Lockheed Martin Corp (LMT) Presents at UBS Global Industrials and Transportation Conference - (Transcript)

Lockheed Martin Corp (NYSE:LMT) UBS Global Industrials and Transportation Conference June 2, 2020 1:20 PM ET

Company Participants

Kenneth Possenriede - EVP & CFO

Conference Call Participants

Myles Walton - UBS Investment Bank

Myles Walton

Welcome to the UBS Industrials and Transportation Conference. Welcome back. For those who -- you who have been on previous sessions, I'm Myles Walton, I'm the aerospace, defense and airlines analyst here at UBS.

It's a pleasure to moderate this next fireside chat with the Chief Financial Officer of Lockheed Martin, Ken Possenriede. Ken, welcome. I know you have a disclosure statement to make, and then we'll get right into the Q&A.

Kenneth Possenriede

Great. Thanks, Myles. Thanks for having me. Yes. A little bit of a housekeeping matter. So 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. Our actual results may differ materially from those projected in the forward-looking statements. Please see 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. So thanks, Myles.

Question-and-Answer Session

Q - Myles Walton

No. That's great. So why don't we kick it off with a topic of near term first on the COVID-19 impacts that you're having to deal with both in your supply chain and as well as is in your own facilities? And maybe just update us on how that's progressing, your kind of return-to-normal strategy. I understand it's more of a 2Q impact. Is that looking like it's going to be contained to 2Q? And any other color you want to offer there.

Kenneth Possenriede

You bet. Thanks, Myles. First, I'd have to say, and foremost, the health and safety of our workforce is our #1 priority, and it should be. And the steps we've taken are meant to ensure the continued well-being of our employees and our teammates and our customers. We've done quite a bit here. We've implemented social distancing policies, telecommuting wherever it's possible. In fact, greater than 50% of our workforce is now telecommuting, and we'll have to see going forward if that's the new normal. And we require masks to be worn in all our facilities, including our manufacturing environment, including F-35.

So you mentioned the supply base, Myles. The supply base continues to perform as we expected when we talked about it on the call back in April. I mentioned, I think the way I phrased it was likely impacts to the supply base and potential impacts to deliveries on F-35s. So we're seeing areas that are beginning to return to a more normal production rhythm, which is encouraging. And a good example is our F-35 FACO in Italy. That was temporarily closed back in March. They did a deep cleaning of the plant. And as we sit here today, about roughly 90% of the staff are back to work, and they'll continue progressing to get back to full workforce.

As for the cost impacts, we're still assessing those in conjunction with the customer. And this applies to all products across all our business areas, not just aero and not specifically just F-35. One possibility that we're exploring, and it seems to be getting a little traction and this really applies to the entire industry, is try to work out a cost impact for the COVID-19, do it at the macro corporate level rather than contract-by-contract. We think this could be done equitably and allow for a faster resolution. Then you could rebaseline our contracts, return to -- and then return to normal. It's a little bit of an unusual method, frankly, but we're definitely in, frankly, unusual times. And from my perspective, it would be a way more efficient and effective way of getting this behind us.

Specifically on F-35, I think it was 2 weeks ago, we did announce a temporary alternate work scheduled for the F-35 production line for the employees in Fort Worth. It's a 2-week on, 1-week off rhythm. And we think this will help us to staff the production line to support ongoing work and help us retain the expertise of our talented workforce. This was a proactive step that we took, in our opinion, and we believe this will help the entire F-35 team work through the effects of this pandemic.

We ceased -- excuse me, we sized our sales impacts in the Aeronautics business area. And frankly, I'll attribute that to the F-35 program at approximately $375 million, and I stated that on the call in April. It's just above -- a bit above 0.5 percentage point. The sales impact we noted included production modifications. It's similar to what we're seeing today. And as for any additional cost impacts for delayed manufacturing, we're still assessing those, as I just mentioned.

Myles Walton

Okay.

Kenneth Possenriede

At this stage because of our -- go head, I'm sorry, Myles.

Myles Walton

No, no, no. Keep going.

Kenneth Possenriede

What I was going to say is basically, at this stage, because of the slower workforce resulting from supplier days -- delays, that's where the critical path is at some of these suppliers. We do think it's between 18 and 24 jets that we plan this year that we're not going to be able to deliver that will be pushed into next year. Talking about the other business areas, we still see them in their ranges of the updated guidance we provided back in April. And if there was any of them that had the potential future impact as we sit here today, it would be missiles and fire control. And think about it, they're higher-volume business, production business, we haven't seen any of these impacts yet. In fact, the good news is they've done a nice job of going down into 100% of their supply chain and have concluded right now, about 10% of them are noting impacts. So 90% aren't, 10% are. We seem to be able to work through that and don't see any impacts at this time. So back to what we see today, we're holding the line to our updated guidance that we provided in April.

Myles Walton

That's really helpful, Ken. And maybe just to circle back on one of the things you threw out there, which was this maybe at the macro corporate level resolution. And I'm just curious, I've heard from other companies, there seems to be a little bit of a conversation on does it have to occur at the contract level, at the policy level, at the legislative level, kind of all of the above. And so from a financial management perspective, can you assume that it happens at a legislative level, that it happens at a policy level? Basically, how does it impact the EACs in the near term, if at all?

Kenneth Possenriede

Yes. It's definitely going to impact the EAC. So I think this is a 2-step process. As I stated earlier, I do believe, we do believe it makes sense to aggregate all this, meet with the OSD, meet with respective leaders within the department and try to negotiate this at a macro level. But then the devil's in the details. It's probably likely -- and I'm speculating here, but pick a program like F-35, which will have a large -- be a large percentage of the impact, if I had to speculate today, it's likely we probably would work with the Joint Program Office, the JPO, to push those costs down and add a contract value down back to the contract and rebaseline there.

I think the only point I'd make is we're talking about thousands of contracts, would it make sense to do that on every contract? It would be pretty inefficient and cost-prohibitive. But take the 80-20 rule, perhaps 80% cost impact, which is probably going to be 20% of the volume. It might make sense to rebaseline those, so you have a clearer picture of what the EACs look. And then the rest of it, you hold that at some macro level and deal with that accordingly.

Myles Walton

That makes sense. The other question that I get, I'm sure you've gotten a thousand times, on the back of this is around the availability of money with stimulus spending tripling or quadrupling annual deficit levels, and what kind of pressure that might put on spending over the medium term. I want to ask on a glass half empty and glass half full way. So the glass half empty way, it's pretty obvious. Where do you think the pressures will build to and how do you think that plays out? The glass half full is, I think the world was a little bit surprised by how well the industry handled the last downturn. And I think Lockheed had margin expansion of 150 basis points through the downturn. They all grew earnings through the downturn in cash flow. So maybe conceptually, put it through those 2 lenses, if you can.

Kenneth Possenriede

Sure. So yes. There's obviously a lot going on here. But if you step back and you look at what happened in February, just as actually when this COVID event was actually starting to hit the United States and -- or the best we knew at the time, the President submitted his FY '21 budget. It met the Bipartisan Budget Act of the 2019 targets, which as we, you and I, would agree is a big deal. We're looking at top line defense budget of about $741 billion. If you think back to last year's budget, $738 billion, just for argument sake, let's say it's flat, which is not a bad thing, frankly, because I think the devil's in the details of what actually comprises the budget. But if you think about -- you're right, I mean we have these massive stimulus packages being pushed forward. Someone's going to have to pay for that. But just macro, if you look at the longer-term direction of defense spending, we're going to have to see where this goes. There's been a significant amount of stimulus injected into the system. That's great. It's likely to introduce budget pressures at large. There's no question, somebody is going to have to pay for it. But you have to think about historically, the threat scenarios that -- to tend to be a big influence on the budgets, and those don't appear to be eliminating at any near-term time period.

And again, much of that future spending is meant to align with the National Defense and Security strategies. They highlight the need to address specific areas of evolving threats. My best guess is we won't see dramatic increases as we've seen in recent years. And I think you'd agree with that. But if the threat level remains elevated, we shouldn't see dramatic decreases either. The issue is, the point is can we grow with -- if the budgets do contract? And I'd say, I think it starts with where we ended the year. And, frankly, where we ended the first quarter with our backlog of $144 billion, we're playing with a position of strength for the near term and the midterm.

And if you look at where we're probably going to end the end of this year based on the order book we have in hand and what we see for the rest of the year, we have a good shot at hitting $150 billion of backlog by year-end, $149 billion, $150 billion of backlog, which, as I said, is a position of strength.

The DoD noted in their FY '21 budget submission that they remain committed to implementing National Defense Strategy, and we feel very well aligned with that policy. That includes air superiority, contested space, air and missile defense. These are all areas in which we have a leadership position, we believe. And you would think that even in a flat or a slightly declining budget environment, those priorities are likely going to remain intact.

So to me, there's a couple of variables at play. One is the threats that are out there; and then two, what are the DoD priorities. And given where those 2 areas seemed to be headed and if you take that with our record backlog, we think we still have a chance to continue our growth trajectory. We're going to have to keep an eye on it to see where these variables do play out, though, since this is an uncertain future.

Just on a couple of specifics. The budget did include $3.2 billion for hypersonics programs, which we feel we're very positioned for. And you also probably saw that NASA was well supported with about $3 billion more than last year for items like Orion and work on our future Mars missions. The budget finalization process is probably going to see some timing impact because of activity combating the virus. I mean that should be no surprise.

Congress, they are beginning to weigh in with 1 bill that has been introduced, proposing over $40 billion of additional budget over the FY '21 request. And a different group of House representatives also ask for a reduction from last year's budget. So we'll see where that plays out. We're hopeful that the legislation that was passed last year will stand and we can get to a bipartisan authorization appropriation bill like we did last year, that would be very good news.

The timing of course is the million-dollar question with the upcoming election, which is going to add some complexity and of course this pandemic issue. And if we get pushed into a continuing resolution, I wouldn't expect much impact to us in the near term because of the total DoD FY '21 budget request. It's frankly not all that much different than what the FY '20 appropriations ended up being.

And I'd say, even though we're still growing, we can't take our eye off cost control. That's important. That's been a focus item of ours. We've been focused on that from a cost savings perspective for both labor and technological efficiencies. We're keeping our team focused on affordability, and it's for -- frankly, for our customers and our shareholders. And frankly, this COVID event has just amplified that focus. As I mentioned earlier, a lot of folks working from home, telework, telecommute, virtual work, whatever you want to call it. But we're thinking through, sorting through our office configuration, our square footage, and it's likely we'll look at our footprint and continue to look for ways to consolidate that.

Myles Walton

Yes. Ken, and maybe to ask the question -- the second part of the question a little bit as well. So I don't think there's a risk in the near period of time. But again, if we do enter a more physically constrained environment for the second half of the decade, or '23 through '26, how much opportunity is there for Lockheed to, to your point, focus more on the cost, which it had to do in the last downturn? And again, your margin profile, you're obviously investing twice as much in R&D as a percent of sales as you did at that point, just are the levers more or less the same? Is the playbook the same as you -- as the company played out in the last downturn? Or is there something that's structurally different?

Kenneth Possenriede

I think the playbook is the same for the things you described, Myles, where we would be focused on consolidation becoming more efficient, more productive. But I think let's talk domestically, the United States. We do think we have programs that, even in a downturn, are mission-critical programs for our customer set like F-35, CH-53K; the 2 big helicopter competitions, FARA and FLRAA. We think our missile defense portfolio is still very appealing to our customer set for their replenishment needs.

I mentioned Space, even if there is a downturn with Space, we think we have enough of an intriguing portfolio there to keep that going. And then back when the last downturn occurred, I'm not sure what the exact number was, roughly 15%, 17% of our sales were international. They're now closer to 30%, 28%, roughly, going to 30%. So back to will there be declines internationally as well? Probably. But I also think it depends on what the threats are, what the international customers' priorities are. And I'll just mention two products that we have. One is F-16. From a production standpoint, we have done a remarkable job of resurrecting that program. We have 3 customers under our belt. We're going to shortly have two more. Hopefully, late this quarter, early next quarter or two, we can announce that will be orders of roughly 90 more additional aircraft. And then the other one I'll talk about is missile defense. Though the United States is doing the replenishment, there is a strong demand for Hellfires and GMLRS, JASSM, PAC-3, et cetera, that we do not see diminishing in the future.

Myles Walton

That's great. And you kind of led into it on the international. But maybe to just riff on the F-35, can you talk about the international buy dynamic there? And if anything is tempered or picked up from the international volume, the F-35 front?

Kenneth Possenriede

Our view, based on what we're seeing, is the international interest remains strong even with the virus. And that -- and for that matter, you got to throw in oil prices, and it all goes back to the comments earlier I made on the threats. There's a lot of strong international interest for the F-35. You saw Poland just completed an expedited procurement process for 32 aircraft. And they signed a letter of offer and acceptance, an LOA, with the United States government. 2 years ago, Belgium added 34 airplanes. The Japanese had just increased from 47. They increased 105 -- 42, excuse me, to 105 to get to 147, second largest customer that we have. We're in the final stages of the Canada competition, which we feel pretty good about. We're bullish about that. And Switzerland, Spain and Finland all have competitions planned among other countries. So we do think there's strong demand there.

And just to remind everybody, if you look at our block buy lot 12 through 14, and then the next lot, 15 through 17, almost 50% of the airplanes that are going to be ordered are international customers. So strong demand there. And I give the team credit for driving the price down to below $80 million in aircraft for the A variant. And we're on a path by the middle of this decade to get the sustainment cost, the cost per flight hour down to $25,000 and get availability up to 80%, which should be very intriguing to the international customer set.

Myles Walton

Is that $25,000 per flight hour getting there going to help you convince the Air Force on the multiyear proposal that you've kind of independently put in front of them? Or are there two things decoupled in a more meaningful way?

Kenneth Possenriede

Are you referring to the PBL, the performance-based logistics?

Myles Walton

Yes. Exactly.

Kenneth Possenriede

Yes. Okay. Yes. Yes. So what we have seen in the past is, and this is not a criticism of our customer, this is just how the procurement process has evolved, we're doing these annual spare buys, we're doing these annual base stand ups, we're doing annual budgets across the board for the F-35 sustainment program. And our concern was that though we think we could get to the 80% capability and the $25,000 per flight hour, it's being done in an extremely inefficient way. And what we offered up is a concept called performance-based logistics, which we're doing today. And I'd say successfully for our Navy customer and for Lockheed Martin is on our MH-60 program. So a similar concept where we, industry, will sign up to a service level agreement to get to those specific metrics that I described earlier. We would take all the risk from an investment standpoint. We would take the risk of hitting that target for per flight hour, $25,000, and the risk of having availability of aircraft at 80%. And if we do hit those goals, we want to be adequately compensated for it. If we don't hit those goals, then we should be, from a profit standpoint, penalized for that. So there is interest from our customer set. We're hopeful that we'll start having a conversation to shape an RFP for us to offer up an RFP so we can get going on this.

Myles Walton

That makes sense. And then maybe to transition a little bit on cash flow. Your $7.6 billion, you obviously had a great first quarter to get out the gates. And it sounds like you were maybe ready to increase that, if not for the virus impact. Walk us through some of the -- excuse me, headwinds that still exist for you as you stretch through the rest of the year and kind of your level of confidence on both that cash flow number as well as deployment directions.

Kenneth Possenriede

You got it. Yes. You're correct. Our current guide for cash, it's $7.6 billion for this year. We talked about on the call how we feel really good about that target. I don't think there's any question, Myles. If it wasn't for COVID, we would have taken our number up, our outlook up. You mentioned that we had a strong first quarter of cash generation. It's likely was going to be better than we thought. We're just taking a pause because of COVID.

Let's talk long term because I know everyone likes to hear just more than 2020. We haven't changed our expectations for 2021 or 2022. We're feeling good, 2021 right now at $7.7 billion. We still see a line of sight for that. And in 2022, we see $7.8 billion. And we'll -- I'm sure we're going to talk about the tax change that will occur out in 2022 that's going to alter how we expense our R&D costs and have to amortize them over 5 years. If that happens and it's -- it occurs, it's implemented as written, we will not hit the $7.8 billion, but we could talk about that certainly for a second.

If you think about this year, the DoD has changed progress payments from 80% to 90%, that has helped us immensely. We're doing everything we can to push as much of that down as a prepayment to our supply chain. We did $450 million. We're committed to doing that. We did it. We did $150 million cash from operations prior to us receiving any of that benefit. And Myles, it's likely we're going to continue doing that throughout the rest of the year, and we'll push down payables to our small business suppliers and our distressed suppliers throughout the year, including year-end.

So from a tailwind standpoint -- so you got a headwind this year. Your headwind this year is the payroll tax deferral, that's for $460 million. We have to pay $230 million of that back in 2021 and another $230 million of that in 2022. The other headwind that we see is in pensions. As I described in the first -- I'm sorry, year-end call last year, we're assuming a 7% growth in our pension assets. Right now, snapshot in time, that is not happening. As of last Friday, it was basically breakeven, which is good news because it was significantly worse than that a couple months ago. And if it stayed there at the end of the year, we probably have another $300 million headwind next year on pensions. Our plan was to do a little less than $1 billion. This would be an additional $300 million. And then we have another headwind in 2021 of about -- round numbers, call it, $250 million that would hit us.

The tailwinds, we seem to be in a good groove of working capital improvements. So there's opportunity there for us. And another tailwind would be is if this progress payment rate change continues, there would be benefit to us. Again, we would work to take care of our suppliers. So I think we still feel good about cash flow this year of $7.6 billion, cash flow next year of $7.7 billion and cash flow of $7.8 billion in 2022, putting aside the R&D tax implications even with these headwinds that I described.

Myles Walton

Yes. And so on the progress payment rule change from 80% to 90%, how permanent are you assuming that to be? Or does it become a head -- is it assumed in your headwinds calculation for '21 and '22?

Kenneth Possenriede

So this year, we'll collect incept today costs, 80% to 90%, which is sizable for us. And then on an ongoing basis, for 2020, we're assuming any new contract that we get that has progress payments will be at the 90% rate. But just to put things in perspective, think about our portfolio, 60% is fixed price -- 62% fixed price, 38% cost plus. Of course, cost plus is not on a progress payment. And the lion's share of our fixed-price contracts are on a performance-based contract payment scheme. So we do have a sizable amount of progress payment contracts, but it is not -- it is the smallest of the three groupings.

So we're still assuming that, that happens by year-end. But what will start happening, Myles, is we'll start liquidating, hitting milestones where we would have collected that money anyway. So that headwind as we go into next year, we'll start winding down as we start delivering on those milestones.

Myles Walton

Okay. Got it. Yes. And the feedback I get from your suppliers are, by far, you've been the fastest to deliver cash flow down to them. So I know from a supply chain perspective, you're kind of getting top marks from that perspective, if it's worth the feedback to you.

Kenneth Possenriede

That's good to hear. Thank you for the feedback.

Myles Walton

And then at that conference, I think it was Goldman, you talked about the headwind in 2022 from the R&D tax treatment being higher than you were previously anticipating. And that $2 billion this morning, RTX actually echoed that comment that it could be $2 billion of a headwind to them and they're a similar size. And so I guess that backs up your assessment as well. But maybe the bigger question is, what's the pathway to contain it to just IRAD or to maybe shorten the amortization period? Or just kind of when do you think there'd be some resolution there?

Kenneth Possenriede

Sure. Yes. So the $2 billion assumption for Lockheed Martin is it's not just IRAD, it's looking into our research and development contracts that we have assumed in this analysis that would be applicable to the tax change to amortize over the 5 years, and that's how we got to the $2 billion.

I actually did read the tax law. It is vague. But my tax attorneys, internal and external, have told me that one strong interpretation would be the one that we're making, and it sounds like UTX is making as well, which would be, for us, the $2 billion impact. Right now, we're working with our Government Affairs organization to talk to the right constituents in Congress, the tax authorities just to talk about this, to talk about this would be harmful to industry. This certainly would be harmful for Lockheed Martin. It effectively, for the first year, would take our cash from operations down $2 billion, $1.6 billion year after that, $1.2 billion et cetera, et cetera, until it evened itself out.

We're trying to shape it. So you're right. So you amortize just our IRAD, which is roughly $1.3 billion over 5 years, which rough numbers is $200, whatever it is, $270 million rough numbers. I'm not that good. If that were the case, I'm not that good to say we can't cover that in 2022 and beyond. So if that were to happen, I think that would be a major win for industry, a major win because it would allow us to make more investments going forward, employ more people and generate more cash for our investments and for our shareholders from a cash deployment standpoint. We're speculating here, Myles, but we don't think anyone's really seriously going to address this until a, COVID is over; and b, there is an election and either a new -- an incoming President or a new administration.

Myles Walton

Okay. That makes sense. And to transition to MFC for a second, that's obviously been a big growth driver over the last couple of years, and it seems like it remains quite strong. Can you give us a sense as to your visibility to maintain these levels and higher? And in particular, I guess on the missile defense side with that and PAC-3 being some of the bigger drivers in the unit?

Kenneth Possenriede

Sure. Yes. Missiles and Fire Control, fastest-growing business for us and highest-margin business, which is not bad. One aspect, and we kind of touched on this before, of their growth is the expanding production lines. It's for, frankly, almost all their missile products. So Hellfire is going to go from 7,000 up to 11,000, PAC-3 is going from 250 to 500, and we're also expanding GMLRS and JASSM. It's a combination, as I mentioned on an earlier question, our domestic customers replenishing their stockpiles as well as orders from international customers. We've been investing in these facilities, buildings. They're long-term assets. We've been encouraged by our customers to make these investments. In fact, I'd say it's probably more than an encouragement. They're there with us lockstep, showing us their coordinated forecasts of what that entails in the future for domestic and international.

We opened two labs in Orlando over the past year or so. We expanded our footprint in Troy, Alabama for a missile production facility, that's for JASSM and LRASM. The customers have been very supportive of our expansions. And in most cases, they -- frankly, they've been also investing alongside of us in special tooling, for example, as they're driving that demand. This is roughly going to be over a 3-year time period with 2020 being year 2 for most cases. In some cases, it's the first year of expansion. So while our capacity will eventually grow to support the larger sales outlook, we do think we have the right expectation going forward.

And we just received a $6 billion order for the PAC-3 program. The majority, roughly 70% of it was for FMS countries. So we haven't seen any material impacts there yet. In fact, back to the capacity increases on PAC-3 from 250 to 500, we could go higher than the 500 in the short term. We're just taking a pause on that because we're not clear that the demand is there beyond the 500 in the long term, but we'll see. And last week, the State Department approved a sizable Patriot system sale to Kuwait. Our portion is for the PAC-3 missile, of course. It's worth approximately $800 million for us. It's for 84 interceptors. So we knew this was coming, but it was good to get behind us. So we're feeling good long term -- medium term, long term of where Missiles and Fire Control is going from a growth perspective.

Myles Walton

And Ken, this was once a high-teens margin business, and now it's down to around 14%. And it's still, like you said, the highest margin across the enterprise. But I'm just curious, are there other scenarios where the margins get back up towards the high teens or higher than mid-teens?

Kenneth Possenriede

Yes. I think getting there is going to be hard. So the trade-off is continue investing, continue winning development programs and grow the top line and still have very, very respectable margins. So I think our margins right now, at least from a plan standpoint, we're going to call -- I think they're stable. I think where they are today is where they're going to be in the future. You may see some upside if we -- back to the cost takeout conversation we had earlier, in the short term, with that $144 billion of backlog, the fixed price portion of that, specifically for Missiles and Fire Control, are there some opportunities from a risk retirement standpoint or margin expansion? There might be. But as I mentioned, we've been successful at Missiles and Fire Control for winning some key development program, and we've been balancing this part of the portfolio with our production programs. That's been our focus.

One element that may cause some pressure, but I'd say it's a good thing and that's if we continue to win more development programs because there's top line growth there. And if we're successful performing, they'll turn into production programs that will turn into mid-teen, single -- double-digit margins. So we're pleased where the portfolio is.

Myles Walton

And we're coming to the top of the hour results. Just one more, one of the business areas is Space. And in particular, you trade-off there was an extra $3 billion put into the NASA budget. But maybe you can touch on hypersonics flows disproportionately through this segment now as opposed, obviously, through the segment that is classified. And so your backlog in the business has obviously grown quite a bit. And the sales haven't quite grown quite as proportional because it's a long-cycle business. But maybe you can give us some color on the length of visibility for growth in this segment that you see.

Kenneth Possenriede

Yes. Yes. You're right. Space has received a lot of attention of late. And I think one of the reasons is the National Defense strategy and the National Security strategy, both highlighted Space as an area of special emphasis, which is a good thing. Our backlog actually did increase last year by about $6 billion in Space. They had a great order book last year, that's more than 25% over the end of 2018. Our U -- our AWE, excuse me, customer gave us a 3-year authorization.

And to your point, we did see some strong growth in classified and in hypersonics. So back to what you stated earlier, Myles, hypersonics is growing strongly in Space, Missiles and Fire Control and to some extent, Aeronautics, but the lion's share, highest percentage of volume and growth is in the Space area. It's -- we think space is very well positioned given the National Defense and Security strategies that I mentioned. But also when you add in the emphasis of deep space exploration to Mars and the new lunar missions in NASA, we think there's good things to happen there for us.

So the question is, can we continue to grow like they have? We're pleased with their growth rate last year. We're touting mid single-digit growth this year. Not sure if they could stay at that pace. We'll have to see. As you mentioned, it's a long-cycle business. The last time we took a snapshot of the out years, they weren't quite there yet, but we're going to start kicking off a long-range plan process soon, and we'll see where they're going, especially with that increased backlog that we talked about. So we're pleased with the portfolio, a lot going on here and bright future ahead for them.

Myles Walton

All right. Well, great. Thanks so much, Ken. Good discussion and thanks for joining us on the call.

Kenneth Possenriede

Thank you, Myles. Everyone, stay healthy and safe.

Myles Walton

Take care. Bye, bye.

Kenneth Possenriede

Bye.