Lockheed Martin Corporation (LMT) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Lockheed Martin Second 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.

Thank you, John, and 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.

Good morning, everyone, and thank you for joining us today. It's a pleasure to be here on my first Lockheed Martin's earnings call, and I look forward to working with all of you. I hope this call finds you and your family 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 to manufacture the aircraft while practicing social distancing and completing regular deep cleaning. The corporation also continues to support our critical industrial-based 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 and 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 slowed all of the accelerated payments the corporation has received from the Department of Defense, $1.3 billion in total 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 emphasis on veterans and military families. And as a global organization employing thousands across the world, we are supporting related initiatives in 15 different countries, including donations to food banks, health care 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. And across the country, we produced more than 65,000 protective gowns and 32,000 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 communities in which our company operates through the course of 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, have 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 4 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 executed 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 2 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. The building is expected to be completed by fourth quarter 2021, with operations there 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. This 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. And our Space business area added multiple orders, including a classified award for over $1 billion. In total, the corporation grew orders 23% above second quarter 2019 and achieved a company-wide 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 the 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. So encouraging elements for our portfolio is the Senate version confirmed that the national defense strategy remains the road map 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 in supporting our warfighters' needs. Moving on, I would 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 of World War II, is now aboard the HMS Queen Elizabeth aircraft carrier. The Squadron will now begin its series of flight trials demonstrating the jet's ability to defend the carrier through combat air controls, 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 2 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 4 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 in a fabrication, demonstration and test. 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. With 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 counterfire target acquisition capabilities. The TPQ-53 radar locates and tracks enemy indirect fire in either a 360-degree or a 90-degree mode and was first deployed in 2010 to Iraq and Afghanistan where it delivered outstanding performance and reliability to defend our troops. We are currently in full rate production to provide approximately 190 units with a contract value at $1.6 billion. So both the Sentinel A4 and the TPQ-53 are part of Lockheed Martin's open, scalable, rare architecture, the cornerstone of each of these systems designs, 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 THAAD interceptor to the U.S. Army. That program is a key part of the U.S. missile defense system 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, and this really is exciting, 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 service -- surface to begin their journey back to Earth. We look forward to supporting this remarkable mission and continuing our long-running 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 and Operation Desert ship 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 of service. Moreover, Marillyn and her executive team have positioned the company for even greater success in the future, and I'm eager to deliver on that prospect. Since becoming CEO about a month ago, I've met often 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 the national security space. There's great appreciation for the technologies and solutions we provide, and 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 in 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 and needs of our nation and its allies, and 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. We've had engaging conversations, and I look forward to continuing 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.

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 in 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 noncash charge related to an international joint venture that we are now exiting. We generated $2.2 billion of cash from operations, and we continued 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 the 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. And 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 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 continued 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. And 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 have 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. And 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 and gives 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. And in total, we have raised the midpoint of our segment operating profit guidance by $100 million. And 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, a reflection of the strength provided by our broad portfolio. We continue to closely monitor the environment and evolving conditions in our business related to COVID-19, and 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 Instructions] And first, from the line of David Strauss with Barclays.

Jim, to follow up on some of your comments, I want to ask you how you see Lockheed's portfolio position to perform relative to peers if you look out at potentially a tougher budget environment over the near term and how you're 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.

Sure, David. 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 2 things together, I think the company vis-à-vis peers is incredibly well positioned relative to others. The backlog of $150 billion is equipment and services that the customer needs they've already signed up and budgeted for. And again, 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. But if it changes, those requirements are still going to need to be met. And because of our platform position, David, we can extend and broaden the capabilities of existing platforms, make sure that their life can be extended while at the same time being upgraded to whatever standard is required at that point in time. So 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 in a downturn, frankly. Secondly, on long-term growth, that's -- the threats aren't going away. Defense is going to have to be supported, I think any reasonable person's view going forward, especially if those people are in positions of responsibility no matter what party they may come from. So I view that defense has got to be an important priority for the country going forward. There may be a mix change, if you will, but it's still going to be an important priority. Again, the benefit of coming in the door here is the existing portfolio position of the company across the services, domains, international, space, et cetera. That broad platform is a risk mitigator, in my opinion, to a downturn in, say, the defense spending trajectory. So on the upside, the innovation gene at this company is fantastic. So when you can apply that innovation genetic framework to the broad portfolio that we have, and I hope, bring in some tech industry practices and maybe some new partnerships and technologies to augment that, I think the upside for long-term growth is really tremendous. And on the R&D front, if we can get our customers convinced that certain types of independent research and development need to be compensated for perhaps new ways by the government, so the companies like ours and others can take risk and we can bring in partners that are willing to take risk, at least knowing they may have a path to compensation at the end of the day, then we're going to be able to accelerate our growth. So we're in a great position to try to work 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 really bring that technology is just one example into our space and drive performance at this company as a result of that.

And Jim, just a quick follow-up there. How do you -- based on your time at American Tower, how do you 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?

Yes. I'm pleased to say that Ken is 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, we used a wide variety of vehicles to deploy capital, get others to do it on our behalf or in partnership with us. And maybe we can add some of those elements here and some of my preexisting relationships in the tech sector and telecom to join us in some of this investment profile. But I do think that we can continue to drive cash flow per share growth here and ROIC stability or expansion at the same time. We did it at American Tower over a 20-year period, and I think we can do it here, too.

Our next question is from Rob Spingarn with Crédit Suisse.

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, but -- 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 -- might it reaccelerate 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 development.

You bet. So yes, Missiles and Fire control is the one that we did not adjust guidance for. You're exactly right. Just to remind everybody, it is still our fastest-growing business area, still most profitable business area. But going around the horn, and it's a little bit of what I talked about in the first quarter, our biggest concern from a COVID impact standpoint was clearly at Aeronautics. And clearly, the main driver -- main concern at Aeronautics was F-35. And we've done a good job of anticipating that in the quarter and hence, the results you saw in the quarter. We had really strong results at Missiles and Fire Control in the second quarter, frankly, in the first half. You're right. If you look at where we're going, we're holding guidance. We do see COVID impacts. This is a very high-volume business. So we are starting to see some pressures on Hellfire deliveries and ATACM deliveries regarding -- mainly driven by COVID. But we're going to be up year-over-year mid-single-digit from a growth standpoint in the second half. So still pleased with the trajectory of where the business is going. Let's see, your second question on guidance for F-35. Yes, second quarter, we saw strong growth across F-35. Follow-on modernization, we 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, if you recall, we had a little bit of a slow start in the first quarter, and that was basically timing of supplier payments to us that picked up in the second quarter, but really strong production growth in the second quarter and sustainment is up as well. And so 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.

Our next question is from George Shapiro with Shapiro Research.

Yes. Ken, I wanted to pursue a little bit more Aeronautics. The F-35, you had an incremental margin of like 18.5% in the quarter. So obviously, you must have raised the margin, if you can share how much the margin went up. And then my second question is 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?

Thank you, George. So yes, in the quarter, F-35 is up very, very strong. I'm on the top line growth. Production was up strong, sustainment up strong, as I mentioned on 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. It wasn't just block buy, but it was a few of our previous lots that actually are still open. So we had some risk retirements there. Developments, so SDD, the SDD has wound down. That was a low-margin business for us. And now we're embarking on follow-on modernization with our customer. And we're seeing -- though it's cost plus, we are seeing stronger margins than we did on SDD. Think of those as high single-digit margins. And then on sustainment, we had a variety of risk retirements, not one single sustainment program that I could spike out, but there's a variety of sustainment programs that had some risk retirements in the quarter. So you're right on that, a strong quarter from a margin standpoint. Second half, we're not anticipating the risk retirements that we had in this quarter, George. And your other question was looking at the high end of the guidance. Though we think we have done a very good job with our customer mitigating a lot of the risks due to COVID in the second quarter, we are starting to see risks specifically in Texas and specifically in our supply chain due to COVID. And we do anticipate seeing a couple hundred million dollar impact specifically on F-35 production top line due to COVID risk. And so to your question, is that being conservative, it's only conservative if COVID does not happen. But if it happens, we feel comfortable with our midpoint of guidance and our high end of guidance.

And next, we'll go to the line of Jon Raviv with Citi.

Welcome, Jim. Looking forward to working with you. Hope everyone is well. 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 a potential political change, high deficits, potential budget pressure, the capital allocation strategy looked to get a little bit imbalanced. So just any more further perspective on how capital allocation strategy can shift and flex if the reality on the ground changes? And what might be different today versus, let's say, 10 years ago? I think 10 years ago, you were heavy in the repo, pretty big dividend on a relative basis, CapEx fell a lot, whereas now CapEx is still at a pretty high level. So if you could also weave in your very unlevered balance sheet as well and to think about how capital allocation plays a role in a pressured budget environment.

Thanks, Jon. It's Ken. I hope you're well as well. So I'll take that. Jon, we're committed to providing still a significant portion of our cash flow to our shareholders. And that's regardless of what happens, what this downturn looks like. But I'll start with cash. And we just took our cash up to greater than or equal to $8 billion this year. We have some tailwinds, and frankly, this year, we have some headwinds. And with that balance and what we see with our working capital improvements, we were comfortable doing that. One thing I'll say, going out to the future, and it's based on our strong backlog and this, what I'll call, our culture of cash, I've mentioned in the past that we're comfortable right now even with the headwinds that we see out in 2021 of $7.7 billion. Based on what we see right now, we're comfortable taking that up $100 million to $7.8 billion. And then out to 2022, we talked about the pretax change for the amortization of R&D that we saw a path to roughly $7.8 billion in 2022. We're comfortable today taking that up another $100 million. So think of just cash that could be used for internal investments and for cash deployment, up $400 million this year, up $100 million next year and up $100 million in 2022. We've talked about capital this year and next year are probably the highest capital spends. We're going to have, think rough numbers, about $1.7 billion this year, though there is an appetite to spend more at the business areas. But right now, we're forecasting $1.7 billion and probably $1.7 billion next year, which gives us still very strong free cash flow going forward. We're committed to the dividend. There's absolutely no question. That is our priority, and we don't see that changing in the future. Jim and I will go to the Board to recommend a change to our dividend rate in the September time frame for the next 4 quarters. Based on what we see today, it's -- for planning purposes, we should assume high single-digit increases. I think for planning purposes, that's what we'll plan going out into the future. I still think repos. Repos has a place for us. We've talked about the $1 billion this year. We've done about $1.1 billion-ish through July. We're now going to pause at least in the near term. It makes sense for us to do that based on this COVID environment. And just from a planning standpoint, we should assume $1 billion in 2021 and 2022. And think of that as to prevent dilution in our share count. And as you mentioned, and Jim has talked about this, other investments we need to make, we have the balance sheet to do that. We have the cash flow to do that. And you saw in the second quarter, we did float $1.150 billion of debt. We did that opportunistically, got a great yield on that money. And we'll continue looking at whether it makes sense for us to go into the debt market, whether it's for organic or inorganic investments.

So Jon, this is Jim. Ken just gave you a great landscape picture of the whole -- the scenery here. And I can add and pick up on one thing you did say about -- and maybe something you were looking for in your question too is what would we do different potentially in the downturn on capital allocation. And just to recap, the dividends there, it's going to be a growing dividend, in our view, at least, Ken and mine's. And the Boards, I expect, would agree with us. But in a downturn, in my historical recent experience and my philosophy here is that may be also presenting an opportunity for us. If there is a downturn, we're going to look at the silver linings that may be there and -- whether it's M&A and other investments. So if you add together the scale of Lockheed Martin and the cash flow that comes from that, that Ken just defined, the backlog on top of it that extends out into time and the balance sheet strength that we have, there could be opportunities for us to act in a time period where asset prices are depressed for things that we may want to bring into the company or JV with or whatever. And so that's just another way to picture it, is the strength and the breadth and the foundation of this company could allow us as it did in my prior experience to get assets we really wanted that might be even more available at attractive prices, which then drive the nice ROIC that you want and the cash flow growth to come with it.

[Operator Instructions] And next, we'll go to the line of Rich Safran with Seaport Global.

So if you mentioned this in your opening remarks, I apologize I missed it. Hopefully, have a fiscal '21 budget in place by start of the fiscal year. But what I wanted to focus on was -- and what I wanted to ask you was about the global settlement you've talked about. I'm sure you're aware that there's also been chatter about additional stimulus funding. So what I was looking for is if there's any risk to your cash flows and sales guide if there actually isn't a global settlement and/or stimulus funding. I'm just curious about what assumptions are embedded in the new guide and what you're expecting from the settlement.

Yes. I'll take that. So you're right. We have provided OSD, the Department of Defense, a ROM based on what we see as impacts to Lockheed Martin and its supply chain that go out to September. We just had a few internal conversations, and we're starting to have conversations with the customer. Probably makes sense since that -- it's already stale. This is a fluid situation. Probably makes sense for us to update that rough order of magnitude, and it may make sense for us to extend it beyond September. We'll go through that with them. Regarding what we're assuming from a sales and margin standpoint, what we're generally seeing, Rich, is these impacts are out farther than we thought, say, 3 months ago, and probably more in the '21 time period, maybe a little bit in the fourth quarter of this time period. So if there is not a deal, the grand deal, I think the next course of action would be for us to go work individually with our respective customers to negotiate on a case-by-case basis what the impacts are to us and what are not. The issue is going to be the available funding for that. If there's not funding, these are all allowable costs. And then 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 probably more at the profit level, not at the top line. And right now, we don't see that playing out as advertised. So it's fluid, and we're working through this with our customers.

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