Q2 2022 Lockheed Martin Corp Earnings Call
Speaker 2: 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.
Speaker 2: Thank you, Brad, and good morning. I'd like to welcome everyone to our second quarter 2022 earnings conference call. Joining me today on the call are Jim Takelet, our Chairman, President, and Chief Executive Officer, and Jay Malawi, our Chief Financial Officer.
Speaker 2: Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statement.
Speaker 2: 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. These charts also include information regarding non- GAAP measures that may be used in today's call.
Speaker 2: Please access our website at www.lachimartin.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.
Speaker 3: Thanks Greg.
Speaker 3: Morning everybody and thank you for joining us on our second quarter, 2022 earnings call.
Speaker 3: I will begin today with an update on our F-35 program.
Speaker 3: Yesterday we signed a bilateral record of negotiation with the U.S. government.
Speaker 3: Reaching agreement on the last 15 through 17 production contract.
Speaker 3: Through a collaborative effort with the F-35 Enterprise, including the Joint Program Office, Suppliers, and teammates, we've concurred on the major parameters of the program.
Speaker 3: addressing inflationary and pandemic-related issues unanticipated at the start of the negotiation process.
Speaker 3: The agreement supports our long-term objective to produce 156 aircraft a year.
Speaker 3: However, COVID impacts experienced by the F-35 Enterprise
Speaker 3: have required us to modify our near term production plan.
Speaker 3: Deliveries over the next two years are expected to remain in the 147 to 153 range of aircraft, similar to our 2022 plan.
Speaker 3: Before we then achieve our 156 aircraft delivery target in 2025.
Speaker 3: We continue to anticipate annual deliveries of 156 jets beyond 2025 for the foreseeable future. Per-cor descending flight at iPhone W tuners requires communication updates promoting global wojewisen service and accessing future.
Speaker 3: I'd like to thank the entire team for the dedication and professionalism shown throughout this process.
Speaker 3: And we look forward to delivering these unmatched fifth-generation aircraft for our U.S. Air Force, Navy, and Marines, our partner countries, and our international customers.
Speaker 3: According to our quarterly results, our business area operational performance was solid, delivering increased profit margins from last year's second quarter.
Speaker 3: Our new business activity and order flow were also favorable.
Speaker 3: And we continue to anticipate our backlog ending the year significantly above our 2021 levels, positioning us for longer term growth.
Speaker 3: Our sales in the quarter were $15.4 billion. Lower than we expected due to the delay and contract agreement on the F-35 and supply chain impacts.
Speaker 3: We anticipate the supply chain challenges to continue for the remainder of the year.
Speaker 3: And we've reduced our 2022 outlook to reflect that.
Speaker 3: as well as some other items and Jay will cover this in more detail in a few minutes.
Speaker 3: We also progress well on our cash deployment plan, delivering over $1.1 billion to stock holders in dividends and repurchases.
Speaker 3: exceeding 100% of our free cash flow.
Speaker 3: We will continue to execute our strategy of driving the CASH generation, discipline and dynamic capital deployment.
Speaker 3: growing free patch flow for share, and delivering attractive long-term total returns to you shareholders.
Speaker 3: Turning briefly to budgets, both the House and Senate Armed Services committees approved their versions of the FY23 National Defense Authorization Act.
Speaker 3: The SASC recommended approximately a $45 billion increase to the president's request, and the Full House Chamber passed a completed authorization bill with a $37 billion increase.
Speaker 3: 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-35s and Black Hawk helicopters.
Speaker 3: Increases over the lower than expected volumes that were in the initial President's request.
Speaker 3: Both the Senate markup and the House bill received strong bipartisan support and 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.
Speaker 3: Congress will continue the next phases of the authorization and appropriations process over the coming weeks and months and we look forward to its timely finalization.
Speaker 3: 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.
Speaker 3: These efforts are designed to benefit our soldiers, sailors, Marines, Airmen and Guardians.
Speaker 3: by continually upgrading their mission capabilities with the latest physical and digital world technologies.
Speaker 3: 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.
Speaker 3: This is a biennial training activity focused on integrating forces in multiple-done mains.
Speaker 3: Valien Chiehl 2022 is a cornerstone of Indo-Paycom's Integrated Deterrence Strategy to prevent conflict in the region. Integrated Deterrence Strategy to prevent conflict in the region.
Speaker 3: And it's the largest US Joint Force exercise in the Western Pacific.
Speaker 3: We linked our Diamond Shield Battle Management System, EGIS Weapon System, High Mobility Artillery Rocket System, or High Mars, and Pack Three Missiles to successfully demonstrate integrated multi-domain operations strategic. Now process of mass-energy operation records
Speaker 3: and tactical mission levels across Airland Sea and Space.
Speaker 3: During this 12-day event, our Lockheed Martin team demonstrated all domain capabilities.
Speaker 3: and collaboratively engage in experiments with IndoPay Com using artificial intelligence to enable rapid decision making.
Speaker 3: seconds or minutes compared to hours.
Speaker 3: Technical demonstrations like these are key enablers to our four-pillar growth strategy.
Speaker 3: And we will continue to demonstrate to our frontline commanders and servicemen and women in many additional exercises and real world demonstrations to come.
Speaker 3: Moving to our four pillar growth areas and staying with the Pacific region, RMS's Aegis weapons system was selected to be the backbone system for the Missile Defense Agency's Defense of Guam architecture.
Speaker 3: This is a pathfinder for joint all-domain operations for the DoD and for regional integrated air and missile defense.
Speaker 3: with an expected program value itself of over $1 billion.
Speaker 3: This architecture will defend against ballistic, cruise, and hypersonic missile threats through the integration of capabilities across multiple industry products.
Speaker 3: and not just Lockheed Martins.
Speaker 3: 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.
Speaker 3: This Guam architecture leverages existing Lockheed Martin capabilities such as terminal high altitude area defense or FAD, HAC3, Sentinel-A4 radar, and our C2VMC command and control system.
Speaker 3: highlighting the advantages of our broad portfolio and cross-business area collaboration with missiles and fire control.
Speaker 3: RMS will also fully integrate missile future system capabilities, which may include space-based sensors, directed energy, and advanced missiles in the defensive Guam, a critical cornerstone in Western Pacific deterrence. And we'll be using an open architecture where we can tie in other prime contractors, and systems along with ours.
Speaker 3: Staying with RMS, this quarter the US Marine Corps approved our Sikorsky team CH-53K heavy lift helicopter. This is a test of the
Speaker 3: One of our key programs a record for initial operating capability.
Speaker 3: 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.
Speaker 3: The 53K has a plan of record to deliver 200 domestic aircraft.
Speaker 3: and a total program life cycle value expected to be approximately $50 billion.
Speaker 3: We are also excited this quarter to receive a $2.3 billion award for Sikorsky's 10th walk multi-year contract to provide 120 H60 helicopters.
Speaker 3: This contract includes options, which if exercised, have the potential to deliver an additional 135 rota craft with a value of up to another $4.4 billion. The contract includes options, which if exercised, have the potential to deliver an additional
Speaker 3: Also this quarter, Missiles and Fire Control received a $1.6 billion contract award to produce stat interceptors for both domestic and international customers.
Speaker 3: Under this Combined By award, the THAAD team will provide both the U.S. government and the Kingdom of Saudi Arabia with additional interceptors in support of integrated air and missile defense. Under these Graveyard By awards, the THAAD team will provide both the U.S. government and the Kingdom of Saudi Arabia with inspirational whateverCollins available to the interface and train let oriental commanders and weapons use.
Speaker 3: MFC Business Area was also awarded a contract by the Missile Defense Agency to initiate the production of the 8th SAD battery.
Speaker 3: The eighth battery expands the U.S. government's ability to field the integrated air and missile defenses and builds upon the previously delivered seven systems.
Speaker 3: A clear demonstration of the value delivered by the signature program and defending against current and emerging threats and maintaining deterrence. An opportunity for<|yi|> Engler's
Speaker 3: Before I turn the call over to Jay, I'd like to express my appreciation for the Presidential Viget visit to the Javlin Manufacturing Facility in Troy, Alabama.
Speaker 3: supporting the men and women who produced this remarkable product.
Speaker 3: Ukraine conflict has been a dramatic reminder that we're in a global power competition
Speaker 3: and we at Lockheed Martin stand ready to support our nation and its allies with advanced systems and technologies.
Speaker 3: The US alone is committed more than 5,500 javelin missiles to Ukraine in defense of their country.
Speaker 3: In this visit, Spotlight has the continued need for a focus on global security and deterrence capabilities. Lizard capabilities.
Speaker 3: With that, I'll turn the call over to Jay and join you later to answer your questions.
Speaker 3: Thanks, Jim, and good morning, everyone. Today, I'll walk you through our consolidated results, business area detail, and provide an update to our 2022 outlook. The business area detail, and provide an update to our 2022 outlook.
Speaker 3: As I highlight our results, please follow along with web charts we have posted with our earnings release today.
Speaker 3: Let's begin with chart three and an overview when we're isolated from equal resources.
Speaker 2: Operating results were largely in line with our expectations for the quarter, along with non-operating impacts that we previously had highlighted.
Speaker 3: We generated sales of $15.4 billion. And as Jim noted, our revenues were affected by the delayed contract agreement for production lots 15 through 17 on the F-35 program and supply chain impacts.
Speaker 2: Underlying performance was solid with segment operating profit of $1.7 billion and segment margin expansion of 60 basis points year over year to 11%.
Speaker 2: Earnings per share were $1.16, including $5.16 in non-operational charges.
Speaker 2: And we deliver greater than a billion dollars in free cash flow while returning a hundred and seven percent of that amount to shareholders through shared purchases, and the rents.
Speaker 2: As noted in the press release, we updated our outlook, which I'll review later in my remarks.
Speaker 2: Turning to consolidated sales and segment operating profit results on chart 4.
Speaker 2: Total sales declined 9% due to anticipated program transitions and supply chain impacts across the business areas.
Speaker 3: In addition to more than $300 million in revenue shortfall from the gap in F-35 funding in advance of our agreement on Lots 15 through 17.
Speaker 2: Operating profit declined 4%. As previously mentioned, segment operating margins expanded 60 basis points to 11%.
Speaker 3: reflecting another quarter of solid underlying performance, benefits from contract mix, as well as higher net step-ups, largely due to the absence of last year's classified program charge in aeronautics.
Speaker 3: Moving to earnings per share on chart five, we've included a reconciliation of our GAP EPS to an adjusted or operational EPS.
Speaker 3: First, with refinance $2.3 billion about staining debt, claim maturities from the next three years, and lowering our near-term exposure to interest rate risk. This impact was 10 cents.
Speaker 4: In addition, we executed our latest pension transfer transaction. And as a reminder, this is our seventh such transaction to reduce long-term risk and volatility of pension trust asset returns.
Speaker 4: The impact of the quarter was $4.49, including 16 cents of tax timing that will reverse over the balance of the year.
Speaker 4: Lastly, volatile capital markets have significantly impacted asset returns and are lucky more inventors fund and other plans.
Speaker 4: Despite the short-term volatility, our Ventures Fund has delivered significant financial returns over the long term. But more importantly, has infused Lockheed Martin with emerging technologies to benefit our core business. With emerging technologies to benefit our core business.
Speaker 4: Adjusted for these non-operating items, our second quarter earnings per share would have been 6,332 cents.
Speaker 4: And even higher had the F-35 funding constraint been lifted.
Speaker 4: Moving to cash flow on chart 6, as you've come to expect, we delivered solid free cash flow in the quarter and accelerated payments of a billion dollars to suppliers.
Speaker 4: Once again, cash deployed to shareholders exceeded free cash flow in the quarter, and for the first half of 2022, we have returned 178% of free cash flow through dividends and share repurchases.
Speaker 4: Okay, moving over to segment results and starting with aeronautics on chart 7.
Speaker 4: Second quarter revenue decreased approximately $800 million from last year. F-35 sales were down over $900 million due to supply chain impacts, the impact of the lot 15 through 17 on recognized sales, and sustainment award timing.
Speaker 4: This is partially offset by strength in our classified area, which increased by more than $200 million this quarter, and a 50% increase from the second quarter of 2021. A 50% increase from the second quarter of 2021.
Speaker 4: Segment operating margin for error increased 180 basis points, primarily due to the absence of last year's loss recorded on a large classified program.
Speaker 4: Moving to missiles and fire control on page 8, sales were lowered by approximately $200 million, including the expected reduction in sustainment following the withdrawal of U.S. troops from Afghanistan.
Speaker 4: as well as lower volume in multiple missile programs.
Speaker 4: strong performance in tactical and strike missiles, and in the Missile Defense PAC-3 program, as well as favorable program mix, drove 160 basis points increase in segment operating margin.
Speaker 4: At rotary, admission systems on page 9, lower blackhawk and presidential helicopter volume, along with supply chain impacts across the business area lowered year-over-year sales by approximately $200 million.
Speaker 4: Operating profit was lower based on fewer favorable profit adjustments on Aegis and radar programs, the impact from lower volume, and changes in contract mix.
Speaker 4: Turning to chart 10 in our space business area. Overall sales were down 350 million dollars.
Speaker 4: by a 425 million dollar reduction from the re-nationalization of the atomic weapons establishment, which is partially offset by solid growth on the next generation interceptor program.
Speaker 4: This will be the last quarter affected by the AWE compare.
Speaker 4: Operating profit was lower primarily due to the mix and timing of launches at United Launch Alliance as well as lower profit step-ups.
Speaker 4: Okay, moving over to our updated outlook on page 11.
Speaker 4: Our expectations for segment operating profit and free cash flow remain unchanged despite a lower sales outlook.
Speaker 4: reflecting solid year-to-date results and management's focus on operating performance.
Speaker 4: Our expectation for full year sales have been reduced by $750 million to approximately $65.25 billion.
Speaker 4: Three of our four business areas have been reduced due to supply chain impacts, award timing, and program schedule shifts, all of which are incorporated into our new guidance.
Speaker 4: The impact of lower anticipated sales volume is expected to be offset by improved margins for the year, which is supported by our year-to-date margin performance.
Speaker 4: We're alluring the earnings per share outlook by $5.015 to reflect the impact of one-time items, such as the pension transfer, debt refinancing, and your-to-date mark-to-market adjustments.
Speaker 4: Support to note that these expectations assume that we definitively defined the lot 15 through 17 contract here in the third quarter.
Speaker 4: In addition, there are no incremental mark-to-market impacts assumed for the second half of the year.
Speaker 4: Okay, moving to chart 12, we provided a detailed view of the changes to earnings per share for the year. The one time pension settlement charge is now included in our outlook and following the execution of that pension transfer.
Speaker 4: The remeasurement of our pension plans has caused us to reduce our FAS CAS pension adjustment by $50 million.
Speaker 4: We have also incorporated the impacts of the year-to-date mark-to-market adjustments and our debt refinance to the new estimate of approximately $21.55.
Speaker 4: At chart 13, you'll see the changes to guidance by business area.
Speaker 4: As I mentioned before, three of our four business areas have reduced sales outlooks, reflecting supply chain impact and award timing. But as noted, each business area is holding to the previous guidance for segment operating profit.
Speaker 4: We're confident that we can deliver higher operating margins, offsetting the top-line headwinds with our continued focus on cost reduction, program performance, and leveraging the size and scale of the enterprise.
Speaker 4: Okay, let's wrap up on chart 14.
Speaker 4: Our operational performance in the second quarter was solid, with improved segment margins and consistent cast generation and deployment.
Speaker 4: We revised our 2022 financial outlook incorporating headwinds, but held our commitments for segment operating profit, free cash flow, and cash deployment.
Speaker 4: Now looking beyond 2022, the Lockheed Martin fundamentals remain strong. We continue to invest into the support of our customers' important security missions, leveraging the breadth of our platforms and solutions.
Speaker 4: Our broad portfolio, as well as the current and projected backlog underpin our future growth expectations.
Speaker 4: In addition, the outlook for domestic and international defense spending has improved. And we expect to incorporate these changes over the coming months, as we gain clarity on the timing of global security spending commitments and industry fulfillment. But replaceable support. for filming.
Speaker 4: To close, our pillars of growth, financial position, focus on strong cash generation, and our disciplined and dynamic capital deployment strategy place us in an enviable position to deliver long-term value to shareholders.
Speaker 4: With that Brad, let's open up the call for Q&A.
Speaker 2: Of course, and ladies and gentlemen, if you wish to ask a question, please press the 1 followed by the 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1 and 0 command. If using a speakerphone, please pick up your handset before pressing the numbers. And once again, if there are any questions, please press 1 and 0 at this time.
Speaker 2: Our first question today comes from the line of Doug Harnett with Bernstein. Please go ahead.
Speaker 3: Yes, good morning. Thank you.
Speaker 3: I wanted to make sure to have a good understanding of where the F-35 stands here. You've guided to 147 to 153 per year in the next two years and then 156 in 2025. But the block 15 to 17 size averages down at 125. And we assume that starts in mid-2023 in terms of deliveries.
Speaker 3: So really two questions here. First, can you reconcile the lower block size with your production plan and also with the 2023 budget levels, which suggests some lower deliveries, at least to us in 2025?
Speaker 3: And then second, why did DOD go to these lower block sizes? And does that have any implications for how you think about margins in these blocks?
Speaker 4: 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.
Speaker 4: With the 375 that puts us at 455. So if you zoom again at the midpoint for 23 and 24 of about 150 aircraft that puts you at 300, that leaves about 155 for 2025. And so maybe one short to the 156 and 25, look pretty much up right there. So pretty much up right there.
Speaker 4: As far as the lower outlook, a lot of that was incorporated in our negotiation on Lot 15-17 in terms of the factors we talked about before as far as impacts from COVID, impacts in supply chain, also the lower volumes and other factors. All of that was taken into consideration in the Joint Program Office.
Speaker 4: The margins themselves, at the end of the day, the way the contract is structured as we finalize this, is it would 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.
Speaker 4: We are confident we can perform to those levels.
Speaker 2: And our next question comes from the line of Richard Safran from Seaport Research Partners. Please go ahead.
Speaker 5: Jim, Chad, Greg, good morning, Hario.
Speaker 5: Great Greg, good morning, how are you? Good morning.
Speaker 5: 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 to 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 what might actually affect your outlook for what get your eyes on in another person.
Speaker 5: for 23? And in your answer there 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.
Speaker 4: Sure, Richard. Yeah, let me get started on that. I think the takeaway here in the closing remarks is that, you know, as I mentioned, the environment has improved from where it was a year ago. And along with that, our pipeline has certainly grown. And I'll throw maybe a couple examples to that. You know, we've seen, I think, in the press, in terms of higher demand, and we've seen new contracts on the F-35.
Speaker 4: There's also interest on the F-16 with international partners and customers. And we've talked about, we've got a backlog today, 128 aircraft. We're pleased to have Germany come into the full, I'm sorry, Jordan come into the fold as well. But beyond that, we've talked about a pipeline to read a 400 additional aircraft.
Speaker 4: That pipeline has grown to about 500 aircraft, given what we've seen over the past 6 to 12 months.
Speaker 4: I mean, so in our arrow in these aircraft, we see incremental opportunities.
Speaker 4: I'd say similarly in our missiles and fire control, both in the air and missile defense side as well as tactical missile side, we've seen inquiries on foreign military sales and that pipeline has grown as well. And that's in say the multi-billion dollars of opportunity.
Speaker 4: Things like, you know, things that they've been out there and oppressed, whether it's javelin, high Mars, as well as path three opportunities. It's important to remember that in the path three, we are increasing our outlook in our production schedules to begin with. And so the question is, how much higher can we take it over the next number of years? As this coalescence, and I mentioned in my remarks, that we'll gain more clarity in terms of, we have learned how to overcome a cheap,
Speaker 4: how these things will actually manifest themselves into real contracts. The reality is today, none of it is under contract. And so we're trying to get a better understanding with the timing of which these will come into contract, and then get a better understanding of our supply chain capability to determine when we can actually deliver. What I can say with some level of reasonable confidence is that our orders and backlog outlook over the next two years will be better than it was a year ago. But that will still take some time to convert to revenues.
Speaker 4: beyond that time period. Yeah, and just to add to that in, uh,
Speaker 3: 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 had largely withdrawn from its military operations after two decades of heavy presence in the Middle East. The US had a very large number of security personnel that were in the midst of the military operations. So after two decades of heavy presence in the Middle East, the US had a very large number of security personnel that were in the midst of the military operations. The US had a very large number of security personnel that were in the midst of the military operations. The US had a very large number of security personnel
Speaker 6: you know, China's increasing activism in the Western Pacific while recognized was perceived as kind of a potential concern to watch item for the future, if you will.
Speaker 6: Europe was totally at peace and Russian forces remained within their borders at that point in time.
Speaker 6: But if you fast forward to today, the U.S. 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.
Speaker 6: The U.S. 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, to mention North Korea.
Speaker 6: The value of deterrence has never been greater, really, at this point. Now, and that shift happened over literally three or four months.
Speaker 6: 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...
Speaker 6: 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.
Speaker 6: 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.
Speaker 6: And for the kinds of systems that Jay outlined, the US government's 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.
Speaker 6: equipment like F-35 and F-16 and high Mars etc.
Speaker 6: We actually have a match to our original strategy, which was for the next couple of years, were you expecting?
Speaker 6: for 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 this share count to be ready for an inflection point. Now again, in 2024 and beyond, the middle of the decade,
Speaker 6: This unfortunate situation in global security, having deteriorated, can only bolster our inflection point from where it would have been.
Speaker 6: And along with that, we're doing the integration of our signature platforms that everybody seems to want right now.
Speaker 6: 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 gonna take a while for the clutch to engage here, both in the US and internationally, but the demand and the situation that our customer base is facing has dramatically changed over the last three, four.
Speaker 7: much.
Speaker 8: And our next question comes from the line of David Strauss with Barclays. Please go ahead.
Speaker 9: Thanks for morning.
Speaker 10: who of m
Speaker 9: Jay wanted to ask about the pension. So I saw you you know you mark to market with the yes
Speaker 9: with the pension transfer, so 50 million worse.
Speaker 9: this year, but what does that mean for, you know, based on where things are today, you know, given, you know, big time negative asset returns? What do you think about for pension the next couple of years relative to what you got it for prior? I think it was $2.3 billion in pension income in 23 and $2 billion in 24. Thanks.
Speaker 4: Good question, David. This year, excluding the impact of the one-time charge, we're at $2.2 billion.
Speaker 4: 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.
Speaker 4: I would expect our pension, our total adjustment, and our FAS is going to be flat. So about 400 and change this year, it will be about 400 and change next year.
Speaker 4: Similarly on CAS, we're seeing similar types of effects where next year the CAS cost 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 contracts.
Speaker 4: 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 training data. But I can say right now for 23 essentially flat. But I can say right now for 23 essentially flat.
Speaker 8: And our next question comes from the line of Kai Vanrumer with Cowen. Please go ahead.
Speaker 11: 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 pre-announced that that might be an issue. Where are you with both supply chain? What are the problems? Where are they? And similarly with labor availability. Thank you.
Speaker 4: Yeah, good question, Kai. You know, going back in the beginning of the year, you know, everyone was impacted by the latest variant that we had. And our operations were impacted, our supply chain operations were impacted, and I think our ability to recover from that has been more challenging than we had originally anticipated. We have seen some level of improvement in certain areas of not only our operations, but also our supplier operations.
Speaker 4: but we've also seen broken commitments at the same time. And so it just causes to reassess what this meant for the year. And so while we do see some improvement, our ability to recover the lost time in the beginning of the year is just become too much of a challenge. And that's really the question, when you go beyond 22 now, is how does that ripple through? As you see Jim mentioned,
Speaker 4: The COVID impacts on the 135 as an example. We're seeing that ripple through through multiple years. And so that's something that we just kept to continue to evaluate and take a look at what that means to 23 and beyond. And take a look what that means to 23 and beyond.
Speaker 4: As far as labor, labor has been a, you know, an ongoing challenge, I think, for the industry as well as us. I think we've given the size and the scale of Lockheed Martin. I think that we've been able to weather it reasonably well. And as an example on F-16, we've been able to take up close to 50 employees out of a different operation and international operation and bring it into Greenville, South Carolina to help us stand up and move quicker on the F-16 program. So I just goes to the strength and the...
Speaker 4: breath that we have here at Lockheed Martin. But nonetheless, it's been a challenge. Our ramp on that program is taking longer than we originally anticipated, largely because of the slower ramp and hiring employees. We're pretty laser focused on it. We have a dedicated team, HR team, that is focused on hiring people. They are very focused on a particular radius to bring those people in. And I think we're on a good track now with our new schedule. We expect to deliver.
Speaker 4: aircraft next year and then that we'll get to a more strong, more of a run rate, full capacity run rate for a Greenville in 2024.
Speaker 4: So hopefully that answers all your questions, Kai. But again, it's been, again, supply chain has been choppy. For the year, the reason why we took it, took the expectation down as we expected to continue to be choppy for the remainder of the year and we'll have to reassess it when we give our training data in terms of what it means for 23 and beyond. And in terms of what it means for 23 and beyond.
Speaker 8: And our next question comes from the line of Greg Conrad with Jefferies. Please go ahead.
Speaker 12: Good morning. Good morning. I was hoping maybe just to talk a little bit about Sikorsky and how you're thinking about the outlook there given you've had some incremental CH53Ks and finalization of the multi-year 10 for Blackhawk. When does that business return to growth and then with that any update on FLORA and kind of how you're thinking about award timing there?
Speaker 4: So on Sikorsky, we expect to return to growth really starting in 2023 for that business. We're expecting, as you mentioned, the Florida decision, which we've been told 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 Mallard and Jim Takelet had talked about the four pillars of growth.
Speaker 4: and one of those being new awards, FLARA was one of those programs that we have talked about. And so we expect to...
Speaker 4: to see incremental growth in 23 and beyond. And that is on the back of the CH53K, which is a program of record, as well as new awards, FLARA being the most significant.
Speaker 6: And the timing we thank on Flora, or at least what the Army has stated is that there's a decision to be announced in September of 2022. That slipped a month or two from their original plan, but we're expecting and hoping for a good news on that front when the announcement is bad. We need an announcement, but... We need an announcement, but...
Speaker 8: And our next question comes from the line of George Shapiro, with Shapiro Research. Please go ahead.
Speaker 13: Yes, I got three little questions for you, Jay. You had previously said that F-35 impact from not signing 15 to 17 would be 500, now 325, so as curious as to the difference. Second one, the classified you mentioned was up 210 million. Was that the same program that you took the charge last year? And the third one was why is the space margin go down in the second half of the year?
when you'll have more launches, so ULA profits ought to be higher. Thanks. 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, is we have growth on new programs as well as classified programs, which are coming with pretty low margins, which are pretty dilutive. 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. I'm on the 2.10, that was basically the absence of the charge and the classified program last year and arrow. 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.
And our next question comes from the line of Christine LeWag from Mortgage Stanley. Please go ahead.
Hey, good afternoon guys. Sorry, calling from the air short might be a little choppy. But maybe back to the F-35, Dependent-Begon a few months ago was suggesting that the contract for not 15 to 17 could cover in the order of 400 aircraft versus the 375 that you have a handshake deal on. So considering the demands of international partners, why is it a little volume lower?
And then also a follow up to that is, you know, when you think about the potential for congressional plus-up and the international demand, I would have seen there's some urgency from some of our partners. Is there upside to that 375? How firm is that figure?
You know, it's an excellent question, Christine. You know, I think there could be some variability right now, but I was just still TBD. As we mentioned, you know, Jim, in the opening remarks, we still need to defendatize this particular agreement. You know, we did see the, in the President's budget, us specifically, really the 23 budget would have had mostly impacting last 17, is where you see these lower reductions. They've talked about,
the funding constraints relative to the nuclear modernization and other items. And so that's something that we just keep monitoring. They did, as you said, Christine, in the funded priority list, wanted to add back 19 aircraft. Obviously, we're very supportive of that. And that's something that we're certainly pursuing. And we're confident there'll be something there. And it's really TBD over the next few months as Jim noted in his remarks. But there could be some upside. And we just have to let it let the process play out.
there, maybe hoping for a bit of review on hypersonics and if you can still hit that $3 billion target. And then some of the other major programs that are going to drive growth, it sounds like a couple of years from now when the clutch kicks in as you say.
So Rob, let me start at Jim here on just over the overall.
Strategic approach that we have and then I'll turn over to Jay for some of the programmatic details in color. So look we're focusing on the things we can control versus what we can't control.
So what we can't control right now is the level of inflation adjusted defense budget, which given, you know, 90% 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 sun setting if you will, or at least reduction in rate of volume, like Blackhawk 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 of pressure in any circumstance, right? So during this time, as you pointed out, you know, pressure on top line revenue, you know, we've really used our dynamic capital allocation approach.
to in a slow revenue growth period
still drive i r and d and cat backs because we want to invest for the future growth but at the same time ramp up share repurchase and we continue to the con on that path as well the goal then is to take down the share count in the relatively low growth period so in the high growth period
comes about, you've got kind of a turbocharger on the investors.
kind of a turbocharger on the investors basis if you want.