Operator:

Good day, and welcome, everyone, to the Lockheed Martin Second Quarter 2024 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the conference over to Maria Ricciardone, Vice President, Treasurer and Investor Relations. Please go ahead.

Jim Taiclet:

Thanks, Maria. Good morning, everyone, and thank you for joining us on our second quarter 2024 earnings call. Over the past few months, Lockheed Martin's people, systems and platforms have again demonstrated their ability to enhance security in Eastern Europe, the Red Sea and the Middle East. From the PAC-3s critical role in air defense, to the Aegis Combat System with AI augmentation to the F-35 of this advanced sensor and data management capabilities, our company has made major contributions to Allied and Partner defense. We continue to demonstrate the impact of our 21st Century security strategy by harnessing the latest digital technologies to continuously improve mission effectiveness, strengthening and scaling defense production system, and expanding industrial cooperation among our allies and partners. Consequently, demand for our defense technology solutions remains robust, with a backlog of nearly $160 billion greater than two times our annual revenue. Our strong performance so far in 2024 extends beyond blast backlog as well giving us confidence to raise our 2024 full year outlook for sales, segment operating profit and EPS. In the second quarter, sales increased 9% year-over-year and 5% sequentially and reflected growth in all four of our business segments. The supply chain continues to improve and defense outlays also continue to increase. Our focus on operational execution helped us achieve segment operating margins of 11.3%, up 20 basis points compared to last year's second quarter and free cash flow of more than $1.5 billion, an increase both year-over-year and sequentially. Jay and Maria will talk more about the specifics of the quarterly results in a moment, but suffice it to say, we are pleased with our financial performance and momentum so far in 2024. I'm especially happy to report the progress we have made on the F-35 program. As announced last week, we began deliveries of the first Technology Refresh 3 or TR-3 configured F-35 aircraft to the US government. The TR-3 upgrade and further Block 4 enhancements represent a critical evolution in capability and their full development remains a top priority for us. These and further software updates over the life of the program will ensure that F-35 remains an effective deterrent to aggression and the cornerstone of Joint All-Domain operations now and decades into the future. We continue to produce at a rate of 156 aircraft per year and expect to deliver 75 to 100 aircraft in the second half of 2024. Over 95% of TR-3 capabilities are currently being flight-tested and we look forward to delivering full TR-3 combat capability to the customer. In addition, we expect deliveries of F-35 aircraft to exceed production for the next few years. Jay will talk about the financial aspects of our current status in a moment. Continued close collaboration with the joint program office, or the JPO as known and across our industry partners has been and will be essential to meet and exceed expectations of this critical national defense program in a timely and cost-effective manner. I met with my F-35 industry CEO colleagues in Fort Worth recently to set plans for enhancing the cooperation on our software and hardware and test integration processes, among other initiatives to increase speed and efficiency in the program. The TR-3 hardware and software provide a significant upgrade in computing power that enables major improvements and capability to our airmen, sailors and marine as well as to our partner and allied nations. International customers continue to recognize the superior capabilities of this, the most advanced fighter aircraft in the world in key aircraft node in the DoD's Joint All-Domain architecture. On the international front, Israel announced a third squad of F-35As, increasing their fleet by 50%. Greece is in the final stages discussion with the U.S. government to procure the F-35 and we continue to see interest from Romania as well as a potential new customer. Beyond the F-35 is the quarterback of Joint All-Domain operations our ongoing collaboration with the U.S. military during major exercises with deployed operational units exemplifies our commitment and ability to enhance readiness and integrate capabilities across all of our customers' missions and priorities. In June, new advanced capabilities from across Lockheed Martin contributed to the tenth iteration of U.S. Indo-Pacific Command's Valiant Shield exercise. During this exercise, there were several significant milestones demonstrating how we are continually improving our forces capabilities and enhancing our deterrence posture. One example is that we successfully integrated digital command and control capabilities with the Indo-Pacific Command's Joint Fires network, enhancing real-time decision-make commanders and operational agility for the forest. Our operational planning data fusion engine was employed to coordinate joint operations using live real-time data producing actual tasking orders at combat relevant speed. And another example from the same exercise, Lockheed Martin Space and Lockheed Martin Aeronautics jointly demonstrated the ability to autonomously optimize intelligence, surveillance and reconnaissance, or ISR, collection and enhance their imagery for quick, automated target detection and classification, facilitating data delivery across a wide range of space-based and airborne platforms like never before. In addition, the U.S. Army tested our Precision Strike Missile, or PrSM, against the moving maritime target in the Pacific Ocean. This next-generation missile enables further improved range and precision to deter potential adverse series from even greater distances. According to the Army, this test is a significant step in the PrSM programs progress. We've also moved toward realizing the 21st Century Security Joint All-Domain vision with the signing of a landmark agreement with Australia's Department of Defense to build their future joint air battle management system. They call it Project AIR6500 Phase 1. As we've discussed before, this system will provide the Australian defense force with leading-edge integrated air and missile defense capability using next-generation technologies to combat high-speed threats and establish Australia's integrated air and missile defense as one of the most highly advanced in the world. We also continued to demonstrate 21st Century security in other innovative ways. In May, our Skunk Works Tactical artificial intelligence team successfully executed their second set of flight tests with the University of Iowa’s, Operator Performance Laboratory. RAI flew an L29 jet aircraft by means of heading, speed and altitude command sent directly to the onboard autopilot than to the plans flight controls. This test has shown our AI team can rapidly develop, iterate and integrate artificial intelligence technology for autonomous flight operations. We're also making great progress in another leading-edge defense tech initiative, hypersonic strike, which is a critical element of deterrence in today's world. As announced by the Department of Defense in June, the US Navy and US Army completed an end-to-end all up ground flight test of a common person missile, core to the Navy's conventional prompt strike or CPS and the army's long-range hypersonic weapons programs. The test marked a major step forward for the nation's development of hypersonic systems by Lockheed Martin. Pivoting to the supply chain, we continue to explore opportunities to drive our concept of anti-fragility across the global defense industrial base. For example, we recently signed a collaborative memorandum of understanding with Ryan Mittal to work together on land, air and naval opportunities. One of our first initiatives is the new Global Mobile Artillery Rocket System or GMARS is a highly interoperable two-pod launcher system intended to fire the MLRS-based munitions. Combining these combat-proven systems will help address the growing demand for long-range rocket capabilities in Europe and elsewhere. On our PAC-3 program, international collaboration remains strong as well, including development of indigenous capabilities with the opening of a PAC-3 MSE launch tube production line in Poland, as well as a memorandum of understanding with Grupo Oesía in Spain to provide an opportunity to manufacture factory MSE parts for worldwide customers. Spain and the United States also formalized an agreement for Spain to purchase pack free MSE missiles and related support, making Spain PAC-3s 16th partner nation. I'd also like to briefly discuss the latest status of the US defense budget. The House approved their version of the FY '25 defense appropriations. So the focus now shifts to the Senate where the process continues before the reconciliation phase later this year. We believe our portfolio is well-aligned to current and future customer mission priorities, including air superiority with the F-35 and CH-53K and Black Hawk or UH-60M. Our integrated air and missile defense with PAC-3 and NGI, hypersonics with CPS and the LRHW I just mentioned a minute ago and tactical strike weapons and munitions with JASSM, LRASM, PrSM, JAVELIN and GIMLERS. Ultimately, we look forward to the conclusion of the USG appropriations process and the continued utilization of the existing supplement mental funding. On the international front, I was encouraged by conversations I had at the recent NATO Summit a few weeks ago in Washington. International partners and allies remain steadfast in their pursuit of elevated defense spending to strengthen the overall integrated deterrence posture of the alliance given the tragic and ongoing conflict in Ukraine. I'll now turn it over to Jay for award highlights and additional commentary on our financial results.

Maria Ricciardone :

Thanks, Jay. Today, I'll discuss second quarter year-over-year results for the business areas, starting with Aeronautics on Chart 5. Second quarter sales at Aero were up 6% year-over-year. The increase was primarily due to higher volumes across F-35 and the continued production ramp on the F-16 program. Segment operating profit increased 5% with higher volume and favorable mix being offset by lower profit booking rate adjustments. Regarding aircraft deliveries, we resumed F-35 deliveries in Q3, as Jim shared, and we've delivered our 1,000 F-35s. On F-16, we delivered four in the second quarter and are targeting around 20 for the year. For 130J, we delivered five in the quarter, reaching a milestone of 2,700 deliveries of this critical tactical airlifter and expect around 20 deliveries for this year. Turning to Missiles and Fire Control on Chart 6. MFC had another strong quarter with sales up 13% from the prior year, driven by production ramps on a handful of our precision fires programs within the tactical and strike missile segment, primarily Guided Multiple Launch Rocket System, GMLRS and Long Range Anti-Ship Missile, LRASM. Segment operating profit increased 21% year-over-year due to higher profit booking rate adjustments led by the PAC-3 and Apache programs margins returned to 14.5%, which is more in line with historical rates. MFC backlog reached a record level of almost $35 billion in Q2 supported by continued global demand for several of our missile ammunition programs. Key awards included the PAC-3 award that Jay mentioned as well as $1.3 billion in combined awards for launchers, including HIMARS, and M270 upgrades and a $500 million follow-on production contract for JAGM and HELLFIRE to support U.S. and international customers. On the delivery front, I'll highlight a few of the key program quantities in the quarter. We delivered 100 PAC-3 interceptors, more than 2,000 GMLRS rockets, over 2,700 HELLFIRE missiles and 11 HIMARS systems. Shifting to rotary emission systems on Chart 7. Sales increased 17% in the quarter to over $4.5 billion primarily driven by higher volume at integrated warfare systems and sensors on radar and laser programs as well as the Canadian Surface Combatant program. Sikorsky programs also saw higher volume led by BLACK HAWK and CH-53K. Also of note in the quarter, we delivered five S-70 helicopters to international customers, which resulted in about $115 million of revenue on a passage of title POT basis. Operating profit increased 9% year-over-year due to higher volume, partially offset by lower profit booking rate adjustments. Now, for a brief summary of helicopter deliveries. In addition to the five S-70 helicopters I mentioned, Sikorsky delivered five Black Hawks, four combat rescue helicopters, and one VH-92 Presidential helicopter in the quarter. On the delivery front, a few of the key program quantities in the second quarter, we -- yes, sorry about that. Let's go to space. Finally, with space on Chart 8. Sales increased 1% year-over-year. The growth was driven by higher volume on strategic and missile defense programs, primarily hypersonics and Fleet Ballistic Missile, FBM. Partially offsetting this growth was lower volume on classified programs and Orion. Operating profit increased 11% compared to Q2 2023, driven by favorable mix and higher profit booking rate adjustments. Now, I'll turn it back over to Jay to wrap-up prepared remarks.

Operator:

Thank you [Operator Instructions] The first question comes from the line of Kristine Liwag from Morgan Stanley. Please go ahead.

Jim Taiclet:

Let's call it the sound of Freedom, Christine, it's good.

Jim Taiclet:

So Kristine, I'll start and emphasize that we're going to do this unwind and conduct the deliveries with safety and quality is our number one priority. So just starting with that foundation, we actually have the ability to add resources, which have already been identified and designated. And that's test pilots, maintenance team, software and hardware engineers to get the flight test done that we need to, be at the higher end of that range. But we want to make sure that if it's weather, if it's pilot, crew rest issues, anything like that, we will accommodate for those. But we should -- we have the resources in place, I'll say, that should enable us to get to the higher end of that range, if you will.

Operator:

Thank you. The next question is from Cai von Rumohr from TD Cowen. Please go ahead.

Jay Malave :

Okay. Cai, let me just say, first of all, as Jim mentioned, restarting delivery was an important first step really towards delivering the fully combat capable aircraft. Aircraft, the withhold -- the aircraft withhold this final delivery payment is a timing item, as you mentioned. And we're working with the customer to finalize the terms of those final delivery payments. We're making excellent progress, but it would be immature or premature to give details of that because it remains subject to negotiation. Suffice it to say that you will see timing benefit over the next few years as we deliver, but I think we still need to work through and finalize this agreement with the customer. As far as the revenue, I really wouldn't see -- expect much of an incremental benefit in terms of revenue. We continue to build at a 156 rate. We are seeing production a little bit higher this year. But for the most part, we should expect that to be, I think, fairly stable. And yes, we'll see incremental activity in terms of test activity, which does increase penetration on a percent complete basis. But I don't really view that being all that material. And so we just hold the production. We'll expect F-35 to grow mostly from sustainment next year and in the years to come. I think it's important to mention as well that we are -- the headwind on funnel delivery payments are here in 2024. We're holding our outlook, so we're absorbing that with better performance in the rest of the portfolio. Yes, we will see the timing benefits downstream. But as I mentioned before, we have to get just the whole delivery cadence straight. And I just want to make sure I had it straight in terms of the last question. We're targeting anywhere between 12 to 18 months to fully deliver on these parked aircraft. And as I mentioned, we just need to learn out the process over the next few months here and get -- to be able to give better guidance on that.

Operator:

Thank you. Our next question is the line of Scott Deuschle from Deutsche Bank. Please go ahead.

Jim Taiclet:

Good morning.

Jay Malave:

Yes. No, I appreciate the question. We've said over the last few months and really the last year or so that our goal has been to increase absolute free cash flow in the low single-digit clip, and then that augmented with share repurchase would get us to a mid-single-digit free cash flow per share expectation. That remains of the outlook. We'll go through our multiyear forecast over the next few months here, we'll be able to give you a better update in the October timeframe. I think given the fact that we're at a higher level in 2024 is a positive, and we continue to expect to grow in 2025 off this higher baseline. So, that in and of itself should result in a higher cash flow baseline as well. But there's a lot of work to be done between now and then. And so I would like to have the benefit of going through that in more detail, and we'll update that to you at least preliminarily in October.

Operator:

Thank you. The next question is from Gavin Parsons from UBS. Please go ahead.

Jim Taiclet:

Good morning.

Jay Malave:

Well, I'd say it's a combination of both. We ended the year in 2023 with a $160 billion backlog, which was a record. We ended here in the second quarter at $158 billion was slightly below where it ended a record with significantly higher sales than we thought through the first half of the year. We expect -- our continue -- as I mentioned in my prepared remarks, that we continue to expect the backlog to increase at end of this year, which gives us more visibility into further growth in 2025 and beyond. So, we're very bullish on where that stands from a backlog standpoint. As far as supply chain, we did see improvement. We are seeing continued improvement there and on-time delivery. The part shortages continue to come down. Having said that, there are still areas where we're -- particularly where we're ramping up some of our major programs where we still have some work to be done there. And we're still going through many of the initiatives and actions that -- proactive actions that we've talked about in the past, which is some in-sourcing on some capabilities, dual sourcing, where it makes sense. Also, we have deployed, and we continue to deploy personnel to provide on-site assistance at our suppliers. And of course, we also continue to look at product redesign. But I'd say, by and large, we are seeing an improvement in the in the supply chain, which also gives us confidence for that continued growth in the future.

Gavin Parsons:

Great. Appreciate the detail.

Pete Skibitski:

Hey, good morning, guys. Guys on missiles and fire control, if you think about what was appropriate in the 2024 baseline budget and the Ukraine supplemental, how much order flow is still to come there for you guys at MFC? And also, just if we think about the growth cadence there, you talked about $750 million a year in the past, you're going to be well above that this year. So I'm just wondering if that cadence is going to come back into play 2025 on a higher baseline. Thanks.

Jim Taiclet:

And Pete, it's Jim. Again, on a qualitative perspective, I tell our teams and our executives internally we're in the aerospace and defense industry, but we're in the deterrence business. right? So if you step back and say what contributes to deterrence from an MFC, for example? And I think anybody that's everyone watching Clint Eastwood would movie will know that, if we run out of ammunition, you're in a lot of trouble, right? So part of deterrence is showing that, a, you have enough ammunition stocks to prevail and sustain your operations from an aggressor. That's the first thing. Second thing is you also – it's helpful to demonstrate that you can produce at rate and ramp that rate quickly. That's our anti-fragility program. And the third piece of it is you can produce and repair MFC and other products in the local theater and not have to bring them all the way back to the US to fix them or drive that production up. That's the third part of our strategy. So everything we do is based on deterrents and strengthening that. And MSC has a huge role in making sure that adversaries know that we've got enough stocks in MFC type products, and we can ramp that rate and we can produce in different places and repair in different places should they act. And that's really kind of a qualitative underpinning of what Jay was talking about.

Jim Taiclet:

Thank you.

Seth Seifman:

Hey. Thanks very much and good morning. Probably just a quick one. Sorry about the background noise here. Just a quick one and kind of big picture. I think, Jay, I think you've said in the past that there was good potential for growth to be at least as strong as 2024 and 2025 and good potential for that growth rate to accelerate. Is that still the case off of the higher revenue base and a higher growth rate here in 2025 -- in 2024?

Operator:

Our next question is from Sheila Kahyaoglu from Jefferies. Please go ahead.

Jay Malave:

Yeah. The second half of the year, Sheila, is -- I mean the most significant would be the program loss at MFC that we have to record in the second half. So as I mentioned in my prepared remarks, we recorded about $100 million here year-to-date. In the second half, we expect about another $225 million. So that will put pressure on margins in back half. The second piece I would say is that, we would have -- even though we had a very strong and solid profit adjustment first half that slows down a little bit in the back half of the year just based on program timing, the timing of risk retirements -- and so just the risk retirements and profit adjustments are not all linear, they incur different aspects of a program life cycle. But what I would say is we feel comfortable with where we're headed. We've talked about 2024 being a low watermark for all net-net margins, and we expect it to improve gradually over the next few years, and we still feel confident that can take place.

Jay Malave:

All right.

Ken Herbert:

Yes. Hi. Good morning. I just wanted to see and apologies if I missed this, but can you comment on your view of NGAD, and how you're thinking about that now moving forward? And what we might be thinking about in terms of the next catalyst for you on this particular program?

Operator:

Thank you. And the next question comes from the line of Rob Spingarn from Melius Research. Please go ahead.

Jim Taiclet :

So we got together, Rob, as I mentioned a few minutes ago in the prepared remarks in Fort Worth about a month with the CEOs of half of those companies that contribute to this in a significant way. We communicated the importance of exactly what you're speaking to which is not just a core processor, but there's a range and a number of other components across all of these companies that need to maintain or increase their production rates and modernize their equipment along the way. And so that communication of those suppliers has been made. They know our plans were well integrated -- more integrated than we ever have, I think, when it comes to test and planning and design iterative software across multiple companies, et cetera. So we're in a position, and as suppliers are telling us they will meet the demand. We will monitor them and continue to even put people in their sights when we need to, to make sure that happens. But we've got the major suppliers together, and they understand the demand rate, quality level we need and a better integration plan for test and development that we have built going forward.

Jim Taiclet:

So you're right, Rob, that this is designed for backward integration, if you will. There'll be a schedule that the US government. It comes up with for TR-3. There may be -- it will be up to them as to the cadence, the investment rate, et cetera. But over a period of time, there will be a great number of originally built TR-2 aircraft that will get converted. There's some hardware software upgrades to that.

Jim Taiclet:

Yes. So again, this is a US government policy decision, so it's better to request that kind of commentary from them, Rob. But we're, again, ready to do it at the rate that we expect -- that they come at us with.

Jim Taiclet:

Thank you.

Noah Poponak:

Hey good morning everyone.

Noah Poponak:

Jay, could you give us the updated -- I guess, if you snap the line today or just ballpark as you see it, cash flow, pension contribution in CAS recovery for at least '25, and I guess if you had it, and we're willing to give it beyond that would be helpful. And then I guess, can you talk through the pieces of how you grow absolute dollar free cash flow in '25, given the pension headwind you have and how it compares to how quickly you can grow the segment EBIT.

Operator:

Thank you. The next question is from the line of Peter Arment from Baird. Please go ahead.

Jay Malave:

Sure. A lot of these agreements enable -- they're part of in-country requirements for industrial cooperation. You mentioned Poland, you mentioned Germany, also Australia. And those are enablers for us to build up this backlog and drive this demand. On the PAC-3 specifically, we expect to get to $550 million in 2025, and then to $650 million by 2027. And so all of these orders and these partnerships that we're signing up, while all enablers to us to be able produce and deliver at those rates. And it's not just PAC-3. We've talked about GMLRS going from 10,000 to 14,000. We've talked about Javelin going from 2000 to about 4,000. We've talked JASSM and LRASM going from about 700 a year to 1,100 a year, so all of these orders that we're seeing, all these customer engagements that we have both domestic and international are all enablers to drive to these rates that we're building to. And so what they do is fill in the bucket to bring us to that backlog that's necessary for us to generate those sales. And we're on track to that.

Jason Gursky:

Good morning everybody. Jim, I wanted to just throw a big picture one at you, and maybe have you kind of wrap all of this together and kind of what you're seeing both in the near and in the long-term? And maybe just get your sense of maybe with a few more quarters here of hindsight, some of the lessons learned from the conflict in Ukraine. What you at Lockheed have learned from that whether you're investing in any new areas as a result of that? And kind of the feedback loop that you're getting from your customer both here in the United States, as well some of our allied nations as well. Are we seeing a development of a new set of requirements and investment areas kind of where are you spending and how are you going about doing it? Just a big picture, here we are middle of 2024, what have we learned from Ukraine? And what are we doing?

Maria Ricciardone:

Great. Hey Lois, I think we've come to the top of the hour. So, I'll turn it back over to Jim for some final thoughts.

Operator:

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.

Operator:

Good day, and welcome everyone to the Lockheed Martin First Quarter 2024 Earnings Results Conference Call. Today's call is being recorded. [Operator Instructions]. At this time for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Treasurer and Investor Relations. Please go ahead.

Jim Taiclet:

Thanks, Maria. Good morning, everyone, and thank you for joining us on our first quarter 2024 earnings call. I'd like to begin today's discussion with a brief overview of our quarterly financial results, the state of the U.S. Department of Defense budget, status updates on some key programs, and recent advancements made to support our vision of 21st Century security that integrates the latest digital technologies. Then Jay and Maria will provide more detailed information about quarterly highlights and financials. The increasingly unstable geopolitical environment in the world today makes it essential for industry and government to strengthen our nation's capabilities to deter and defend against further aggressive behavior against the U.S. and our allies. We here at Lockheed Martin are continuing to invest heavily to improve our design and production capabilities, while actively partnering with leading companies inside and outside the A&D industry to incorporate a wide range of technologies. As a result, we delivered robust revenue growth across the company, and we maintained a robust backlog of $159 billion, reflecting alignment between our advanced technology solutions and our customers' key missions and priorities. These first quarter results reinforce our confidence in our ability to achieve the full year financial expectations we shared in the most recent earnings call. Moreover, the approved FY2024 defense budget reflected many positives for Lockheed Martin, consistent with national defense strategy priorities too. Highlights include robust funding for munitions multi-year procurement, continued investment in hypersonics and classified activities, and ongoing support for programs such as Black Hawk, CH-53K heavy lift helicopter, the fleet ballistic missile, C-130, and F-35. There were also additions to the original budget submission, including F-35 aircraft, C-130, and combat rescue helicopters. The initial budget request for FY2025, while still very early in the process, continues support of many of these same major programs, including the F-35, CH-53K, UH-60M and others. In addition to emphasis on advanced munitions programs such as JASSM, LRASM, PrSM, Javelin, Daimler, and PAC-3, as well as hypersonic conventional prompt strike and the long range hypersonic weapon. In addition to that, next-generation interceptor is getting support, which I'll address more in a moment. In this week, funding of $95 billion for Ukraine, Israel and Indo-Pacific security supplementals passed the House and is currently under consideration in the Senate. We expect FY2025 Presidential Budget request and additive supplemental funding will provide a strong underpinning for future growth over the next several years for our company, giving us further confidence in our long range plan. While demand for these key programs remains elevated, it is also essential that our program performance in terms of quality, safety, cost and schedule gets and stays at the highest level. On our most significant programs, I, Jay, and my senior executive team are personally and directly involved. On F-35, we remain focused on program execution in terms of concurrent development, production and sustainment, and we are bringing all relevant resources across our company and collaborating closely with our customers and suppliers to fully implement the TR-3 capabilities that everybody is looking forward to getting. These capabilities based on the new core processor, data storage unit, and pilot display will ensure that the F-35 is not only the most capable and effective fighter aircraft in the world, but it will also further advance its abilities to act as the air domain quarterback of joint all domain operations for the U.S. and its allies. We're encouraged by the solid progress made over the last few months towards resuming deliveries, including improvement in aircraft mission system capabilities and system stability as we advance from prior software versions towards a combat training capable configuration. Flight testing of this configuration is now underway and we're on a path we expect to be on with regard to maturing the system with approximately 95% of TR-3 capabilities in this flight test program. The test results to-date support our expected timeline of delivering the first TR-3 combat training capable aircraft in the third quarter and then transition to a fully combat capable aircraft in 2025. As planned, there will be continual software updates to support further capability insertions over the Block 4 program and beyond. While there were no final deliveries of F-35 jets in the first quarter, we're maintaining our production rate and continue to expect an aircraft delivery range for 2024 between 75 and 110, which requires timely receipt of the necessary hardware from TR-3 suppliers along the way. The F-35's advanced combat and interoperability capabilities continue to create strong demand for the aircraft internationally too. In the quarter, the Czech Republic became the 18th nation to join the F-35 global team with a signed letter of offer and acceptance, making it official its intent to procure 24 F-35s. In addition, the U.S. State Department approved a potential foreign military sale to Greece for up to 40 F-35s. And Singapore announced its intent to purchase eight F-35As to complement the 12 F-35Bs to which it has already previously committed. Also in the lower air domain, while we're disappointed in the cancellation of the Future Attack Reconnaissance Aircraft program or FARA, Sikorsky remains committed to delivering innovative and reliable aviation capabilities to our domestic and global customers. With a strong foundation of more than $20 billion in backlog, bolstered by expected and funded growth in the heavy lift CH-53K helicopter program, Sikorsky’s multi-year outlook is stable. We're also encouraged by the army's renewed commitment to Black Hawk production and modernization, as well as our ability to address mission gaps with capability upgrades that leverage Lockheed Martin's broad portfolio of solutions in the lower air domain, things such as autonomy, AI, et cetera. Turning now to missile defense missions, which given recent world events are becoming more critical than ever. We continue to lead the industry. Last week, the missile defense agency or MDA selected Lockheed Martin to deliver the new homeland missile defense capability for the United States, which is called the next-generation interceptor or NGI. As the MDA's NGI prime contractor, Lockheed Martin will provide the most modern, reliable and technically advanced interceptor in the history of this system. This program was a 1LMX that's our digital transformation worn digital program meaning we embrace model-based engineering, digital tools, processes and technologies from the very, very start of this program. Now, as it continues on its path to the critical design review, integration with broader weapons system and flight tests, I'm proud of the Lockheed Martin team that enabled all of this. We were MDA's early down select before it was even on their schedule because we're so far in front to get this essential homeland defense capability off to a fast start. Earlier this quarter, the Long Range Discrimination Radar or LRDR, completed final acceptance and was officially handed over to the Missile Defense Agency in preparation for an operational capability baseline decision. And what that means is final transition to active service for that radar to help defend the country. The LRDR is a cutting edge national asset providing the benefits of both low and high frequency radars to search, track, and discriminate incoming missiles with an open system approach, enabling the customer to add incremental capabilities such as hypersonic defense. This is located up in Alaska, in the prime location, where we can sense early what any attack might look like and respond to it. What that really does, though, is create an elevated deterrence to any kind of attack like that. So it's really great to have LRDR about ready to go online. Now, both NGI and LRDR will be critical elements within the overall homeland defense mission, and they're going to be integrated into the broader defense architecture with a battle management system that we call command control, battle management and communications, or as the military calls it, C2BMC. So that's the system that's going to be used to integrate the radars, the missiles, and allow us to defend the country. In April, Lockheed Martin was selected for a potential 10-year, $4 billion follow-on C2BMC next-generation contract with the MDA, demonstrating again our leadership position and battle management systems for homeland defense. Under this contract, we'll continue to modernize and expand the system's capabilities to enhance global integration, improve space domain awareness, and optimize sensor connectivity and data fusion to levels never done before. All of which will create the most complete picture of these incoming threats as I just spoke about a minute ago. Separately, we also continue to advance our 21st Century security solution through collaboration with strategic commercial partners across the tech, telecom, microprocessor, and other industries to support the national defense. Citing just one example, we announced Lockheed Martin will work with Intel to support the simulated transition for Advanced Microelectronics Packaging or STAMP program for the office of the Under Secretary of Defense for Research and Engineering. This CHIPS Act related collaboration will provide a revolutionary leap in defense systems capabilities using high performance U.S. built semiconductors. Over the next 18 months, we'll integrate our latest sensor open system architecture technology with Intel semiconductors with the intent to ultimately implement, test and complete production through the U.S. Navy's Lockheed Martin MH-60 Romeo helicopter program. I'll now turn it over to Jay for more highlights and some additional commentary on our financial results. Jay?

Maria Ricciardone:

Okay. Thanks, Jay. Today, I will discuss first quarter year-over-year results for the business areas. Starting with aeronautics on chart five. First quarter sales at Aero were over $6.8 billion up 9% year-over-year, and that's 1% normalized for the extra week in 2024. The increase was primarily due to higher volumes across F-35 and Skunk Works and the continued production ramp on the F-16 program. Segment operating profit is comparable year-over-year with higher volume being offset by lower margin development contract mix and lower net profit adjustments, mainly on the F-35. Aeronautics backlog remains at a healthy $57 billion, which includes 373 F-35s and 80 C-130Js, and 132 F-16s, supporting growth into 2025 and beyond. Turning to Missiles and Fire Control on Chart 6, sales increased 25% from the prior year, 16% normalized for the extra week driven by production ramps on tactical and strike missile programs, primarily GMLRS, HIMARS and JASSM, LRASM. Integrated air and missile defense also saw higher volume on PAC-3 and THAAD. As expected, segment operating profit decreased 18% year-over-year, primarily due to the $100 million loss on the classified program Jay mentioned previously. Normalizing for the loss, MFC's margins would have been 13.7%. Now, I'd like to provide a quick update on our annual production capacity plans for key programs. PAC-3 is currently at 500 missiles, growing to 550 in 2025, and 650 by 2027. GMLRS currently is at 10,000 missiles, growing to 14,000 by 2025. JASSM, LRASM currently at about 650 missiles, growing to 1,100 by 2026, and HIMARS currently at 72 launchers, growing to 96 next year. Shifting to rotary emission systems on Chart 7. Sales increased 16% in the quarter, 8% normalized for the extra week, driven by higher volume across the entire portfolio, including radar and laser programs within integrated warfare systems and sensors, various programs within C6ISR and the CH-53K and Seahawk programs within Sikorsky. Operating profit increased 23% due to higher volume and favorable contract mix, partially offset by lower profit adjustments. Finally, with space on Chart 8, sales increased 10% year-over-year, 2% normalized for the extra week to approximately $3.3 billion. The growth was driven by higher volume on the fleet ballistic missile program and ramp ups on hypersonic and next-generation interceptor programs within strategic and missile defense, as well as higher volume on space development agency transport and tracking layer programs within national security space. Operating profit increased 16% compared to Q1 2023, driven by higher volume and ULA equity earnings, partially offset by lower net profit adjustments, primarily on the Next-Gen OPIR program. Now, I'll turn it back to Jay to wrap up our prepared remarks.

Operator:

Thank you. [Operator Instructions]. Our first question is from the line of Doug Harned from Bernstein. Please go ahead.

Jim Taiclet:

Sure, Doug. So I think it's important to understand that we're doing, as I said earlier, concurrent development and production and then advancing the sustainment capability as well, all at the same time. Most of these complex programs go through a period of development and then a production run largely off of that design base or that engineered base of what the aircraft supposed to look like and how it's going to perform. The F-35 is different in a sense that development has been going on since the day the program started years and years ago, and it's going on today. Now, the good news about that is you have step function increases in capability every few years, and as a result of the F-35's capacity to do that, the government just came out and extended the expected service life of the aircraft another decade or two, I think it was. So this is a good thing, but it's also an extremely difficult thing to do and even to predict schedule, right? It's our responsibility to hold cost and schedule, but we're -- we don't control all the variables let me just say. And that's okay, we're still the OEM, we're still responsible. And so what we run into on TR-3 is just a level of complexity and executing the step function increase, that's pretty, I'd say, novel or dramatic. What the team is doing at our company is we're integrating a series of components, devices, software, and managing and integrating all of that. And so what's happening now is we are ringing out all of the software through all of the new hardware and integrating it into all the aircraft other systems. And that's taken longer than our team predicted. The way we're going to get at that is if you think of it as a release one and a release two, and we've got a lot of confidence in this stage. So release one, if you think of it that way is what we're calling along with the U.S. government, a combat training capable aircraft, meaning we can get these jets in the hands of squadron, wing, and regional commanders so that they can start training their pilots on them and training their maintenance organizations and also getting their bases and infrastructure, spare parts, pools and everything else sort of in operational shape, if you will. Once we get the final software load for the fully combat capable version of TR-3, sometime in the next few months, then those aircraft could be deployed into actual combat operations and you'll have the training, the maintenance, the ringing out, the operational patterns and procedures on how to actually fly the jet in combat. So we'd like to be able to do it sooner, but this is the schedule we're on. And I'd say for the combat training cable aircraft, we're highly confident, based on the test results so far, that those will be deliverable in the third quarter. Jay, you want to say anything else about cash flow and --

Operator:

Thank you. Our next question is from Peter Strauss from Barclays. Please go ahead. I'm sorry, David. Okay, great.

Jim Taiclet:

Good morning, David.

Jim Taiclet:

So David, as we mentioned, for this quarter, we started off pretty solid, just on an apples-to-apples basis 5% growth in the first quarter lines up pretty well with a mid-point guidance range, which is 2% to 2.5% and the high end of that range being, say, around 3.5%. So we're well-positioned to deliver on that expectation. It is possible somewhere to last year that we could see some upside towards the higher end of the sales guide range there. So again really good start that enables that. As we think about 2025, what you saw in the budget, what we're seeing here in supplemental, give us higher confidence that we'll continue to grow. We talked about growth in -- starting in 2023, a year earlier than we had originally anticipated, accelerating in 2024, and then giving us more confidence that we'll see at least a same if not more growth in 2025. We'll give you -- it later in the year, we'll give you a much better update in terms of what we're seeing. But right now all this bodes well to our sustained growth in terms of what we've been driving to, not only in 2025, but beyond 2025 as well.

Peter Arment:

On missiles from fire control, can you talk maybe about the confidence in your margins -- margin guidance for the year? Just given the 1Q margin performance was certainly the lowest that we've seen in many years. And we know the classified losses are supposed to expect it to continue, but you've got kind of this reflecting top-line. I think Maria called out all the production increases and just do the losses just get smaller on the class side, or are we going to see some offsets just because of the higher volume? Maybe you just give more color on kind of your expectations on the margin performance profile going forward. Thanks.

Jim Taiclet:

And Peter, it's Jim. I used to fly these aircraft for the USAF and I can assure you that the capability that's being developed here at MFC in the classified program will have very, very long legs. There's going to be many, many years, we believe, of orders to follow. So, yes, for a quarter, for the year, maybe for a couple of years, we're going to absorb the loss provisions that Jay described. But I think if you look under the curve for the lifecycle is going to be significantly positive. And so we want to get there as efficiently as we can. This is a long run franchise program that I think the U.S. government is going to support for a very long time.

Operator:

Our next question is from Matt Akers from Wells Fargo. Please go ahead.

Jim Taiclet:

Good morning.

Jim Taiclet:

So the company made a beta about three years ago to say, okay, we've got a digital transformation program that is going to take the whole company to this model-based engineering system. And that's all the way from requirements acceptance from the government to sustainment years and years down the road. And we spoke this before; it's about a $6 billion, 8 to 10-year program to convert the entire company to a model-based engineering production sustainment operation. NGI was one of the pathfinder programs picked to implement this because there's no legacy to convert, right. There's no old blueprints to try to figure out how to make three dimensional, which is something, by the way, we are doing for C-130 and other programs right now. But we could get off to the fast start on NGI because it was in this born digital category. Right from the proposal, we were using these digital technologies, 3D, CAD and everything else, and sharing data with the government in that fashion, and they were able to receive it. And we could thereby accelerate the schedule and contain the cost of the development and ultimately of the production too, by using these tools. There were three original players in this. One dropped out fairly early. The second was in kind of this final phase, if you will, of down select. And we were -- we just ready to go and provided our proposal ahead of schedule. The other player, to my knowledge, provided a proposal also. And then the government was able to make a decision based on that. But I think because of our speed and our ability to demonstrate manageable cost over time, we won, and kind of won early, if you will. I'll let Jay talk more about financials, but what I can assure you is the process of this bid did not require us to dive to the bottom on cost. So Jay, do you want to take it from there?

Operator:

Thank you. The next question is from Ron Epstein from Bank of America. Please go ahead.

Jim Taiclet:

Yes. So Ron, this is Jim here. As we kind of roll into the 21st Century, what our company is trying to do is not just look at things through the programmatic lens or I'll call it vertical kind of column but also horizontally through the actual mission and figure out what technologies can accomplish the mission that will enable our core basic platforms to be successful as well. And that's how we're looking at the rotary business. It's not just at Sikorsky anymore. It is Sikorsky plus all of Lockheed Martin, right? And that's one of the reasons we're able to work with U.S. Army, Congress and the broader U.S. government to increase support for, let's say, Black Hawk, for example, in spite of the fact that FARA is being canceled and there's another vertical lift program in the form of FLRAA, which is going to be a tilt rotor. So there are missions that the Black Hawk will be extremely well suited for in the rotary lower -- it's really the lower air domain. It's not just for rotorcraft. So how do we pair those rotorcraft, a traditional Black Hawk, let's call it, by modernizing the Black Hawk with digital technology to do what the Air Force would call CCA, collaborative combat aircraft, meaning you can in the lower air domain tie drones and unmanned, uncrewed aircraft to a Black Hawk using digital technology, and we've demonstrated that already. You can actually make the Black Hawk itself autonomous with no pilots in it being flown from a command center to do high-risk missions. So we're looking at the mission and saying, what can we do all across Lockheed Martin, whether it's through sensor fusion, AI, 5G, space-based sensor assets to make the Black Hawk, for example, a much longer lived platform, a much more relevant platform and actually a very efficient platform compared to, say, the FARA aircraft that won't be able to do some of the missions anyway. So we have a strong confidence then in Sikorsky itself and the platforms that it does produce. And that includes CH-53K, which I mentioned the Seahawk, which is a Black Hawk that's configured for maritime operations that is pretty high tech as well. And so we feel really solid, as I think Jay said in his remarks, on Sikorsky's future with a backlog of $20 billion and the ability to modernize these really reliable in production aircraft to do new things and with missions in digital technology and other -- and integrate with other parts of LM and our partners to make those platforms relevant in the future. So I'll stop there. Jay, you have anything else you want to say?

Operator:

The next question is from Rob Spingarn from Melius Research. Please go ahead.

Jim Taiclet:

So it's a great topic, Rob. And so let's start with the origination of the F-35 program. It was intended, as you said, to be a wide-based Allied program. I think it was seven literally partners, essentially treaty partners that we all get together and contribute their industrial capacity and their financial capacity to this program, given its importance and complexity and the scale that people are contemplating. So yes, we have a pretty broad supply chain. There were a couple of times when that's gotten a little tough for the program. COVID was one of those. So we had delayed deliveries out of the UK, because the factories there weren't open, although ours were. So we will be mitigating any future programs that we have. And we're eager to have international production and sustainment partners, and we're going to expand that. But we're also going to apply some anti-fragility methodologies to those initiatives going forward. No one really thought of COVID, of course. But now that we've had that example, we need to know -- we know we need to have second and maybe third sources. And geographic diversity would be a positive thing from that perspective. So we'll just be a little more broadly thoughtful about how we do this. Having single sources outside the U.S. is probably not the best idea. There's an affordability issue around that too. So we're just going to have to balance everything out. So based on its origination and essentially the commitment of the countries to the program, we do have that sort of spread out supply chain with a couple of weak spots in it. Look, another weak spot's canopies, right? How hard is it to make a glass canopy? Well, with this kind of stress and the kind of precision that's needed and put in an F-35 canopy together versus an F-4, which I used to look out a little bit. Highly complex, hard to produce, single source, one of the big degraders that we have. So again, we're going to learn from that, whether it's a domestic or an international supplier going forward. In addition, as you pointed out, we are heavily in-sourcing when we can, and Lockheed Martin has the best technology. We're looking hard at making sure that we can control as much of the supply chain that is feasible and reasonable based on whatever program it is. And so, for example, on NGI, that was at MFC, Lockheed Martin Space collaboration to make sure that the most critical sensor components that we could produce in the company effectively and efficiently were the ones that were selected, okay? And so your topic is a really great one. We intend to actually geographically further diversify our supply chain but really based on this anti-fragility concept of having two or three sources, either different parts of the world, different companies, different logistical chains, things like that where we won't run into some supply chain issues as much as we have on some prior programs, including F-35, honestly, so.

Rob Stallard:

Jim, last quarter, you had some comments on contract structures and the way perhaps your customers have been dealing with defense industry in recent years. I was wondering if there's been any sort of resonance from your commentary and any willingness, early willingness from the customer to look at this in a fresh way.

Jay Malave:

I'll just add, Rob, we have seen some changes where the contract structure is more closely aligned with the capability that's being requested and the assessment of the technology maturation of that capability. And so you're not seeing as many of these kind of high-risk fixed-price development contracts that really don't work well for anybody because they don't optimize a solution, and they typically end up poorly for the contractor. And so we have seen those changes. Again, they're case-by-case. But I can tell you that at least what we're seeing, particularly in the higher risk, higher technology-type risk arenas, we are seeing a shift in contracting to contracting vehicles that are just more relevant to those circumstances.

Operator:

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

Jim Taiclet:

Jay?

Operator:

And our next question is from Noah Poponak from Goldman Sachs. Please go ahead.

Jay Malave:

Yes, that's correct, Noah, just one program. And I think right now, our outlook would say probably in -- if you're -- probably 2028 is where we would expect that to flip to positive. Again, it's a question of the timing of the recognition of the losses, but if you assume kind of more linear approach from here on out to be about 2028. As far as NGI, just again, the different contracting vehicles are ranging anywhere from cost plus to fixed price incentive. There is no -- the customer hasn't selected exactly which vehicle wants to pursue. So there's nothing actually under contract for the next phase or phases. Right now, we're going to continue to perform under the current contract, as I mentioned. We got critical design review in 2025. We also, as part of this contract, we have to provide some test assets. And between now and then, I'm sure we'll have discussions in terms of getting future phases on contract.

Maria Ricciardone:

Lois, I think we have time for one more question since we're close to the top of the hour. So let's take one more, and then we'll be done.

Rich Safran:

Good morning, thanks. Two-part -- quick two-part question on C2BMC. I want to know if you could discuss the P&L impact in terms of timing and margins. Second and more broadly, I thought you might discuss a bit about how this fits with the -- with your strategy for pulling in mission-centric programs and what the opportunity set there is?

Jim Taiclet:

And so from the mission-centric approach, this is actually a pretty good example of that, Rich, in pulling through or extending existing programs, right? And so we're trying to show is that you can map data flows through a full mission, right, which generally includes and now cyber, by the way, upfront. So you have a cyber-track, then you have to have a sensing capability. You then have to have a way to get sensor data, whether it comes from a satellite or a submarine back into the command and control system. Along with that, you have to have targeting and tracking quality data that comes from beyond just the sensing of an object that's a target. You have to be able to track the target in a way that you can then guide a projectile to it and take it out or put a cyber-attack against it or laser or whatever the effector will be. And so the term of art for that is not pretty. It's called a kill chain. We want to put these chains together in diverse ways that are, again, anti-fragile, which means if you take out one link in that chain, you don't eliminate your ability to complete the mission. And so that's where we're looking at data flows in addition to physical flows, if you will, right? And if we can help create an open architecture system that can provide multiple routes of data flows that can affect missions, then we will be able to have a head start on our platforms and designing to those. And that's what we're doing with Black Hawk for example. That's what we're doing using the C2BMC system. The LRDR radar and ultimately, the NGI missile will be based on a similar architecture. We'd like that architecture to be common outside of Lockheed Martin as well as inside because that will open up more suppliers to us and also provide the government more competitive options. So this is all coming together, and I'm kind of glad you asked the question here at the end because it's very intentional.

Operator:

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.

Operator:

Good day and welcome everyone to the Lockheed Martin Fourth Quarter and Year-End 2023 Earnings Results Conference Call. Today's call is being recorded. [Operator Instructions]. At this time, for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone, Vice President, Treasurer and Investor Relations. Please go ahead.

Jim Taiclet:

Thanks, Maria. Good morning, everyone and thank you for joining us on our fourth quarter and full-year 2023 earnings call. In 2023, the 122,000 men and women of Lockheed Martin, working closely with our customers, made excellent progress advancing our 21st Century security strategy and delivered strong financial results for our shareholders. Turning to Chart 3. Robust demand for our broad portfolio of aircraft, helicopters, satellites, radar systems and other products, services and advanced digital technologies boosted backlog to a record $161 billion. Full-year sales of $67.6 billion increased 2% year-over-year and came in stronger than anticipated, as did earnings per share of $27.55. To position the company to take full advantage of these future growth opportunities, we invested more than $3 billion across research and development and capital in 2023. We generated $6.2 billion of free cash flow, as expected, which resulted in year-over-year free cash flow per share percentage growth in the mid-single digits. We returned approximately 145% of free cash flow to shareholders over $9 billion through dividends and share repurchases combined. Our expectation for Lockheed Martin's 2024 financial outlook, include low single-digit growth in sales off of the higher 2023 base and a range of $6 billion to $6.3 billion of free cash flow. Our ongoing dividend and expectation for $4 billion of share repurchases will sustain our focus on returns to shareholders in 2024. We also plan to further advance our vision for 21st Century security in the year as we believe that it is our responsibility at Lockheed Martin to bring the best of U.S. and allied technology and industrial capability to help maintain an effective deterrent to arm conflict and to provide our armed forces with the capabilities to win should we need to. First, we work closely with our supply chain to apply anti-fragility measures and increased resilience. Through teaming arrangements to expand sources of supply and by making strategic investments in start-ups with cutting-edge technologies. For example, we are collaborating with a supplier in which we have a minority investment, to accelerate our additive manufacturing progress, reducing material and process dependencies and complex thermal management applications such as heat exchangers. We also stood up a wholly owned subsidiary called ForwardEdge ASIC to work with major semiconductor fabs to design and manufacture the cutting-edge microprocessors that we need. Second, we led the industry to broaden and strengthen the defense industrial base by making significant progress with our commercial technology collaborators to bring their innovations into the service and national defense. For example, in the fourth quarter, Lockheed Martin worked together with a team, including Intel, Verizon, Microsoft, Juniper Networks, Keysight and Radisys to successfully demonstrate a secure, resilient, hybrid 5G and military datalink network in a live field demonstration in Colorado. Our 5G.MIL unified network solutions performed as a tactical and commercial multi-node hybrid network for integrating land, air and space operations. Together, we demonstrated absolutely cutting-edge system capabilities, performance and operation for customers in a field setting by combining the best of our technology with those of our commercial teammates. Third, we deepened relationships internationally with partners and allies to ensure that the U.S. can drive maximum interoperability in both industry and in military operations. We are making progress towards a mission-centric approach that uses the latest digital technologies to network aircraft, satellites, command centers and other key elements together to vastly improve their effectiveness and deterrent value across our U.S. and allied customers. One example from 2023 is work with Australia to develop Phase 1 of AIR6500, that's a joint battle management system and the first of its kind in terms of situational awareness and interoperability. This increases collaboration with trusted allies and partners can also help reduce the fragility and increase the capacity of the defense production system. Last week, Lockheed Martin was awarded the guided weapons production capability Risk Reduction Activity contract, which will provide a mechanism for swift knowledge and technology transfer and serve as a path finder to manufacturing our suite of guided munitions in Australia with their workforce and with contributions from their society and their economy. Turning briefly now to the status of the U.S. defense budget. The current proposed agreement being discussed with the administration in Congress would support an $886 billion top line budget, 3% higher than 2023. We will continue to monitor the status of the U.S. budget process and strongly believe that Lockheed Martin programs will continue to be well supported as the process unfolds. I'll now review a few notable highlights from our operations. Starting with Aeronautics and the F-35. We delivered 18 F-35 aircraft in the Technology Refresh 2 or TR-2 configuration in the fourth quarter, bringing the 2023 total to 98 [Indiscernible]. We are making continued progress towards delivering the first TR-3 configured aircraft. Today, over 90% of the TR-3 functionality is currently in flight test, and we are further advancing the software integration to include additional aircraft and mission subsystems. While this system maturation process continues to advance, it is taking somewhat more time than we originally anticipated. A second quarter customer acceptance of delivery software remains our target. However, we now believe that the third quarter may be more likely scenario for a TR-3 software acceptance. We are taking the time and attention to get this technology insertion right the first time because it will be absolutely worth it. The step function technological advances of TR-3 will provide our customers with the onboard digital infrastructure of data storage, data processing and pilot user interface to provide unmatched capabilities for many years to come. These include increased types of capability for air-to-air and air-to-ground munitions, advanced sensing, jamming and cybersecurity capabilities and more accurate target recognition. To achieve this level of reliable capability for the long run, the resulting aircraft delivery range for 2024 is between 75 and 110 and requires the TR-3 hardware suppliers to keep pace with production demands both this year and in the future. Given the increasing operational capability and digital connectivity of the aircraft is a cornerstone of all domain operations, international demand for the F-35 remains very strong. In December, the Republic of Korea made a decision to procure 20 additional F-35 aircraft. Also in December, we presented the first F-35A to the Belgian government, which will be one of more than 600 F-35 that will be stationed in Europe across NATO member bases by the 2030s. Aero also continued to advance the F-16 as the first European F-16 training center in Romania was inaugurated in November and a partnership with Romania and the Netherlands. This center will provide world-class training to enhance mission readiness and ensure safety of flying and operating F-16 fighter jets. In addition, we delivered the first two Slovakian F-16 Block 70 jets in the fourth quarter. Deliveries for Slovakia totaling 14 aircraft will continue through 2025. Aero Skunk Works continues to pioneer groundbreaking innovation as well. And for a change, I can actually tell you about one. The X59 experimental supersonic aircraft built by Skunk Works and NASA Aeronautics was selected as one of Time Magazine's best inventions of 2023. The X59 is expected to transform the future of commercial supersonic flight over land by quieting the sonic boom, one of aviation's most persistent challenges. The X59 was unveiled at a rollout ceremony earlier this month and is expected to take first flight later this year. Our MFC business continued to push technological advancements forward as well through modernization of air and missile defense and precision strike capabilities. In the fourth quarter, we delivered the first Precision Strike Missile, or PrSM, to the U.S. Army and conducted system qualification test for an extended range Guided Multiple Launch Rocket System or GMLRS, which will extend the range of the HIMARS system that many of you are familiar with. MFC also delivered the 800th THAAD, that's a Terminal High Altitude Area Defense interceptor to the U.S. government in October. And also, we successfully integrated the PAC-3 Patriot Missile with the U.S. Army's new air and missile defense radar system to defend against cruise missiles, tactical ballistic missiles as well as hypersonics. International demand for the PAC-3 remains strong too. This year, Switzerland and Romania each signed Letters of Offer and Acceptance for PAC-3 MFCs, marking 15 partner nations for this program. RMS also saw strong international interest in the fourth quarter. The U.S. Navy awarded Lockheed Martin contract to produce eight MH-60 Romeo SEAHAWK helicopters for the Spanish Navy and six of them for the Norwegian government as well. To date, Sikorsky has delivered 330 MH-60 Romeo aircraft to five countries, including the United States, 67 more are on order or in production for India, Greece, South Korea, Australia and now Spain and Norway. Also in the quarter, Sikorsky installed the U.S. Army's improved turbine engine on our RAIDER X, designed for the Army's Future Attack Reconnaissance Aircraft or FARA program. This final phase of the RAIDER X build brings us one step closer to completing the system that will support the Army's high-tech future missions requirements, and we anticipate the first flight of RAIDER X in late 2024. Finally, turning to space. United Launch Alliance successfully launched The Vulcan Centaur Rocket earlier in January. This launch was the first of two flights required to complete National Security Space Certification and the second planned mission could happen as soon as April. The U.S. Air Force awarded space a nearly $1 billion contract to develop a new reentry vehicle for the Sentinel Intercontinental Ballistic Missile. The reentry vehicle or Mk21A will be mounted on top to Sentinel. The award follows a technology maturation and risk reduction contract and the ICBM recapitalization contributes to modernizing strategic deterrents and reinforcing Lockheed Martin's critical technological contributions to the nuclear triad. And last week, the Space Development Agency announced Lockheed Martin was awarded an almost $900 million contract for Tranche 2 Tracking Layer to provide 18 small sats, 16 of those space vehicles are for missile warning and tracking and two space vehicles are for missile defense infrared sensors to be on board. The first group of nine satellites is expected to launch in April of 2027. A lot going on at Lockheed Martin, all of our operations. And with that, I'll turn the call over to Jay and join you later for questions.

Operator:

Thank you. [Operator Instructions] And our first question is from Myles Walton from Wolfe Research. Please go ahead.

Jay Malave:

Okay. Thanks, Myles. On the margins for F-35, what we're seeing in 2024 are lower favorable profit adjustments, and so it's really twofold. One of it is the F-35, where as we make progress on the TR-3 program as well as getting ourselves into production, it's difficult to take risk and rely on risk retirements as we're still facing this program and the progress we're making there. And so we assume that the profit adjustments slowdown in 2024 on the F-35 program. There's also some headwinds on C-130 program, where we're seeing the effects of inflation and also some disruption related to supply chain, some pressures that we've had there. And so when you look at that decline year-over-year, you're talking about 30 basis points, say, half and half between C-130 and F-35. On the production cadence for F-35, yes, we feel pretty confident in where we are through the third quarter. To the extent that there were any delays beyond that, we would have to revisit our production cadence at that point in time. But right now, all signs are pointing to our production and delivery restart here in the third quarter.

Operator:

Thank you. And the next question is from the line of Scott Deuschle from Deutsche Bank. Please go ahead.

Jim Taiclet:

Good morning.

Scott Deuschle:

Jay, here to ask on 2025, but at a high level, is the 10.5% total company margin guide for '24, is that the right jumping off point for thinking about 25%, or is it the 11% underlying margin, or is it the 10.8% margin you did in '23, just in terms of identifying jumping off point for thinking about '25? Thank you.

Operator:

Thank you. And your next question is from Gavin Parsons from UBS Equity Research. Please go ahead.

Jay Malave:

Good morning.

Jay Malave:

Yes, a good question. That's something that we've contemplated. Just where we are from a baseline perspective, zero contributions required in 2024. 2025, we're looking at in the range of about $1 billion of required contributions there. And so we're always looking at whether or not there's an opportunity to pull forward. As you mentioned, the utilization of our strong balance sheet to potentially do that. We haven't made any firm decisions on that, but that's definitely an opportunity that's under consideration for us.

Operator:

Thank you. And our next question is from the line of Pete Skibitski from Alembic Global. Please go ahead.

Jay Malave:

Good morning.

Jay Malave:

Yes, for the most part, Pete, it's not really impacted significantly. In our case, we're able to build up inventories. And then as we get the funding, we're able to take that to sales. And so for the most part, we've kept all of our processes intact up. That becomes more difficult if the process extends beyond March. And that's why I was very clear in my comments that we’re dependent on this happening that the budget getting clarity and finalization in March. Because going beyond that makes it very -- just makes it difficult for things to get on contract and you run out of runway in the year to convert those into sales.

Jay Malave:

Well, just some key things that we're talking about from sales perspective. Lot '18, '19 is a big one for the F-35 program. We also have some long lead F-35 awards that we would be expecting as well. We've got things -- there are some classified contracts across the portfolio. I can't really get into any beyond that. But you're talking multi-billions of dollars there that we have in our order plan for this year. There are things like PAC-3 orders, which is multiple billions of dollars there for FY '24 requirements. And also, I would say hypersonics space, particularly on CPS is another one that can approach $2 billion. So there are a number there. As those get clicked off in the year, we'll certainly report on those and keep you appraised on the progress.

Operator:

Thank you. The next question is from the line of Jason Gursky from Citi Research. Please go ahead.

Jay Malave:

So let me get into the deliveries. Jason, we do have a handful of deliveries we expect in the first half. But for the most part, you're talking 90% of the anticipated deliveries actually will happen in the back half of the year. And so I think that's just the way to think about just a handful, really in the first half. Maybe I'll kind of give a little bit of color and then hand it over to Jim. For the year, we still expect there to be strong demand, and we have a pretty solid line of sight to a book-to-bill that would be above one yet again in 2024. And so obviously, these things have to materialize. The budget has to be approved and all these things have to happen. But the line of sight is there for continued growth in orders as well as in our backlog. A couple of things, too, and you've just done the question about cost plus. The interesting thing is that part of the margin pressure that we saw in 2023 was due to mix. Our percent of sales of cost type contracts went from 38% in 2022 to 41% in 2023. That in itself caused some margin pressure of about 20 basis points relative to what we were anticipating in the year. And so we're actually seeing an uptick in cost plus contracts, which we think kind of bodes well from terms of risk tolerance in the way some of these stronger technological types of programs will be contracted for. And so I think that is, generally speaking, a favorable trend. Well, the other thing that we're -- just to talk about what we're thinking about contractually, and Jim has really led the way here is that we just are employing a lot more pricing discipline than we have more recently. And we're looking at things and ensuring that there's just a more analytical support for the way we approach pricing. Do we capture any types of technological advantages that we may have also that as we make an assessment of risk, a, the contracting vehicle is appropriate to that risk, but that our pricing accounts for that risk as well. And so that's the way we've been approaching things for really this year going into 2024. And I'll hand it over to Jim.

Operator:

Thank you. Your next question is from Doug Harned from Bernstein. Please go ahead.

Jim Taiclet:

Good morning.

Jim Taiclet:

Look Doug, it's Jim. I think we can continue at this rate. Demand from the U.S. services and our international customers, Air Forces, Navy's, et cetera, around the world is they need the aircraft, right? They've got to recapitalize the planes that they're still flying that I was trying to get when I went to pilot training in 1983, right? So this is essential that this production line keep up, it's the -- basically, it's the recapitalization of the Allied fighter aircraft for us is the F-35. And so I think the key to that is full transparency and realizing the reality of the situation. When you're trying to drive this much technology into an air vehicle, you've got to be honest about the schedule. What can industry do, what can the test and evaluation community handle in the various military to accept that technology and what's the supply chain capacity. And we're being brutally honest with our services and our joint program offices to what we think industry can do with us and our airplane. And industry is who makes the radar. Industry is who makes the EOT, the electrical optical system. The industry is who makes the electronic warfare suite. It's not us. So we have to be brutally honest as an industry and with our suppliers' inputs to that with the government and say what is feasible to keep the production rate up. I think that's starting to get traction. I hope it gets more traction, because we cannot afford to be overoptimistic in the ability to deliver these technologies as rapidly as one might like. There are real technical and physical challenges to doing this. And well our commitment to the government, meeting the service chiefs and our allies is I will tell you honestly, what we think industry can do with the jet. And if you want to push it beyond that, I'll tell you what the risks are and what the cost might be to do it. But let's agree on a feasible executable plan for exactly Doug, what you talked about.

Sheila Kahyaoglu:

Good morning, guys.

Sheila Kahyaoglu:

Jim, I don't want to talk about what happened in 1983, but in terms of the puts and takes for MSC, if you could just talk about the 7% top line growth you guys have what are the biggest program drivers there between missile defense and tactical, and just on the margins, you've already highlighted the 50 bps from the classified programs. Are there any offsets? And I really appreciate your commentary about the government and how you plan to sell to them. So I was just thinking, where do you think that will manifest itself in its portfolio in your portfolio, the fact is, is it MFC? And specifically, can you give any specifics?

Jim Taiclet:

And then when it gets to moving towards a value pricing model, Sheila. The first place that's already starting to happen is in command and control, command situational awareness, information advantages our customers would call it. So those are largely digital services, right? You've got sensors on satellites, aircraft, ships, radars out scanning the sky, infrared sensors in space looking for looms of heat when a missile is launched, things like that. That's data, right? So how do we gathered all the data from our sensors, whatever domain they happen to be in land airspace, et cetera. How do we make intelligent data fusion, and then present commanders and decision makers with options using AI and other digital services. So this will be probably the first place where we can value price because my goal is to bring in commercial technology to do that digital, digital data fusion, evaluation, AI application, et cetera. As I said a minute ago, commercial industry is investing 10x what our aerospace and defense industry could invest in these areas, and we need to take advantage of that. The only way they're going to participate in a material fashion in that industry is value pricing. They're not going to provide cost information. It's just not how their industry works. They're not delivering an airplane that you can add up all the costs that it took to make that airplane and give it to the government, so they can give you the margin on top. So these command and control systems, and they're real programs, by the way, defensive Blohm is a program like this, AIR6500 is one dimension. And also something called Joint Fires Network, which will be deployed in the Indo Paycom Command of the U.S. So this is where I think it will start. And then as we look at mission road maps that we've established and drawn out inside of Lockheed Martin, and we're now sharing and have been sharing with the U.S. services and VOD. We're looking for capability gaps where digital technology can really make a difference, right? So I'll give you one really quick one. So if we could get a direct feed from an orbiting satellite scanning a wide swath of the Pacific to find ships and actually directly provide that data link and that information to aircraft flying in the area, then those aircraft can vector towards those targets and turn on their radars and get a much more precise location and maybe even a tracking solution to sync the ship if that's what's needed. And so that's a mission gap, a capability gap that we would have in an antiship mission. And so how do we value price that because that's basically a data management exercise, which requires what we call 5G.MIL. It requires an artificial intelligence solution within it, and it requires the management of that data at various classifications, which is something not many companies can do besides those in our industry. So we can value price something like that. And I think it'd be a capability gap that would be interesting to the Department of Defense, and they might accept value pricing, but not to take too much time on this topic. But one of the things that we're really advocating for at Lockheed Martin, and we've got some friends of the court trying to work with us on this is, how do we set up an adjacent acquisition process in the Department of Defense to its traditional acquisition process, designed and reconstituted and originated to purchase digital services versus platforms and products, which is what the traditional acquisition system is built to do. That is a heavy lift. It is very complicated. It's what I've kind of referenced earlier, where you're literally going to need to act the contrast to do this. But if we want to value price as an industry, bringing commercial partners at scale, I think the government needs to consider and actually go do this with us.

Operator:

Thank you. Your next question is from the line of Seth Seifman from JPMorgan. Please go ahead.

Jay Malave:

Yes. Let me start with that question first, and I'll come back to the F-35. Just on the 2025 margins going forward, yes, it would be essentially one lot versus two. However, you got to take into account the volumes that are in that lot versus the volumes that we're in these first two lots. And so you really -- you think about it from a gross headwind, it doesn't necessarily change all that much, because you're -- there's more in there. And so that's what's keeping the pressure. There's not just an automatic lift, because we're going from two lots to one lot in a subsequent year. On the F-35, I mean, I think the way you've talked about it Seth is right, anywhere between 100 to 120 aircraft is in terms of undelivered -- against the 156 type of expected delivery rate is the right way to think about it, yes.

Ronald Epstein:

[indiscernible] question.

Ronald Epstein:

I'll do the question first. What are you thinking about the opportunity for the Black Hawk going forward, meaning I don't know, we've kind of heard there's some challenges on future vertical lift. And what opportunities does that open to you for the Black Hawk?

Operator:

Thank you. And our next question is from the line of Kristine Liwag from Morgan Stanley. Please go ahead.

Jim Taiclet:

I'll make a couple of comments and ask Jay to follow. The steps that we're taking to take the fragility out of the missile production system are varied. One of them is -- and it's very specific, we are endeavoring to stand up a third solid rocket motor supplier in the United States that can be additive to the industry supply chain we have today, which hasn't been performing well, right? That's one piece. More broadly, we're using additive manufacturing, and we're bringing in more varied suppliers into the supply chain, so that we can get the materials we need from a more diverse set of group of suppliers outside of solid rocket motors. And also, we're looking at international opportunities to build this equipment including in Australia and in Poland, U.K. and others are kind of on tap for coproduction or joint ventures with us to do these things, in Germany, I should mention as well. So these are some of the approaches we're taking. And it really comes down to these three areas, which is how can we on one hand take basic steps in anti-fragility to more suppliers, more diversity on the supply chain, different labor pools, better training, those kinds of things where it's just basic. Secondly, how can we insert technology to make this more reliable production system, which we just mentioned. And then thirdly is how do we get international countries and take advantage of their labor forces, their supply to sub-supply chains, et cetera, and get them into the production system. So we look at this in all three areas of our core company strategy and apply it to missile production. Jay, anything you want to add?

Operator:

Thank you. Our next question is from Matt Akers from Wells Fargo. Please go ahead.

Jay Malave:

Yes. So we delivered five aircrafts in 2023. We would expect that to triple potentially quadruple here in 2024. And so we're -- the ramp is certainly in full force. We've got over 30 aircraft there in WIP as we ended the year. And so that is, I think, from a delivery standpoint, increasing the production cadence is all trending well. From a profitability standpoint, you may recall, we've had some pressure because it's taken us longer to get to this point. And so that puts some pressure on our initial contracts. Here, as we fully deliver those out and deliver on the subsequent contracts, we will see profitability improve on the F-16 over the next few years.

George Shapiro:

Yes, hello.

George Shapiro:

I'm talking at a longer-term perspective here. If I look at the margins like from 10 years ago, MFC made 18%, aeronautics made 11%, space made 13%. And so we're obviously down in all of those categories overall, maybe 200 basis points in 10 years ago. So my question is, was this due to a lot of the fixed price development, more aggressive bidding. And now you're trying to change that. So when we look towards 2025, we actually could see margins go up from where they'd be in 2024 for kind of -- are they just lower margins overall that we expect to see from what we used to see?

Maria Ricciardone:

Okay. Luis, I think we're at the top of the hour. So I'm just going to turn it back over to Jim for some final thoughts.

Operator:

Thank you. And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.

Operator:

Good day, and welcome, everyone, to the Lockheed Martin Third Quarter 2023 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 Maria Ricciardone Lee, Vice President of Investor Relations. Please go ahead.

Jim Taiclet:

Thanks, Maria, and good morning, everyone. Thank you all for joining us on our third quarter 2023 earnings call. All of us on the line today are well aware that since our last call, the world is now seeing yet another terrible conflict. Everyone in our company remains dedicated to fully supporting the United States government's policy and efforts to deter aggression, restore security and achieve peace. Today, I will first highlight our third quarter results as we pursue our vision of 21st Century Security, designed to support the U.S. Department of Defense Strategy of Integrated deterrents and then I'll turn it over to Jay to provide additional detail before taking your questions. Starting on Page 3 of the slides. Sales increased 2% year-over-year to $16.9 billion and backlog remains at historically high levels at $156 million. EPS of $6.73 exceeded prior year and free cash flow was a strong $2.5 billion. We returned approximately 100% of free cash flow to shareholders through dividends and share repurchases during the quarter. Earlier in October, we announced a $0.15 increase in our dividend which reflects 5% growth and is the 21st consecutive year of dividend increases for Lockheed Martin. At the same time, our Board also approved a $6 billion increase in our share repurchase authorization, bringing our total authorization to $13 billion, reconfirming our continued commitment to returning capital to shareholders. We are also reaffirming our full year 2023 financial outlook for sales, profit, EPS and free cash flow. Given the current status of the 2024 U.S. defense budget, global geopolitical tensions and the macroeconomic environment, we will provide our expectations for our 2024 financial outlook during our full year 2023 earnings call in January. On the U.S. budget, though the specific trajectory of the future U.S. defense budget is still in process between the administration and Congress, the global threat landscape is increasingly elevated. Our robust backlog reflects the relevance and importance of the Lockheed Martin portfolio and elevating deterrence to great power conflict involving the United States and its allies and the solid positioning of our business to serve our domestic and international customers. From a process standpoint and government, the current continuing resolution or CR is in place through November 17. At that point, one of the following could occur. FY '24 appropriations bills will be enacted, Congress will enact another partial or whole CR or there could be a partial or full government shutdown. In any of these scenarios, there continues to be the option also for supplemental requests related to support Ukraine, Israel and potentially Taiwan. As Congress continues to work through the FY '24 appropriations bills, we are optimistic that there will be consistent support for the National Defense strategy and funding for its priorities. In the meantime, we will continue to work with our customers and suppliers to minimize any potential disruptions due to the process. And we will press on with executing our 21st Century security strategy of building capacity, efficiency and resilience into our production operations, driving advanced digital technologies to enhance integrated deterrents and expanding our international business and operations. Turning to the F-35 program. We delivered 30 F-35 aircraft in the third quarter, bringing the year-to-date total to 80 jets. Consistent with our announcement in September, we continue to expect to deliver a total of 97 aircraft this year, all in the Technology Refresh 2 or TR2 configuration. We are producing F-35s at a rate of 156 per year, and expect to continue at that pace while simultaneously working to finalize TR3 software development testing. And we recently began flight test evaluations of the next software release that encompasses major systems upgrades such as improved RADAR, next-gen distributed aperture system and weapons capability. As previously announced, we continue to expect to deliver the first TR3 configured aircraft between April and June of 2024. The superior technological capabilities of the F-35 continue to generate strong interest both domestically and internationally. In September, Denmark's first four locally based F-35 aircraft arrived on their home soil. Denmark's program of record calls for 27 F-35A aircraft. Also in September, the Czech Republic chose to become part of the global F-35 Lightning II program, and the U.S. State Department approved a possible $5 billion foreign military sale to South Korea for up to 25 F-35 Joint Strike Fighters. Earlier in the quarter, Israel announced that we'll buy an additional 25 F-35, which will add a third squadron and increased its F-35 fleet to 75 aircraft. Additionally, in August, Lockheed Martin was selected by the Australian Department of Defense, as their strategic partner for their Air 6500 program Phase 1. This transformational Pathfinder program will deliver the broadest scope of Joint All Domain Operations, JADO in the free world, and will completely revolutionize the way the Australian defense force operates. By connecting Australian systems and platforms that operate across air, space, land, sea and cyber domains, we expect that Air 6500 will set the blueprint for future military operations worldwide. This proven technology will provide greater situational awareness and defense against increasingly advanced air and missile threats and enables significantly greater interoperability between Australia and allied nations. Lockheed Martin will lead this first phase which will provide the core architecture and multi-domain integration for the program. This is just one recent win that demonstrates the business success of our 21st Century security cornerstone, trusted and reliable battle management and command and control systems that integrate across multiple domains, military services and allied forces. Late last year, Lockheed Martin also won the $500 million Defense of Guam award. And in late September, we were also awarded a potential seven-year, over $1 billion contract for systems engineering and software integration to the integrated combat system across the surface force portfolio of the U.S. Navy and Coast Guard. This will link together systems and software across the services and a JADO construct and it not only enables faster decision-making and better capabilities but also serves as a much more effective global deterrent strategy. Beyond these awards, we continue to develop 21st Century security technologies to advance interoperability between Lockheed Martin product lines. The 5G.MIL hybrid base station that our engineers invented is the 1 LM initiative that includes teams at MFC and Aeronautics. We recently transferred data from a sniper targeting pod that was set up in Orlando, Florida to the Tactical Missile Simulation Lab in Grand Prairie, Texas to provide real-time updates to a simulated missile in-flight. This event significantly advanced efforts towards upcoming live fire demonstrations across the main platforms operating in a joint environment that will use data from multiple sources across an open architecture. Also, Skunk Works partnered with the University of Iowa's Operator Performance Laboratory to demonstrate an AI commanded jamming capability. In this, we successfully used artificial intelligence on two air systems to provide jamming support to a simulated strike against enemy air defenses. This demonstration showed how AI agents with high performance and reliable behavior can operate in close coordination with and be controlled by human crude aircraft. We also conducted a successful test of the prototype radio for the PAC-3 MSC missile that will enable communications with the SPY-1 radar, the key sensor in the Aegis Weapon System. This test performed by a 1 LM team across MFC and RMS paves the way for the design of a multifrequency radio data link for PAC-3 MSC. In turn, that will enable the U.S. Navy for the first time to have the ability to integrate the state-of-the-art PAC-3 missile onto its warships and open up another opportunity for Lockheed Martin in the future. International interest in PAC-3 also remains strong. As demonstrated by our deepening partnership with Poland, which signed a letter of offer and acceptance for 644 PAC-3 MSCs and related equipment in the quarter. In our RMS business, Sikorsky CH-53K helicopter is expected to grow meaningfully also over the coming years. In August, we won a $2.7 billion contract to build and deliver 35 additional CH-53K helicopters and it's the largest procurement to date for this multi-mission aircraft. Another longstanding major Lockheed Martin program, this one is space is also poised for significant growth ramp. In late September, the Fleet Ballistic Missile program won a $1.2 billion contract for the Navy's Trident II D5 life extension. For nearly seven decades, Lockheed Martin has supported the U.S. Navy as a critical partner for its mission to provide sea-based strategic deterrents. The TRIDENT II D5 LE missile will be in service through the 2040s, maintaining the proven performance of the D5 system for significantly less cost to the government than of designing a new missile. Also in our Space business, Lockheed Martin's Next Generation Interceptor or NGI program, executed its digital preliminary design review in partnership with the Missile Defense Agency customer. That happened on September 29. During this review, the MDA assessed the NGI program's readiness and maturity to continue into the detailed design phase, confirming that our solution continues to meet the requirements for this crucial and demanding mission. Finally, the OSIRIS-REx Sample Return Capsule touched down in the Utah Desert on September 24, returning NASA's first ever sample from an asteroid. After a seven-year mission traveling approximately, I believe is 4 billion miles in space. The capsule holds material from Bennu, a carbon-rich asteroid and scientists hope it will teach us more about the origins of organics that led to life on earth, plus the mechanics behind overall planet formation After release of the capsule, the spacecraft was set on a new course to investigate the asteroid Apophis under the mission name OSIRIS-REx. So with that interesting and exciting news, I'll turn it over the call to Jay and join you later for questions. Jay?

Operator:

Thank you. [Operator Instructions] Our first question will come from the line of Doug Harned from Bernstein. Please go ahead.

Jim Taiclet:

Good morning, Doug.

Jay Malave:

So Doug, the timing on sales and the profits associated with the sales, the booking margin, I really shouldn't expect much variability with that. As we've mentioned, that really doesn't get impacted. What you could see and what we are seeing today is that our risk retirements are obviously dependent upon successful completion of the test program. And so that will - could limit our ability to take profit adjustments on a Lot 15 to 17 program. But as I've said in the past, we are performing and expect to continue to perform profitability stronger on Lot 15 to 17 than we did on Lot 12 through 14. And so we might see some short-term limitations on our ability to take profit rate adjustments, we still expect and have confidence will drive higher profitability on this contract lot than the prior one.

Cai Von Rumohr:

Yes. Thanks so much. So Jay, I think recently, you made a comment about gravity on margins, and you haven't provided a guide for '24. But I think one of the issues that kind of you mentioned has been the classified missile program at MFC, where you have some LRIP options coming up. Could you maybe give us some color in terms of the status of that and how that impacts could impact next year? And any other items we should be watchful of that might exert gravity on margins? Thank you.

Jim Taiclet:

Yes. And Cai, it's Jim. Just to add on the classified program. First of all, given my Air Force filed experience, I can tell you that this is a really important capability for the country. It should continue on as an important capability for many, many years and even decades, assuming the program is successful, which we think we're on track to be and it will be massively NPV positive over that longer time frame. So we're working our way through the schedule and the performance in the early phases of the contract, but at the end of the day, it will be worth it for the country and the company. But we will keep you all updated as Jay just did on the path to get there.

Kristine Liwag:

Hi. Good morning, everyone. So maybe an F-35 question. We've seen a lot of new countries express interest in the F-35 and current partners like Israel, have indicated plans to add to existing orders. What are your thoughts on expanding capacity to meet all the international demand? And is there demand from the customers to potentially bring forward their deliveries? And should you increase capacity, what level of investments?

Jay Malave:

Yes. I mean, the investments, it's probably in the low hundreds of millions. It's manageable. But again, to Jim's point, it needs to be coordinated with the customer.

George Shapiro:

Yes. Jay, on the F-35, can you discuss a little bit where we stood in the quarter in terms of sustainment revenue versus production because the decremental margin on the production was pretty high at 22%? And I'll sneak in one other one, which is in RMS, the implication is that you'd have a 14% margin in Q4 to meet your guide, yet revenues would be relatively flat. So if you can just kind of tell us what's going on to cause that to occur? Thanks.

Operator:

Thank you. And our next question is from the line of Ron Epstein.

Operator:

Yes. One moment. We're opening his line. I'm sorry, the next person that we will go to is David Straus from Barclays. Please go ahead.

Jim Taiclet:

Good morning, David.

Jay Malave:

Sure. Thank you, David. The first one on the R&D capitalization, the draft guidelines that came out, we view those as promising. We believe that they support our position of continuing to deduct the costs associated with cost plus contracts. And just as you remember, we treat that and view it as a cost of sale, not really as an R&D activity. The risk is really borne by the acquirer of those services. The rights are short-lived and they're also restricted. And so we believe the draft language is, at least thus far, appears to be consistent with our approach. And so we view it positively. As far as pension, a couple of things going on with pension, I'll go on the P&L. FAS pension will see a significant reduction next year. We're going to go from about $375 million of income in '23 to about $50 million of loss in 2024. It's a function of two things. One is the returns. And the second is essentially the expiration of benefits that we're amortizing since - from the 2014 salary plan freeze. And so those run out, and so we'll see a significant increase. As you know, that's pretty much noncash, but it will affect EPS. On the cash side of it, we'll see a little bit of a slight reduction anywhere between $25 million to $50 million reduction. But again, the biggest piece there is on FAS. From a cash contribution, we talked about anywhere between $500 million to $1 billion of contributions required starting in 2025. Right now, given where things are, we would expect that to be in the higher range, if not higher for 2025. And if we stay where we are, it could trigger some contributions in 2024. But I will say, when you think about cash contribution to pension and what that means, we've got an enviable position in our balance sheet. We've demonstrated that we're willing to use it. And so I wouldn't view that higher pension contributions as limiting, otherwise limiting our ability to continue our cash deployment strategies, and that's the key point.

Ken Herbert:

Yes, hi. Good morning, Jay and Jim. Maybe, Jay, just to follow up on a comment you made in the prepared remarks. I think you made a comment around the buyback activity in the fourth quarter sort of dependent upon timing of the fiscal '24 budget and whether or not there is a shutdown potentially. Can you just talk about how you're thinking about the timing of the '24 budget, but very specifically, if there's any sort of shutdown, how much does that put at risk sort of the buyback activity expected in the fourth quarter? Or if it's very short, does that not impact me? Maybe you can walk through how you're viewing sort of the risks around that and impact on the fourth quarter cash deployment?

Operator:

The next question will come from the line of Sheila Kahyaoglu from Jefferies. Please go ahead. Sheila's line did drop from the Q&A. So we'll move to Rob Stallard, and he's from Vertical Research. Please go ahead.

Jim Taiclet:

Good morning, Rob.

Jay Malave:

It's a good question. If you look at just the profile with this incremental authorization that we have, the way we're looking at it is $6 billion here in 2023, $4 billion in 2024 and then essentially $3 billion in '25 and $3 billion in '26, which puts us equal to free cash flow in that ballpark, assuming kind of a $6 billion placeholder offer free cash flow in those given years. And so that's the way we're viewing it, Rob. So over time, over the next few years, it will revert back to more of a 100% of free cash flow. But again, we'll look at it year-by-year. As you've seen in the last two years, we did increase it here in the fourth quarter, and we'll continue to evaluate those opportunities as they present themselves, the reality of what happens with actual pension funding, what progress we make in our working capital reduction initiatives and all those will go into the mix master and provide the inform what we formally do in any given year.

Richard Safran:

Thanks. Jim, Jay, Maria, good morning. How are you?

Richard Safran:

So if we take an optimistic scenario here on what happens with the budget outlook, I wanted to know if you could discuss the 2024 bookings and the opportunity set both classified and unclassified. Again, if we assume no shutdown and we assume to get funding, I'm interested in what the major competitions are next year is, what was - how you see backlog growth and the book-to-bill is better than 1?

Richard Safran:

Thanks.

Operator:

The next question is from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Jim Taiclet:

Yes. We can hear you fine, Sheila. Good morning.

Jay Malave:

Well, not much has really changed, to be honest, we talked about low single digits for a while now. We - I talked about that in my prepared remarks. On the margins, underlying margin is generally flattish because we could be in a situation next year where we have multiple lots of the classified program, that could cause some variability. But that doesn't fundamentally alter what we've been really talking about. Same thing with free cash flow. We've been targeting mid-single-digit free cash flow per share growth. And we still see a path there. We know there are some headwinds, whether it's pension and the like, but we still believe that that we have a line of sight to be able to do that. And that's what we're going to be working through on a year-by-year basis since starting with 2024 over the next couple of months. We'll work through, solidify our plans, and we'll present them formally to you in January.

Operator:

Thank you. And our next question is from the line of Seth Seifman from JPMorgan. Please go ahead.

Jim Taiclet:

Good morning.

Seth Seifman:

Maybe, Jay, one quick housekeeping question and then one broader question for both of you. The mid-single-digit growth you talked about for free cash flow per share next year, did that assume any kind of pension contribution next year? And how big might that be or not? And then just more broadly, when you guys talk about seeking out additional suppliers of solid rocket motors, is that something for maybe developing hypersonics programs for late in the decade and into the 2030s? Or is that about replacing your suppliers on kind of today's existing programs? Thanks.

Jay Malave:

On the question of the free cash flow per share for 2024, Seth, what I mentioned is that we're setting up internal targeting and internal actions to be able to arrive at that incremental. Pension contribution would obviously put pressure on that. And we'll go through that over the next coming months and determine what the art of what's possible and what our plans would be, and again we'll present that in January.

Myles Walton:

Thanks. Good morning. Jay, a quick clarification and then a question for Jim. The clarification on the margins for next year, 25 to 50 basis points of risk, I guess, is what you're seeing on the MFC. Should we anticipate that there's a way around that? Or is that the base case? And then, Jim, in the press release, you talked about digital services revenue over time. And I'm just curious, maybe you could touch on your vision of what digital services revenue is today and where you want to take it over the next several years?

Jay Malave:

Okay. Going back to the question on margins for next year. Just as I mentioned, underlying margins, and let me for sake of clarity, margins, excluding the impact of the MFC program, we expect to be flattish. The MFC programs, it will provide a drag on the margins next year, and it's a question of timing. So it could be anywhere between 25 to 50 basis points. And again, we'll have a lot more clarity on that as we close out the year.

Noah Poponak:

Hello, everyone.

Jay Malave:

Hi.

Jay Malave:

Well, let me maybe take the second part of it and then circle back. There are really two different programs. I think you're referring to the standard Stand-in Attack Weapon award, and that was a fixed price development program that we decided not to pursue because of the risk posture over there. And each program and pursuit really stands on its own, and we review those individually. In this case, we thought the risk profile was just too much. And so we backed off. On this particular program, on the classified program, that was a cost-plus development program. So there really was not much risk associated what the development cycle. There are these production low rate initial production lots that were priced pretty aggressively. And hence, we're starting - we're going to start to see the headwinds associated with that. As Jim mentioned, these are - this would be a long-term program. And we know what it takes to make sure that we provide accretive NPV on these types of programs. And so we track that and monitoring that, and we're confident over the long term, we'll be able to deliver that. So again, these are case-by-case type of situations that we pursue. On the - we'll probably have to get back to you on the specific MFC margins for next year. I think we can back into 25 to 50 on the total company, you can back into what that impact is for MFC. But I just don't have it in front of me.

Maria Ricciardone Lee:

Okay. And Lois, I think we have time for one more as we approach the top of the hour.

Jason Gursky:

Yes. Good morning, everybody. Jim, you mentioned in your prepared remarks, the idea of a supplemental for Taiwan. I'm wondering if you would do us a favor, just kind of remind us of what you're shipping into Taiwan today. And in the context of a supplemental, what kinds of things do you think are going to be in high demand and would lead to more revenue for you all? And then Jay, related to international here, I was wondering if you could just give us a quick update on the margin profile of your international business, kind of writ large today outside the F-35 program. If international is growing faster, is the expectation here that we would, all else be equal, see margin expansion in light of international historically being higher margin than domestic business? Thanks.

Jay Malave:

And on the international margins, historically, the margins have been higher than they are for U.S. government customers. But in this case, it's so what I would expect the base business to continue this higher margin. But a lot of the incremental opportunities that we've been talking about are really going through foreign military sales contracting which are more like U.S. DoD-type margins. And so while we will see kind of a net blended margin profile that's probably higher than the kind of base U.S. DoD, it will be limited - at least the incremental business is going to be limited because they are FMS.

Jim Taiclet:

Sure. Thanks, Maria. I think before we conclude today, I do want to thank all of our employees around the world and across the country for their continued dedication. They're supporting our signature programs. They're going after new pursuits, advancing these digital technologies. And all that together will really enhance deterrents globally, especially in the more sort of dangerous world we live in. I want to really congratulate and thank our teams for everything they're doing. We also want to make sure that the shareholders are reminded yet again that everything we're doing here is designed to deliver a compelling value to you all for many years to come. Jay and I really focus on free cash flow per share, along with the dividend to make sure that you're getting an interesting return over time, and we're trying to expand the business as we go as well. So thank you again for joining us today. We look forward to speaking with all of you on our next earnings call in January. And Lois, that concludes the call for this morning. Bye-bye.

Operator:

Good morning everyone and welcome everyone to the Lockheed Martin Second Quarter 2023 Earnings Results Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would now like to turn the call over to Maria Ricciardone Lee, Vice President of Investor Relations. Please go ahead.

Jim Taiclet:

Thanks, Maria. Good morning, everyone, and thank you for joining us on our second quarter 2023 earnings call. I’d begin today with a few key strategic and operational highlights and then Jay will discuss our quarterly financial results and full-year 2023 outlook. Starting on page 3 of this slide our Q2 financial results were strong, with sales of $16.7 billion up 8% year-over-year and double-digit growth at both aeronautics and space. Backlog reached a record level of $158 billion, up $8 billion from year-end resulting from a book-to-bill of $1.7 in the quarter. Orders included an approximately $8 billion option of [Indiscernible] for the 126 F-35 for production lot 17 as well as significant awards to ramp up emissions [Ph] at MSC. This highest ever backlog gives us visibility into multiyear sales of our key programs and enables our suppliers to be better positioned to meet growing demand. Segment operating profit of $1.9 million in the quarter reflected an operating margin of 11.1%. Free cash flow was $771 million and we remain committed to advancing technology and expanding production capacity. So in Q2, we invested $356 million of company funded R&D and $329 million of capital expenditures to address our customer’s needs and requirements. Meanwhile, we returned almost two times free cash flow to the shareholders. Given the strong results in the first half of this year, we are raising and narrowing our full year 2023 financial outlook. For sales we’re raising the midpoint of our range by $1 billion to revise expectation of between $66.25 billion to $66.75 billion and free EPS we are raising the midpoint of our range by $0.35, to revise the expectation of between $27 to $27.20 per share. We are confident in our ability to achieve these higher expectations and return to growth sooner than previously anticipated. Turning to the state of the defense budget, the outcome of the debt ceiling negotiations preserve top line defense spending at the President’s budget request for FY 2024. It also stipulated defense budget growth in FY 2025 while allowing for additional support through supplemental funding. The Embedded 3% growth in the proposed FY 2024 defense budget included funding for 83 F-35 aircraft with supplemental funding to support munitions investment that will enable us to ramp up production rates under new multiyear contracting authorities. While there are still numerous steps to reach final approval and funding for the FY 2024 budget, we’re encouraged by the strong support for our programs so far, and we look forward to the completion of committee reviews in the full appropriations process. On the F-35 program, we continue to see strengthening customer demand both domestically and internationally. The Czech Republic has expressed interest in the aircraft and Israel has formally decided to add 25 More F-35s, expanding their fleet by 50%. We delivered 50 F-35s in the first half of 2023, all of which were delivered and the technology refresh to or TR2 configuration. During the first quarter earnings call we indicated that in anticipated reduction to 2023 deliveries from what we initially thought last year, due to software maturation, acceptance and certification related to the Technology Refresh Three or TR3 configuration and hardware delivery timing. Our current view is we expected to deliver 100 to 120 F-35 aircraft in 2023. Importantly, there is no change to our longer term delivery outlook of 156 aircraft in 2025 in the foreseeable future, and the supply chain and production system continues to execute at a rate to support these future delivery targets. Our team remains fully dedicated to delivering the first TR3 aircraft in 2023. We have completed 58 flight tests on four different aircraft in the TR3 configuration, including a successful flight test for the most recent software release that happened in May. That software update brought in the next set of critical capabilities, such as upgraded data links, the new electro optical targeting system and radar. In the coming weeks and months, we will begin testing multi shift missions, sensor fusion, and additional weapons among other capabilities as part of the next software release. TR3 significantly updates core processing power and memory capacity, as well as modernizes the computational core of the F-35 to enable block four capabilities. It is a significant hardware and software upgrade that will greatly enhance the mission capability of the aircraft, which is on track to be the free world’s predominant fighter for many decades into the future. Meanwhile, we are continuing the long tradition of leading the development of the next generation of military aviation in this time, with both piloted and unpiloted aircraft and our Skunk Works operation in California's high desert. Skunk Works just celebrated its 80th year anniversary in June. That’s 80 years of pushing the innovation envelope from the year [Ph] to in the 1950s that continues to fly today to the Mach three plus SR-71 to pioneering stealth aircraft, and beyond by advancing hypersonic artificial intelligence and other revolutionary technologies. Skunk Works continues to create exciting feats of engineering and goes beyond the edge of known science for our customers. A prime example today that we can discuss is our partnership with NASA to develop and build the X-59, the prototype that will quiet the supersonic boom and lead someday perhaps to supersonic commercial flights over land. This elegant and amazing airplane is advancing a pace towards its first test flight. And our company’s pioneering spirit has lived even longer in the world of rotorcraft and helicopters. At the Paris Air Show, Sikorsky celebrated its 100th anniversary. Yes, 100 years ago, Igor founded Sikorsky aero engineering company on a chicken farm in Long Island, New York, with a small team of engineers and craftsmen, many of whom were immigrants like himself, who fled the Russian Revolution. In 1939, he brought his dream to reality when he piloted the first practical helicopter, the VS-300 as it left the ground for all 10 seconds. His passion for innovation and perseverance to achieve his vision carry on in the Sikorsky culture today and throughout Lockheed Martin. Sikorsky signature product line the H-60 Black Hawk family of military helicopters, also perseveres around the world. The U.S. State Department is approved a possible foreign military sale to Norway for 6 MH-60 Romeo multimission, helicopters and related equipment and Spain signed a letter of offer and acceptance for 8 MH-60R Seahawk aircraft as well. We achieve several milestones in the quarter in support of other NATO allies as well. The German air force successfully launched a PAC-3 missiles segment enhancement or MSC interceptor from a German modified launcher. This flight test was the last step before delivering PAC-3 MSC to Germany later this year. We also entered into an agreement with Rheinmetall Defence to collaborate on a unique rocket artillery system to be produced in Germany. And earlier in July, Rheinmetall selected a site in Germany to build a factory to manufacture F-35A center fuselages. This partnership, which was first announced in February between Lockheed Martin, Northrop Grumman and Rheinmetall expand supply chain capacity for the F-35. Production is expected to start with our new German partner in 2025. In addition, our relationship with Poland continues to progress with the first F-35 Lightning II for the Polish Air Force formerly entering production and the initial shipment of HIMARS launchers to Poland. The U.S. State Department also approved the multibillion dollar potential foreign military sale to Poland for PAC-3 with modernized sensors and components. On top of that, our partnership with Australia continues to advance as well. In April, as mentioned on our last earnings call, the Commonwealth of Australia selected Lockheed Martin as a preferred bidder for Project 9102, a sovereign military satellite communication system for the Australian Defence Force, we’re excited at the prospect of deepening our relationship with a diverse team of Australian companies and helping establish Victoria as the engineering and technical hub for Australian Defence. Also in space, Lockheed Martin will be taking on a major role in Blue Origin’s national team to develop and demonstrate a human lunar landing system for the Artemis program. Our Space Operations will be building humanity’s first Cislunar Transporter, which will enable recurring astronaut expeditions to the moon surface and back from NASA’s gateway space station. Finally, we continue to advance our integrated 21st century security digital technology architecture during the quarter. In May, as part of the U.S. Indo Pacific commands joint fires network, we successfully demonstrated Digital Command Control or C-2 to synchronize joint all domain operations during the northern edge exercise near Alaska. The exercise demonstrated the ability to successfully integrate with both Lockheed Martin and third party platforms and aircraft, including F-35s. The system performed C-2 functions across all the military services, all levels of operation and across multiple domains from space to air to surface. This is the first time Joint Force synchronization has been demonstrated at this scale. It was a major milestone for all joint all domain command and control interoperability, and our company’s vision for 21st century security. The results of this demonstration will help shape future JADC2 capabilities and continue Igor Sikorsky and Skunk Works pioneering legacy into the digital world. Also, as part of the northern edge exercise, the Lockheed Martin aeronautics and RMS teams demonstrated the first use of artificial intelligence capabilities on a stocker unmanned aircraft system for recognition and tracking of ships at sea. This capability showcase the value of using relatively cheap drones to greatly enhance the capability of and improve the survivability of much more valuable manned aircraft and ships. All these types of digital technology enhancements require reliable access to advanced semiconductors. In support of this crucial priority, I recently had the opportunity to join Global Foundries CEO Tom Caulfield and Senate Majority Leader Schumer to announce a collaboration that will advance us semiconductor manufacturing and strengthen resiliency within America supply chain. This partnership enables us to more quickly and affordably produce 21st century security technologies that increase deterrence for the United States and its allies, alongside Senator Schumer and other leaders and industry, Congress and the administration, we remain strongly supportive of the bipartisan chips and Science Act signed into law last year. The Lockheed Martin team will work closely with Global Foundries as we expand our critical manufacturing line in New York and with our semiconductor, other semiconductor and tech industry partners across the country to ensure access to made in America microelectronics for our platforms and systems. With that, I’ll turn the call over to Jay and join you later for questions.

Operator:

Thank you, ladies and gentlemen. [Operator Instructions] And that first question comes from Robert Spingarn from Melius Research. Please go ahead.

Jim Taiclet:

Good morning.

Jay Malave:

Sure, if you look at where we are, and maybe take us back to I think it was the fourth quarter call in January. I was asked about our outlook for 2024 growth and at the time, what I said was to expect a low single digit growth. And I think that that’s just right now we’re going to park there, although that’ll be on a higher base here in 2023 because 2023 is better. But we still need to go through and get a feel for what the site supply chain performance clearly with the backlog? It's not a question of demand; it’ll be a question of supply. And we need to go through that analysis over the next few months. And determine to what extent our growth outlook will change, if anything from this baseline of low single digit. And so if anything, what I would say the backlog gives us a lot of confidence that we are going to return to growth. The demand signal itself would indicate a higher rate than low single digit. But we need to wait and watch the supplies part of it to make sure that that can catch up to that demand. As far as the margin profile at MFC, we do expect there to be continued pressure over the next number of years. I would agree that some of the upside that we’ve seen in this incremental demand are from higher margin products and should provide some level of mitigation, but we will really get a feel for exactly what that means until again, as we go through this over the next few months as we understand specifically, what type what contribution each of these different programs will have in 2024 and beyond and what their timing will be and what that mixed benefit may be.

Robert Spingarn:

Thanks very much.

Matthew Akers:

Yes. Hey, good morning, guys. Thanks for the question. I wanted to follow up on the commentary on Tech Refresh 3. Can you just touch on the cash impact of that? How big was that, how were you able to offset that and kind of hold this year’s guidance? And then I guess is it fair to assume sort of additional deliveries above the 150 level for 2024 and sort of cash and benefits associated with that next year?

Jay Malave:

Yes, and just as a kind of to, again put it all in context, we can actually deliver more than 156 aircraft in 2024, because the factory is going to be producing at the rate of 156. So there’s some carryover, we might actually deliver more in 2024, then what the on-going run rate will be because the factory will still be performing, right while those aircraft are waiting to be accepted. I just want to make sure that everybody knows what we’re applying to this problem to make sure that we minimize it. And this is the same conversation that I’m having with the senior seniors in military and civilian roles in government. So first of all, we are not suppliers are applying all the needed resources to this, it’s a top priority for our company and few others as well. We’re running extra shifts, and we’re deploying subject matter experts into other companies or suppliers, operations to make sure this stays on track, flight test programs on schedule. And we’ve got the sufficient pilots, both in the company and in the Department of Defense, for acceptance, as we move forward on all of that. And then finally, the purpose of the flight test program is to base continuously narrow the funnel of testing of all the aircraft functions and mission capabilities in a really methodical fashion sort of narrowing a funnel. And so we’re just moving through that and methodical way. Our latest estimate is that’ll all be completed by the end of the fourth quarter this year. Could it move a little bit into early 2024? Yes, it could. But we think we’re on track to really get all the dimensions of resources, commitment, and schedule to give that option for the December delivery everything we can.

Operator:

Thank you. And the next question is from Peter Arment from Baird. Please go ahead.

Jay Malave:

Yes, on CapEx, I would definitely expect it to increase in the back half of the year. We’re still holding our forecast of $1.95 billion for the year. And we’re going to that’s going to essentially stay elevated for the next few years. So a lot of that is investment in capacity and production capability, as Jim mentioned in his prepared remarks. And so we expect that to return kind of remained fairly level. On the working capital side, that for us is a is a source of opportunity. We expect that to really to what we’re trying to do is take it back down to what we performed, from a day’s perspective over the past, say 2020 2021, and some period of 2022. And so, while we’re increasing volumes, you would expect working capital to increase as well. We believe there’s efficiency opportunities to perform at levels we’ve been able to perform in the past and make that at a minimum, not a use of cash. And if we’re fully successful, make it a source of cash in spite of growth. And so that’s our view, particularly the back half of the year as well as over the next few years.

Operator:

Thank you. And our next question is from the line of Sheila Kahyaoglu from Jefferies. Please go ahead.

Jay Malave:

Yes, it’s just in many cases Sheila it’s earlier than anticipated ramps on some of the programs. So the first half, we ran higher than we expected. And we were expecting to run at those levels in the back half of the year. This includes classified programs, also protected communications, international security space business, as well as an NGINS [Ph] in our strategic and missile defense business within space. We’ve also had a little bit of growth in the Next Gen OPIR Program. And so all of those together, really drove the increase versus where we were coming into the year. And much of that we’ve really realized in the first half of the year with a little bit to come in the back half, but we had already planned ramping up those programs in the back half.

Jay Malave:

You’re welcome.

Richard Safran:

Jim, Jay, Maria. Good morning. So there’s been a lot of press around the F-35. And an engine upgrade both during and after Paris. I just want to know if you could clarify your remarks a bit discuss where you stand on the new engine program. But also, I’d like to know what this kind of means for Lockheed and for the F-35. In general, since the engine as I thought was government furnished equipment.

Richard Safran:

Thanks. Got it.

Noah Poponak:

Hi, good morning, everyone.

Noah Poponak:

Jay. We’ve talked about this dynamic where the outlays have lagged the authorization. In the second quarter, outlays finally grew a decent amount, your revenue then grew at the fastest rate in a while organically year-over-year. I know in the back half, you have tougher comps. But the updated guidance and the revenue would have to be down in the back half organically. So I guess I’m curious to hear you talk about is the outlay to authorization gap going to keep closing, is supply chain or whatever else was impacting that resolved? And are you building guidance assuming that continues to close? Or would that create upside if it were to play out that way?

Noah Poponak:

Got it. And Jay pension on the cash flow statement, I think it’s been a bit since you’ve updated the beyond 2023 contribution and cash recovery. Could you give us updated numbers for that?

Operator:

Thank you. The next question is from Myles Walton from Wolfe Research. Please go ahead.

Jay Malave:

Well, that’s one important element miles of being able to expand past 156. But there are a lot of other elements that would have to be essentially funded between our suppliers, ourselves and the U.S. government to build the rate in the entire supply chain above the 156 level that we’ve all agreed on so far with the government. So if the demand continues for the aircraft, which it seems to be re-joining [Ph] continuously, and the U.S. authorizes export of the aircraft to either more countries or more in more in more numbers to existing countries, there might be a business case for the government and industry to go beyond the 156. The Rheinmetall center fuselage expansion will definitely be constructive to that, let’s say.

Jay Malave:

No, we haven’t. So the whole production system, especially the long lead time parts, are tracking through the supply chain, as if we’re, going on our ramp up of between, 100, mean 140s, and ultimately to 156. The deliveries will be that of their delays, if there are delays of aircraft will be fully completed aircraft on the ramp waiting for not just not even the software load. But the confirmation that the software load they have for TR3 passed all the flight test points. And that’s really what they’ll be caught waiting for. There won’t be a production lag. There’ll be just a delivery lag based on the completion of the software integration testing that has to be done in the air on not only on the aircraft, but among numerous aircraft flying together at the same time. That’s they’ll be waiting for.

Operator:

Thank you. Our next question is from the line of Ken Herbert from RBC Capital Markets. Please go ahead.

Jay Malave:

Let me Ken go to the with the backlog, much of the backlog particularly here, what we saw in the second quarter, were 20%, only 23 contracting requirements. There was something there was also GMLRS, which, which also included some 24 requirements. But, as Jim mentioned, we’re working towards multiyear contracting, but are not yet under any multiyear contracting agreements yet. And so, what we put into the backlog is pretty high confidence, it’s going to convert to sales. And so we’re continue to do it. As Jim mentioned, having a dialogue with a customer to the dry multiyear requirements beyond that. As far as the marginal in terms of long-term agreements, we essentially, many cases will enter into agreements with our supply chain, with over that period of time of these requirements, so we’ll go back to back with our customer. So as we enter into agreements with our customer, that will cover multi years, we will also get into contracts with our suppliers for those same multi year. So any benefits that we get from that probably is going to drop through to our customer in favorable terms and pricing. So I wouldn’t expect there to be any type of margin upside from where we are today. So I would expect consistent margins from those. But again, those are pretty solid.

Jay Malave:

Thank you.

Jason Gursky:

Good morning, everybody. Jay, Jim, give you an opportunity to maybe offer up some comments on the other segments. Jay you’ve talked a little bit about low single digits, expectation and MFC. I mean if you could walk us through the other segments as we move out into 2024 and beyond and kind of your baseline assumptions for those at this point. And then also, maybe talk a little bit about margins, you made some comments during the quarter about the 1LMX initiative that you have going on, particularly around supply chain, and consolidating your purchasing and maybe getting some better purchasing power and pricing, and just kind of how that's informing your outlook for margins in the future.

Jason Gursky:

So fair to say then, that margin outcomes will depend largely on mix going forward between development work and fixed.

Jason Gursky:

Okay, thanks.

Operator:

Thank you. Our next question is from David Strauss from Barclays. Please go ahead.

Jay Malave:

Good morning, David.

Jay Malave:

Sure. I’ll take the sections 174 question. In over the past, I’d say probably six months, the IRS has acknowledged that this is an issue they need to provide guidance to, we’re hopeful that we’ll see some guidance by the end of the year from them related to our position, there’s been no change in our position there. And so, what we eagerly await any type of guidance that they may have and still feel confident in the position that we’ve taken. And I’ve laid out in the past of why we’ve taken our position that we have today. There has been some legislation proposed that could defer the implementation of section 174 to 2026, it would be retroactive to 2022. So we’ve we’re optimistic, of course, we believe that it should be repealed. But at least a deferral would be a good start. And so we'll monitor that legislation. Obviously, we’re supportive of that. And we’ll see how it works through Congress. And then when it comes to Aerojet Rocketdyne, we have two interests and only two. And those are the reliable access to propulsion, especially solid rocket motors is critical of critical importance to the entire aerospace and defense industry. And so the two sided benefit that we need to preserve of Aerojet Rocketdyne’s current structure is that it’s a merchant supplier of propulsion to the industry. And that means it treats all of the -- I’ll call them prime contractors for the end products, the OEMs equally. And that’s what we feel we need to preserve, even if AJRD goes into the ownership hands of another company. Secondly, the performance of AJRD has been improving, but it needs to get significantly better nonetheless. And so whether it’s on its own or part of another company, it’s really important that resources be applied to AJRD’s operations, so that it becomes a more capable supplier for on time, deliveries, quality, etcetera. So those are our two interests, maintaining the merchant supplier status, and also having higher performance of the operations of that company. So we have not received any commitments from L3Harris at this time, that would assure us that they are going to keep AJRD as a merchant supplier. And that’s the one thing we really are looking for.

Jay Malave:

You’re welcome.

Ronald Epstein:

Yes, hey, good morning guys. Maybe a broader big picture question here. As we as we look out to the fiscal 2024 budget, and what so what was in fiscal 2023? And the trajectory, maybe even, fiscal 2025. And 2024, it looks like there's going to be maybe 6 billion or so of spending on classified aircraft programs, everything from NGAD, F/A-XX. Now there’s been chatter about replacing U-2 with the hypersonic platform. I know you’re limited in what you can say, but can you just give us a feel for what kind of what that means for Lockheed Martin? How you think about it? And as outsiders kind of model this and think about it, how would you guide us to think about it?

Jay Malave:

And just running. Overall, the over the entire portfolio, the classified business for us is around $8 billion. And if you recall, we talked about it being one of the four pillars of our growth projection all the way through 2027. And our highest probably will be our programs of record, given what we’ve seen, particularly with MFC. But that will be our second highest grow or anywhere between mid to high single digit growth through 2027.

Jay Malave:

You’re welcome.

Pete Skibitski:

Yes, good morning. Can you can you just talk about labor availability and cost, just incrementally from last quarter. Has hiring become easier, just in terms of hiring people? And then also wage rates? Have you seen improvement there? Thanks.

Pete Skibitski:

Okay, that’s great. Appreciate the color.

Douglas Harned:

Good morning. Thank you. If I want to go back to missiles and fire control in Ukraine for a minute, because if we think back to the early days of the Russia, Ukraine conflict, there were things like Javelin for you there was of course, stingers, everything looks like it would be kind of a short term need, potentially building out some capacity for replenishment of weapons. And so now we are more than a year later into this. And you’ve gotten some very big awards in this last quarter, that appear to be related to Ukraine, either directly or other European needs. We’re seeing NATO spending go up. Can you talk about how you view the opportunity and missiles and fire control for revenue and, and backlog? I had, depending on how things may play out in Ukraine, from if we saw, the conflict come to a resolution or if we had increasing NATO involvement, how do you think about that in your planning?

Jay Malave:

And that appears consistent with the nature of these recent orders you’ve gotten that are large quantities extend over work over a longer period of time than we might have thought.

Maria Ricciardone Lee:

This is Maria. I think we’ve come to the top of the hour here. So I’ll turn it back to Jim for some final thoughts.

Operator:

Thank you and ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.

Operator:

Good day and welcome everyone to the Lockheed Martin First Quarter 2023 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 Maria Ricciardone Lee, Vice President of Investor Relations. Please go ahead.

Jim Taiclet:

Thanks, Maria. Good morning, everyone, and thank you for joining us on our first quarter 2023 earnings call. I'd like to begin today with a few highlights from the quarter, as well as an overview of the Presidential Budget Request and then Jay will discuss our financial results and full-year 2023 outlook in detail. We had a solid start to the year with first quarter sales of $15.1 billion led by 16% year-over-year growth at space. Segment operating margin was 11.1% led by MFC at 15.8%. Free cash flow grew 11% to $1.3 billion and combined with the lower share count contributed to a strong free cash flow for share growth year-over-year. We remain on track to meet our financial expectations for the full-year and the return to growth in 2024 as we laid out in January. In terms of capital deployment, we returned $1.3 billion or 101% of our free cash flow to shareholders in the quarter. We remain focused on our long-term strategy of growing free cash flow per share and continue to plan to deliver approximately 110% of our free cash flow to stockholders in 2023 through dividends and buybacks. Turning to the budget. The administration released preliminary details of the FY ‘24 President's Budget Request or PBR in early March. This budget proposal reflects a heightened emphasis on defense and security cooperation with allies. The FY ‘24 DoD budget request is $842 billion an increase of $25 billion or 3% over the FY ‘23 enacted funding. The near peer threats posed by China and the Russian invasion of Ukraine is driving the national defense strategy and has created added demand for Lockheed Martin's advanced effective solutions. Key highlights include the procurement of 83 F-35 aircraft continued expansion in classified programs and an increase in requested funding for munitions. The PBR also includes facilitation investment and advanced funding for long lead time parts in support of multi-year procurement of JASSM and LRASM. We're also engaged with DoD on multi-year procurement proposals for PAC-3 MSE and guided multiple launch rocket systems. These proposals are subject to congressional approval during course of the FY ’24 defense authorization and appropriations process. The PBR also includes continued investments in key technology development efforts such as conventional prompt strike, long range Hypersonic weapon, next generation interceptor, Hypersonic defense, bomb defense system and other space programs. Furthermore, key technology areas aligned with Lockheed Martin investment priorities received increased funding to include microelectronics, 5G technologies and joint all domain operations. We are encouraged by this initial request and look forward to its progression through the authorization and appropriations process. We also anticipate heightened emphasis on national security prioritization from Congress, supplemental spending requests including Ukraine and elevated demand from allies and partners. Turning to the F-35 program, the 83 F-35 Lightning II aircraft included in the PBR signaled strong support from the services and the administration. Moreover, the Canadian government's January announcement that it will procure 88 F-35s marks another milestone in continued international demand for the aircraft. As to production, deliveries of F-35 engines which are government furnished equipment resumed in February. And then flight operations and deliveries resumed in March. However, we do expect a fraction of total expected 2023 deliveries to be impacted later this year, due to both software maturation related to Technology Refresh 3 or TR3 and hardware delivery timing. However, we anticipate little to no revenue impact from any potential delivery delay and therefore no material adverse effect on our 2023 P&L. Jay will provide some more color on this in a moment. Also at Aeronautics, the first Greenville built F-16 Block 70 took flight and was delivered to Bahrain. In addition to the Bahrain customer six countries have selected Block 70 or 72 aircraft and Jordan and Bulgaria have signed letters of agreement for additional jets. Further related to the F-16 in the quarter, while I was at the U.S.-India CEO form in March, I had the privilege to announce the memorandum of understanding with the Tata Lockheed Martin Aero Structure Limited joint venture to produce F-16 wing structures in India demonstrating our commitment to India as an industry partner and customer, while bolstering our supply chain. Turning to Hypersonics, it is encouraging to see the continued investment outlined in the PBR for the conventional prompt strike weapon system or CPS. As it begins integration and testing for Zumwalt Class Ships recognizing our advancements in this critical technology. In February, the U.S. Navy awarded Lockheed Martin an initial contract for CPS, the first sea based hypersonic strike capability for the United States. Enabling long range missile flight at speeds greater than Mach 5. First delivery is expected by the mid-2020s. Regarding our Air launch rapid response weapon also known as Aero, we are continuing testing of the system at hypersonic speeds in order to advance technical maturation of the missile and the glide body and to ensure the final product is safe, reliable and supportive of our customers' missions and future plans. In January, we also completed the second flight test of hypersonic air breathing weapons concept also known as Hawk in partnership with DARPA and the Air Force Research Lab. We accomplished all the test objectives during the second flight test, including affordable rapid development and performance requirements. And in late March, the U.S. Navy announced its support of the hypersonic air launched offensive anti surface strike weapon or HALO. Lockheed Martin was down selected and awarded a contract for the first step to fielding a critical capability over the next decade and begin the design and development of a carrier based air breathing hypersonic strike capability for the Navy's fleet. As a company, we remain fully committed to developing hypersonic technology on accelerated timelines to meet this critical national security need and establish a solid deterrent posture in this area for the U.S. and its allies. The hypersonic solutions are just one element in our vision of 21st Century security. We advanced several additional aspects of this strategy during the quarter, including announcing a memorandum of understanding with Juniper Networks to jointly develop integrated hybrid software defined wide area network solutions and to demonstrate that with our customers in the future. This technology enables Mission Aware Dynamic Routing, a foundational capability for resilient joint all domain operations. This mission where dynamic routing shifts the movement of data and communications in real time across a mix of military and commercial infrastructure according to evolving conditions. Our solutions give customers the flexibility to rapidly adapt to maintain the flow of crucial data and information as their assets operate in contested environments. We also led simulations of technologies to the U.S. Army, Air Force and Navy to demonstrate the impacts of 5G communications and advanced analytics to significantly improve operations and maintenance performance for a variety of aircraft, as well as for unmanned platforms and operationally challenging environments. And at the Mobile World Congress in Barcelona, I had the opportunity to deliver a keynote address and meet with CEOs across the digital technology, mobile and networking industries to encourage us working together to promote innovative solutions to protect our countries and advance our space exploration capabilities. Another example of our leadership in accelerating advanced 21st Century technologies to improve national defense and deterrence to conflict is in the arena of directed energy. Recently, our RMS unit achieved success in our initial test of our demos. High energy laser, which verifies that the laser's optical performance meets the system's targeted design parameters. This 50 kilowatt class laser weapon system aligns with the Army's directed energy, short range air defense mission. In addition to delivering on absolutely cutting edge technologies, demand for many of our well-known and long-time high performing systems continues to be strong. For example, in January, the Australian government announced the purchase of 20 Lockheed Martin high mobility artillery rocket systems or the now familiar High Mars, providing Australian defense force with a reliable, well proven capability. And we continue to grow our significant partnership with Australia beyond High Mars. In February, an agreement was announced between the Australian and United States governments for a foreign military sale of 40 UH-60M Black Hawks for the Australian Army and deliveries are slated to begin early this year. The Black Hawk remains unmatched as an all-around, multi role durable military helicopter for Australia and for the 34 other countries around the globe that use it. Further, we're excited to work with the ADF and Australian industry to develop their sovereign satellite communications component, otherwise known there as joint Project 9102. The Commonwealth of Australia announced in April that Lockheed Martin was selected as the preferred bidder for JP-9102. This multibillion dollar project will provide the ADF with a robust solution for military satellite communications and defined by its versatility and its resilience. With that, I'll turn the call over to Jay and join you later for questions.

Operator:

Thank you. [Operator Instructions] Our first question will come from the line of Seth, I'm sorry Seifman from JPMorgan. Please go ahead.

Jay Malave:

Great question, Seth. Let me just say on FLRAA. We're obviously disappointed. We believe that our offering was the best technology to support the multi-mission requirements at the best value. And while we'll acknowledge that the proposal did include aggressive pricing, a significant amount of our offering included efficiencies made possible by the benefits of 1LMX. And our adoption of 1LMX model-based and digital thread enhancements significantly improved our cost competitiveness and we expect that to continue in the future. The business case itself was favorable and that's what enabled the pricing that we were able to offer. As it relates to -- I think generally speaking, that's how we evaluate these proposals. We look at the NPV, we look at IRR, we looked at all different metrics, we look at current affordability. And as I mentioned at your conference Seth, I've said it, in a classified program at MFC, we have to take a little bit of short-term pain for some long-term gain. But the fact of the matter is the business case does provide that long-term gain for us. And so, we go through all of that as part of the management decision making, the technology that we can provide. As you would expect, we have the leverage, we have the capability of wherewithal to provide favorable pricing in outstanding technology offerings to our customer, and we don't do it at the expense of financial returns. Let me just add, just on the CH-53K, we did have something in the press release. There was a small adjustment related to a development contract -- an older development contract, there was no adjustments taken on the forward production agreements that we're working on currently.

Kristine Liwag:

Thanks, good morning, Jim and Jay. On the F-35, the talk of the performance-based logistics deal has been ongoing for some time. But it seems like it's possible you would reach a deal this year? So, could you give us an update in terms of where you stand in transitioning over to a PBL contract in the program? And then assuming that PBL meets conditions set by the 2022 NDAA, how could this impact the sustainment work and the overall program profile over the coming years?

Jay Malave:

And Kristine, we think we're on a path to establish a PBL with F-35 customer enterprise this year and that's what we're tracking too.

Rob Stallard:

Thanks so much. Good morning.

Rob Stallard:

Jim or Jay, now that you actually mentioned supply chain issues or labor shortages or other things in your commentary, so I was just wondering if you could give us an update on that situation and whether things have improved?

Jim Taiclet:

And Rob, it's Jim. We're on the cusp of fully implementing really best practices in supply chain across this one Lockheed Martin concept that we have now, used to be that each business unit here or business areas, we call it, did its own supply chain management. And then within programs, it was even more narrowly managed. And so, we're now bringing all the aggregate demand together for each supplier across all of Lockheed Martin from space to MFC and everything in between. And then, we're also looking at components that programs are using in different parts of the company from mid-tier suppliers and aggregating that demand to actually synchronizing our requirements and so that we can have more and more bulk buys everything from raw materials up through mid-stage components, et cetera. So, we're implementing those, kind of, best practices that will be good for the supply base too. I don't have more reliable demand from our company in total and I think will lead -- I hope will lead the industry into that future, where we help strengthen the supply chain by our practices in addition to their improvements.

Cai von Rumohr:

Yes, thanks so much. So, Jay, you had very strong profitability at MFC 15.8% was up and yet you talked of this classified missile program hitting, I think 50 bps to 100 bps on margins. Can you update us in terms of -- is that still what the number is given the strength in the first quarter and how far out into the future does that extend? And then maybe more broadly, Northrop also mentioned, maybe on B-21 that they have some fixed-price exposure looking out, do you have any other programs where we should be aware of potential, you know, LRIP or fixed price options on programs out in the future?

Operator:

Thank you. And the next question is from Ron Epstein from Bank of America Securities. Please go ahead.

Jim Taiclet:

Good morning.

Jim Taiclet:

Ron, it's Jim. If we're constantly and have over the years, the company's history worked with government on intellectual property, management rights, et cetera. We'll continue to do that and got itself is a concept in progress, I'll call it. The government services, DoD et cetera, they are formalizing and crafting with NGAD is going to look like and then what NGAD stands for is Next-Generation Air Dominance aircraft. So, think F-15, F-22, that kind of class airplanes [Indiscernible] win air-to-air combat. And so, there'll be a mix of -- may accrued and uncrude vehicles in that concept, that's still being formulated. We're working with government through our Skunk Works operation on what the options are there. We'll sort out the intellectual property rules as we go forward. But frankly, we're driving and advocating strongly for a more open architecture approach to the entire industry, unless proprietary standards and protocols and architectures and we just demonstrated one of those with the docking mechanism for spacecraft, which can be basically implemented on any -- a wide range of spacecraft to do future replenishment of either data fees or fuel et cetera to satellites inflate. So those are the kinds of things we're advocating for and we will always guard and protect our intellectual property rights for the IP that we develop and we'll work with customers to create the open architecture, so that we can continue to compete effectively.

Pete Skibitski:

Hey, good morning, everyone. Jim, I was just wondering if you can add some more color on sort of where Lockheed stands with Hypersonics just in light of the changes made to Aero and your Hawk variant. Obviously, CPS looks good, I don't know how big that could be, but could you walk us through maybe where you're at today in Hypersonics and with the program changes where things could go? How big you could get? Thanks.

Jay Malave:

Sure. It's -- today, it's about a $1.5 billion business for us in the aggregate, all of those programs that Jim mentioned. We expect that to continue to grow and be a contributor. It's one of our growth -- four growth pillars, it's not the largest because it's smaller than some of the other contributors. But it still provides healthy growth and there's upside to that related to hypersonic defense. And so when I talk about [$1.4 billion, $15 billion] (ph) going to with solid growth, it's embedded in our growth projection, it's really these weapons systems that Jim just mentioned.

Rich Safran:

Thank you, Jim, Jay, Maria, good morning.

Rich Safran:

So I wanted to know if you could just expand on your opening remarks about international demand. Wanted to know if you could maybe discuss some of the timing of international award opportunities where you're seeing the most demand for what types of equipment? And finally here, are you seeing any more interest in direct commercial versus FMS in international orders that you're signing-up now? Thanks.

Jim Taiclet:

Yes. And I could add some more background to Jay's remarks there. As mentioned, space, there's like an incredible amount of upside, the notion of independent for sovereign satellite communication for military and national defense is catching on if you will. U.K. already has a system like this, but they want to replace and upgrade that. Australia is getting into that, a game as well and I think there'll be countries in the Middle-East and elsewhere that we'll look into these options for space. On the Aero side, the F-35 is been incredibly popular and I think on every competition. Meaningful competition over the last few years as far as fifth-generation fighter aircraft go. In addition to that F-16, we can build them fast enough with additional orders coming in. We're going to compete in India to try to get that order as well and it's a matter of us being able to get to the production rate that the international is demanding and requesting of us there. RMS is having a lot of success with the SEAHAWK helicopter for example and various versions of the Black Hawk. As we mentioned, Australia as part of that. Also the radar systems are becoming more exportable as we go forward and both in Europe and Asia there is demand for those. And then at MFC, obviously PAC-3 Javelin, GMLRS, ultimately potentially JASSM and LRASM for somewhere closer allies are going to be in the mix. So, there's a wide and broad range across all of our business areas, a significant international demand that we'll be seeing over the next few years. Contracting that through the FMS process does take some time. On the other hand, there are a few DCS programs and projects, but a lot of this is going to be -- continue to be export controlled by the U.S. government and there'll be largely FMS. But it's a broad range, it’s going to last for many years, and we'll continue to be updating you on other programs, let's start getting more international traction.

Myles Walton:

Thanks, good morning. Maybe on RMS, could you talk about the driver to the expansion in the margin implied in the guidance? I guess a couple of 100 basis points implied run-rate for the rest of the year. Is that something programmatic, was there extra R&D associated with FLRAA? And also on FLRAA now that, that decision is made. Anything you anticipate needing to do at Sikorsky to maintain competitiveness? Thanks.

Operator:

The next question is from the line of Matt Akers from Wells Fargo Securities. Please go ahead.

Jay Malave:

Yes. So, when you look to get over the next five years at MFC, they're certainly our strongest grower, we'll lay out a little bit more specifics as we go through our strategic planning process in the summer and we give you, kind of, a first look on 2024 and maybe beyond when we do that in the October call. But I certainly are strongest grower. Yes, there are capacity investments. Jim mentioned some of the funding that is being proposed in the Presidential budget request for facilitation investments. We've also invested our own money’s and capability PAC-3 is a good example. I mean, a few other programs where we've got in front of funding to make sure that we can deliver to the requirements for capacity and delivery requirements that our customers asking for. And so, again, I think we've got a good beat there. We've talked about different capacity levels over the next few years. We reached some of these levels in ‘25, ‘26 and ‘27. And that investment really between now and over the next few years is going to help enable that capacity increase in growth as well.

Operator:

Thank you. Your next question is from the line of Jason Gursky with Citigroup. Please go ahead.

Jay Malave:

So let me just start with a book-to-bill question. Jason, essentially, it's one. Last year, we ended the book -- the backlog at $150 billion. This year, we're planning for that to be around the case maybe it's down $1 billion or up $1 billion. But effectively, a one book-to-bill sets us up for the growth to resume in 2024. So, we don't need to necessarily see the backlog. There is opportunity for it to grow from where we are, and where we landed or ended in 2022. But right now, we're planning for that to be generally flattish and that's where we need to be to drive the growth resumption in 2024.

Jay Malave:

And by breaking it out of the business area, business says structure enables these ideas in these pursuits to really operate at a speed and agility level. It probably wouldn't otherwise be available to them working within the bureaucratic structure that we have in our business areas with the multi -- all the policies and procedures that we have. And so, we give them a little bit more flexibility to operate with some speed. And as Jim mentioned, the ability to pursue co-investment by others as well.

Scott Deuschle:

Hey, good morning. Jay, if I were to model Q2 through Q4 space systems sales based-off of Q1. And then just to adjust for increased number of weeks in those future reporting periods? And go get around $12.8 billion space segment sales for the year versus the guidance midpoint of $11.6 billion? So basically 10% higher than what you've guided. So, curious if you comment on what prevents that type of upside case from happening or to ask another way, what the volume headwinds are and the remainder of the year relative to the first quarter? Thank you.

Operator:

Next question is from the line of George Shapiro with Shapiro Research. Please go ahead.

Jay Malave:

Okay. Let me -- so George, a fair question. Just to -- you may tackle a big question, the big picture question in terms of what happens for the balance of the year. Just on the investment gains, obviously we saw that in the quarter. We talked about that being $0.18 imply, because we're not changing it implies that we're reversing the balance of the year, so we'll see. We'll give that an update in the second quarter, update more halfway through the year and make a call on that. The other element we just were speaking about a little bit in terms of our investment in LM Evolve, we have some of those investments increasing in the balance of the year as well. And then there's just residual corporate costs that we have flowing through. And so all those things are allocated. We'll monitor those throughout the rest of the year and see whether or not. Again, I think we'll just make an assessment halfway through the year on where we are those things to the extent there's upside, we'll make an update at that point in time.

Ken Herbert:

Hi, good morning. Jay or Jim, I wanted to see if you can provide a little more granularity on the TR3 and the F-35 program. Specifically, it seems like that program is faced in ongoing delays and other headwinds in terms of adoption and implementation. But how is that impacting deliveries this year and how do you see that timing of that getting back on track?

Maria Ricciardone Lee:

All right. Lois, this is Maria. I think we've come to the top of the hour. So I'm just going to quickly turn it back to Jim for any final thoughts.

Operator:

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.

Operator:

Good day, everyone, and welcome to the Lockheed Martin Fourth Quarter and Full Year 2022 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 Maria Ricciardone Lee, Vice President of Investor Relations. Please go ahead.

Jim Taiclet:

Thanks, Maria, and good morning, everyone. Hope you've all had a good start to the new year, and I thank you for joining us on our fourth quarter 2022 earnings call as we review our results, key business area accomplishments and our outlook for 2023. I'd like to begin with a few highlights from the quarter and from the year, and then Jay will review the financials in a more detailed manner. Lockheed Martin had a strong close to 2022. All of our business areas met or exceeded our prior expectations, resulting in a 2022 full year sales of $66 billion, segment operating profit of $7.2 billion and earnings per share of $21.66. Our free cash flow for the year of $6.1 billion also came in above our prior expectation, while backlog for the year increased to $150 billion, driven by all-time record orders for Lockheed Martin. Our financial results included more than $1.7 billion of independent research and development investments, or IRAD, a new high watermark for the company. We also continue to modernize and streamline our operations to increase efficiencies and reduce costs. Significant capital projects include our ongoing investment in what we call One Lockheed Martin transformation or 1LMX. This is our multiyear internal project to transform our business processes and systems from end-to-end. By implementing new digital tools in our operations and expanding our use of model-based engineering to enhance our speed to market and our cost competitiveness. In 2022, we completed a majority of the detail design for our new systems and business processes. And for 2023, we expect to complete the detailed design and implementation road maps that go with it, and then we'll transition to the system build and configuration phase over the next couple of years. These IRAD and capital investments accelerate the capabilities our customers need and for our operations to efficiently and effectively meet those needs. From a capital return perspective, we delivered approximately $11 billion to shareholders in 2022 via share repurchases of $7.9 billion and dividends of $3 billion. During the fourth quarter specifically, we entered into a $4 billion accelerated share repurchase program, and we've retired approximately 7 million shares under that agreement so far. We expect to complete our remaining repurchase authorization of $10 billion over the next few years, consistent with our focus to deliver free cash flow per share growth to you, the investor. These operational and financial results created significant value for our shareholders, ending the year with a total shareholder return of 40%. I will touch briefly now on the Department of Defense, or DoD, budget. In late December, Congress signed the FY '23 Omnibus spending bill into law, appropriating $858 billion for National Defense, including $817 billion for the DoD-based budget. This reflects approximately 10% growth year-over-year for both national defense and the DoD-based budget. The law also represents a 6%, or $45 billion increase from the President's budget request for DoD. These appropriations enabled us, along with the Joint Program Office, to finalize the contract for the production and delivery of up to 398 F-35s for $30 billion in Lots 15 and 16, including the option for Lot 17. Further, several other of Lockheed Martin’s programs received the funding levels necessary to drive the growth outlook we previously identified, including our combat rescue helicopter, the C-130J, Blackhawk, CH-53K and FAAD. We view this funding outcome as positive for the future, and our current expectation is that growth will materialize over the longer term, starting in 2024. Let's now turn to the four growth pillars

Operator:

[Operator Instructions] And first go the line of David Strauss with Barclays. Please go ahead.

Jay Malave:

So David, let me take the first one and then kick over the second part of your question to Jim and just really talk in the context of '23 and what's going to be different in 2024. In 2023, when you look at it, we've got continued growth in our four pillars, really the programs of record that Jim had mentioned. But we do have some specific unique items to 2023, and I'll give you an example. For example, in aero. On the F-35, we continue to expect mid-single-digit growth in sustainment on the program. But we are expecting also a mid-single-digit decline in production as deliveries catch up to the material that we had purchased in prior years. Similarly, on the F-16, we're going to see continued growth in production to roll out our backlog, but we are seeing a reduction in modernization and sustainment programs on the F-16. So as those -- both of those normalize in 2023 going into 2024, they will no longer be headwinds, which will continue to allow for growth in Aeronautics, particularly in the F-35 sustainment and on F-16 production. Similarly, like MFC, what we saw in 2022 and it carries over a little bit to 2023 is some of the areas where we see the higher demand from a production level, particularly in programs of record, things like PAC-3, it's taken us a little bit longer than we originally expected to ramp up. And so we're going to see gradual improvement in supply chain as well as our internal operations in '23 with stronger growth in 2024. At RMS, CH-53 will double deliveries in '24 versus '23. And '23 versus '22 is pretty much flat deliveries. We also see probably some Black Hawk growth in '24 as well. And what we're going through right now is the transition for multiyear 9 to multiyear 10 in RMS and Sikorsky specifically. So those are all things that we think will lift from '24 relative to '23, and those are headwinds that are really unique to 2023.

Jay Malave:

Just let me follow up on your last question, David, whether or not there's upside. Where we see potential increases to where we were at baseline before really is in MFC. Over the next five years, we've got revenue potential. It's around $6 billion. And that would more than offset lost revenue associated with FLRAA should that decision hold. And so net-net, we see that there could be some upside over the next five years.

Myles Walton:

Thanks, good morning. Jim, maybe one quick one and one sort of allow you to expand a little bit. When is your expected restart of deliveries in the F-35, as a quick one? And then, obviously, there's more of a debate going on in D.C. around fiscal restraint and has been in place in the last several years. And so I'm just curious where you think this ends up as one thing, but more importantly, what, if anything, do you do operationally to prepare yourself for whatever the outcomes are in terms of balance sheet holding back on repo or leaning forward, looking for areas where 2023 budget -- excuse me, 2024 budget might be in a continuing resolution for a full year. Anything on that perspective from an operational perspective?

Jay Malave:

No. You got it. That's it.

Operator:

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

Jay Malave:

Sure. Good question. Let me follow up. And we looked at this and tried to triangulate performance in a number of different ways. We looked at just straight piece part on-time delivery here in the fourth quarter relative to what we saw in the second and the third. We also looked at program performance, so earn value-type metrics, and we really didn't see a meaningful change in on-time delivery or schedule performance relative to our earned value systems. But what I will say is the fourth quarter had a significant step-up in requirements. And if you adjust for the number of weeks in the fourth quarter relative to the balance of the year and you also adjust for some of these benefits that we saw in terms of award timing, our requirements in the fourth quarter stepped up sequentially by about 5%. And I would say the entire value chain, whether it's our internal operations and the supply chain, was able to meet that increased level of requirements. So that, to me, bodes well to the future as well as expecting a gradual improvement in 2023. And I think that just provides a reasonable assumption and a reasonable basis for that assumption

George Shapiro:

Yes, good morning. If you look at the F-35 program, like the incremental profit you reported was about a 16.4% rate, so I assume you stepped up the margin on the F-35. And going forward then, the slight decline that you're forecasting in the margin probably reflects sustainment growing versus production. And a quick follow-up, the $20 million charge that you took in a classified program in aero, was that the same program that you took large charges a couple of years ago? Thanks.

Operator:

And next, we'll go to Rob Spingarn with Melius Research. Please go ahead.

Jim Taiclet:

Sure. And it's largely classified, Rob. But what I can say is many of the elements of counter hypersonics, we also have a pole position in, right? So we've got existing products that we can take the lessons learned from and a lot of the engineering and apply them to just a faster incoming target, right? So we're working on NGI, as you already heard, which is a ballistic missile. It travels at similar speeds. We have the FAAD system, which is a sort of a high-altitude interceptor as well. And then we have PAC-3, which is a very accurate lower-level further in, if you will, defensive systems. So we've got the engineering talent. We've got the intellectual property. And we're developing these 21st Century Security concepts like applying artificial intelligence to network systems together and process data much more quickly, which, of course, you need that to process the information coming in on a Mach 5 missile, right? So I think we have a lot of the elements that will go into the eventual counter hypersonic solutions, and we are working on many of them right now in integrating what we have and developing what we need.

Richard Safran:

Jim, Jay, Maria, good morning. How are you?

Richard Safran:

So I wanted to ask you about the F-16 and maybe expand on the remarks you made just a few moments ago. I thought you might comment on things like U.S. and international opportunity set ahead, maybe update on the first delivery expected production rates. And if it's at all possible, maybe touch on like what margins you're expecting on the program right now. I'm just thinking that they should be pretty decent given the move to Greenville was done to improve the cost structure on the program.

Jay Malave:

Sure. Just maybe a little bit more color. Just on top of the first flight that we had today the successful first flight, congratulations to our Aeronautics team there. We have over 20 aircraft that are currently in process in the production phase. We will deliver anywhere between, say, 78 aircraft this year, and then that will step up significantly in 2024. And so we're on a good path that we recognize the opportunities that are in front of us. There are a few countries that have been announced there that we're eagerly awaiting contract finalization, hopefully this year, with Jordan and Bulgaria. That's about combined about 20 aircraft. And so the demand, as Jim mentioned, is pretty significant. And we're ramping up as we speak to be able to deliver the customer requirements.

Seth Seifman:

Thanks very much. Good morning, everyone. Jay, I'm sorry to waste a question on pension. But if we look at the CAS recoveries, it was about 30% of this year's cash flow. And I know there's discount rates and returns and all that stuff, but CAS tends to be much more visible than FAS on the income statement. So can you give us a multiyear outlook for the CAS recoveries over the next few years and where the balance stood at year-end?

Operator:

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

Jay Malave:

Yes. No, good question. This is something we talked a little bit on the third quarter call. We've got some new program awards, particularly in classified, that are going to put margin pressure not just next year but a few years beyond that as well. And it's really just on the early phase of these programs as we head into production. It's just low margin, and it will take time to have those restore to margins that we've seen in the past. What I will say is that we do have the benefit of some offsetting mix with the upside that we're seeing in this business. I mentioned before a potential $6 billion over the next five years. Those will come with more solid margins will help mitigate the reduction that we're seeing on these new programs. But there will be some pressure there that we have to deal with. And look, the MFC team has a good track record of driving out cost, driving margins. I'm confident they'll be able to do that in the future as well, but it will take a few years to get there.

Kristine Liwag:

Good morning, everyone. Maybe switching gears to a different topic. With tighter cost of capital, we've seen valuations come down in high-growth investments. Is this a better time for corporate VC to enter into deals on attractive terms? I mean just looking at the limitations on M&As from the FTC stance that we saw with Aerojet Rocketdyne, I mean how should we think about the importance of Lockheed Martin Ventures to access these new technologies? And could we see ventures double from here?

Jay Malave:

I'll just add, Kristine, I mean it's a great point. I mean we've got a pretty tight alignment on the targets that we pursue to our technology road maps. And these are examples like Joint All Domain Operations interoperability, autonomy, artificial intelligence and other areas that will help us drive and accelerate our internal organic capability with these new emerging technologies. And so it's a great point. There's certainly opportunity there. As Jim mentioned, we've increased our availability of funding for that, and we're excited about those opportunities.

Scott Deuschle:

Hey, good morning. Jay, you guys have taken a bit of a different approach on this R&D tax issue than some of your peers. And I know this subject has been beaten to death already, but I'm just curious if you've had any recent conversations with the government on whether they're going to agree with the approach you've taken. And then I guess just stepping back more broadly, you had this uncertain tax position disclosed in the 10-Q. Just kind of give us a sense for when you think that might get resolved? Thank you so much.

Operator:

And next, we'll go to Rob Stallard with Vertical Research. Please go ahead.

Jay Malave:

Yes. Rob, inflation is something that we evaluate all the time. In many of our existing contracts, we have not really seen a significant impact, only because I mean our fixed price contracts -- our suppliers are under fixed price contracts with us. Where we have seen is really on new proposals is where we've seen some impacts, where you've got suppliers unwilling to provide longer-term price commitments requesting what we refer to in the industry as economic price adjustments, which are escalation clauses, inflation clauses. And those are ongoing dialogues that we have with our customers as well. And so it's still an ongoing issue. To be honest with you, on the proposal side, we really haven't seen any type of reduction there in the pressure. It's something that we review quite often on these new proposals, and it's something that we grapple with because either you have to price in some type of inflation assumption into your proposal or you have to have some type of back-to-back agreement where you're going to have an inflation clause. And we're getting squeezed with our customer as well as with our suppliers, and we're trying to make sure that we can accommodate both requirements here.

KenHerbert:

Hi, good morning, Jim and Jay. Just wanted to ask a question here on the new award outlook. Putting FARA aside, if you look at NGI, maybe NGAD and other opportunities, what's the current expectations for timing around some awards, specifically around NGI? And are there other programs out there on the new award side that could significantly move the needle as we think about sort of the potential impact into '24?

Operator:

Next, we'll go to Sheila Kahyaoglu with Jefferies. Please go ahead.

Jay Malave:

Yes. Let me maybe talk a bit in the kind of longer-term outlook. And you look at the history of Lockheed Martin over the last probably five to 10 years, and we've reached margins in the range of 12%. I do believe we have the potential to get back to those, but that will take time. In the short term, really, I would say, over the next three years or so, our objective will be just to hold the margins where they are because some of these pressures that we see on these new programs, particularly at MFC, when you've got a 90 basis point reduction in one year from -- in one BA, that's a lot to really overcome. We've worked things internally as far as both product cost reductions, overhead cost reductions to really try to drive and maintain our margin profile. But that's where we're really going to be over the next few years is really trying to maintain where we are as we re-crank the growth cycle. And I think that's the key message that we have had internally

DougHarned:

Good morning. Thank you. On F-35, so when you get ready to restart here, you've also though now flown the F-35 with tech refresh upgrade -- or Tech Refresh 3 upgrade. Can you talk about how that's progressing, how Tech Refresh 3 is progressing? And how does the progress there play into your delivery plans for Lots 15 through 17? And perhaps you might also comment on, when you get the restart, you've got these airplanes that have already been produced. Should we see those as really add-ons to 2023 deliveries?

Jay Malave:

Sure. To answer the question on add-ons, that is -- will be -- that will occur but not necessarily in 2023. If you think about it right now, we're going to be introducing and cutting in new production, hardware and software on a full rate production program, which is a pretty aggressive schedule. And so what I would expect -- and this is included in our sustainment revenue growth projections, we'll see the retrofits on the existing fleet over time. And that will probably start beginning maybe sometime in 2024 and beyond, and its part of our mid-single-digit sustainment growth on the F-35.

Matt Akers:

Good morning. Thanks for squeezing me in. I wanted to ask, I think you had mentioned some of the restocking of stuff Ukraine and you've got some orders there. How big is that for Lockheed Martin? And how should we think about sort of the timing? And how accretive that might be the growth maybe in '24 and beyond?

Jim Taiclet:

Yes. And Matt, it's Jim. One of the issues that this situation has illuminated with is that when you need to accelerate production in the defense enterprise for national defense, we would have liked to have been able to A, ramp up the production faster and B, bringing the revenue sooner. So it just highlights the need, I think, and it's an urgent one, to work together with government and industry to quickly evolve the relationship between the two so that we can maintain an effective deterrent conflict as we've talked about. So what I'm discussing with some of our senior government officials who are receptive, and there are several thought leaders in government on this now, is apply the concept of anti-fragility to the relationship between government and industry, meaning things like ensure that we have multiple reliable sources of key materials and components, right? So we have a lot of single-source components that we have to go back down into our supply chain and find out who and if they can double or triple their production of the components so we can double or triple the output of the system. Another piece of this anti-fragility concept is to have the government invest in production capacity with us, call it, 2 standard deviations above the mean peace time production rates. So if you need to accelerate, you can quickly and start up the line or speed up the line much faster. Another one is significant, expansion of the use of long-term and multiyear contracts so that we don't have to have a fluctuation in demand year-to-year, which sets our supply base back, again, less willing to invest because they can't predict the future. And then finally, especially for those small and medium businesses, we're suggesting that government really take an overview of a broad overview of the oversight and compliance burdens that are on companies that participate in the defense industrial base from an audit and compliance and certified cost perspective, truth and negotiation act, things like that, while we at Lockheed Martin and other major defense funds would like to see that burden ease, it's a burden that can really prohibit other medium and small companies from working with us or working with the government to provide what it needs. So there's a great dialogue beginning. I'm sure other companies are raising these issues too. But this issue of restocking raised an important industry issue that we're going to try to work with government to solve.

Jim Taiclet:

Great. Thanks, Maria. I'd like to conclude our call today by thanking the entire Lockheed Martin community for everything they've done in 2022 and they'll do this year and beyond. Together, we positioned our company to continue to push the edge of the technology and advance scientific discovery to ensure our customers remain what we call ahead of ready and keep people safe around the globe. So thanks again for joining us on the call today. We look forward to speaking with you on our next call in April. John, that concludes the call. Thanks, everybody. Have a great day.

Operator:

Good day and welcome everyone to the Lockheed Martin Third Quarter 2022 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.

Jim Taiclet:

Thanks, Greg. Good morning, everyone, and thank you for joining us on our third quarter 2022 earnings call as we review our quarterly results, our 2022 full-year outlook, and our preliminary expectations for 2023. But before we begin, I’d like to welcome Maria, who I’m excited to tell you all, has started as our new Vice President of Investor Relations just yesterday. I’d also like to thank Greg, who announced his plan to retire at the end of the year for his more than 37 years of dedicated service at Lockheed Martin, including five terrific years as our Vice President of Investor Relations. It’s been a pleasure to work with you, Greg, and we wish you all the best in retirement.

Jim Taiclet:

I’d also like to note that we continue to await the U.S. Army’s selection for its Future Long-Range Assault Aircraft competition, FLRAA, as it is known. We’ll modernize the Army’s rotorcraft fleet and represent a long-term franchise growth opportunity. We are confident that DEFIANT X is the transformational aircraft that the U.S. Army’s going to need to accomplish its complex missions today and well into the future, and we look forward to the Army’s announcement. Lockheed Martin had a solid quarter financially with 3% increase in sales from last year’s third quarter, and strong operating margins and earnings per share. Our free cash flow was outstanding as we generated $2.7 billion in the quarter. And our backlog grew nearly $5 billion, closing at $140 billion. We remain on track to achieve the full year outlook for all of our financial metrics that we discussed last quarter. In a few minutes, Jay will provide a detailed review of our quarterly results, updated 2022 guidance and trending information. But before he does that, I will provide a framework for our outlook, and discuss our plans for delivering value to customers and shareholders over the next several years. We continue to anticipate growth over the long term, but with the residual pandemic impacts and supply chain challenges continuing, we now expect a return to growth in 2024 with 2023 sales being approximately equal to our 2022 outlook. We are confident in our four pillars to drive growth in 2024 and beyond. Importantly, we expect to deliver solid growth and free cash flow per share in 2023 and thereafter through a combination of cost reductions throughout the business, improved working capital management, and an expanded share of purchase program. Our Board of Directors has approved an increase to our share repurchase authorization to $14 billion. You will see in Jay’s charts that we’re doubling our share repurchase plan outlook for this year, increasing our outlook by $4 billion for a total expectation of $8 billion in 2022. We also announced a 7% dividend increase this quarter. So altogether, we’re on track to deliver approximately $11 billion to shareholders in 2022. We are also elevating our commitment to drive long-term growth through strong independent research and development and capital expenditure funding with an expected total of nearly $4 billion in 2023. These investments will support our customers and deliver on our 21st century security vision to accelerate leading edge, commercial digital technologies, and defense of our nation and allies. A key driver of this strategy is our new One LM transformation, or as we call it, One LMX, [ph] a multi-billion-dollar, seven-year company-wide program to transform our end-to-end business processes and systems. One LMX will create a model-based enterprise with a fully integrated digital thread throughout the design, build, and sustained product lifecycle. As part of our ongoing corporate stewardship approach, we are conducting an internal review to identify potential synergies between our four business areas, further cost reduction opportunities, and a general portfolio review with the goal of increasing operating efficiency in anticipation of our future growth. We are confident in long term growth as domestic and international demand for a wide range of our products and services remain strong. We will continue to actively reinvest capital into our business to meet our customers’ requirements and drive organic growth, and we’ll use our disciplined and dynamic capital allocation process and strong balance sheet to drive attractive total returns for shareholders. Moving on, I’d like to highlight a few key accomplishments from each of our business areas, beginning with an update on our F-35 program. Last month, the Swiss government signed a letter of offer and acceptance for the procurement of 36 F-35As. This milestone completes the government-to-government procurement process that was first announced in June 2021 when the Swiss Federal Council shared its selection of the F-35 for its future fighter. The signing officially makes Switzerland the 15th F-35 customer. Also, in August, we received contractual authorization from the Joint Program Office, enabling us to book a Lot 15 order of over $7.5 billion and recognize revenues and earnings from the second quarter as well as from the third quarter. Our Space team celebrated the successful launch and deployment of the space-based infrared system GEO-6 satellite, the final spacecraft in the SBIRS constellation. SBIRS has been one of our longest running signature programs, providing the Space Force with an integrated system for missile warning, battlespace awareness, and intelligence gathering. We will also continue to support and advance this important mission through our next generation Overhead Persistent Infrared or next gen OPIR program, which will deliver even more advanced and more survivable missile warning capabilities to the country. At Rotary and Mission Systems, the Sikorsky line of business secured an order for 12 SEAHAWK helicopters from the Australian Ministry of Defense. Over the past 40 years, we’ve delivered over a 1,000 SEAHAWKs to the U.S. and international customers both with more than 50 remaining in backlog. And in Missiles and Fire Control, the State Department approved a potential sale to the United Arab Emirates for two THAAD systems, including 96 interceptors. The UAE currently operates two THAAD batteries, and this opportunity would significantly increase their air and missile defense capabilities, and once finalized, could be worth over $2.2 billion. Turning to budgets, both chambers of Congress have advanced Appropriation bills in support of fiscal year 2023 Department of Defense budgets. We have seen strong bipartisan support for increased defense funding in congressional authorization and appropriation committees. Final legislation approving these funds has yet to be passed, and the federal government is currently operating under a short term continuing resolution for FY23, limiting DOD funding to prior FY 2022 levels. As part of the continuing resolution, Congress did approve additional supplemental spending to support efforts in Ukraine for the defense of their country. The CR added $3 billion in funding for Ukraine Security Assistance Initiatives, a program to provide equipment, weapons, and military support to Ukraine, bringing the total amount appropriated for this effort to $9 billion. In addition, the continuing resolution appropriated $2 billion to replenish U.S. stocks of equipment sent to Ukraine and to increase production of critical munitions with a presidential drawdown authority funding now having been increased to over $14 billion since the beginning of the year. The international community has also increased their focus on global security with nations across the world having announced a planned five-year increase in defense budget funding of approximately $60 billion in total. We continue to have discussions with customers to expand the manufacturing of multiple products and have submitted offers for consideration. While many of these contracting actions remain in the early stages and may take time to be fully implemented, we believe our signature programs and 21st century security technologies have us well positioned to address the challenges presented by a resurgence in global great power competition. Turning to our 21st century security strategy, I’d like to highlight two examples of Lockheed Martin’s leadership in deterrence technologies and how our 5G.MIL open architecture can be used to enhance performance and drive effective Joint All-Domain Operations? During the third quarter, Lockheed Martin and AT&T teamed to transfer UH-60M Black Hawk helicopter flight and performance data from an aircraft at flying in Connecticut to receiving location in Colorado, using both an AT&T 5G private cellular network and Lockheed Martin’s 5G.MIL multi-site pilot network. Operational performance was also improved with the efficiencies introduced by this technology, shortening the total processing time of the task by nearly 85%. Also this quarter, Lockheed Martin and Verizon flew 5G enabled drones to capture and securely transfer high speed, real time intelligence, surveillance and reconnaissance data from aircraft and flight to geolocate simulated adversarial positions. This demonstration showed the capabilities of our hybrid base station to bridge commercial and military technologies together, providing our service members with enhanced deterrent capabilities and further enabling the mission all the way out to the actual battlefield. With that, I will turn the call over to Jay and join you later to answer your questions.

Operator:

[Operator Instructions] And first, we have line of Rob Stallard with Vertical Research. Please go ahead.

Jay Malave:

Yes. We have some program transitions, Rob. And maybe I’ll just maybe go through around some of the business areas to give you a little bit of color there. When you look at aero next year, we expect that to probably be in the range of being down -- flat to down slightly. And that’s on the back really of lower production volume on the F-35. We expect that to be done -- even though sales -- or the deliveries will be generally flat. We recorded sales in advance of that with long lead procurement in 2021 and 2022. So, it will be a period of catch-up on sales for aero there. So, that’s going to be the biggest driver there, but we’ll expect that to abate when we go into 2024. At MFC, we’ve got some -- just some timing, so program timing, particularly in our sensors business, we expect them to be probably flattish to down slightly as well. And then, we expect some growth -- low-single-digit growth at both RMS and Space. And RMS will just be driven by new programs. And at Space, we have -- our national security business is down, but we’ve got other programs that are spiking up there. And so, that’s generally what’s driving it, I’d say, by business area and by segment. So slightly down in a few and slightly up in others, and our balance will be flat.

Ron Epstein:

Jim, can you walk through why you think growth is going to start again in 2024? I mean, what underlies that? And maybe one of the things I scratched my head on a bunch is you’ve got, what, the 15th customer for F-35. It looks like there might even be some more within the next year or so. So, how do we think about that growth recovery? What’s going to underlie that? And why are F-35 levels at a higher rate of production than where they are today? And could they go higher?

Jay Malave:

Let me just -- to maybe add a little bit to it as well, Ron. Just to augment, some of the things that we’re seeing in 2023, we’ve got some expected abating headwinds when we go into 2024. Jim mentioned a little bit on supply chain. That’s primarily affected our programs of record. And so, those should lift by the time we get to 2024. We also have a few program transitions in 2023 that will also allow for easier comparison when we get into 2024. And so for example, I just mentioned the F-35 where production will be down next year. Those will normalize when we get into 2024, which will allow our sustainment to grow, as Jim mentioned. We’ll also see accelerated growth in the F-16 program. As you may recall, that program slipped to the right, but in 2024, we expect that to accelerate. In Space, as Jim mentioned, FBM, there are other programs such as NGI that will continue to grow. And so we’ve got some things where we’re cycling down this -- on 2023 on the SBIRS program and even things like next-gen GEO or OPIR, again, those headwinds will abate as we get into 2024. Similarly, on MFC, Jim mentioned the PAC-3 program. We’ll see also continued growth there in the classified programs as well. And then at RMS, as Jim mentioned, also at CH-53K, there’s also other radar programs as well as Joint All Domain-type programs like Defense of Guam that will drive some growth in those years. So, all of these areas and these programs are the ones that we have pretty clear visibility to. They do assume obviously that there is abatement to an improvement in supply chain. That’s 15 months from now for improvement that we expect to occur.

Matt Akers:

Greg, best of luck and good working with you. I wanted to ask about Future Vertical Lift, FLRAA, just what you’re hearing from your customers there on the delays? And any indication of what’s driving that? And when do you think that contract might be up?

Operator:

Next, we’ll go to Pete Skibitski with Alembic Global Advisors. Please go ahead.

Jim Taiclet:

So, Pete, I’d say, yes, the legacy but still extremely effective MFC programs are fairly high margin because of the volume and the learning curve that were already down. So that will be a margin upside to us, should those volumes increase further. And we’ve gotten ahead of this. So, for HIMARS, GMLRS, Javelin, again, the products you kind of see in the news these days and a few others as well. About 6, 7 months ago when we saw what was beginning to happen in Eastern Europe, I went over to visit some of the senior officials in the Pentagon and basically took them a letter and said, we’re going to start spending on capacity for a few of these systems, including the ones you just asked about. And now we’ve got a lot done already. So for example, on HIMARS specifically, we’ve already met with our long lead supply chain to plan for increasing production in 96 of these units a year. We advanced funded ahead of contract $65 million to shorten the manufacturing lead time. That was without a contract or any other even memo or whatnot back from the government. We just went ahead and did that because we expected it to happen. So, those parts are already being manufactured now. The third thing we did was we’ve determined where we could open up another modern manufacturing facility to be able to produce the products and got it ready early, and we’re cross-training our skilled workforce across a bunch of product lines. So, as the demand grows and shifts across some of these products over the next few years, we’re going to have people that kind of fungibly move between them. And then, the last thing we did was going back to this One LMX, we’re putting the best and newest manufacturing technology into some of these product lines first so that when the ramp comes, we can pivot to it quicker. So, those are some of the things that we’ve done to actually capture some of the volume we expect to get. And we do expect to get it, both from the U.S. to refill stocks, as I mentioned earlier in the prepared remarks, and also significant interest being shown. Now, it’s got to go ahead and get contracted, which as we discussed last call, it can take a couple of years to get all that done, especially for an FMS contract. But we know it’s -- the demand is there, and we’ve spoken to the senior government officials from those countries that know that this is important for them.

Operator:

Next, we’ll go to Sheila Kahyaoglu with Jefferies. Please go ahead.

Jay Malave:

Okay. There’s a lot there. So, let me maybe start with the share repurchase. As I mentioned -- both Jim and I mentioned in our prepared remarks, we’re confident in the long-term outlook of the Company. We saw this as an opportunity to really amplify the value creation that we see over the long term. And we saw no better time than really now to get started on that here in the fourth quarter. The profile to think about going forward is $4 billion here in the fourth quarter, $4 billion in 2023, $4 billion in 2024 and maybe $2 billion in 2025 as a starting point. And so, that’s the profile we should expect it to be. As far as debt, we do -- are going to finance this fourth quarter share repurchase program with the issuance of debt. So, it will be about $4 billion. That will increase our interest expense next year. But again, it’s all accretive. And so, we’ll see that. Again, our debt leverage ratio on an EBITDA basis will put us still below -- at or below 1.5 times. So, it’s still very supportable and also very attractive. As far as the R&D tax capitalization, really nothing’s changed at the moment. We’ll see what happens as we move forward here in the fourth quarter. First things first, we got to get through the November elections. And then we have the expiration of the existing continuing resolution on December 16th. It’s possible through legislation, therefore, a new budget that we could see movement on tax extenders that would include some type of either deferral or what we would prefer a repeal of the task capitalization policy. And as you know, we believe that it’s sound policy, and we believe there’s bipartisan support to remove any disincentives that promote innovation. And so, that’s a firm policy. It’s something that we’re firmly behind and we’ll continue to push for.

Operator:

And next, we’ll go to Rob Spingarn with Melius Research. Please go ahead.

Jim Taiclet:

So Rob, autonomy is 1 of the 14 critical technologies that we think are essential in the 21st century. And to everyone’s credit at the company, we’ve been investing in Skunk Works and other parts of the Company, including Sikorsky, in autonomy for 15-plus years, right? This is not an easy thing to do or an easy thing to get approved or regulated. But Lockheed Martin and Sikorsky, when it was part of UTC and thereafter, had been working on autonomy for quite some time. So, the Aeronautics side of it, I can’t say much about because it’s pretty highly classified. But we’re far down the road on crewed, uncrewed teaming. And in the January call, we expect to have hit a couple of milestones in that, that I’ll be able to explain in some more detail, but we want to get the testing done before we talk about it. But we’re far down the road there, mainly out of Skunk Works, as I said. And then, on the rotorcraft side, if you get the Aviation Week from maybe 3 or 4 months ago that showed a Sikorsky helicopter flying around with no people in it, right? I’ve actually flown in the Matrix helicopter, we call it, which is a DARPA project that’s run out of Sikorsky. It has three -- and they all work, by the way. It has three modes. One is manual mode, just like any traditional helicopter. The second mode is sort of assisted like a Tesla, so to speak, right? So, you can take over if you need to or if you want to change the flight instantly. And then, the third mode is fully automated. And it -- you plug the mission in a trailer down or up at Stratford, Connecticut, thing will take off, go do the mission and come back and land on itself. So, it’s really working already. And then, it’s a matter of when is the U.S. government and the service is ready to turn these technologies into programs of record, but we’ll be ready when they are.

Cai von Rumohr:

Yes. Let me join everybody and say thank you, Greg, for a great job done. And Maria, welcome. So, we haven’t talked about inflation. What are you guys seeing and assuming in inflation going forward? And as you know, Bill LaPlante has basically suggested that DoD should kind of kick in to help companies because the current level of inflation was not anticipated where the -- when the contracts were signed. And yet Senator Elizabeth Warren, no big surprise, is saying that’s not a good idea. So what are you seeing in inflation? And what are you assuming going forward in terms of DoD support?

Operator:

Next, we’ll go to Seth Seifman with JP Morgan. Please go ahead.

Jay Malave:

Sure, Seth. Yes, I think low single digit for 2024 as a baseline is the way you should look at it. We talked on this call today that there are some upside opportunities to that baseline. Missiles and Fire Control is certainly a prime opportunity. Jim talked about opportunities related to HIMARS and other programs. And so, there could be upside from where we are today. These are ongoing dialogues we’re having with our DoD customers. So, it’s hard to really put them into a firm forecast until we get ourselves a clearer picture in terms of what’s going to be under contract and the timing of those deliveries. So, I would say low single-digit baseline is the appropriate level to be. We’re getting better clarity and I think we’ll have a lot more clarity come January, provide our full guidance for 2023 and a better outlook on 2024. As far as pension’s involved, we do expect the FAS income to come down. You’re talking in the range of say $50 million. On the CAS side, we expect the CAS cost to come down as well by about $75 million. So the FAS/CAS adjustment all in, we’re expecting to come down by about $125 million. That’s if we struck things today. As you know, at the end of the year, we’ll have to true up and formally change, but that’s based on what we see today. As far as CAS is involved, we’re going to have to get back to you in ‘24 and beyond in that. Greg will have to come back to you Seth on that.

Kristine Liwag:

Greg, congratulations, and welcome, Maria. Jim and Jay, thank you for providing color on the specific headwinds in 2023. But maybe taking a step back for a 30,000-foot view, the defense budget environment is pretty robust. We saw the ‘22 budget request up mid-single digit. The Ukraine military aid so far adds another 10% to the ‘22 modernization budget. So, your book-to-bill also year-to-date is 1.1x. I guess I would have thought that these items could have offset the specific 2023 headwinds you called out. So maybe absent the specific programs you mentioned, should we expect the portfolio to grow above the low or in line with the overall DoD budget?

Jay Malave:

Yes. And so Kristine, we fully expect, as Jim mentioned, to participate in this industry upside. You’re going to see that in the orders in the backlog. And what we’re talking about here is converting that to sales taking a little bit longer than expected. I think the important thing to remember in terms of 2023 is that in spite of a lower outlook from a sales perspective, even the margin pressure, we’re still delivering the same amount of free cash flow that we told you a year ago. And our free cash flow per share outlook has gotten better because of our share repurchase program.

Peter Arment:

Yes. Good morning, everyone. Good morning, Jay, Jim. Can you hear me?

Peter Arment:

Great. Congratulations, Greg. Appreciate all your effort. Hey Jay, just maybe you made -- Jim made a comment about the Aeronautics kind of flat to kind of slightly down in ‘23, but then sustainment becomes a bigger piece of the story as we get into ‘24. Should we be thinking about Aeronautics kind of troughing out in 2023? Is that kind of what you’re implying, or are there other puts and takes that we should be thinking about longer term? Thanks.

Jim Taiclet:

Yes. And I’d also add there, Peter, that we’re starting to get some real traction on our sort of JADO offering, so to speak. And one of them has been mentioned briefly today called Defense of Guam. And that’s the really first well -- highly organized DoD major contract to come out that really drives the capability and not just a product or system. And what it’s meant to do is integrate and this is our whole 5G.MIL approach. Actually, that’s why we won it, I think, is that integrating current command and control systems in use by the various services. So, the Army’s -- happens to be provided by Northrop Grumman, for example. We’re going to fully incorporate that into the solution and work with them to do it. And then, we’re going to bring the Aegis system from Lockheed Martin into that mix and a number of other programs and products from a range of OEMs. We’re going to work together on this for the first time in this way. So, I think this is going to be a real pathfinder for the future. And once this demonstrates that it can be a success and the industry has got to coalesce and help make it happen with us, we, as an industry, will see more of these opportunities in the 2024-plus time frame, too.

George Shapiro:

A couple of questions. On the Aeronautics area, Lot 16, you’re not supposed to get in Q4. Jay, does that come with added sales that you may be working on now as well? And then, a second question, if you look at the incremental margin on the profit you provided on the F-35 and the $325 million of sales, it’s like 21%. Does that imply that you increased the margin on the F-35 program? And will that help the margin next year, or is it more than offset by the growth in the sustainment?

Operator:

Next, we’ll go to Rich Safran with Seaport Research Partners. Please go ahead.

Jim Taiclet:

Good morning.

Jay Malave:

Well, Rich, so if you think about our free cash flow last year, and I’m going off -- a little bit off recall here, we said $6.1 billion in ‘23. I believe it was $6.2 billion in 2024. I don’t see any reason why we can’t deliver that and continue to deliver that level of free cash flow beyond ‘23 and ‘24. So -- and our free cash flow, again, with the share repurchase program will get better than what we were saying a year ago. Again, just our management focus on working capital, our management focus, discipline in delivering free cash flow is not going to stop after one year. And so, I’m pretty confident that we can continue to deliver the free cash flow that we committed to a year ago. And again, our free cash flow per share, our growth, you’re looking probably in the range of mid-single-digit growth over this period of time.

Jim Taiclet:

Sure, Greg. Thanks. I’d like to conclude today by, again, reinforcing what Jay just talked about, our commitment to delivering long-term, attractive and reliable total returns to shareholders, underpinned by our strong cash generation and our robust balance sheet as well as delivering on these 21st century solutions to meet the challenges that our customers are facing in global security right now. And if some of you might have been around when I was at American Tower, we focused completely on free cash flow per share generation. And that got us through 18 years of up and down cycles, the Great Recession and a few other issues that happened along the way. That’s the right metric for this company, too, and that’s why Jay and I are so -- so much emphasizing it today. So, we’re positioning ourselves for anticipated growth inflection in the next few years, investing in innovative technologies for our customers’ missions, as I said, and strong repurchases along the way to amplify the per share value creation as we go. So, thanks again for joining us today, and we look forward to speaking with all of you on our next earnings call in January. John, that concludes the call. Thanks, everybody.

Operator:

And good day, and welcome, everyone, to the Lockheed Martin Second Quarter 2022 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.

Jim Taiclet:

Thanks Greg. Good morning, everybody, and thank you for joining us on our second quarter 2022 earnings call. I will begin today with an update on our F-35 program. Yesterday, we signed a bilateral record of negotiation with the US government, reaching agreement on the Lots 15 through 17 production contract. Through a collaborative effort with the F-35 enterprise, including the Joint Program Office, suppliers, and teammates, we have concurred on the major parameters of the program, addressing inflationary and pandemic-related issues unanticipated at the start of the negotiation process. The agreement supports our long-term objective to produce 156 aircraft a year. However, COVID impacts experienced by the F-35 enterprise have required us to modify our near-term production plan. Deliveries over the next two years are expected to remain in the 147 to 153 range of aircraft, similar to our 2022 plan, before we then achieve our 156 aircraft delivery target in 2025. We continue to anticipate annual deliveries of 156 jets beyond 2025 for the foreseeable future. I'd like to thank the entire team for the dedication and professionalism shown throughout this process and we look forward to delivering these unmatched fifth generation aircrafts for our US Air Force, Navy, and Marines, our partner countries, and our international customers. Moving to our quarterly results. Our business area operational performance was solid, delivering increased profit margins from last year's second quarter. Our new business activity and order flow were also favorable, and we continue to anticipate our backlog ending the year significantly above our 2021 levels, positioning us for longer term growth. Our sales in the quarter were $15.4 billion, lower than we expected due to the delay in contract agreement on the F-35 and supply chain impacts. We anticipate the supply chain challenges to continue for the remainder of the year and we've reduced our 2022 outlook to reflect that as well as some other items, and Jay will cover this in more detail in a few minutes. We also progressed well on our cash deployment plan, delivering over $1.1 billion to stockholders in dividends and repurchases, exceeding 100% of our free cash flow. We will continue to execute on our strategy of driving cash generation, disciplined and dynamic capital deployment, growing free cash flow per share and delivering attractive long-term total returns to you, shareholders. Turning briefly to budgets. Both the House and Senate Armed Services Committees approved their versions of the FY 2023 National Defense Authorization Act. The SASC recommended approximately a $45 billion increase to the President's request and the full House chamber passed the completed authorization bill with a $37 billion increase. While the budget process remains in its early stages, we are encouraged by the support our programs have seen with the Senate recommending additional F-35 and Black Hawk helicopters, increases over the lower-than-expected volumes that were in the initial presence request. Both the Senate markup and the House bill received strong bipartisan supporting committee with recognition of the need for greater investment to respond to increasing global security threats and the imperative of improving the readiness of our armed forces. Congress will continue the next phase of the authorization and appropriations process over the coming weeks and months. And we look forward to its timely finalization. Turning to our 21st Century Security strategy, I'd like to highlight an important example of how our signature platforms can be integrated into effective joint all-domain operations. These efforts are designed to benefit our soldiers, sailors, marines, airmen and guardians by continually upgrading their mission capabilities with the latest physical and digital world technologies. This quarter, our Rotary and Mission Systems and Missiles and Fire Control business areas partnered with the US Indo-Pacific Command in Valiant Shield 2022. This is a biannual training activity focused on integrating forces in multiple domains. Valiant Shield 2022 is a cornerstone of INDOPACOM's integrated deterrent strategy to prevent conflict in the region, and it's the largest US joint force exercise in the Western Pacific. We linked our DIAMONDShield battle management system, AEGIS Weapon System, High Mobility Artillery Rocket System or HMARS and PAC-3 missiles to successfully demonstrate integrated multi-domain operations of strategic and tactical mission levels across air, land, sea and space. During this 12-day event, our Lockheed Martin team demonstrated all domain capabilities and collaboratively engaged in experiments with INDOPACOM using artificial intelligence to enable rapid decision making in seconds or minutes compared to ours. Technical demonstrations like these are key enablers to our four-pillar growth strategy. And we will continue to demonstrate to our frontline commanders and servicemen and women in many additional exercise and real-world demonstrations to come. Moving to our four-pillar growth areas and staying with the Pacific region, RMS' Aegis Weapon System was selected to be the backbone system for the Missile Defense Agency's Defense of Guam architecture. This is a pathfinder for joint all-domain operations for the DoD and for regional integrated air and missile defense with an expected program value itself of over $1 billion. This architecture will defend against ballistic, cruise and hypersonic missile threats through the integration of capabilities across multiple industry products and not just Lockheed Martin. Aegis and our TPY-X radar, a derivative of our long-range discrimination radar product, will be the core systems to outpace the potential threat and expand JADO capabilities for Guam. This Guam architecture leverages existing Lockheed Martin capabilities such as Terminal High Altitude Area Defense or THAAD, PAC-3, Sentinel A4 radar and our C2BMC command and control system, highlighting the advantages of our broad portfolio and cross-business area collaboration with Missiles and Fire Control. RMS will also fully integrate future system capabilities, which may include space-based sensors, directed energy and advanced missiles in the Defense of Guam, a critical cornerstone in Western Pacific deterrence. And we'll be using an open architecture where we can tie-in other prime contractors, products and systems along with ours. Staying with RMS, this quarter, the US Marine Corps approved our Sikorsky teams CH-53K heavy lift helicopter, one of our key programs of record for initial operating capability. The IOC declaration validates the operational readiness of the King Stallion to forward deploy Marines across the globe and positions the Marine Corps for a full rate production decision in 2023. The 53K has a plan of record to deliver 200 domestic aircraft and a total program life cycle value expected to be approximately $50 billion. We're also excited this quarter to receive a $2.3 billion award for Sikorsky's 10th Black Hawk multiyear contract to provide 120 H60 helicopters. This contract includes options, which, if exercised, have the potential to deliver an additional 135 rotorcraft with a value of up to another $4.4 billion. Also this quarter, Missiles and Fire Control received a $1.6 billion contract award to produce THAAD interceptors for both domestic and international customers. Under this combined buy award, the THAAD team will provide both the US government and the Kingdom of Saudi Arabia with additional interceptors in support of integrated air and missile defense. Our MFC business area was also awarded a contract by the Missile Defense Agency to initiate production of the eighth THAAD battery. The eighth battery expands the US government's ability to field the integrated air and missile defenses and builds upon the previously delivered 7 systems, a clear demonstration of the value delivered by the signature program and defending against current and emerging threats and maintaining the turns. Before I turn the call over to Jay, I'd like to express my appreciation for the presidential visit to the Javelin manufacturing facility in Troy, Alabama, supporting the men and women who produce this remarkable product. The Ukraine conflict has been a dramatic reminder that we're in a global power competition. And we at Lockheed Martin stand ready to support our nation and its allies with advanced systems and technologies. The US alone has committed more than 5,500 Javelin missiles to Ukraine in defense of their country. And this visit spotlighted the continued need for a focus on global security and deterrence capabilities. With that, I'll turn the call over to Jay and join you later to answer your questions.

Operator:

Of course. [Operator Instructions] Our first question today comes from the line of Doug Harned with Bernstein. Please go ahead.

Jay Malave:

Let me walk you through the reconciling item here on your first question, Doug. So, first, when we ended the second quarter, our backlog was 169 aircraft. If you assume, say, the midpoint of 2022 of our guide, let's say, 150 aircraft that says that we would be delivering about another 89 aircraft in the back half of the year. That would take our backlog down to 80 aircraft. With the 375, that puts us at 455. So, if you assume again at the midpoint for 2023 and 2024 of about 100 aircraft -- 150 aircraft, that puts you at 300. That leaves about 155 for 2025. And so maybe one short to the 156 in 2025, but pretty much right there. As far as the lower outlook, a lot of that was incorporated in our negotiation on Lot 15 to 17 in terms of the factors, we've talked about before as far as impacts from COVID, impacts in supply chain, also lower volumes and other factors. And all of that was taken into consideration in the negotiation with the Joint Program Office. The margins themselves at the end of the day, the way the contract is structured as we finalize this is there will be some level of fixed price to it and some level of incentive to it. So, we're incentivized to perform and provide delivery, to provide delivery as well as quality targets to the customer. If we can perform to our expectation in those improvements, then we wouldn't see any type of dilution to our margins today. And we're confident we can perform to those levels.

Richard Safran:

Jim, Jay, Greg good morning. How are you?

Richard Safran:

Jay, if I could, let me follow up on something you said in your closing remarks here. Actually, I have to think that your international outlook has changed quite a bit in just the past few months. I recognize you're in various stages of negotiations, but could you discuss where you're seeing the most demand come from, for what types of equipment? And importantly, would you be willing to discuss a bit on how this might affect your outlook for 2023? And your answer, maybe you could also just address if you think there could be a trend towards more commercial contracting as a result of what's going on? Thanks.

Jim Taiclet:

Yeah. And just to add to that, in response to your question there, Richard, is look, the DoD is in the midst of changing gears and so are our allies, right? So at the beginning of 2022, the administration was still in the midst of a relatively benign global security environment at least relative to now. The US has largely withdrawn from its military operations after two decades of heavy presence in the Middle East. China's increasing activism in the Western Pacific, while recognized was perceived as kind of a potential concern, a watch item for the future, if you will. Europe was totally at peace, and Russian forces remained within their borders at that point in time. But if you fast forward to today, the US and its allies are actively responding to Russia's invasion of Ukraine. The Pacific is on higher alert because of the statements and actions of China recently, not to mention North Korea. The value of deterrence has never been greater really at this point now. And that shift happened over literally three or four months. What that requires is the Department of Defense to shift gears, okay? And I can tell you the clutch isn't engaged yet. And the clutch engaged means there are contracts in place. There's a demand signal out there that's clear. There's funding appropriated by the US Congress in the case of the United States. And we're producing, as Jay said, with a supply chain that's robust enough to support it. To get the clutch to engage is going to take two to three years. And that's for our allies as well because they not only have to go through their own processes internally. They then have to go through generally the foreign military sales process. And for the kinds of systems that Jay outlined, the US government is probably going to continue to insist that we mostly use the FMS process to contract with foreign -- through them to foreign governments for these kinds of equipments like F-35 and F-16 and HIMARS, et cetera. So we actually have a match to our original strategy, which was for the next couple of years, we were expecting relatively flat defense budgets in the US, not a lot of concern out in the allies. That's all changed. But we're aiming for the company and for the share count to be ready for an inflection point now again, in 2024 and beyond, the middle of the decade. This unfortunate situation in global security having deteriorated can only bolster our inflection point from where it would have been. And along with that, we're doing the integration of our signature platforms that everybody seems to want right now into that 21st Century Security fabric, which will make them, we think, even more attractive. And then we'll bring in our counterparts along onto that open architecture going forward. So I do think that it's going to take a while for the clutch to engage here, both in the US and internationally. But the demand in the situation that our customer base is facing has dramatically changed over the last three, four months.

David Strauss:

Thanks. Good morning.

Jay Malave:

Yes. Good question, David. This year, excluding the impact of the one-ime charges, we're $2.2 billion for the total FAS/CAS adjustment. I'll break it down. On the FAS side, interestingly, is you're right, David. The assets -- not only did we lose $4.3 billion worth of assets with the pension transfer, but the returns are lower, too. And so that will impact our returns next year. But that is essentially entirely offset by lower amortized losses associated with the pension transfer that we just took. So I would expect our pension, our total adjustment in our FAS is going to be flat. So about 400 – in 400 and change this year to be about 400 and change next year. Similarly, on CAS, we're seeing similar types of effects where next year, the CAS costs will be similar to what it was this year. That is higher than what we are anticipating it to be coming into this year for 2023. So, we'll have to evaluate whether that has any impact on the backlog of our contract, but when you look at it year-over-year, it's essentially flat. Going beyond that, we'll have to kind of update you, I think, in our October call and we give the trending data. But I can say right now for '23, essentially flat.

Cai von Rumohr:

Thanks so much and good ops. Jay, could you maybe update us? You mentioned supply chain issues, and you mentioned the issue in the F-16, which I guess you kind of preannounced that, that might be an issue, kind of where are you with both supply chain? What are the problems? Where are they and similarly with labor availability? Thank you.

Operator:

And our next question comes from the line of Greg Konrad with Jefferies. Please, go ahead.

Jim Taiclet:

Good morning.

Jay Malave:

So on Sikorsky, we expect to return to growth really starting in 2023 for that business. We're expecting, as you mentioned, the FLRAA decision, which we've been told which should be coming in September. We believe that we are the best choice for that platform, and that is a pillar of our growth. If you may recall, both John Mollard and Jim Taiclet had talked about the four pillars of growth, and one of those being new awards, FLRAA was one of those programs that we have talked about. And so, we expect to see incremental growth in 2023 and beyond. And that is on the back of the CH-53K, which is a program of record as well as new awards, FLRAA being the most significant.

Operator:

And our next question comes from the line of George Shapiro with Shapiro Research. Please, go ahead.

Jay Malave:

Okay. Good questions, George. Let me maybe go backwards. On the Space margin, you're right. We do have stronger ULA launches in the back half, which will give us lift. Offsetting that is where we're seeing some margin pressure, as we have growth on new programs as well as classified programs, which are coming with pretty low margins, which are pretty dilutive. And so, that's just putting some pressure on the margin in the back half of the year. We'll keep monitoring that, but that's pretty much where we are now. On the $210 million, that was basically the absence of the charge in the classified program last year in Aero. If you recall that the charge itself was $225 million in the second quarter last year. And then on the F-35, the delta, we said that the -- coming into the quarter and throughout my remarks at various conferences, the impact could be as high as $500 million. We were able to obtain some incremental funding, some international funding in the quarter, which helped us reduce that impact to this $325 million.

Kristine Liwag:

Hey. Good afternoon, guys. Sorry, calling from the airshow, it might be a little choppy. But maybe back to the F-35, the Pentagon a few months ago was suggesting that the contract for Lot 15 to 17 could cover in the order of 400 aircraft versus the 375 that you have a handshake deal on. So, considering the demand from international partners, why is the total volume lower? And then also a follow-up to that is, when you think about the potential for progressional plus up and this international demand, I would assume there's some urgency from some of our partners. Is there upside to that 375? How firm is that figure?

Operator:

And our next question comes from the line of Rob Spingarn with Melius Research. Please go ahead.

Jim Taiclet:

So, Rob, let me start, it's Jim here, on sort of the overall strategic approach that we have and then I'll turn it over to Jay for some of the programmatic details and color. So, look we're focusing on the things we can control versus what we can't control, right? So, what we can't control right now is the level of inflation-adjusted defense budget, which, given 9%-ish inflation, is pretty flat. We can't control the duration of US government and the FMS processes, although we're advocating for those to be speeded up and streamlined. We can't control the timing of legacy programs, so sunsetting, if you will, or at least a reduction in rate volume like Black Hawk, for example. We can't control COVID virus and its effects on the supply chain and our own people. But what we can focus on is our strategic approach of running this company to maximize free cash flow per share in any circumstance, right? So, during this time of, as you pointed out, pressure on topline revenue, we've really used our dynamic capital allocation approach to -- in a slow revenue growth period to still drive by R&D and CapEx because we want to invest for the future growth, but at the same time, ramp up share repurchase and we're going to continue on that path as well. The goal then is to take down the share count in the relatively low growth period. So when the high-growth period comes about, you've got kind of a turbocharger on the investors' basis, if you will. So we think shareholder value inflection point comes mid-decade because the revenue growth we expect to ramp in, we're doing a lot on the efficiency side, something we can control over the next two, three years with our digital transformation and other cost control efforts that we've actually redoubled recently. And so we're going to continue to invest in the business, and so we can make that -- during this period so we can make that inflection point as attractive as possible for you as we expect it to come. So, with that I’ll offer it back to Jay to give you some of those four-pillar details.

Operator:

Our next question comes from the line of Peter Arment with Baird. Please go ahead.

Jim Taiclet:

So -- and Jay can add to this. We'll look out to the next few years with some, sort of, trending information later in the fall. So I don't want to speak to numbers. But what we can speak to is, again, the reduction in share count. We hope and expect to have ramping revenue down the road, which we should be able to convert into cash flow. So without getting into magnitudes, that's the mechanics of how we are planning for this to play out. But Jay, if you want to add more.

Operator:

And our next question comes from the line of Seth Seifman with JPMorgan. Please go ahead.

Jay Malave:

Good morning.

Jim Taiclet:

So Seth, it's Jim. The mix of priority between US and international is set by the Joint Program Office and US government. So we can't really speak to an estimate, future estimate for that. But the fact of the matter is the jets performing extremely well for the US services, the fly, and the commandos will tell you that. Navy is especially impressed because they've done actual fleet tours and exercises in the Western Pacific last year -- over the last six to 12 months and seen it in operation at scale and exercises, which we're really happy with and some of the other services, too. On the international side, you see the interest, including Germany now and others. And I think that's going to continue to increase, both in Asia and in Europe, by the way. So we're confident that the F-35 is here to stay, and we're going to drive through the program. We just can't give you an estimate of US government allocations over the next few years, that's something that they do. Jay, anything else you'd add?

Operator:

And our next question comes from the line of Matt Akers with Wells Fargo. Please go ahead.

Jay Malave:

Yes. Good question, Matt. Very strong performance through the first half of the year in excess of 15%. We do expect it to step back down in the second half of the year. It's primarily due to lower step-ups and some contract mix. And so, we see some just against some of the newer classified programs ramp up. And then we see just the solid performance was really somewhat of an acceleration of good performance into the first half of the year versus the second half. And so that's just going to be a natural decline there. Having said that, we did -- they are holding their profit in spite of the lower revenue outlook. And so, their margins are going up relative to what we thought coming into the year. So, we'll kind of -- we'll watch them because their performance has been solid, if anything, maybe there's a little bit of upside there. But again, it's just a function of the timing of what we see in terms of visibility to step up changes to profit rate adjustments and in the program contract mix.

Pete Skibitski:

Hey good morning, everyone. Jim, I just want to maybe drill down into your thinking about how the US goes about replenishing its stocks. Obviously, in terms of your programs, you think about programs like Javelin but even bigger ticket items like HIMARS and I think maybe GMLRS. I think the US has sent over quite a few of those systems to Ukraine. So, are you guys thinking that basically, it will take until the fiscal year '24 budget is approved for the US to kind of reprogram that replenishment in and get it approved and then the orders start flowing? Is that kind of the right way to think about it?

Greg Gardner:

Well, Brad, we're coming up on the top of the hour. I think everybody who was in the queue has had a chance to ask a question. So with that, I will turn the call over to Jim for some closing remarks.

Operator:

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Services. You may now disconnect.

Operator:

Good day, and welcome, everyone, to the Lockheed Martin First Quarter 2022 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.

Jim Taiclet:

Thanks, Greg. Good morning, everyone, and thank you for joining us on our first quarter 2022 earnings call. I'll begin today by welcoming Jay Malave to our executive management team. Many of you have worked with Jay during his two-decade-plus career in the aerospace and defense industry and know him to be an exceptional financial professional and an outstanding leader. We're excited to have Jay join our company. On a personal level, I'm extremely pleased to be working with him. I'd also like to recognize John Mollard, he's with us today for his tremendous contributions as our acting CFO. We're grateful to John for his leadership and financial acumen, and he's continued as a key member of our team, leading our treasury organization. Moving to our financials. Jay will discuss our first quarter results and 2022 outlook in detail in a few moments, but I'll begin with a brief overview. Our first quarter sales were slightly below our expectations. However, our full year 2022 outlook remains intact. We did experience some adverse impacts from the winter surge and the Omicron variant in our operations and our supply chain, but we expect these to reflect short-term timing issues. I'm proud of how our team responded to these challenges, and we remain committed to delivering all the objectives that we laid out in our January outlook. Our operational performance was solid, with our business areas delivering increased profit margins from last year's first quarter and free cash flow was ahead of our projections. We also progressed well on our cash deployment plan, executing a $2 billion accelerated share repurchase agreement during the quarter. We are well on our way to achieving our full year outlook of $4 billion in repurchases as we look to deliver over 100% of our free cash flow to stockholders over the course of the year inclusive of dividends. We will continue to execute on our long-term strategy of disciplined and dynamic capital deployment, growing free cash flow per share and thereby delivering strong long-term returns to shift to shareholders. Turning to the F-35 program. Germany recently announced their intent to procure 35 aircraft. Lockheed Martin will support our U.S. government Joint Program Office in this process, as we look to partner with Germany to provide this unique capacity and capability for its national defense. The government of Canada has also announced it will enter into the finalization phase of their procurement process with the United States government and Lockheed Martin to purchase 88 F-35 fighter jets for the Royal Canadian Air Force. Canada is one of the original eight partner countries on the F-35 program, and we're very pleased to have the opportunity to provide this unrivaled plane to strengthen Canada's national defense. The German and Canadian announcements followed similar award decisions last year from Switzerland and Finland. And these four competitive wins have the potential to add 223 F-35s to our backlog when all are finalized. All four of these recent announcements underscore that the F-35 fighter jet remains the most capable, survivable and highly connected platform in production as well as the best value available today for our war fighters. And although the initial quantity of F-35 is requested in the FY23 President's budget submission was below our expectations for lot 17 aircraft, we expect that the services adds via the unfunded priority list and increased international demand will enable us to deliver on the stabilized production profile we had previously established. With respect to the overall Department of Defense budgets, this quarter, Congress passed the fiscal year 2022 Omnibus Appropriations Act, with strong bipartisan support in both the House and Senate, and the bill was subsequently signed into law by President Biden. This legislation improved approximately $742 billion in DoD spending, an increase of nearly $40 billion over the FY21 enacted amount. The final bill resulted in increases that will benefit multiple Lockheed Martin programs over the next few years, including fully funding 85 F-35s, 21 additional C-130J transport aircraft, 10 additional Black Hawks, 2 additional CH-53K helicopters as well as increases to some of our franchise satellite and missile programs. This quarter, the President also submitted the fiscal year 2023 Defense Department budget request, the first step in the FY23 budget process. The President’s submission added an additional $30 billion to the enacted FY22 appropriations and totaled $773 billion in requested DoD funding. This initial budget submission continues the administration's emphasis on the Indo-Pacific region, it supports Ukraine and focuses on strengthening our nation’s deterrence capabilities, all initiatives that are well aligned with our portfolio and with our 21st Century security The DoD also expanded investments in important technology development efforts such as Future Vertical Lift and hypersonics. Also key elements in our multi-pillar growth strategy, and we look forward to providing our customers with innovative solutions for these and other important missions. On a related note, I'd like to take a few moments to bring you up to date on two of the four pillars in our long-term growth strategy, our programs of record and new business opportunities. As to programs of record, this quarter, our Sikorsky team received over $1 billion in orders for the CH-53K platform, one of the main contributors in our program of record growth pillar. These announcements included awards for 13 low-rate initial production lot 6 aircraft, including 4 for Israel as well as long lead time items for full rate production lot 7 helicopters. The program is performing very well and as it continues to inflection to full production, we anticipate tripling our deliveries in the next few years. We also continue to see significant opportunities across the competitive new business landscape. Beginning with our space business area, we are very excited to be awarded transport layer tranche 1, one of three prototype agreements from the Space Development Agency. The $700 million award to design and build 42 small low-earth orbit satellites as part of the initial tranche of the National Defense Space Architecture. This transport layer constellation will connect assets in space with platforms and other domains in a highly capable mesh network environment for joint all-domain operations. And it's an outstanding example of 5G.MIL enabled JADO technology, maturing into a program of record. This award built on our current Tranche 0 contract that will deliver 10 space vehicles later this year, and we look forward to continuing our support to the SDA and the development of our country's next-generation space architecture. Continuing with competitive new business activity, in March, our Sikorsky team delivered our final updated prime proposal to the U.S. Army in response to their future long-range assault aircraft solicitation. Several weeks ago, we flew our DEFIANT aircraft 700 nautical miles from West Palm Beach to Nashville to be displayed at the Annual Army Aviation Association of America Conference. That was completing a 7-hour mission that further demonstrated the capabilities and the maturity of this remarkable rotorcraft. We believe our DEFIANT offering is the most mission-capable platform available, one that will provide our soldiers with transformational capabilities and unparalleled maneuverability, and we're excited to offer this unique solution in support of our armed forces. Before I hand the call over to Jay, I'd like to take a moment to express my sincere sympathy for those affected by the Russian government's unprovoked invasion of Ukraine. The conflict has resulted in devastating impact to the Ukrainian people and heightened security threats for the European continent. While we hope that this conflict is resolved peacefully soon, Lockheed Martin is taking steps to help address the resultant humanitarian crisis through multiple partners. These include committing aid to the Polish Red Cross, Project HOPE, USO and others to provide assistance to refugees, and we will continue to support ongoing relief efforts in Eastern Europe. With that, I'll turn the call over to Jay and join you later to answer your questions.

Operator:

[Operator Instructions] And first, we go to line of Rob Spingarn with Melius Research. Please go ahead.

Jay Malave:

Thank you, Rob. It's great to have you covering the Company and the industry again. Welcome back.

Jim Taiclet:

Sure, Rob. Let me just start by articulating the foundations of what we think we're facing as a company and a country and an alliance, given the circumstances. The world's clearly changed with Russia's invasion of Ukraine. A major global power has crossed a recognized international border to take territory by force. And as a result, the value of strong deterrents to war as an instrument of nation's geopolitical strategy has not been as great since the middle of the 20th century. So, here at Lockheed Martin, we're aggressively and have been aggressively positioning our company as a deterrence company. Using the F-35 and our other core platforms as pathfinders, we're developing an open architecture using 21st Century digital technologies to continually enhance the deterrent effect of our national and our Allied Defense enterprise. And we have an integrated strategy to do so. I mean, I'll talk about a couple of platforms in a minute. But it's really about the integrated strategy and its ability to enhance deterrents as we go forward, every -- not 6 to 10 years with a new platform, but while we're doing the new platforms every 6 to 12 months in parallel. So, across Lockheed Martin, we're integrating our own business areas to be able to deliver on this idea and this vision. We're also integrating our strategy as a company across the U.S. and toward its allies, so they can work together more closely and effectively over time and ultimately, across the defense and aerospace industry and commercial technology industry as well, so we can accelerate those 21st Century digital technologies that others are investing a lot of time and talent in to, like 5G, AI, distributed cloud computing, et cetera. So, it's more about the strategy and what we can deliver in total as a company and maybe as a pathfinder for our industry. So, some of the platforms you mentioned fit really well into this strategy. The F-35, for example, you led off with. My interactions with pilots and commanders and senior government officials in countries, including the U.S. and Israel, and in Europe, where the F-35 has been used in either combat or combat support operations. The feedback is the aircraft is unmatched as an aircraft, especially with its fifth-generation stealth capability and be survivable in a really hostile environment. But equally exciting to the people I’ve been getting feedback from on the front, so to speak, is the ability of the F-35 to be a core sensor and a core command node and control node in a much wider network of national defense or deterrence. And so, the sensing capability of the F-35, combined with its aspects and kind of a 5G.MIL perspective as it's got -- and we'll have even bigger but it's got the largest data storage capacity of any fighter aircraft. It's got the greatest store data processing capacity on board of any fighter aircraft that we know of. And it's also got the best connectivity and sensor suite back to the command and control network into other platforms. And that really is the essence of what we mean by 5G.MIL. So, as you see, the F-35 has already become a more important platform, I guess, I'd say post Ukraine, unfortunately. And that is with Germany, seemingly moving from one direction to another toward the F-35 for its nuclear mission, responsibilities in Europe. Also, with Canada selection, of course, they’re part of NORAD as well and the integration, both in Europe and there and even in Asia, will be enhanced with F-35, and we expect that -- again, the services are asking for more airplanes beyond the President's request as well. So, the F-35 has been called by Chief Brown as the quarterback of the U.S. Air Force future strategy because of all those capabilities I talked about. So, that's part and parcel and really kind of the lead pinnacle, so to speak, of our strategy, and it actually fits in really, really well with integrated deterrents, which is the same concept that Secretary Austin has been developing with his team. You mentioned F-16. It's a great affordable 4.5 generation airplane when you take the Block 60 and 70 avionics and you marry them up with a proven -- an aircraft like the F-16. It's an earlier and more affordable way to get our allies on board with us so that we can integrate them into our 5G.MIL system. And then, the other effectors that you talked about, long-range precision strike weapons and long-range defensive weapons like THAAD and PAC-3 are going to be probably in greater demand as we move through time. So, all those are the trends that strategy that I outlined is meant to really ensure that we can defend against what's going on in the environment of the country in alliance. But it's the future out-year revenue growth for Lockheed Martin, it's too early to say, and we're not yet in a position to attempt to quantify that. But we'll update you as we proceed forward, Rob, every quarter as to what our expectations are in the current period. But we'll also update you on where we see these trends going. But I think this is the right set of platforms and the right strategy to enhance and preserve Lockheed Martin's leadership in the defense and aerospace industry.

Sheila Kahyaoglu:

So, can we talk about the F-35 some more, maybe what's going on with negotiations, what exactly is the hold up? And then, when we think about the fiscal '23 request of 61, how does that relate to production? And how do we think about international orders being feathered in when we think about 156 units produced overall?

Jay Malave:

Jim, let me just add on a little bit. As far as the negotiation, Sheila, we're encouraged by the progress being made. There has been progress, and we're encouraged by that. As far as an acute impact, it could be $500 million plus in the quarter, which we'd expect to be timing that we would recover in the balance of the year, assuming a successful negotiation. There does remain a gap, and Jim alluded to that. The team has been working with a sense of urgency to really complete this negotiation. And again, as Jim mentioned, it's important to keep in mind that we need to reach the right agreement for our stakeholders, even if that means we have to endure some impacts in the short term. As far as the production question. I mean, we're pretty confident in the 156 three-year plan that we had laid out before from a delivery profile. As you mentioned, the international customers and these customers that Jim just mentioned in his prepared remarks, provide some level of flexibility to really shore up that production schedule. You may have seen in the unfunded priority list for the Air Force, the Navy and the Marines, there was about 19 aircraft added to that. So, when you mix that in with the international demand, we feel very comfortable in our ability to maintain a 156 production cycle over that three-year period.

Ron Epstein:

In the investment community, it seems like there's this assumption. I'm just going to lay this out here and that Textron is going to win Future Vertical Lift. And I'm curious from your point of view, why you don't think that is the case? And I mean, if you could walk through for all of us on the call, the pluses and minuses of a layout like defiance got over valor? I mean you've got counter-rotating helicopters, what do you get with that that you don't get for the tilt rotor and vice versa?

Jay Malave:

No, I think that was well said. I think that's it.

Rich Safran:

So, I recognize you don't want to get out in front of the government on this, but I thought you might comment on what the FY23 request says about growth this year and next year and your prior expectations for $8.1 billion in cash from ops for '23. I just have to believe that the request as it stands, was above the assumptions you used when you gave out your 2023 estimate. So, if they requested -- if we take a standpoint that if the request is enacted just as is. Does that alter how you're thinking about 2023 growth and your cash from ops guide?

Operator:

Our next question is from Kristine Liwag with Morgan Stanley. Please go ahead.

Jim Taiclet:

So Kristine, this is Jim. And obviously, we're in a long-cycle business here from an authorization in the House Armed Services Committee, for example, to book of revenue -- booking of revenue at Lockheed Martin could be 12 months to 3 years, depending on the program. So, I think -- as I tried to lay out, the environment is more challenging from a security -- national security and global security perspective than it was before. That suggests that deterrence is a more valuable product than it's ever been, at least in the last 80 to 100 years, and that we feel we're really positioned well with our strategy to meet that need for national security and global security. But we can't quantify yet exactly how that's going to touch our revenue on a $66 billion base, for example. And until we get actual contracts that have order schedules and we get the funding to do the long lead time items and all of those nuances and specifics in defense contracting. So, we're not going to try to bracket what those growth numbers are going to be, because we want to keep the fidelity of our guidance process. And we give it a year at a time. I did that in my last company, too, because that's where we have real data upon which we can give you a reliable forecast.

Operator:

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

Jay Malave:

Kai, so at this point, we would not expect any type of profit hit based on our negotiation as it currently stands. And again, it's a dynamic discussion, but we wouldn't expect any type of charge there. Going forward, as I mentioned here, the impact would be up $500 million plus in the second quarter. To further extent, obviously, that will go up. I think that we'll probably have to revisit later in the quarter to see how things are progressing. And I think we can update accordingly then. I think let's just kind of get through the quarter. We're encouraged and really pleased with the progress we're making to date. I know it's been a long road, but there's been some significant progress that's been made. And so, we're encouraged that we can be able to close this in a relatively short period of time. If not, then we'll update you accordingly at that point in time.

Operator:

Next, we'll go to Seth Seifman with JP Morgan. Please go ahead.

Jim Taiclet:

I can start with the theory and turn it over to Jay for the practice. The theory I have on capital deployment is what’s some highest and best use every quarter of the dollars that are created by the company or that we could or should be borrowing from the capital markets. And the batting order for me here kind of continues from my prior experience, which is based on regression data on when we make decisions, how they turn out. And what's the best ROIC that we can expect for a given dollar of investment or a given $100 million of investment? It tends to have been in my experience in both, this and other companies that capital investments based on actual or anticipated contracts with real customers, tend to have the highest ROICs. And we've bolstered our CapEx budget and plans under John's leadership and now Jay's as well at Lockheed Martin because we've got good prospects for contracts we're winning that are going into production that we need to invest in. The other thing we've done and really stepped up our internal spending on and we expect to get good returns from is our digital transformation program which I would say really is in the major leads right now, frankly. We've got a great CIO running it. She's got a fantastic team. We have a well-thought-out plan. We have support from our Board to go do this on a multiyear basis. And it's going to make us more efficient, more competitive and higher quality products coming out of our plants. So those are -- that's the first area. Our highest ROIC tends to be in universe, so to speak. Second area I found to be most beneficial is inorganic investments, right? So, we're looking at really hard now, making investments in both, the U.S. and other countries in technologies and programs we think are going to have duration and traction. And again, some of those will be in the U.S. and some will be outside the U.S. I think you'll see us investing a little more by putting, say, let's call it, boots on -- and brick-and-mortar on the ground and other countries than we have in the past because we expect those ROIs to be pretty compelling. When it comes down to what's left, M&A tends to be the third in the batting order. That doesn't seem to be really wide open in our industry right now with the current administration. So, we're going to then look to what else can we do and it's share repurchases, the next thing in the batting order. And you've seen us step up to that as far as announcements and performance already this year. And if we've got excess capital, and we are at a reasonable leverage level, we'll go ahead and continue to buy back shares. And I'll let Jay talk about intrinsic value and how we weave that in. But we're going to put our capital to work, the cash flow we generate and what we can borrow and maybe even lever up if those opportunities with high ROICs get bigger than we thought.