Q1 2022 Lockheed Martin Corp Earnings Call
Yes.
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.
Thank you John and good morning.
I'd like to welcome everyone to our first quarter 2022 earnings Conference call. Joining me today on the call are Jim <unk>, Our chairman, President and Chief Executive Officer, and Jay Malave, Our Chief Financial Officer, Steve.
Statements made in today's call that are not historical fact are considered forward looking statements that are made pursuant to the safe Harbor provisions of Federal Securities Law.
Actual results may differ materially from those projected in the forward looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward looking statements.
We have posted charts on our website today that we plan to address during the call to supplement our comments.
These charts also include information regarding non-GAAP measures that may be used in today's call.
Please access our website at Www Dot Lockheed Martin Dot Com and click on the Investor Relations link to view and follow the charts.
With that I'd like to turn the call over to Jim.
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, 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 joined our company on a personal level I am extremely pleased to be working with them.
I'd also like to recognize John Moller, who is with US today for his tremendous contributions as our acting CFO .
We're grateful to John for his leadership and financial acumen and these 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 in the omicron variant in our operations and our supply chain, but we expect these to reflect short term timing issues.
I am proud of how our team responded to these challenges and we remain committed to delivering all of 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 that <unk> entered 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, 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 30 fives 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 30, fives requested in the FY 'twenty three President's budget submission was below our expectations for <unk> 17 aircraft, we expect that the services adds via the unfunded priority lists.
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 was strong bipartisan support in both the house and Senate and the Bill has subsequently signed into law by President.
This legislation approved approximately $742 billion in Dod spending.
An increase of nearly $40 billion over the FY 'twenty one enacted amounts.
The final Bill resulted in increases that will benefit multiple Lockheed Martin programs over the next few years, including fully funding 85 F 30, Fives 21 additional C 130, Jay transport aircraft.
10 additional blackhawks.
Two additional CH 50 <unk> helicopters.
As well as increases as 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 FY 'twenty three budget process.
The President's submission added an additional $30 billion to the enacted FY 'twenty two appropriations.
And totaled $773 billion and requested funding.
This initial budget submission continues the administration's emphasis on.
On the Indo Pacific region, and supports Ukraine and focuses on strengthening our nation's deterrent capabilities all initiatives that are well aligned with our portfolio and with our 20 <unk> century security strategy.
<unk> also expanded investments and important technology development efforts, such as future vertical lift and hypersonic.
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 and our long term growth strategy.
Our programs of record.
And new business opportunities.
The programs of record this quarter, our Sikorsky team received over $1 billion in orders for the CH 53, K platform one of the main contributors in our program of record growth pillar.
These announcements included awards for 13 low rate initial production lot six aircrafts, including four for Israel as well as long lead time items for full rate production lost seven 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 one.
One of the three prototype agreements from the space Development Agency.
The $700 million award to design and build 42 small low earth orbit satellites <unk>.
The initial tranche of the National Defense space architecture.
This transport layer constellation will connect assets in space with platforms in other domains and our highly capable network mesh network environment for joint all domain operations and it is an outstanding example of <unk> Dot mill enabled <unk> technology maturing into a program.
<unk> of record.
This award builds on our current tranche zero contract that will deliver 10 space vehicles. Later this year and we look forward to continuing our support to the SBA and the development of our country next generation space architecture.
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 solicitations.
Several weeks ago, we flew our defined aircrafts 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 seven hour mission that further demonstrated the capabilities and the maturity of this remarkable rotorcraft.
We believe our define 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 of the Ukrainian people and heightened security threats the European continent.
While we hope that this conflict is resolved peacefully soon lock.
Lockheed Martin is taking steps to help address the result in humanitarian crisis.
Multiple partners.
These include committing aid to the Polish Red Cross project hope, the 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.
Thank you Jim and good morning, everyone. I appreciate the introduction and it's an honor to be part of the Lockheed Martin team and represent a 114000 employees on the first quarter earnings call.
Today, I will walk you through our consolidated results.
This area of detail and discuss our 2022 outlook.
As I highlight our results. Please follow along with the web charts, we have posted with our earnings release today.
Let's begin with chart three and an overview of our consolidated first quarter results as.
As reported in our earnings release results were largely in line with our expectations as the first quarter was impacted by program lifecycle transitions.
In addition to the expected program effects. We also saw some impacts to sales timing, mostly due to the spike in Covid early in Q1.
Total segment operating profit was $1 7 billion and segment operating margin expanded 30 basis points to 11, 1%.
Earnings per share were $6 44.
And we delivered $1 1 billion of free cash flow.
We also got off to a strong start to this year's capital allocation program.
With $2 billion of shares repurchased in the quarter at an average price of approximately $427 per share.
Along with almost $800 million dividends paid we returned greater than two times, our free cash flow to stockholders.
And we remained committed to our full year outlook.
Turning to consolidated sales and segment operating profit results on chart four.
Total sales declined by 8%.
Mostly reflecting anticipated program reductions with about one five points coming from supply chain and internal operations delays primarily associated with the recent COVID-19 surge.
Our operations and supply chain teams did a strong job of managing this latest challenge and we expect these timing impacts to be recovered over the course of 2022.
Segment operating profit declined 5% versus last year, and our segment operating margins expanded 30 basis points to 11, 1%.
Collecting solid underlying performance in spite of lower net profit adjustments versus last year.
Turning to segment sales on chart five.
Three of our four business areas were affected by expected program lifecycle timing.
Space declined by approximately $450 million due to the nationalization of the atomic weapons establishment program.
Rotary and mission systems sales were also lower driven by approximately $300 million from the delivery of an Australian pilot training program in last year's first quarter as well as other mission system program transitions.
And COVID-19 related timing been packs.
In missiles and fire control was lower due to supply chain delays in integrated air and missile defense.
Do Sustainment revenue for special ops, following the troop withdrawal from Afghanistan and program transitions in the tactical and strike missile business.
Aeronautics was flat this quarter as expected with increased F 16 production offsetting lower volume on F 35.
Moving to segment operating profit on chart six operating margins were higher at space NMFC with increase in space driven by additional ULA equity earnings.
NMFC expansion from solid program performance and successful contract negotiations on an international program.
Both Aero and RMS margins contracted primarily due to lower net profit adjustments, but they met or exceeded our expectations for the quarter.
Overall solid performance across the operations.
Turning to earnings per share on chart seven our first quarter EPS of $6.44 declined by 2%.
It reflected the impact of decreased sales volume mark to market adjustments and lower fast cash income.
Partially offset by benefits from the increased segment operating margin reduced share count and a lower tax rate.
Yes.
Shifting to first quarter cash generation and deployment on chart eight.
Free cash flow of $1 1 billion was ahead of our expectations. Following the very strong $3 7 billion of.
Our free cash flow generating generated during the fourth quarter of 2021.
Cash deployment continue to drive value for our stockholders as we returned $2 billion.
Through share repurchases, leaving approximately $2 billion on our existing authorization and outlook for 2022.
Combined with nearly $800 million and dividends paid we returned over 240% of free cash flow to shareholders. This quarter.
Operational cash remains solid as the business looks to grow quarter over quarter through the rest of 2022.
Okay moving over to our 2022 outlook on chart nine.
We remain confident in our full year outlook as we have seen improvement since the omicron variance spike.
Our first quarter sales were approximately $250 million below our expectations, which equates to less than a single data volume and we expect this to be fully recouped throughout 2022.
For the balance of the year, we project sales of slightly below $16 billion in the second quarter around $17 billion in the third quarter and $18 billion in the fourth quarter.
As our release stated.
Our outlook does not include any impacts from potential debt refinance our pension liability transfer actions that are currently under evaluation.
Our chart 10, we breakout our segment sales and operating profit outlook.
Our segment estimates for 2020 to remain consistent with the guidance. We provided in January and we continue to anticipate long term growth for all four of our business areas.
It is important to note that our consolidated and <unk> outlooks are dependent upon reaching agreement on F. 35 lots 15 through 17 here in the second quarter.
Funding constraints would likely cause a timing impact to our financial results beginning this quarter.
Our teams are diligently working with our joint program office counterparts to achieve closure on this critical milestone and both parties are striving to finished negotiations in the near term. So we remain confident in our full year projections.
Okay to bring it altogether on chart 11.
The first quarter delivered solid operational performance that was largely in line with our expectations. In spite of the effects of the recent COVID-19 spikes or cash generation and deployment also got off to a good start with a focus on strategic investment for growth and fulfilling our capital allocation outlook for the year.
Our solid performance in our four pillar growth strategy, how is well positioned to deliver long term shareholder value. So with that John let's open up the call for Q&A.
Certainly and ladies and gentlemen, if you wish to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the ones Euro command and if youre using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question you May press one zero.
At this time.
And first of all the line of Rob Spingarn with Melius Research. Please go ahead.
Well good morning, Jim and J, it's good to see you again.
Thank you Robin it's great to have you covering the company and the industry again welcome back. Thank you.
<unk>.
Jim I wanted to ask you if we could discuss eastern Europe , a little bit more and I know it's early.
But perhaps we can expand on your earlier comments and discuss in more detail the potential impacts for Lockheed.
So to start I am thinking of incremental demand for longer range weapons that the U S is now talking about for Ukraine, but also the F 35, the F 16, and other products at MFC.
Both domestically and for Allied nations. So in terms of specifics what products are most relevant.
And at a higher level, how do we think about this influencing organic topline growth over over time say the next five years rest of the decade.
Sure Rob let me just start by articulating the foundations of what we think we are facing as a company and our country and in alliance given the circumstances.
The World has clearly changed with Russia's invasion of Ukraine.
A major global powers Cros are recognized international border to take territory by force.
And as a result, the value of a strong deterrent to war as an instrument of nations geopolitical strategy has not been as great.
Since the middle of the 20th century.
So here at Lockheed Martin.
<unk> had been aggressively positioning our company as a deterrent company.
Using the F 35, and our their core platforms as Pathfinders.
We're developing an open architecture using 20 <unk> 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'll talk about a couple of platforms in a minute, but it's really about the integrated strategy and its ability to enhance deterrence as we go forward every six to 10 years with a new platform, but while we're doing the new platforms every six 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 20 <unk> century digital technologies that others are investing a lot of time and talented too like <unk> 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 the hit strategy.
The F 35 for example, you led off with.
My interactions with pilots and commanders.
And senior government officials in countries, including <unk> in Israel.
And in Europe , or the F. 35 has been used in any other combat our top AD support operations.
The feedback is the aircraft is unmatched as an aircraft, especially with its fifth generation stealth capability and be survivable and it really hostile environment.
But equally exciting to the people I've been getting feedback from on the front so to speak is.
Is the ability of the F 35 to be a core sensor and our core command node and control node and a much wider network.
National defense or a deterrence and so.
The sensing capability of the F 35.
Combined with its aspects in kind of a <unk> dot mill perspective is it Scott and we will have even bigger but it's got the largest data storage capacity of any fighter aircraft. That's got the greatest that's got the greatest store data processing capacity onboard of any fighter aircraft that we know of and it's.
<unk> 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 <unk> Dot mill.
So as you see the F 35 has already become more important platform I.
I guess, I'd say post Ukraine, Unfortunately, and that is with Germany.
Seemingly moving from one direction to another towards the F 35 ports nuclear mission responsibilities in Europe .
Also.
With candidate selection the courts are part of <unk> as well and the integration of both in Europe , and there and even in Asia will be enhanced with the 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 call it by.
Chief Brown is.
As the quarterback of.
The U S Air Force feature strategy because of all of those capabilities I talked about so that's part and parcel and really kind of the lead pinnacle's so to speak of our strategy and it actually fits in really really well with integrated turn switches. The same concept that secretary Austin has been developing.
His team.
You mentioned F 16.
Great affordable.
Four five generation airplane when you take the block $60 70, avionics and you marry them up with a proven.
Aircraft like the F 16, it's an earlier and more affordable way to get our allies onboard with us so that we can integrate them into our <unk> Dot mill system.
And then the other factors that you talked about long range precision strike weapons and long range.
Sure.
Defensive weapons like that and Pac three.
We're going to be probably in greater demand as we as we move through time. So all those are the trends.
That strategy that I outlined is meant to to really assure that we can defend against what's going on in the environment as a country and 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 will also update you on where we see these trends going but I think this is the right set of platforms and the right strategy.
<unk>.
Enhance and preserve Lockheed Martin's leadership in the defense and aerospace industry.
Next we'll go to Sheila <unk> with Jefferies. Please go ahead.
Good morning, gentlemen, grow but can we talk about that comes from the line maybe.
Going on with negotiations what exactly is that and then when you think about for fiscal 'twenty one.
One how does that relate to production and how do we think about international weather quarter again, when we think about 156.
Joe It's Jim I'll start off and maybe turn it over to Jay for some more of the detail, but we're very confident in our ability to reach an agreement with the joint program office in the U S government.
On our negotiations that are ongoing, but what's really important to us and for all of our stakeholders, including our shareholders is that we have a clear and shared understanding of the.
The changes in the cost environment of the aircrafts that have occurred over the last 12 months or so.
During this negotiation and two of the biggest cost drivers in the upward direction our inflation.
And Covid.
Effects that have actually been ongoing over the past couple of years and so we need and feel its very very important to take all of those costs into consideration make sure that there is a joint.
Agreement on what those costs are in the magnitude of those so that we can have a successful program.
For everyone and lot 15 to 17.
There is also as we touched on earlier some lower quantities that we're initially projected for that lot. We're working with the U S government and also the our international partners to see if there's ways to bolster that number.
But right now what we're working with is a lower number in negotiation. So when you add all those things together, it's incumbent upon us to make sure we get an appropriate.
Transaction or agreement for our shareholders and for the U S government and for our workforce as well. So that's what the I wouldn't call. It a holdup I will just say that's the reality of the situation and we're working closely and constructively with our government customers to.
Coalesce onto that cost baseline and then we will work from there on the contract.
Jim Let me just add on a little bit as far as the negotiation Sheila we are 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 but the teams are working with a sense of urgency to really complete this negotiation and again as Jim mentioned is 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.
And we're pretty confident in the $1 56, 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.
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 and we feel very comfortable in our ability to maintain a $1 56 production cycle over that three year period.
Our next question is from Ron Epstein with Bank of America. Please go ahead.
Yes.
Good morning, guys.
In the investment community. It seems like there is this assumption I'm just going to lay this out here.
The textron is going to win future vertical lift.
I'm curious.
From your point of view.
Why you don't think that the.
I mean, if you could walk through for for all of us on the call the pluses and minuses of.
I will lay out the client Scott over valor, when you've got Counterrotating helicopters, where do you get with that.
Don't get the tilt rotor.
And vice versa.
Brian its Jim on the ex Airforce aviator, maybe I can start off and Jay can add to it if he would like.
<unk>.
Hi.
Experienced this pretty close hand and.
I've been involved in special ops helicopters, not as a pilot, but as a partner in my prior life long time ago.
What's most important to people that have to fly helicopters into hot landing zones as maneuverability.
And an ability to.
Hey get into close quarters lets say into <unk>.
Landing zone surrounded by trees onto a rooftop in a crowded urban environment things like that.
And I would.
Because I've seen the aircraft fly.
Alone the matrix myself, which is R Tech demonstrator and S 92 up at up in Stratford.
That is the the Warfighter advantage the maneuverability of.
The.
Dual rotor.
X.
Technology.
Is head and shoulders above anything you could ever do with a tilt rotor.
And the second question, then would be what about the speed at Mach speed.
Toward horizontal flight if you will cruise.
Got our aircraft up to over 230 knots I believe at this point there is probably some upside to that.
And that is not the differentiator getting the aircraft. The 100 miles that you need to go from touch from base to target.
Two minutes faster is irrelevant versus when you get to the target are you going to survive and lived through that mission.
And thats the differential I think it fits more fighters and commanders, making this decision.
The only one they can make as future vertical lift out of Sikorsky and Boeing here.
Jay anything else no I think that was well I think that's that's it.
Next we'll go to rich Safran with Seaport Research partners. Please go ahead.
Jim Jaye, Greg Good morning, how are you good morning.
Sure.
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 FY 'twenty three requests says about growth this year and next year and your prior expectations for $8 $1 billion in cash from ops for 2003.
I just have to believe that the request as it stands.
It was above the assumptions you used when you gave out your 2023 <unk>.
Estimate so if the requested if we taken if we take a standpoint that if the request is enacted just as is does that alter how you are thinking about 2023 growth.
And your and your cash from Ops guide.
Let me take that question first.
Sure.
In the budget.
<unk> was beneficial I think as Jim mentioned.
The trends are favorable directionally, it's moving in the right way and again, you would expect it to be incremental from the low single digit baseline that we previously provided and maybe a little bit of color you've seen.
There are a lot of reference to integrated deterrence emphasis on all domain and interoperability.
Quite a few things from a programmatic standpoint to be excited about things like nuclear command control and communications reentry future reentry vehicle systems, <unk> recapitalization, Nextgen interceptor, Nextgen <unk> and others.
And so directionally again as I mentioned it feels pretty good as Jim had mentioned were still compiling this and we're going through the analysis is going to take us some time to work through exactly what that means from an impact I think it's fair to say that it's beneficial.
It's biased to the upside the extent to which they would really have to work through and at the appropriate time, we'll let you know what that is.
Our next question is from Cristina <unk> with Morgan Stanley . Please go ahead.
Hey, good morning, Jim and John .
Maybe following up on Rob's earlier question.
Understand that it's too early to provide long term outlook with regard to your chrome.
Can you give more color in terms of the nearer term opportunities for you and in Germany has announced the $100 billion monetization of the armed forces.
Our allies.
For defense.
How meaningful is this opportunity for you.
And in addition to the F 35.
There'll be opportunities that we should watch for in missile and missile defense.
Okay.
So Christine this is Jim obviously.
Obviously, we're in a long cycle business here.
From.
And yes and.
Nation in the House Armed Services Committee for example, too.
Both.
Book of revenue booking of revenue at Lockheed Martin can be 12 months to three years, depending on the program. So I.
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 the turns is a more valuable product than it's ever been at least in the last 100 years.
And that.
We feel we're really positioned well with our strategy to meet that need it for national security and global security.
But we can't quantify yet.
Exactly how thats going to touch our revenue on a $66 billion base for example in until we get actual contracts that have order schedules and we get the funding to do the long lead time items.
All of those nuances in specifics in defense contracting, so where 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.
At my last company too.
Because that's where we have real data upon which we can give you a reliable forecast.
Yes, I'll just add.
There are conversations.
<unk> ongoing with our government customer to Jim's point and sensitivity analysis scenario planning and things like that and as those firm up we will provide clearer information to you.
Our next question is from Cai von <unk> with Cowen <unk> Company. Please go ahead.
Yes, thanks, so much for taking my question.
If we could return to the F 35 contract negotiation so.
Youre a major subcontractor took a $93 million hit because of delays related to Covid you mentioned that COVID-19 is an issue.
Understand that al <unk> is still kind of working through the software and.
And you've been at this with the government for what three quarters trying to negotiate there. So I guess the question is I assume you will reach an agreement, but basically will this result in a profit hit and secondly, if you don't reach an agreement in the second quarter, what's the incremental impact likely to be.
Thanks, so much.
So at this point, we would not expect any type of profit based on our negotiation as it currently stands and again.
In a dynamic.
Discussion, but we wouldn't expect any type of charge there.
Going forward as I mentioned here any impact would be up by $100 million plus in the second quarter to further extends obviously that will go up I think.
We 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, what were encouraged and really pleased with the progress we're making to date.
I know, it's been a long road, but theres been some significant progress has been made and so we're encouraged that we can be able to close this relatively short period of time.
If not then we'll update you accordingly at that point in time and remember during the negotiation period, we've had significant changes in the underlying cost factors of bidding for the next three loss and again those it was concurrent so yes, we've been going at this for a number of quarters, but that's because.
Does that cost baseline has been moving during that time and we both have to agree on where we think it's going to end up and so COVID-19 impacts as was sighted and inflation, which is even a more recent phenomenon. So to speak we have got to go all the way back to our supply chain and see what the impacts are going to be then present that to the government they have to.
Those estimates and those cost assumptions and Thats what.
As a basis of the negotiation to follow so this has been along longer than normal because the underlying ground has been shifting on the most important assumptions that go into the negotiation.
We are going to stay with.
Our strategy, which is constructive.
At which they are.
And progressing negotiations on the basis of actual cost.
Information and data.
That provides our shareholders a fair margin and return as well as the government.
Attractive.
Contract.
Next we'll go to Seth <unk> with Jpmorgan. Please go ahead.
Hey, thanks, very much and good morning.
Good morning.
I wanted to ask a little bit about capital deployment and.
I think you mentioned kind of similar to prior guidance, but you can talk about the buyback plan or capital deployment overall.
<unk> dynamic and so the share price.
Has changed I think Jay you mentioned some.
Potential.
Items, having to do with the pension or debt repayment.
If you could talk about how youre thinking about things differently and how the dynamic aspect of that has changed versus three months ago. If at all.
Start with the theory and turn it over to Jay for the practice.
The theory I have on capital deployment is what's the highest invest use every quarter of the dollars that are that are created by the company or that quarter should be borrowing from the capital markets.
The batting order for me here it kind of continues from from my prior experience switches.
Based on.
Regression data on when we made decisions.
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 us and other companies that capital investments based on actual or anticipated contracts with real customers.
Tend to have the highest ROIC.
We've bolstered our capex budget and plans under John's leadership.
Leadership, and now <unk> as well.
Lockheed Martin because we've got good prospects for contracts, we are winning there going into production that we need to invest in the other thing we've done really stepped up.
Our internal spending on and we expect to get good returns from our.
Our digital transformation program, which I would say it really is in the.
The major leagues right now frankly, we've got a great CIO running it.
She has got a fantastic team, we have a well thought out plan, we have support from our board to go do this on a multi year basis, and thats going to make us more efficient and more competitive and higher quality products coming out of our plants. So those are thats. The first area, our highest ROIC tends to be in and that Capex universe so to speak.
Secondary I found to be.
Most beneficial.
<unk> inorganic investments right. So we're looking at really hard now.
Making.
Investments in both the U S and other countries.
On Tech now 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.
Youll see us investing a little more by putting say, let's call. It good some brick and mortar on the ground and other other countries and we have in the past because we expect those rois to be pretty compelling when it comes down to what's left.
M&A tended to be the third in the batting order.
It 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 in its 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.
We've got excess capital.
We are at a reasonable leverage level. We will go ahead and continue to buy back shares and I'll, let Jay talk about intrinsic value and how we have that and we're going to put our capital to work the cash flow, we generate what we can borrow.
And maybe even lever up if those opportunities with higher ROIC these get bigger than we thought.
Let me just add.
Let me just clarify in terms of the debt.
We don't plan on Delever Delevering it would be just refinancing what we have and so the existing capacity, we have really doesn't change at all in the use of our cash wouldn't change either it's just taking multi potentially multiple years on refinancing that in various tranches here in doing it.
<unk>.
As far as the prioritization of our capital.
Agree wholeheartedly with what Jim just laid out and so we're going to go through that evaluation process is keep in mind I've been with the company about two five months now and so I would just ask for a little bit of time for us to just go through this process deliberately and analytically. So that we can make the best decisions. If you look at the industry, we've seen an uptick in valuations in the industry.
As a whole, but I would say our stock still remains undervalued on a relative basis and from an intrinsic value. We're just we're going through that whole analysis right now based on some of the quest of the U S really taken another look at our growth outlook and determining what that comes out from a from a value for the company. So we're going to go through that we're going to be deliberate about it and make the best decisions.
From a capital deployment. The key here is that we've got plenty of flexibility and plenty of opportunity and we won't be afraid to use it ultimately what we want to do is get to sustainable growth and free cash flow per share.
And that's what our objective is.
Next we'll go to David Strauss with Barclays. Please go ahead.
Thanks, Good morning, good morning.
Wanted to follow up on this.
Thinking about the growth outlook beyond 'twenty two so I think previously you had said, 2% revenue growth and 23 and a little bit of an acceleration beyond and that would be gone.
$715 billion.
Fiscal 'twenty two budget with 245 billion in <unk> that we got 740 <unk> and.
265.
It sounds like F. 35, you think can kind of hold in there.
With the plan that was in place when you talked about 2% growth. So I mean can you quantify at all how much potential acceleration, we could be looking at above and beyond that 2% and.
Is there anything that they got worse from.
From a program standpoint, as you think about that beyond fiscal <unk>.
Beyond 2022 outlook. Thanks.
Thanks for the question, David Let me, maybe let me just maybe put it in a little bit of context, and remind you that in Jim's comments.
We are a long cycle business. So benefits that you may see in a particular budget year manifest.
Manifest themselves and get delivered from.
From a revenue standpoint over multiple years and the Best example, I can give you is the 22 2022 plus ups. If you look at the plus ups and the impacts to us that was about a little bit over two points of growth in any given year, but the reality is the profile of the delivery profile of that revenue stream is going to be over three years to four years.
So it's going to be spread over and so as we just we just had an opportunity to have this presidential budget dropped it where in the first inning here, we need to see but let the process play out and get a better understanding in terms of what these program.
Increments mean to us.
In what periods and so we're just going to need some time to really go through that and as I mentioned before we'll obviously keep you updated.
At the appropriate time, but it's just a little early to really make those calls right now.
Next we'll go to Peter Arment with Baird. Please go ahead.
Yeah. Thanks, Good morning, Jim Jaye.
Hey, Jim coming into this year, you always have a kind of a long list of international pursuits.
In terms of potential.
The National Awards, maybe you could just remind us some of the bigger ones that Lockheed focused on and maybe any of the timing around that that'd be appreciated. Thanks.
Sure well we've got.
As you've seen a lot of success on the F 35.
We also have.
International F 16.
Interest is increasing.
53, K is on the table and say, Germany for example, so.
Or is it across the board interest in these products Tad and Pac three.
Middle East.
Got to defend itself against.
Missiles being being fired at.
Oil and gas infrastructure and even worse.
Toward populated major cities and so those kind of products have high demand in that part of the world and others as well.
Peter I'll just add.
F 35 lot 15 to 16 orders, we expect they will.
We'll have some international volumes associated with those big numbers this year and those will really move the dial we've got black Hawk multiyear 10, which is a multibillion dollar.
Award as well and we didn't really talk about it here in the first quarter results, but we had a about a $4 billion award in our classified and if you recall and it's one of our pillars of growth here in the first quarter. So very excited about that program as well.
We're positioned pretty well for award growth.
For the balance of the year and heading into next year.
Next we'll go to Matt Akers with Wells Fargo. Please go ahead.
Hi, good morning, Thanks for the question.
There's a line in your release I think is a new one with outlook on.
Potential pension risk transfer and refinancing transactions you may do as early as Q2 I was wondering if you could talk about what some of those are and what kind of impact that might have on time here with also sure sure. Matt. The first one is just the transfer of pension, which you've seen us do over the last few years.
Is essentially matching assets and liabilities and having insurance transfer news over to insurance companies from a liability management perspective.
And so were contemplating doing another around of those on the debt. It's just a matter of taking multiple years of that and really refinancing that out.
Just a little bit earlier than waiting for it for the maturities to occur in each particular year and so those may have some some.
P&L impacts associated with them last year, we had a pretty sizeable impact on the pension liability transfer.
Have that in front of me, we are still working through that right now, but just to say that those may happen here as early as in the second quarter just to give you the heads up about that.
Next we'll go to Peter Kubicki with Alembic Global Advisors. Please go ahead hey.
Good morning, guys.
Hey, Jim you touched on this but.
Getting back to fiscal 'twenty, three and congressional support for defense budgets. When the administration came out with its request for 'twenty three it admitted it hadn't really taken Ukraine into account because of because of timing.
And obviously, we saw the congressional support in 'twenty two so.
Im wondering if you have a sense of how additive to the budget to the request that Congress may be in 'twenty three because it seems like there is.
No more broader support and there was even a couple of years ago.
Sure Pete.
Look I'd like to just to go back to the environment. We're in I think it's pretty evident.
Leadership in Congress.
The key committees of course are well aware of this environment.
And they have points of view on what the defense budget ought to look like.
To meet that environment.
And then the specifics underneath that.
Let me just get ahead of them at this point is really not our place.
But if you look in historical terms recent or beyond.
Congress does have a point of view in these matters intends to.
Take their own actions because they are.
Authorizers and appropriators at the end of the day.
And they'll have a voice, but I can't predict what that outcome is going to be in a quantitative fashion yet.
Next we'll go to Myles Walton with UBS. Please go ahead.
Thanks for taking the question become correct on the profit adjustments.
Related to volume if you correct for those EAC the underlying booking rate was.
It was about eight 4% I think thats the highest that's ever seen for you guys in the quarter.
So two questions. One did you adjust your lift at the underlying booking rates systematically or is this.
More just a reflection of favorable mix happening in the quarter.
I'd say, it's a combination of both miles youre pretty close to that underlying recurring.
Margin percentage.
Think about it last year was a pretty good size year as far as net profit positive adjustments.
You would expect those carry forward into higher run rate margins moving forward as you recognize revenue.
And so if part of it is also mixes plays in the game as well, but I would expect what you saw in the first quarter to generally be.
What we'll see for the balance of the year and so we expect our profit adjustments to be lower year over year last year, we did about 28% of our profit this year in the first quarter, we did about 24% for the full year, we're expecting that to be closer to 25%.
And so but again.
Very comfortable with our margin outlook, we're very comfortable with our EPS outlook and we're just seeing a little bit of a transition here with recurring versus margins versus the profit adjustments.
Okay. Thank you youre.
Youre welcome.
And next we'll go to George Shapiro with Shapiro Research. Please go ahead.
Yes, good morning.
George.
Jay If you look at your guide for the second quarter of $16 billion in revenues. It is down a $1 billion. If you adjusted the first quarter for 300 million nonrecurring benefit you had MST was also down $1 billion. So why wouldn't the second quarter be a little better in terms of relative to last year.
<unk>, particularly when it seems like omicron.
Is somewhat going away.
That's a good question George look.
The second quarter would have us down around 7% year over year, and so we'd be down around that ballpark for the first half of the year.
We're still well, it's still a dynamic environment I guess is the best way to describe it and we're still dealing even though we've seen significant improvement since the beginning of the year. It's still we're not out of the woods and so we're holding it there we still expect to have some level of impact.
That will clear itself up in the back half of the year and Thats really the placeholder for that second quarter number.
We still are dealing with through the first half of the year the impact of the atomic weapons establishment program from the U K and so it's just year over year compares are tough it is sequentially, a pretty big step up you're talking $1 billion nearly around that ballpark and we think thats the right place to be for the moment and of course.
If anything changes we will update you accordingly.
And we'll go to Rob Stallard with vertical research. Please go ahead. Thanks.
Thanks, so much and good morning, good morning, Rob.
There is probably a question for Jim there's been a lot of discussion about weather.
Defense and in ESG construct now looks different I was wondering what your perspective might be on this and whether you've seen any shareholders new shareholders coming onto the register as things have been changing.
Sure Rob I mean, my personal view is having.
And aviator military lifestyle is that.
You can't really have an effective economy and protect human rights.
If authoritarian governments are not constrained in what they might do and how they might do it frankly so.
I would put that.
National Security and.
Human security.
<unk> equally was other ESG topics like corporate governance.
Global warming and climate change, which are also very important but I'd put it the same category.
I recognized in Europe .
Before Ukraine.
Occurred that that was not necessarily the trend.
We've seen some increased interest from our international investors.
Around the world.
Because I think people are starting to recognize that.
This is not an anti ESG industry.
You could call it neutral or positive perhaps but.
We're trying to.
Maintain the conditions, where people can lose safe happy lives and the economy can flourish, especially a free market economy.
And we'll go to Doug Harned with Bernstein. Please go ahead.
Good morning, Thank you.
Last year, you did more than $2 billion in missiles and fire control in the middle East and certainly.
In the Middle East was a critical area over the course of the Trump administration.
Vince add Pac three.
But now we haven't seen as much activity.
How do you see the trajectory going forward in terms of missiles and fire control in the middle East from here.
I'm not sure.
Regional approach is the right way to look at it we've got demand signals for that.
Pac three.
Around the world because again.
<unk> everywhere are recognizing that especially when you see missiles hitting.
Hospitals.
Situations like that and train stations in Ukraine that is.
Worthwhile to have an effective missile defense capacity in your country. So.
We are getting signals that.
If anything we might have to increase capacity in certain products.
Meet the global demand so I am not sure. The regional approach is the best way to look at and by the way that threat Hasnt gone down either it is getting.
Greater instead of lesser.
Based on what I ran tends to do in that part of the world.
Go ahead go ahead.
And that's kind of where I was going because it does seem like.
In Europe , and Asia, there there should be some real strong interest there. So I'm just trying to understand the puts and takes because as you build out.
As you complete a lot of systems in the Middle East should we expect these other parts of the world to essentially take up some of that fill in any gaps there and potentially even add to growth for for Fad Pac three and maybe aegis ashore.
Without the data to quantify it.
And we're a little bit on data driven person I don't want to speculate on that but directionally it sounds.
No.
Something that could.
Come about frankly.
We would expect it in a way but to quantify it a little too soon.
Yes, I'll just add Doug.
Our planning on a multiyear upcycle unpack III, where this year, we'll deliver around 450.
Units when that.
Spiking up to $5 50.
So.
Well positioning contemplates some of the things that you've talked about already.
Hey, John This is Greg I think we've come up with the top of the hour. So I'll turn it back over to Jim for some final thoughts.
Sure I'd like to conclude our call today by thanking the entire Lockheed Martin team all 114000 people strong.
For their contributions and dedication, especially over the last many months.
We're covered.
Reemerged in the winter and we still have production to get done and they did it.
Workforces performed with resilience under a lot of challenging circumstances for a long time and through their ongoing efforts and commitment in our company is now positioned to deliver outstanding technology and solutions for our customers and long term value to our shareholders. So I want to thank you all again for joining us on the call today and we look forward to speaking with you on our next earning calls.
July .
Thanks, John that concludes our call for today.
Youre very welcome ladies and gentlemen that does conclude the conference. Thank you for your participation you may now disconnect.