April, when we did the $500 million ASR. We're highly likely based on where our stock price is trading today. We're going to enter the market again as soon as we're able to -- may not be an ASR, but we're going to go into the open market and buy back more stock, it just absolutely makes sense to do that. Regarding when we knew about the charge, that basically happened in the May time period. It became clear, based off from a process standpoint, Cai, we had a joint customer, Lockheed Martin review to do a deep dive on the program. And then we also did one, that was Lockheed Martin only to provide an additional assurance function. So we've done a very thorough assessment of the situation and that was done in the May time period. And in fact, in the June time period, we reported out to our Board, so Jim, myself, and Frank St. John, our COO, reported out to the Board and we also had what's called a classified business and security committee meeting, and we actually owe them a comeback in September. So that all initiated in May, we're very comfortable with the charge. Just to give a little bit of a flavor of that $225 million, that is for the development portion of this program. Think of that as roughly 40% of that cost has already occurred and the other 60% is embedded in the new estimate to complete. So we're not assuming that this program goes forward with the current the -- excuse me, the prior ETC. It is a new estimate to complete with that over on embedded. So we think we have a good handle on that. And from a timing standpoint, it was after the ASR was put in place.
Operator: Our next question is from Noah Poponak with Goldman Sachs. Please go ahead.
Noah Poponak: Hey, good morning, everybody.
James Taiclet: Good morning, Noah.
Noah Poponak: Ken, maybe you can just -- I know it's classified and you said there's only so much detail you can provide. But any incremental color you could give on what exactly happened, where the performance -- what type of performance issue it is? And you're -- how you're confident, it doesn't linger. And then, just folding that into the total Aeronautics segment margin, the revised annual segment EBIT guidance for the segment implies that margin picks right back up, even to above where it was pre 2Q. How do you do that with the reset number on this program plus I think you mentioned in the release F-35 margin didn't go up. So any color you can provide on where the segments margin goes from here?
Ken Possenriede: You bet. So, yes, let's first talk about the classified program. And I'll assure you know, and for everybody on the call, what we are able to say we've got approval from the customer. And hopefully, I've given you guys enough experience where I'll be as transparent as I can. But on this there's only so much we could say. So, as I answered to Cai's question, no, we've done a lot of independent reviews. We've done reviews with the customer. We think today based on all the information we have, it's a development contract that we believe will be successful from a schedule and performance standpoint, and then ultimately will turn into production -- a production program. And we also believe there are additional opportunities out there. And I'll assure you, we believe, I could say this, that there is still a very strong business case, given these associated opportunity. So this will be a great program for our customers. And I'm talking about all the customers out there that are going to utilize this and it'll be a good program for the Lockheed Martin Corporation. Regarding Aeronautics, Noah, you've got it right. For the second half of the year, we're basically assuming a little bit over 11% return on sales. And think of that as it's got to be primarily F-35. It will be -- from that standpoint, we are assuming some risk retirement on some production programs. I have mentioned in the past on the Block 5 we have taken a pause on risk retirements until we see improved performance there probably next year. But there are other lots out there. Back to the comments we made about our cost takeout initiatives, cost competitive niches, and our strong performance in other parts of the portfolio. We believe F-35 production, there's other opportunities out there for us to have risk retirements. F-16, we'll also see some improvement as we'll see 130. So I think you got that right. Aeronautics, we feel comfortable being around 11% or a little bit above 11% return on sales for the second half of the year.
Operator: And next we'll go to Kristine Liwag with Morgan Stanley. Please go ahead.
Kristine Liwag: Hi, good morning, Jim. Good morning, Ken.
James Taiclet: Good morning.
Ken Possenriede: Hi.
Kristine Liwag: Maybe switching gears, directed energy has been one of the key areas of advanced capabilities that the DoD has highlighted as an important category. How meaningful is it that the Navy is fielding the HELIOS and the DDG 51 Arleigh Burke? How much of a contributor could this be to long-term top line growth maybe in the next 5 years? And also, how far away are we until we see miniaturization of this kind of technology where you could deploy it on a platform like the F-35?
Ken Possenriede: So -- hey, Kristine, it's Ken. I'll take that one. So, yes, we are in the thick of that with the contracts that you described. And we're very pleased with the performance we've had on these programs. And we're also pleased where we think the customers going. I think we'll see a dramatic increase with our involvement, but you have to put that in perspective relative to the size of what it is. But it will be accretive from a top line standpoint. It's just for a $68 billion company that will continue to grow, at least in the next 5 years. Kristine, it's not going to be a -- I'd say, a material impact. In terms of miniaturization, we're working that with the customer. I think based on what we've seen, we're some ways away from that though. But we will give you an update when there is one to give.
Operator: And next we'll go to Myles Walton with UBS. Please go ahead.
Myles Walton: Thanks. Good morning. Ken, it might be another one for you. Can you talk about the second half trends implied on cash flow to get to that $8.9 billion -- greater than $8.9 billion, obviously that would imply materially better than you've ever done in the second half. And then similarly, if you can just color the backlog, is it -- do you have confidence you can get back to that 147, 150 level is the F-35 progressing such that those will actually close this year. Just color on those two things. Thanks.
Ken Possenriede: You're right. So Myles, we've done for the first half of the year a little over $3 billion, which would tell you we've -- we need to do $6.9 billion. And based on what I'm seeing the lion share of that -- I'm not giving you much comfort, but once I finish, I will hopefully the lion share of that $6.9 billion is in the fourth quarter. And really the driver there is we're in the midst and a lot of this is due to COVID. We're in the midst of renegotiating, if you will, the timing and the amounts of performance based payments on the F-35 program that's specifically Block 5. We're working through that now. And if you look at January 1 to the end of the second quarter, rough numbers, our contract assets grew by roughly $1.9 billion. The lion share of that is F-35 and the lion share of that is performance-based payments; timing, if you will, of when we liquidate that for F-35. We believe we're on a path with the customer to close on that. This is the third quarter to close it -- close on that in the third quarter. And just to give you a little more color, we think -- excuse me, we think contract assets are going to grow another $500 million in the third quarter. And then in the fourth quarter and most of that will be before December to give you some comfort, we will be liquidating contract assets to the point where we only see contract assets growing in total by an immaterial amount, they will still come down quite a bit and that's driven by the fourth quarter. And most of that is driven by Aeronautics. There is some work that needs to be done from a cash collection standpoint at RMS as well. But the lion share of that is Aeronautics. And we feel really bullish miles about the $8.9 billion of cash from ops for this year. In terms of backlog, I think we've already stated that. So you've got Lot 15, that we thought for F-35 that we thought would settle last year. We believe it's now going to settle this year. There's just a lot of complications going on and we think the joint program office working with all the constituents, it has a very difficult job, but they're doing a really great job of coordinating what the demands and the needs are of the services plus the international customers. We think that'll close in the third quarter. But because of that we have little to no comfort that Lot 16 is going to close this year. So we're actually out looking that to close next year. And that that's a sizable order. It's just timing, which means right now we're forecasting backlog to end this year at about $143 billion. So we're actually going to erode backlog this year. But again, I'll stress that's all timing. And for Lockheed Martin, we've gotten enough advanced funding on those Lots for 15 and 16, where it is not an impact to us. It'll just be optically a reduction in backlog.
Operator: Our next question is from Peter Arment with Baird. Please go ahead.
Peter Arment: Yes. Good morning, Jim and Ken.
James Taiclet: Good morning.
Peter Arment: Hey Jim question, I guess on sticking on F-35, maybe can you touch upon just maybe the investments that Lockheed is making to reduce sort of the lifecycle costs of F-35 and do you expect to increase any of your internal spending, just given the sustainment discussion continues to grow louder, and I guess in front of your potential, PBL contract with the Air Force? And maybe, Ken, if you could just touch upon when you think that PBL contract could come into play as well?
James Taiclet: Sure. We've spent about $500 million to date in investments to improve the sustainability cause of the F-35 there, Peter. And we'll continue to make reasonable investments as we go forward. But there's a perspective that I can give you from a former Air Force pilot, because operationally and on the line, where the pilots and the commanders are flying the jets and defending the country and doing the missions, there's actually a lot of good things happening, and they'll tell you this themselves. But first of all, you can go to the performance metrics, meaning that flight hour between failure metric, when can you expect to fly the jet before you've got to get a spare airplane that day. It's nearly double the contractual requirement. And so the pilots when they get an assignment from the tail number for a mission, on any given day, they're twice as likely to get in that airplane and fly the mission as they are in any other fourth gen plane. On top of that, it's about twice as reliable as a fourth generation fighter. And meanwhile, the labor hours of maintenance needed for each of those flight hours is about two-thirds of the contractual requirements. So if you get out to bases, and talk to commanders who have either in their wings, F-35s and other aircraft, or they've commanded different squadrons of different types of aircraft, they'll tell you that for the frontline performance in the area of operations, if you will, the F-35 is sort of head and shoulders above legacy aircraft. In fact, the Air Force had about 18 months in CENTCOM recently, where they just got back from that tour, if you will. They had 1,300 sorties with F-35s, and the mission capable rate was all -- it was nearly 75%, sometimes 80% to 90%, any given week. And that's really, really strong, haven't been out and done this before, I can tell you that that's top shelf. Now, on the other hand, the affordability we need to address and I've met with each of the service chiefs and the chairman to implore all of us to work together on this. Lockheed Martin with that $500 million investment over the last few years has taken about 40% of the cost that we can control out of our purview, if you will. Already, we're going to shoot for another 40% over the next 5 years, but somehow 40% keeps coming up. We're only about 40% of the total cost. So 60% is propulsion and military government cost. If we don't have an all-in strategy together to address this we are not going to hit the goals. And so, again, when I meet with the chiefs and the chairman, and hopefully soon with the service chiefs, we will all get together on a tiger team and address this in the only way it can be successfully addressed as an integrated team. So that's how we're going to approach it. I do agree with the team at Aeronautics that there is a way to get this cost per flying hour on an A model of 25,000 an hour, but it's got to be an all-in approach. And we're going to keep doing our part, of course. But we’re -- I'm personally involved in trying to pull the wider team together to get that done.
Ken Possenriede: So, Peter, just based on timing, based on what Jim just said, we are starting to see a lot of interest. If you recall, we issued a white paper that described how we would drive down the costs, we described how industry would sign up to service level agreements. And as Jim mentioned, we are making great progress with the energy industry consortium. And we do think we have Pratt Whitney from a propulsion standpoint and the services fully engaged now. And we believe we're going to soon be responding to an RFP. They're going to take a lot of the key pieces out of our white paper for us then to what I'll call answer a conventional request for proposal. And we're hopeful that early next year, we industry could be under contract for some type of performance based logistics concept. And I'll just remind you that this is likely not going to be a top line enhancement play for us. That that's probably all embedded. But assuming the industry is incentivized to hit these targets or to over achieve these targets, it could potentially be a return on sales play for us.
Operator: Our next question is from David Strauss with Barclays. Please go ahead.
David Strauss: Thanks. Good morning, everyone.
James Taiclet: Good morning.
David Strauss: The -- in the fiscal '22 budget, the next-gen air dominance program saw a nice plus up. Can you talk about the role you're playing on that program, whether that work is all classified at this point, or not? And then, I guess, Ken, could you also touch on the R&D tax amortization issue, where that stands? Is there been any movement potentially done to do that? Thanks.
James Taiclet: Sure. I'll take both. Yes, unfortunately, David, NGAD, everything about NGAD is classified. The only thing I will say is you've heard the customers, the DoD say that F-35 is not going to be a build pair of NGAD. And I still think that's still the answer out there which is good news for the -- our great fifth gen aircraft. But unfortunately everything else regarding NGAD is classified and we can't discuss what our role or not our role is. Regarding the amortization of R&D, we're still working with a lot of our constituents. When we come out with trend data in October, David, our tax experts are telling us unfortunately at that time, it's likely not to be settled. So it is likely we will offer trend data for '22. That would -- right now what we see is assuming this issue goes away or gets deferred and does not impact '22 cash, we see $9 billion or greater of cash from operations next year. So we're in the midst of going through our long range plan. So hopefully we'll be able to reaffirm that. But we're also -- then also going to have to state that right now what we see is this amortization issue was a $2.1 billion impact to cash in '22. We're hopeful that this thing either gets deferred out 5 years, that's one scenario we're hearing. I mean, what we'll see where it goes, or it gets repealed, or it is interpreted differently than the way we industry are interpreting. And it really is just what I'll call conventional independent research and development for us, which would be rough numbers, a $300 million impact rather than a $2.1 billion impact. But regardless, Lockheed Martin sees a path forward for us to continue generating strong cash this year and into the next couple years. And we'll use that for our internal and organic inorganic investments for our employees, and then give a fair amount back to our shareholders.
Operator: Next, we'll go to Rob Spingarn with Credit Suisse. Please go ahead.
Robert Spingarn: Hey, good morning.
James Taiclet: Hey.
Robert Spingarn: Jim, when I listened to DoD, I hear them talk a lot about open architecture solutions and finding ways to be less locked into the contractors. But in listening to your answer to Doug's question before you spoke a fair amount about network effects, which some might view as another form of locking. So can you talk a bit about that tension, whether you think it's there. And if so, how Lockheed resolves to deliver both the vision that you've articulated, while also meeting DoD's broader desires?
James Taiclet: Sure. Rob, the two things are completely compatible and my recent experience has been that telecom and tech industry where it was essential that open architecture be the baseline, or the foundation, if you will, for 4G and 5G network development in telecom, for example. So our approach is completely based on open architecture. We even have a product we call open radio architecture that we demonstrated in a U-2, Lockheed U-2, of course, as basically a cell tower in the sky connecting F-35 and F-22 data links to again, the open radio architecture. And we could add an F-18, or another aircraft, even an allied aircraft, a Eurofighter, for example, down the road. The whole point of this is you want to build the network effect as broadly as you can across, frankly, all the platforms out there eventually. But we're building a roadmap internally in the Lockheed Martin because this -- these are the products and platforms we can control to install, trial, demonstrate and then produce these in our products. At the same time, like I said earlier, we're open to collaborating with our industry partners that are traditional in Defense and Aerospace, and eagerly and already successfully with some of my old counterparts and my former counterparts, I should say, in telecom and tech where we're trying to build out the Internet of Things network of the future here. So this is something where you can and must have an open architecture at the vendor lock, so to speak, will diminish. But this is a matter of leadership and speed and performance. And that's where Lockheed Martin can, I think, take a great position going forward here.
Operator: Our next question is from Sheila Kahyaoglu with Jefferies. Please go ahead.
Sheila Kahyaoglu: Good morning, Jim and Ken.
James Taiclet: Good morning.
Sheila Kahyaoglu: Maybe I was wondering if you could just update us on the classified business in general, how big is it across the businesses? How do you quantify risk versus rest of the segment -- rest of the business? And maybe, where are you seeing the most opportunities?
James Taiclet: Sure. Hey, Sheila, good morning. I'll take that. So, yes, generally speaking, our customers frown upon us from talking about the size of classified, but if you think about it, Aeronautics and Space would have the largest classified business in our portfolio. Third would be missiles and fire control, and then fourth, but last but not least, I'll stress is RMS. We see a lot of opportunities in Space. And that has not been something that's recent, but it seems to be trending up in an accelerated way. And also in Aeronautics, we've talked about this unfortunate missed charge on this program that we have today. As I stress when asked earlier, we do believe this thing has a very strong business case going forward, which will continue to grow. There's also other programs in the Aeronautics portfolio that will continue to grow. Missiles and Fire Control, we've talked about the classified program we won that requires some capital that is still in development and in the not too distant future that also will go into production. So we see the classified portion of Lockheed Martin growing faster than the non-classified portion of Lockheed Martin. Regarding how we run classified versus non-classified, that's a timely question because the -- recall when I answered the question about our classified business and Security Committee of our Board, that is one thing that we do go demonstrate to them that the processes that we have in the white world are identical to the processes that we try to put in the black world, and we also have the -- internal audit. Organization is part of that and we just reaffirm that and our external auditors, E&Y, are also instrumental and part of that. So the key is we try to mirror what we're doing in the non-classified from a process standpoint into the classified world.
Operator: Next we'll go to Seth Seifman with J.P. Morgan. Please go ahead.
Seth Seifman: Hey, thanks. Thanks very much and good morning, everyone.
James Taiclet: Good morning, Seth.
Seth Seifman: Ken, I was -- good morning. Ken, I was wondering, we've talked a little in the past about the F-35 production revenue outlook and you mentioned the rebaselining earlier. If we think about F-35 production sales this year probably being in the, let's say, the mid $13 billion range. As you think about this rebaselining, where does that head into 2022? And then, how would it eventually get up to that plateau, which I assume is something in the range of 170 times the price per aircraft of -- for the three variants. I don't know, maybe it's $90 million on average or something like that. But specifically for next year, how does the rebaselining affect your production revenue expectations?
Ken Possenriede: Yes. Thanks, Seth, and good morning to you. Yes, so we're still -- as I said earlier, we're still working through that rebaseline with the Joint Program Office who think of that as the quarterback, the program manager dealing with the services and the international customers. So all I could say today is our base plan was 169 aircraft. It is highly likely we are going to deliver less aircraft next year than 169. I just don't know what that is. And the only other thing I could say, and I don't mean to make this sound like Yogi Berra, but it's likely going to be less than what it would have been. I'm not suggesting it'll be less than this year, but it'll be less than -- the forecasted 169 and you're spot on, Seth. This rebase line may take 2, 3 years. And again, that's something else we'll get from the customer and the plateau will ultimately be 170 aircraft, perhaps a little bit more. And that plateau then will extend out farther out into the future than what we thought. And back to Jim's opening comments, we were just notified we won in Switzerland. That is a big, big deal for us. We just put in our best and final offer in for Finland. We're in the hunt for the next generation fighter aircraft in Canada. There are many other customers that have an interest in this aircraft including this -- of course, the services of the United States. So we think there is a strong demand out there for this aircraft. Regarding price -- regarding the B variant and the C variant, just based on quantities, it's likely you'll see the price of that aircraft either stay where it is or continue to come down the learning curve. The A variant, and I'm not trying to negotiate with the customer on the phone, but due to where we are in learning, due to where we are with inflation and due to where we are with the added capabilities that they want on the aircraft, it is likely you'll see an increase in prices, a modest increase in prices of where we are today. You got to factor all that in. We should have a better answer for you in the October time period in terms of what the impact is.
Operator: And next we'll go to Joe DeNardi with Stifel. Please go ahead.
Joseph DeNardi: Thanks. Good morning. Ken, can you just talk about kind of how much of the portfolio maybe arrows specifically is related to sustainment? And are you seeing any pressure there? Is there been any shift in focus from -- less of a focus on readiness, more on modernization under this administration? And then just on your comment on the F-35 Block 5 margins, is that just related to the technology insertion? Or are there kind of other challenges you're facing just on pausing risk retirements on F-35? Thank you.
Ken Possenriede: You bet, Joe. Good morning. So on sustainment, think of sustainment, there is sustainment in F-35, which back to the comments Jim made and then I made earlier, we still see strong demand. Well, of course, we want to get the cost per flight hour down. We also want to ensure that there's available aircraft out there, but the demand is going to grow there. And there is a keen desire for the more fielded aircraft that we have out there, the more robust sustainment program we have. We also have sustainment -- think of sustainment on F-22. I mean, eventually F-22s are going to get sunset, but I would say in the foreseeable future think of F-22 sales not being quite, say, a $1 billion -- they're over a $1 billion. And going forward, you may see that decline just a little bit. F-16, a big portion of F-16 is sustainment for international customers. And I believe we've mentioned this in the not too distant past. We actually got a contract with the United States Air Force to sustain their aircraft. And it's been quite a while since we've gotten a current contract for that. So I don't see that demand going away or the interest going away either. C-130, a big piece of that is sustainment of aircraft internationally. And then, in our Skunk Works, think of the U-2 is a sustainment contract, and ultimately they'll get sunsetted as well, but not in the -- not too distant future. And your second question was on Block 5 margins. Yes, it's right now, Joe, we're seeing -- we're taking a pause because what we agree to in negotiations from a learning curve standpoint coming down a learning curve, we're still coming down the learning curve from a -- this is costs now, down the learning curve not as robust as we planned to take these risks retirements. So we want to see continued performance into next year before we take those risks retirements at that time. And so think of Block 5 margins are very high, single-digit margins. These risk retirements would take them up into the low double-digit margins, but we'll likely keep pausing that until next year.
Greg Gardner: Hey, John, this is Greg. I think we've come up at the top of the hour. So I will turn it back over to Jim for some final thoughts.
James Taiclet: All right, Greg. Thanks. Look, I will just stand by reinforcing our commitments. First, our 21st Century Warfare vision, which will make our platforms and services more resilient and more attractive to the customer, in addition to making us more effective in creating a deterrent. Also investments and digital transformation and innovation, and delivering thereby strong cash generation supporting that afterwards that a strong dividend as we deliver long-term value to you all. And I want to just thank you again for joining us today. We're going to have an upcoming investor event in August. We hope you can join us for that. And John you can conclude the call then. Thank you everybody for being here this morning.
