Q4 2022 Lockheed Martin Corp Earnings Call
Okay.
[music].
Good day, everyone and welcome to the Lockheed Martin fourth quarter and full year 2022 earnings results Conference call. Today's call is being recorded at this time for opening remarks, and introductions I would like to turn the call over to Maria Richard Allen Lee Vice President of Investor Relations. Please go ahead.
Thank you John and good morning, I'd like to welcome everyone to our fourth quarter and full year 2022 earnings conference call joining.
Joining me today on the call are Jim take what our chairman President and Chief Executive Officer, and Jay Malave, Our Chief Financial Officer.
Statements made in today's call that are not historical fact are considered forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law.
Actual results may differ materially from those projected in the forward looking statements.
Please see today's press release, and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward looking statements.
We have posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www 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, Maria and good morning, everyone.
I hope you've all had a good start to the new year and thank you for joining us on our fourth quarter 2022 earnings call as we review our results key business area accomplishments and our outlook for 2023.
I'd like to begin with a few highlights from the quarter and from the year and then Jay will review the financials in a more detailed manner.
Lockheed Martin had a strong close to 2022, all of our business areas met or exceeded our prior expectations, resulting in a 2022 full year sales of $66 billion segment operating profit of $7 2 billion and earnings per share of $21 66.
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Our free cash flow for the year of $6 $1 billion also came in above our prior expectation while backlog for the year increased to $150 billion driven by all time record orders for Lockheed Martin.
Our financial results included more than $1 $7 billion of independent research and development investments or IRA at a new high watermark for the company. We also continue to modernize and streamline our operations to increase efficiencies and reduce costs.
Significant capital projects include our ongoing investment in what we call one Lockheed Martin transformation.
One L M X.
This is our multiyear internal project to transform our business processes and systems from end to end.
Implementing new digital tools, and our operations and expanding our use of model based engineering to enhance our speed to market and our cost competitiveness.
In 2022, we completed a majority of the detailed design for our new systems and business processes.
And for 2023, we expect to complete the detailed design and implementation Roadmaps that go with it and then we'll transition to the system build and configuration phase over the next couple of years.
These Iran and capital investments accelerate the capabilities, our customers need and for our operations to efficiently and effectively meet those needs.
From a capital return perspective, we delivered approximately $11 billion to shareholders in 2020 to buy share repurchases of $7 9 billion and dividends of $3 billion.
During the fourth quarter, specifically, we entered into a $4 billion accelerated share repurchase program and we have retired approximately 7 million shares under that agreement so far.
We expect to complete our remaining repurchase authorization of $10 billion over the next few years consistent with our focus to deliver free cash flow per share growth to you the investor.
These operational and financial results created significant value for our shareholders ending the year with a total shareholder return of 40%.
I will touch briefly now on the department of defense or Dod budget.
In late December Congress signed that the FY2023 omnibus spending bill into law.
Appropriating $858 billion for National defense, including $817 billion for the Dod base budget.
This reflects approximately 10% growth year over year for both National defense and the Dod base budget.
The law also represents a 6% or $45 billion increase from the President's budget request for D O D.
These appropriations enabled us along with the joint program office to finalize the contract for the production and delivery of up to 398 F 30, fives for $30 billion, and <unk> 15, and 16, including the option for lot 17.
Further several other of Lockheed Martin's programs received the funding levels necessary to drive the growth outlook. We've previously identified.
<unk>, our combat rescue helicopter.
130, Jay Blackhawk, CH, 53, K and Fad.
We view this funding outcome is positive for the future and our current expectation is that growth will materialize over the longer term starting in 2024.
Let's now turn to the four growth pillars programs of record hypersonic <unk>.
Classified activities and New awards.
With regard to programs of record there were several important developments in key signature programs in our fourth quarter.
On the F 35, the definitive nation of lots 15 through 17 as I mentioned a minute ago included the first F 35 aircraft to be produced for Belgium, Finland and Poland.
We received authorization to procure long lead items for lot 18 F 35 aircraft for the U S Air Force Marine Corps Navy and U S allies as well.
We also formally welcome Germany, the ninth foreign military sales country to the F 35 Lightning two program.
And earlier in January Canada officially became an F 35, operator as the country selected the aircrafts to replace its aging fighter fleet.
We continue to expect deliveries of the F 35 to ramp to a 156 by 2025.
Despite the temporary pause in flight operations and corresponding suspension.
The engine deliveries that began in December and resulted in the delivery of just 141 F 30 fives in 2022, seven shy of our expectation of 148 before the engine issue was discovered.
Also in the quarter the U S. Navy authorized the CH 50, <unk> King stallion heavy lift helicopter to enter fueled feel full rate production.
And then its deployment phase.
This important milestone allows the program to proceed beyond low rate initial production.
This achievement attached to our long standing partnership with the U S Marine Corps, and instills confidence and stability and Sikorsky is diverse domestic supply chain.
In addition at Sikorsky International demand for the Black Hawk remains strong.
Last week, the Australian Army announced it will acquire 40, you age 60 M. Black Hawk helicopters to replace its current multi role helicopter fleet.
Deliveries are expected to begin for Australia this year.
Further the Lockheed Martin built Orion exploration class spacecraft launched on Nasa's Artemis won and completed a 25 day flight test slashing down off the coast of California.
This successful mission takes us one step closer to the first woman and first person of color setting foot on the moon.
On its journey Orion traveled more than one 4 million miles through deep space and surpassed records for total distance.
It traveled 270000 miles from home and the farthest distance from Earth bias, great base craft designed to carry humans.
We look forward to the next stages of the program with seven additional missions under contract.
Turning to hypersonic.
In December Lockheed Martin missiles, and fire control in the U S. Air Force successfully conducted a hypersonic boosted flight test of the air launched rapid response weapon.
This was the first launch of a full prototype operational missile meeting all of its objectives for the test, including reaching speeds of greater than five times the speed of sound.
With regard to classified programs, we achieved successful milestones across multiple business areas in 2022 and grew 5% year over year.
We continue to expect growth in classified.
Outpaced the rest of the portfolio over the next several years.
And finally at New Awards Lockheed Martin's next generation Interceptor NCI continues to make progress.
In late October we announced the delivery of the first <unk> flight software package to the missile Defense Agency.
Providing the framework of software development tools process workflows scripts and environments.
The delivery was ahead of schedule and is a critical step in the path for flight testing and fielding.
This program remains a focused competition for Lockheed Martin was the first NCI forecast for delivery in 2027.
With regard to the future long range assault aircraft or Florida or competition.
We're disappointed in the U S Army's decision and upon review, we determined a formal protest by Sikorsky on behalf of team defiant to be the best course of action.
We continue to believe that the Fiat ex with its increased speed range maneuverability and survivability is the transformational and most cost effective aircraft that best meets the selection criteria for this competition.
Sikorsky remains one of two competitors to the other component of the future vertical lift initiative.
The future attack reconnaissance aircraft or far.
It is currently expected to be awarded in 2025.
The first radar racks competitive prototype is over 90% complete.
It has more than 65% of its acceptance test procedures already done.
Sikorsky is the only company with a representative Barra technology demonstrator aircraft I saw a slide out West Palm Beach, a few months ago. It's amazing the S 97, Raider, which has completed more than 110 flight hours.
In November Norway became the first international customer for our new TPI for radar.
It's the first software defined radar that outperforms and target detection mission diversity and transport ability.
Norway is going to receive eight of Lockheed Martin's <unk> four radars with options for three additional radars.
Finally backlog ended 2022 and $150 billion with book to Bill of one two times and increases in every business area across Lockheed Martin.
This strong cement demand signal bodes well for future growth over the longer term for our company.
So these four pillars will guide us as we face a challenging geopolitical environment.
And apply a growth in integrated capabilities mindset to everything we do here.
This conflict continues in Ukraine, Unfortunately, and projected global threats require coordinated efforts to protect the U S and our allied territories.
Ongoing progress in our 20 <unk> century security vision will enable the acceleration of advanced capability to the third deter these threats.
And drive effective joint all domain operations for our military service customers.
In the fourth quarter, we continued to announce and expand strategic agreements with America's leading commercial digital companies such as IBM Red hat to advanced artificial intelligence innovation on Lockheed Martin military platforms.
Microsoft with whom we're gonna help power classified cloud advanced technologies for the department of Defense.
Microsoft's latest secure framework will make Lockheed Martin the first non government entity to independently operate inside the Microsoft Azure government secret cloud.
Ushering in a new era of cloud opportunities for the industry.
As we look ahead demand for Lockheed Martin platforms and systems is strong in the United States and abroad. We continue to expect 2023 sales about the same level as we discussed back in October .
We also continue to expect to return to sustained top line growth in 2024 and beyond as headwinds diminish in our program mix the supply chain continues to recover and our signature programs grow.
Free cash flow per share will remain a key focus as we maximize returns for you our shareholders.
2022 is a year of great accomplishments for our company in the face of a lot of dynamic challenges.
The outstanding achievements of our teams resulted from real deep commitments across our business areas and better cooperation among them as well as our corporate functions to develop produce and to deliver world class systems to our country and its allies.
Our progress this year is a testament to the dedication of our 116000 team members and the values. We all share so with that let me hand, it off to Jay to give more color on the financials and we'll join you later to answer your questions. Jay Thanks, Jim and good morning, everyone. Today I will walk you through our consolidated results for 2022.
Additional business area detail and offer our first full look at 2023 guidance as I highlight our results. Please follow along with the web charts, we posted with our earnings release today.
Let's begin with chart three and an overview of our consolidated 2022 financials.
Lockheed Martin followed up a solid third quarter with a strong finish to 2022.
Highlighted by 7% year over year sales growth in the fourth quarter and effectively managed a turbulent year impacted by Covid and supply chain disruptions as well as inflation levels not seen in decades.
Besides sales, we also exceeded our expectations for segment operating profit earnings per share and free cash flow, all while soybean incremental headwinds tied to restructuring activities within RMS and mark to market losses in our investment portfolios.
We also booked record orders in 2022, resulting in 11% growth to an ending backlog of $150 billion.
In addition to our orders on F 35, we experienced a surge in new interest for industry, leading security solutions, such as and classified programs in space and in missiles and fire control, where we booked approximately $1 5 billion in orders, reflecting increased demand to replenish stocks and enhanced security positions.
Globally.
And we delivered on our commitment to boost shareholder returns by deploying nearly $11 billion to shareholders through share repurchases and dividends, while making significant investments in our businesses.
Taken together these results demonstrate the perseverance of our dedicated employees to perform in challenging environments and support our expectations for 2023 and beyond.
Taking a closer look at full year results with consolidated sales and segment operating profit on chart four.
Sales came in higher than expected by nearly $750 million limiting the declined to 2% year over year and essentially recovering to the sales guidance. We had originally communicated last January .
The stronger than expected performance was broad based across all four business areas and reflects strong coordination with supplier partners to drive material throughput and program schedule performance as well as some favorable award timing, which drove additional revenue.
Segment operating profit declined 2% year over year, but also finished higher than expected by almost $50 million driven by the higher sales operating.
Margins settled at 10, 9% slightly lower year over year and versus expectations based on lower net favorable profit adjustments.
Moving to earnings per share on chart five.
Adjusted earnings per share grew 2% for the year as the benefit from share repurchases overcame headwinds from lower segment profit and fast cash pension income.
Moving to cash flow on chart six.
We delivered $6 $1 billion of free cash flow for the year, while investing almost $1 7 billion and capex at a ratio of one four times depreciation.
We also ended the year with nearly $1 $5 billion of accelerated payments to our suppliers, maintaining our commitment to a resilient supply chain.
As I noted earlier 2022 represented a significant year of cash deployment in total we returned 178% of free cash flow to shareholders in 2022, leveraging our performance and strong balance sheet, while still investing for our anticipated growth trajectory in 2024 and beyond.
Okay moving to segment results and starting with Aeronautics on chart seven.
Full year sales grew 1% year over year, primarily driven by increases in our classified programs, partially offset by lower F 35 production volume.
Operating profit increased 2% driven by higher net favorable profit adjustments more than offsetting the impact of the lower volume for.
For the year backlog at Aeronautics grew 15%.
As mentioned Aeronautics completed the F 35 lot 15 through 17 negotiation and secured production volumes, while providing the services with a value proposition that combines the highest performance at affordable cost.
Looking at missiles and fire control on page eight.
Sales decreased 3% driven primarily by lower volume on our special Ops Sustainment program following the Afghan withdrawal, along with lower volume on sensors programs.
Operating profit was down 1% with lower favorable profit adjustments, primarily unpack three for.
For the year backlog increased 6% on the back of tactical missile strength.
Our rotary and mission systems on page nine.
Sales decreased year over year by 4% driven primarily by a nonrecurring revenue event in our training business in 2021, along with lower C. Six ISR and Blackhawk volume at Sikorsky.
Operating profit decreased 7% following Sikorsky in <unk> volume and lower favorable profit adjustments on the Blackhawk program.
Backlog grew 4% in 2022 led by the Defense of Guam Award, where RMS will be the lead integrator of the multi domain air and missile defense system as well as stronger Sikorsky orders.
Turning to chart 10, and our space business area sales decreased 2% due to the 2021 renationalization of the AWD program, partially offset by growth on a next generation interceptor program and National Security space.
Operating profit decreased 8% with lower.
Lower net profit adjustments, partially offset by higher equity earnings from United launch Alliance.
<unk> grew 16% based on strong classified program captures.
And Orion orders, so all told a strong finish to the year. So let's now shift to 2023 on page 11.
Before introducing our expectations I'd like to inform you of a reporting change in segment operating profit starting in 2023, we will report purchased intangible asset amortization expense in unallocated corporate expense below segment operating profit.
We've previously intangible amortization was included in segment operating profit.
This change will not impact total earnings and we believe the change provides a more accurate view of operating performance for each of our four business areas. The.
The impact was approximately 40 basis points on our 2023 expectations consistent with the impact in previous years.
Our 2023 financial outlook includes the impact of this change and you can find supporting data for these adjustments in the appendices of our web charts as well as in the earnings release.
Let's get into the outlook for 2023.
We continue to expect sales to be in the range of $65 to $66 billion.
And the midpoint slightly below 2022.
Speaking to the timing of sales. This year, we expect the first quarter to be our lowest quarter of the year ramping up quarter over quarter as we did in 2022.
Segment operating profit for 2023 normalized for intangible asset amortization has improved what we thought from what we thought in October and.
And we now estimate only 10 basis points of headwind from 2022 with segment operating margins at 11, 1% under our new reporting.
We currently expect a $2 1 billion of Fas has income in 2023.
Estimated to be roughly $100 million lower than 22, excluding the impact from our pension transfer transaction.
Our earnings per share is expected to be between $26 60.
$26 90 for 2003 with a year over year reduction to adjusted EPS, primarily driven by lower segment operating profit and fast cash income, partially offset by the benefit from a lower share count.
Our free cash flow estimate for 2023 is greater to or equal than $6 $2 billion and assumes continued enactment of the R&D tax capitalization.
This increase of $100 million to cash generation, along with our share repurchase guide up another $4 billion highlights.
Highlights our continued focus on increasing free cash flow per share for our shareholders.
This projected combination of higher free cash flow and a lower share count led to a mid single digit growth expectation of free cash flow per share in 2023.
Okay on chart 20, a chart 12, let's sum it all up.
We closed out 2022 with a strong finish with operating momentum and a robust backlog, which have us well positioned to resume growth in 2024 and beyond.
Also place a premium on leveraging our strong cash generation and balance sheet to increase cash returns to our shareholders with a significant increase to share repurchases.
All four business areas, our breath of development production and Sustainment programs continued to drive a foundation of growth and sustained high performance and we will work actively with our customers to meet their increasing demands and mission requirements looking ahead to the future.
Our investments for growth value inefficiency, our lines are aligned with our strategy for technology advancement and improved synergies across Lockheed Martin.
So in closing we believe the business the business is well positioned for long term growth and value creation for our shareholders 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 will hear an acknowledgement tone that you've been placed in the queue. You may withdraw your question at any time by repeating the ones Hero command, if you're using a speaker phone. Please pick up the handset before pressing the numbers.
Once again, we have a question to make press one then zero at this time.
And first of all the line of David Strauss with Barclays. Please go ahead.
Okay.
Good morning, everyone. Thanks for taking the question.
Morning, David.
Jim I wanted to ask you about you highlighted the headwinds that you have in terms of your program mix in 'twenty three is the reason.
For flattish sales could you quantify what that number is in terms of in terms of the headwind and what programs. Specifically you are looking at and then as a quick follow up.
Why 23 budget came in I think a fair amount better than you were anticipating plus ups on F 35, and C 130, how might that change what you've previously said with regard to.
The reacceleration in growth in 2024 is it better than low single digit now.
So David let me take the first one and then kick over the second part of your question to Jim and just really talk in the context of 23, and what's going to be different in 2024.
2023, and when you look at it we've got continued growth in our in our four pillars really the programs of record that Jim had mentioned.
But we do have some specific unique items to 2023 and I'll give you. An example for example in Aero on the F. 35, we continue to expect mid single digit growth in Sustainment.
Program, but.
But we are expecting also a mid single digit decline in production as well as deliveries catch up to the material that we had purchased in prior years. Similarly on the F. 16, we are going to see continued growth in production.
To rollout our backlog, but we are seeing a reduction and modernization and sustainment programs on the F 16, so as those both of those normalize in 2023% going into 2024, they will no longer be headwinds, which will continue to allow for growth in aeronautics, particularly in the F 35, Sustainment and an F 16 production.
Kimberly NMFC.
What we saw in 2022 and that carries over a little bit to 2023.
As some of the areas, where we see the higher demand from our production level particulate, particularly in programs of record things like Pac three it's taken us a little bit longer than we originally expected to ramp up and so we're going to see gradual improvement supply chain as well as on our internal operations in 23.
With stronger growth in 2020 for Amit RMS CH 53 will double deliveries in 24 versus $23 23 versus 22, it's pretty much all <unk>.
<unk> deliveries, we also see probably some blackhawk growth in 'twenty, four as well and what we're going through right now is the transition from multi year nine multiyear 10.
And our message of course ski specifically so those are all things that we think will lift.
From 24 relative to 'twenty three and those are headwinds that are really unique to 2023.
Yeah, and as far as where the defense budget came out David.
Really aligns with our view in our company about the nature of the geopolitical threat.
The need to modernize the U S and Allied forces to.
<unk> hopefully deter armed conflict beyond.
The sad and unfortunate situation in Ukraine, Thats already happened and the fact that there is bipartisan support.
And Congress to do just that so we've been expecting all along in our kind of long range plan that the.
The U S government and Congress would would step up to meet that.
Reality of the global geopolitical situation and that's exactly what played out in the budget process for FY2023.
We also expect that same reality to.
To continue to sadly exist again.
The next budget cycle, which is happening even now in 2020 for 2024. So we don't see the circumstances the fundamentals changing therefore, we also believe that the continued robustness of the defense budget is going to be a reality as well.
Next we'll go Oh. Please go ahead.
Yeah, just let me follow up on your last question, David whether or not there is upside.
Where we see potential increases to where we were baseline before really is in MFC.
Over the next five years, we've got revenue potential it's around $6 billion.
And that would more than offset lost revenue associated with flora should that decision hold and so net net we see that there could be some upside over the next five years.
And next we'll go to Myles Walton with Wolfe Research. Please go ahead.
Thanks, Good morning.
Jim maybe.
One quick one and one for.
Or allow you to expand a little bit when is your expected restart of the orders and the F. 35 is a quick one and then.
Obviously, there is more of a debate going on in D. C around fiscal restraint than it's been.
In place in the last several years and so I'm just curious where you think this ends up.
As one thing, but more importantly.
What if anything do you do operationally to prepare yourself for whatever the outcomes are in terms of.
Balance sheet holding back on repo or.
Leaning forward looking.
Looking for areas where.
2023 budget excuse me 24 budget might be in a continuing resolution for a full year anything on that perspective from an operational perspective.
Sure Michael so as far as timing of resumption of deliveries on F. 35, I think it's really important to differentiate between delivery and production right. So we are continuing production and the final assembly factories.
Fort worth in Italy, and in Japan at the same pace, we expect it to before the mishap occurred. We're also continuing to order and receive parts and materials from our supply chain as well.
And so once an aircraft rolls out of the factory our pilots in the Dod pilots conduct a handful of acceptance flights. That's what's kind of on hold right. Now is just that portion of the process. So the vast majority of our revenue much greater than 90% as earned when the aircraft rolls out from the plant door.
So Jay can add more color on the financial perspective, if you like a little bit later, but thats really what happens and so as far as the timing of resumption of deliveries will be notified of that when the U S government and the propulsion supplier conclude their ongoing mishap investigation, Jay do you want to add anything to it you got it that's it okay.
And then secondly, we really can't predict the political dynamic in Congress.
And with them within and with the administration. So we're going to keep our heads down stay on our plan and do our job and expect that the right thing will occur out. The other end of the 2020 for budget process, which is fully funding and making available that funding to the department of defense. So we can deter conflict.
With them and that they can acquire what they need to do that so that's our expectation.
It's really difficult for us to lay out what we think the budget process will be given.
The nature of the House Senate and the administration right now, but we expect that they're going to come together and do what's needed to defend the country and get a budget done.
And next we'll go to Noah <unk> with Goldman Sachs. Please go ahead.
Hi, good morning, good morning.
Jay we've talked about this dynamic where the outlays are trailing the authorization.
And the possibility that supply chain is intertwined in that.
And that was kind of tough in the first half of the year look to be getting better.
In the third quarter, but then.
Exited the year declining.
Do you have any insight into two incremental insight into what's going on there when that gets better.
To the extent that supply chains related your comments that you expect that to improve through 'twenty. Three is that underway you already see that happening or is that still just a logical.
Anticipation of timing.
Sure. Good question, let me, let me follow up and we looked at this and try to triangulate performance in a number of different ways. We looked at just straight piece part on time delivery during the fourth quarter relative to what we saw in the second and third we also looked at program performance. So earned value type metrics, and we really didn't see a meaningful change.
Time delivery or schedule performance relative to our value systems, but what I will say is the fourth quarter had significant a significant step up in requirements and if you adjust for the number of weeks in the fourth quarter relative to the balance of the year and you also adjust for some of these benefits that we saw in terms of <unk>.
We're timing our requirements in the fourth quarter stepped up sequentially by about 5% and I would say the entire value chain, whether it's our internal operations and supply chain was able to meet that increased level of requirement. So that to me bodes well for the future and as well as expecting a gradual improvement in.
<unk> 2023, and I think that just provides a reasonable assumption and a reasonable basis for that assumption.
And we'll go to George Shapiro with Shapiro Research. Please go ahead.
Yes. Good morning majority if you look at the F 35 program like the incremental profit you're recording was about a 16, 4% rate. So I assume you stepped up the <unk>.
Margin on the F 35.
And going forward than the slight decline that you're forecasting in the margin probably reflect sustainment growing versus production and a quick follow up to $20 million charge that you took in a classified program in Aero was that the same program that you took large charges a couple of years ago.
Okay. So George I can probably answer your questions with one yes, but maybe I'll provide a little bit of color. There I'll now take you are correct on the charge. We took that was related to the <unk> program. We continue to have some some learnings there, but our team is I think in skunk work is doing a great job managing that program and this is a development program.
Where were you seeing you continue to have learnings, but in the Grand scheme of things I think we've managed that quite well and it really hasnt did not impact our results as far as the F 35.
A program, we did see some benefits there and you're right in the quarter.
The results they were augmented.
Not only by the volume, but as well as the net profit adjustments at Aeronautics and it was across the board I think next year as we think about.
The margin, yes, theres, a little bit of a headwind there I think mix does play a part in it as well as right now we're planning a little bit of lower favorable profit adjustments, but for the year in the Grand scheme of Lockheed Martin This year, we did about 25% of profit and net.
Net profit adjustments and we expect that to be somewhat similar for the entire company for 23. Thanks for the question George.
And next we'll go to Rob Spingarn with Melius Research. Please go ahead.
Good morning good.
Morning, Rob Jim Jim I think everyone would agree that Lockheed has got the pole position and offensive hypersonic strong.
Program portfolio, there and some recent success is what I think.
People might be interested in are your efforts as well and counter hypersonic.
As we might expect that to be a growing portion of the budget can you talk about that a little bit.
Sure.
Largely classified Rob, but what I can say is.
Many of the elements of counter hypersonic <unk>. We also have a pole position in right. So we've got existing products that we can take the lessons learned from a lot of the engineering and apply them to just a faster incoming target right. So we're working on <unk> as you already heard which is a holistic miss.
Will it travels at similar speeds, we have the SaaS system, which is.
Sort of a high altitude interceptor as well and then we have <unk>, three which is very accurate lower level further.
Further in if you will.
Sensitive system. So we've got the engineering talent, we've got the intellectual property and we are developing these 21st century security concepts like applying artificial intelligence to network systems together and process data much more quickly which of course, you need that to process the information coming in on them.
<unk> five missile right. So I think we have a lot of the elements that will go into the eventual counter hypersonic solutions.
And we are working on many of them right now in integrating what we have in developing what we need.
Our next question is from Rich Safran with Seaport Research partners. Please go ahead.
Jimmy Jean Marie and good morning, how are you good.
Well thanks.
So I wanted to ask you.
About the F 16, and maybe expand on the remarks, you made just a few moments ago.
Thought you might comment on things like U S and international opportunity set ahead.
Maybe update on the first delivery expected production rates and if it's at all possible maybe touch on what margins you're expecting on the program right now that just thinking that it should be pretty decent given the move to Greenville was.
Was done to improve the cost structure of the program.
Hey, rich Jim It's Jim I'll start off quickly and then hand, it over to Jay for some of the background data.
Associated with the program, but the really great news as a block 70, which is the production article out of Greenville. The first Greenfield Black 70 test flight was this morning was successful.
Great milestone for the company in <unk> and.
And for that organization in South Carolina.
But there is a significant demand for this aircraft a lot of it is coming organically I guess I'll call. It.
From allies around the World also we're out actively marketing this jet to those countries that may not be.
Authorized yet or maybe not have the infrastructure for F. 35 at this moment that may in the future India is one of those.
Co chair the U S, India, CEO Forum with sector Mundo, we're going to be gone over there in a month or so.
With a team of Ceos from across our industry and meet with theirs and try to get collaboration going on one of the.
I would say primary opportunities in that endeavor as the F 21, which is F. 16 variant specifically designed for India. For example, so we haven't made that sale, yet, but I can tell you all the way up to my level, we're out marketing F 16, and we have a lot of organic demand coming in from either existing order customers or new ones, Jay anything you want to share.
Just maybe a little bit more color.
On top of the first flight that we had today the successful first flight congratulations to our team there.
We have over 20 aircraft that are currently in process in the production phase we.
We will deliver anywhere between say seven eight aircraft to this year and then that will step up significantly in 2024, and so we're in a good path that we recognize the opportunities are in front of US. There are a few countries that have been announced that we are eagerly awaiting contract finalization hopefully this year with Jordan in Bulgaria.
That's about combined about 20 aircrafts and so the demand is as Jim mentioned is pretty significant and we're ramping up as we speak to be able to deliver the customer requirements.
Next we'll go to Seth <unk> with Jpmorgan. Please go ahead.
Thanks, very much good morning, everyone.
Alright.
I am sorry to waste a question on pension, but if we look at the Cas recoveries. It was about 30% of this year's cash flow.
I know there is.
Discount rates and returns in all of that starts with <unk> tends to be much more visible than SaaS on the income statement. So can.
Can you give us a multiyear outlook for the Cas recoveries over the next few years and where the balance stood at year end.
Yes.
For cash this year as we mentioned that will decline. This year I said about 100, specifically the cash element will decline by about <unk>.
Recoveries by about $75 million, we will see that decline a little bit more over the next few years as well and so it will come down in the range I think around 151 $6 billion over the next few years and so that's the best outlook. We have today as you know these things are are they do fluctuate a little.
Volatile so we'll update that accordingly, as we think about next year and what that means for 2025.
And next question is from Peter Arment with Baird. Please go ahead.
Yes, Thanks, good morning, Jim Jaye.
Jay I wanted to just focus on missiles and fire control just kind of obviously, a little transition and growth this year, but profitability kind of going to be down and also it looks like close to 90 basis points, just maybe walk us through a little bit kind of some of the puts and takes there and just thoughts about kind of margin recovery as we think about the next couple of years. So we've got all this growth in plastics.
Yeah No. Good question. This is something we've talked a little bit on the third quarter call. We've got some some new program awards, particularly in classified that are going to put.
Some margin pressure not just next year, but a few years beyond that as well and it's really just on the early phase of these programs as we head into production.
It's just low margin and it will take time to have those restore two two margin that we've seen in the past well I will say is that we do have the benefit of some offsetting mix with the upside that we're seeing in this business I mentioned before a.
Potential $6 billion over the next five years those will come with more solid margins will help mitigate the reduction that we're seeing on these new programs, but there will be some pressure there that we have to deal with in MFC team has a good track record of driving out driving out cost driving margins I'm confident they'll be able to do that in the future as well.
But it will take a few years to get there.
Next we'll go to Kristine <unk> with Morgan Stanley . Please go ahead.
Hey, good morning, everyone.
Good morning.
Maybe switching gears to a different topic.
But with tighter and tighter cost of capital we've seen valuations come down in high growth investments is this a better time FERC corporate VC.
Turning to deals at attractive terms I mean, just looking at the limitations on M&A from the FTC staff. So let me start with Aerojet Rocketdyne I mean, how should we think about the importance of Lockheed Martin ventures to access these new technologies and could we see ventures double from here.
Hey, Christine this is Jim.
One of the first things I did when I came from the board to active management was to double as you said the double of the venture fund right. So it was $200 million now its $400 million, we're actively actually very actively looking to invest that.
Additional funding.
In the great scheme of the company, though it's really designed to.
Discover emerging technology that might be applicable to our strategy into our products and systems.
And help.
Develop that technology in a way that it can have utilization early earlier than perhaps otherwise for our industry. So we get the most benefit out of our.
Our venture fund, an actual operations production and development of platforms and systems.
We have had a nice up tick turn in the valuations of those investments as well.
But they're not necessarily driving the.
Ultimate results are the ultimate growth.
Aspect of the company.
But they are indirectly doing just that.
And I'll just add Kristina.
It's a great point I mean, we've got a pretty tight alignment.
On the targets that we pursue to our technology Roadmaps and these are examples like joint all domain operations interoperability autonomy artificial intelligence.
In other areas that will help us drive and accelerate our internal organic capability with these new emerging technologies and so it's a great point, there's certainly opportunity there as Jim mentioned, we've increased our availability of funding for that and we're excited about those opportunities.
And next we'll to Scott <unk> with Credit Suisse. Please go ahead.
Hey, good morning.
Good morning.
Jay you guys have taken a bit of a different approach on this R&D tax issue within some of your peers.
Subject to death already but.
I'm just curious if you've had any recent conversations with the government.
On whether theyre going to agree with that approach you've taken and then I guess just stepping back more broadly you have this uncertain tax position disclosed in the 10-Q, just kind of give us a sense for when you think that might get resolved. Thank you so much.
Sure.
Good question.
We remain confident in the position that we've taken we've had really no dialogue we are awaiting guy.
Guidance from the IRS on on what contracts, specifically would be covered youre right that there are different players have taken different positions, we remain confident in our position.
We believe that the risk is a factor in when you earned a particularly cost type contracts. There is no risk taken by the provider of those services. Secondly, we believe the benefit is marginal because of the owner or the contract or although that work is really the one that takes over that technology could transfer to others at any point in time.
<unk> and <unk>.
So we think that that those are sound based on sound arguments supported by.
Our legal teams that we have in a position that we've taken but again, it's uncertain in our uncertain tax position really reflects that uncertainty. So I can't give you specific one way or the other in terms of IRS positions, because we just don't know.
As of yet, but I can tell you. We spent a lot of time researching this has a lot of time discussing it deliberating it internally and we think the position that we've come out is the right position.
Okay.
And next we'll go to Rob Stallard with vertical research. Please go ahead.
Thanks, So much good morning, good morning, Rob.
JM boring inflation question fully.
Are you seeing any signs that inflation is starting to ease as it works itself through your system and was there any mitigation for these cost inflation that is going to be flowing through from the final FY2023 budget resolution.
Yes, Robert inflation is something that we evaluate all the time.
And many of our existing contracts, we have not really seen.
A significant impact only because our fixed price contracts of our suppliers are under fixed price contracts with us where we have seen isn't really on new proposals is where we've seen some impacts where you've got suppliers unwilling to provide longer term price commitments on requesting.
What we referred to in the industry as economic price adjustments, which are escalation clauses inflation clauses and those are all ongoing dialogues that we have with our customer as well and so it's still.
It's still an ongoing issue to be honest on the proposal side, we really haven't seen any type of reduction there and the pressure. It is something that we review.
Quite often on these new proposals and its something that we grapple with because it either you have to price in some type of inflation assumption into your proposal or you have to have some type of back to back agreement, where you're going to have an inflation clause.
We are getting squeezed with our customer as well as with our suppliers and we're trying to make sure that we can accommodate.
Both requirements here.
Our next question is from Ken Herbert with RBC capital markets. Please go ahead.
Yeah, Hi, good morning, Jim and J.
Just wanted to ask.
A question here on the on the New award outlook, putting Florida side, if you look at and GI, maybe and get another opportunities.
What's the current expectations for.
Timing around some awards specifically around in GI and are there other programs out there.
On the New award side that could significantly move the needle as we think about sort of the potential impact of the 24.
Okay.
Yes.
Think about a few of these and it's something that we have.
You know that the F.
F 35, so we've got.
Wait for the product we're expecting the production order on the <unk> 17 in 2023, we do have a large miss.
Missile Defense Air and missile Defense program International program is an important program for us.
This year and so it's probably back half of the year type of decision that has that is included in our four pillars of growth when we talk about new awards.
There are other programs here that are classified really can't get into the detail of those but we expect some of those awards to be made either at the tail end of this year or into next year as well and in <unk>, We would expect a down select around 2025, and so theres a fair amount of markers out there in some of these programs that I just spoke between now really in 2020.
That certainly are important to us Jim mentioned farra, that's probably a 2025 decision as well.
Next we'll go to Sheila <unk> with Jefferies. Please go ahead.
Good morning, and thank you for your time.
J J I think your margins came in a little bit better for 2023, then in corporate pulled your guidance of that panel.
Now when we think about your profitability going forward is this sort of the expected range. We should expect then.
Your sentiment, which do you think is the biggest variables you talked about MFC and some of the challenges there.
If you could talk about that yes.
Yes, let me kind of.
Talk a bit.
On a longer term outlook and you look at the history of Lockheed Martin or over the last probably five to 10 years and we've reached margins in the range of 12% I do believe we have the potential to get back to those but that will take time.
And in the short term really I would say over the next three years or so our objective will be just to hold the margins where they are because some of these pressures that we see on these new programs, particularly at MFC when you've got a 90 basis point reduction in one year from <unk> BBA.
A lot to really overcome.
We work things internally as far as both product cost reductions overhead cost reductions through to really try to drive and maintain our margin profile, but that's where we're really going to be over the next few years is really trying to maintain where we are as we re crank.
The growth cycle and I think that's the key message that we have had internally, let's recap the growth cycle get ourselves in 2024 on track to deliver the growth as we get that flywheel. Turning then we'll be able to focus and turn back around on margins start improving margins.
Next question.
<unk> is from Doug Harned with Bernstein. Please go ahead.
Good morning, Thank you.
Good morning.
On F 35.
So when you get ready to restart here <unk> also though now flown the F 35 with it with tech refresh upgrade.
Three upgrade.
Can you talk about how that's progressing how tech refresh II is progressing and how does the progress there play into your delivery plans for lot 15 through 17.
And perhaps you might also.
Comment on.
When you get the restart you've got these airplanes that have already been produced.
Should we see those as really add ons to 2023 deliveries.
Let me take the first portion of your question is Jim and then turn it over to Jay for the second piece on delivery.
Numbers et cetera.
So tech.
<unk> III is really important in a couple of dimensions.
Youre accurate in this.
<unk> mentioned and thank you for the first flight with the tier three upgraded hardware and software.
It was literally just a few weeks ago.
Got more software releases to go we're going to add capability over the next couple of months.
But we expect production of tier three capable aircraft at all.
Hopefully in this year.
During the course of this year.
Our expectation now what that does for the customer and for us and our strategy is really kind of.
Two major dimensions one is.
For the capability of the aircraft itself it will be able to handle more weapons that we'll be able to upgrade electrical electronic warfare capabilities. It will be able to accomplish more mission. So the basic functionality of the aircraft alone by itself is going to be elevated significantly by the insertion.
Of this technology and what is this technology is.
<unk> updated core processor, so the basically the server for the airplane.
Carries with it is.
It is going to the next generation upgrade the data storage is going to be vastly improved and then the display.
Going to be.
Modernized for the pilot so what they see how they interact with the jet and with other aircrafts and systems around it so those three things right.
Data processing capability and speeds.
Data storage capacity.
And the ability to interconnect with a basically.
A modernized interface for the pilot along with better capabilities are going to have to interact with other aircraft to other systems because of tier three.
All of the characteristics that you need for an edge compute node.
And a modern five.
Internet of things system, and architecture right, the three things or data storage multi cloud connection and processing power and speed. So we've actually kill two birds with one stone with tier three here.
On one hand, the aircraft is going to be much more capable and kind of its traditional role on the secondhand, it's going to be way more capable and perhaps uniquely capable.
And sort of the network.
Internet of things or joint all domain operation of the future right, that's our customer calls that.
So we have now the computing power of the capacity to serve as a sort of the central area a component of our 20 <unk> century security open architecture concept and Thats really the.
Two pieces of F 35 tier three that are Super important one is the airplane itself and second its ability to network with other systems in aircrafts and Iot based.
Architecture Open architecture J, you want to add to the question on add ons.
Dennis will be that will occur.
But not necessarily in 2023, if you think about it right now we're going to be introducing and cutting in new production hardware and software on a full rate production program, which is a pretty aggressive schedule and so what I would expect I mean this is included in our Sustainment revenue growth projections, we'll see the retrofits on the existing.
<unk> fleet over time.
And that will probably start beginning maybe sometime in 2024 and beyond and it's part of our mid single digit sustainment growth on the F 35.
Next we'll go to Matt Akers with Wells Fargo. Please go ahead.
Yeah, Hey, good morning, Thanks for squeezing me in I wanted to ask I think you had mentioned.
Some of the restocking.
Ukraine, and you've got some orders there.
Big is that for Lockheed Martin and how should we think about sort of the timing and how accretive made that might be the growth maybe in 'twenty four and beyond yes.
Yes, so as I mentioned in my prepared remarks, we've got about we had orders of about $1 5 billion.
We will start delivering on some of that in 2023 and that will carryover into 2024, we've got a line of sight to significantly more orders beyond that.
That we'll see again in the outer years.
So its still to be determined but what I can say is that we have had contract funding and internally funded projects to make sure. We can meet higher ramp rates, whether it's high Mars Gmail Rs pad III all of those are all opportunities from where we are today and part of the investment that our customers may.
In it we are making to drive the higher ramp rates yes.
Matt its Jim one of the.
Issues that this situation is illuminated with.
When you need to accelerate production in the defense enterprise.
For National Defense.
<unk>.
We would have liked to been able to ramp up the production faster and be bring.
Bringing the revenue sooner.
So it just highlights the need I think it's an urgent one.
To work together with government and industry.
To quickly evolve.
The relationship between the two so that we can maintain an effective deterrent conflict as we've talked about so what I'm discussing with some of our senior government officials, who are receptive and theres. Some real thought leaders in government. On this now is apply the concept of anti fragility to the relationship between government and industry.
Meaning things like ensure that we have multiple reliable sources of key materials and components right. So we have a lot of single source components that we have to go back down into our supply chain and find out who and if they can.
Double or triple their production of the components. So we can double or triple triple the output of the system.
Other piece of this anti fragility concept is to have the government invest in production capacity with us.
At two standard deviations above the mean of peacetime production rates. So if you need to accelerate you can quickly.
And start up the line or to speed up the line much faster. Another one is significant expanse expansion of the use of long term and multiyear contracts. So that we don't have to have a fluctuation in demand year to year, which sets our supply base back again less willing to invest because they can't predict the future and then finally, especially for those small and medium businesses.
We're suggesting that government.
Really taken overview.
A broad overview of the oversight and compliance burdens that are on companies that participate in the defense industrial base from an audit and compliance and certified cost perspective truth of negotiation AG things like that but.
While we at Lockheed Martin and other major defense primes, I'd like to see that burn needs. It's a burden that can really prohibit other medium and small companies from working with us are working with the government to provide what it needs. So theres a great dialog beginning I'm sure. Other companies are raising these issues too but.
This issue of restocking.
<unk>.
Important industry issue that we're going to try to work with government to solve.
Great. John This is Maria I think we've come to the top of the hour here. So I'll turn it back to Jim for any less.
Great. Thanks Maria.
I'd like to conclude our call today by thanking the entire Lockheed Martin community for everything they've done in 2022, and they'll do this year and beyond.
Together, we position our company to continue to push the edge of the technology advanced scientific discovery to ensure our customers remain what we call ahead of ready.
And keep people safe around the globe. So thanks again for joining us on the call today, we look forward to speaking with you on our next call in April .
John that concludes the call. Thanks, everybody have a great day. Thank.
Thank you and ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.
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