Q1 2023 Lockheed Martin Corp Earnings Call
Speaker 3: Good day and welcome everyone to the Lockheed Martin first quarter 2023 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Maria Richard.
Speaker 3: Richard Owen Lee, Vice President of Investor Relations. Please go ahead.
Speaker 4: Thank you, Lois, and good morning. I'd like to welcome everyone to Lockheed Martin's first quarter 2023 earnings conference call. Joining me today on the call are Jim Takelet, our Chairman, President, and Chief Executive Officer, and Jay Malave, our Chief Financial Officer.
Speaker 4: 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.
Speaker 4: Actual results may differ materially from those projected in the forward-looking statements. Please see today's press release.
Speaker 4: 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.
Speaker 4: that may be used in today's call. Please access our website at www.lachimartin.com and click on the investor relations link to view and follow the charts.
Speaker 4: With that, I'd like to turn the call over to Jim.
Speaker 5: Thanks, Maria. Good morning, everyone, and thank you for joining us on our first quarter 2023 our news call.
Speaker 5: I'd like to begin today with a few highlights from the quarter, as well as an overview of the Presidential Budget Request, and then Jay will discuss our financial results in full year 2023 outlook in detail. We had a solid start to the year, with first quarter sales of $15.1 billion.
Speaker 5: led by 16% year-over-year growth in space.
Speaker 5: Segment operating margin was 11.1%, led by MFC at 15.8%.
Speaker 5: Free cash flow grew 11% to $1.3 billion.
Speaker 5: and combined with the lower share count, contributed to a strong free cash flow for share growth year over year.
Speaker 5: We remain on track to meet our financial expectations for the full year and to return to growth in 2024 as we laid out in January .
Speaker 5: In terms of capital deployment, we returned $1.3 billion or 101% of our free cash flow to shareholders in the corridor.
Speaker 5: We remain focused on our long-term strategy of growing free cash flow for share and continue to plan to deliver approximately 110% of our free cash flow to stockholders in 2023 through dividends and buybacks.
Speaker 5: Turning to the budget, the Administration released preliminary details of the FY24 President's budget request, or PBR, in early March.
Speaker 5: This budget proposal reflects a heightened emphasis on defense and security cooperation with allies.
Speaker 5: The FY24 DoD budget request is $842 billion, an increase of $25 billion, or 3%, over the FY23 Enacted funding.
Speaker 5: The near-peer threats posed by China and the Russian invasion of Ukraine is driving the National Defense Strategy and has created added demand for Lockheed Martin's advanced effective solutions.
Speaker 5: Key highlights include the procurement of 83 F-35 aircraft, continued expansion in classified programs, and the launch of the F-35 aircraft. The F-35 aircraft is a highly-
Speaker 5: and an increase in requested funding for munitions.
Speaker 5: The PBR also includes facilidization investment and advanced funding for long lead time parts in support of multi-year procurement of JASM and LORASM.
Speaker 5: We're also engaged with DOD on multi-year procurement proposals for PAC-3 MSE and guided multiple launch rocket systems.
Speaker 5: These proposals are subject to congressional approval during the course of the FY24 Defense Authorization and Appropriations Process.
Speaker 5: The PBR also includes continued investments in key technology development efforts.
Speaker 5: such as conventional prompt strike,
Speaker 5: Long-range hypersonic weapon.
Speaker 5: Next Generation Interceptor, Hypersonic Defense
Speaker 5: WAN defense system, and other space programs.
Speaker 5: Furthermore, key technology areas aligned with Lockheed Martin investment priorities received increased funding to include microelectronics, 5G technologies, and joint all-domain operations.
Speaker 5: We are encouraged by this initial request and look forward to its progression through the authorization and appropriations process. We also anticipate heightened emphasis on national security prioritization from Congress.
Speaker 5: supplemental spending requests including Ukraine.
Speaker 5: and elevated demand from allies and partners.
Speaker 5: Turning to the F-35 program, the 83 F-35 Lightning II aircraft included in the PBR signals strong support from the services and the administration.
Speaker 5: Moreover, the Canadian government's January announcement that it will procure 88 F-35s marks another milestone in continued international demand for the aircraft. As to production, deliveries of F-35 engines, which are government furnished equipment, resumed in February .
Speaker 5: And then flight operations and deliveries resumed in March.
Speaker 5: However, we do expect a fraction of total expected 2023 deliveries to be impacted later this year due to both software maturation related to Technology Refresh 3, or TR3, and the earlier failure and failure of Wholeasing.
Speaker 5: and hardware delivery timing.
Speaker 5: However, we anticipate little to no revenue impact from any potential delivery delay, and therefore no material adverse effect on our 2023 P&L.
Jay will provide some more color on this in a moment.
Also at Aeronautics, the first Greenville built F-16 Block 70 took flight and was delivered to Bahrain.
In addition to the Bahrain customer, six countries have selected Block 70 or 72 aircraft, and Jordan and Bulgaria have signed letters of agreement for additional jets.
Further related to the F16 in the quarter.
While I was at the US India CEO forum in March, I had the privilege to announce the memorandum of understanding with the Tata Lockheed Martin Aerostructures Limited joint venture to produce F-16 wing structures in India.
demonstrating our commitment to India as an industry partner and customer while bolstering our supply chain.
It is encouraging to see the continued investment outlined in the PBR for the Conventional Prompt Strike Weapon System, or CPS.
as it begins integration and testing for Zumwalt-class ships.
recognizing our advancements in this critical technology.
In February , the US Navy awarded Lockheed Martin an initial contract for CPS.
the first sea-based hypersonic strike capability for the United States.
enabling long-range missile flight at speeds greater than Mach 5.
First delivery is expected by the mid 2020s.
Regarding our Air Launch Rapid Response Weapon, also known as ARROW,
We are continuing testing of the system at hypersonic speeds in order to advance technical maturation of the missile and the glide body.
and to ensure the final product is safe, reliable, and supportive of our customers' missions and future plans.
In January , we also completed the second flight test of hypersonic air-breathing weapons concept, also known as HAWK.
in partnership with DARPA and the Air Force Research Lab. We accomplished all the test objectives during the second flight test.
including affordable rapid development and performance requirements.
And in late March, the U.S. Navy announced its support of the Hypersonic Air-Launched Offensive Anti-Surface Strike Weapon, or HALO.
Lockheed Martin was down selected and awarded a contract for the first step to fielding a critical capability over the next decade and begin the design and development of a carrier-based, air-breathing, hypersonic strike capability for the Navy's fleet.
As a company, we remain fully committed to developing hypersonic technology on accelerated timelines to meet this critical national security need and establish a solid deterrent posture in this area for the U.S. and its allies.
But hypersonic solutions are just one element in our vision of 21st century security.
We advanced several additional aspects of this strategy during the quarter.
including announcing a memorandum of understanding with Unifor Networks to jointly develop integrated hybrid software-defined wide area network solutions.
and to demonstrate that with our customers in the future. This technology enables mission aware dynamic routing.
A foundational capability for resilient joint all-domain operations.
This mission-aware dynamic routing shifts the movement of data and communications in real time.
across a mix of military and commercial infrastructure according to evolving conditions.
Our solutions give customers the flexibility to rapidly adapt to maintain the flow of crucial data and information as their assets operate in contested environments.
We also led simulations of technologies to the U.S. Army, Air Force, and Navy to demonstrate the impacts of 5G communications and advanced analytics to significantly improve operations and maintenance performance for a variety of aircraft.
as well as for unmanned platforms and operationally challenging environments.
And at the Mobile World Congress in Barcelona, I had the opportunity to deliver a keynote address and meet with CEOs across the digital technology, mobile, and networking industries to encourage us working together to promote innovative solutions to protect our countries and advance our space exploration capabilities.
Another example of our leadership in accelerating advanced 21st century technologies to improve national defense and deterrence to conflict is in the arena of directed energy.
Recently, our RMS unit achieved success in our initial test of our demos.
high energy laser, which verifies that the laser's optical performance meets the system's targeted design parameters.
This 50-kilowatt class laser weapon system aligns with the Army's Directed Energy Short Range Air Defense Mission.
In addition to delivering on absolutely cutting edge technologies,
Demand for many of our well-known and longtime high-performing systems continues to be strong.
For example, in January , the Australian Government announced the purchase of 20 Lockheed Martin high mobility artillery rocket systems, or the now familiar HIMARS, providing Australian Defence Force with reliable, well-proven capabilities.
And we continue to grow our significant partnership with Australia beyond HIMARS. In February , an agreement was announced between the Australian and United States governments for a foreign military sale of 40 UH-60M Black Hawks for the Australian Army.
and we continue to grow our significant partnership with Australia beyond HIMARS. In February , an agreement was announced between the Australian and United States governments for a foreign military sale of 40 UH-60M Black Hawks for the Australian Army. And deliveries are slated to begin early this year.
The Black Hawk remains unmatched as an all-around multi-role durable military helicopter for Australia and for the 34 other countries around the globe that use it.
Further, we are excited to work with the ADF and Australian industry to ensure that the
to develop their sovereign satellite communications component, otherwise known there as Joint Project 9102.
The Commonwealth of Australia announced in April that Lockheed Martin was selected as the preferred bidder for JP9102.
This multi-billion dollar project will provide the ADF with a robust solution for military satellite communications
and defined by its versatility and its resilience. With that, I'll turn the call over to Jay and join you later for questions.
versatility and its resilience. With that, I'll turn the call over to Jay and join you later for questions. Thanks, Jim. And good morning, everyone.
Today, I will walk you through our consolidated and business area results for the first quarter and cover our 2023 outlook.
As I highlight our results, please follow along with the web charts we have posted with our earnings release today.
Let's begin with chart 3 and an overview of our consolidated financial results.
Overall, 2023 is off to a solid start, positioning us well to meet our commitments for the year.
We delivered just over $15 billion in sales with $1.7 billion in segment operating profit, resulting in an 11.1% segment operating margin.
Earnings per share was $6.61 and we generated $1.3 billion of free cash flow, enabling a solid shareholder return to share repurchases and dividends.
Our book-to-bill ratio for the first quarter was 0.7 as anticipated, with backlog expected to increase in the second quarter from the upcoming order for F-35 Lot 17 production. And we continue to strategically invest in our growth strategy,
with $600 million of capital expenditures and independent research and development this quarter.
These financial results are on track with our expectations for the year.
Taking a closer look at the quarter's results with consolidated sales and segment operating profit on chart 4.
First quarter sales increased the over year by 1%. A space led the way with 16% growth.
Segment operating profit was down 2% as lower ULA equity earnings and contract mix more than offset the benefits from slightly higher volume and step-ups.
As expected, margins contracted mostly due to the lower equity earnings from ULA.
Moving to earnings per share on chart five.
Adjusted for mark-to-market investment gains, EPS was flat.
On an adjusted basis, the unfavorable year-over-year impacts from segment operating profit, interest expense and fast-cast pension income were offset by the lower share count.
Moving to cash flow on chart 6, we generated nearly $1.3 billion of free cash flow in the quarter, including nearly $300 million of capital expenditures, as well as over $600 million of accelerated payments and continued support of the supply chain.
Our cash deployment plan is on track, which we expect to accelerate throughout the year. In the quarter, we had $500 million of share repurchases and paid almost $800 million in quarterly dividends.
Total cash return to shareholders in the quarter was 101% of free cash flow.
Moving to segment results and starting with aeronautics on chart 7.
First quarter sales at Arrow decreased 2% year over year.
Lower F-35 production sales were partially offset by higher F-16 and classified program volumes.
Operating profit was slightly lower than prior year, as the impact from lower net profit adjustments and sales volume was partially offset by favorable contract mix.
For the year, we expect F-35 deliveries to be lower than previously anticipated due to software maturation with the Tech Refresh 3 program and hardware delivery timing.
We will refine the impact as the year progresses, but do not expect a change to Arrow's 2023 sales and profit ranges that we had previously communicated in January , as we maintain our production cost throughput profile for the year.
Looking at missiles and fire control on page 8, sales decreased 3% as lower sales volume on sensors and global sustainment, as well as our tactical strike missile programs were partially offset by growth in integrated air and missile defense.
Segment operating profit was down 2%, driven by lower sales volumes and net profit adjustments, partially offset by favorable contract mix.
At Rotary and Mission Systems on page 9, sales were down 1% from 2022, driven by lower volume on Blackhawk production and our C6 ISR programs. These declines were partially offset by favorable volume on radar programs in integrated warfare systems and sensors.
including the fence of Guam, an important growth area for RMS that was one in 2022.
Operating profit decreased 14% due to lower sales volumes and timing of net profit adjustments.
Turning to chart 10 in our space business area, sales were up 16% in the quarter driven by strong growth on the next gen interceptor and classified programs.
and further boosted by favorable program life cycle timing on Orion, protective communications, and fleet ballistic missile programs.
Operating profit was up 13% during by the increase in volume and favorable profit adjustments, partially offset by the lower equity earnings from United Launch Alliance.
Okay, now shifting to the outlook for 2023 on page 11.
For the year, we are reaffirming guidance for all key metrics. We continue to expect sales to be in the range of $65 to $66 billion, with segment operating margin at 11.2% at the midpoint.
We also still expect to deliver free cash flow at or above $6.2 billion, while repurchasing $4 billion of outstanding shares.
We believe our first quarter results position us to achieve these expectations as we continue to add orders, meet program execution commitments, and pursue new opportunities throughout the year. Alright, so let's close on page 12 to summarize the comments.
As noted, first quarter represents a solid start to 2023. We reaffirm key financial metrics as previously guided and continue to expect a return to growth in 2024 and beyond with consistent free cash flow per share growth.
Looking ahead, our strategic focus on 21st century security solutions aligns with expected increases to defense and security spending.
With our continued discipline and focus on execution, we are on track to meet our expectations for long-term growth and value creation for our shareholders.
Without Lois, let's open up the call for Q&A.
Thank you and ladies and gentlemen, in the interest of time, we are limiting you to one question. Please return to the queue for any follow-up questions. At this time, we are opening our lines for questions. Please press 1 then 0 to enter the queue to ask a question and to exit, please enter 1 then 0.
If you're on a speakerphone, please pick up your handset before pressing the number. Once again, please press 1 then 0 at this time.
Our first question will come from the line of Seth. Seth? I'm sorry. I'm sorry.
semen from
Seifman from JP Morgan, please go ahead.
Hey thanks very much. Good morning everyone. Apologies I'm losing my voice a little bit here but Jay I wonder if you could talk a little bit about you know the GAO report would indicate that Sikorsky's bid for FLARA was about 45% of that of Bell and so it seems like investors are kind of fortunate.
generating adequate returns on new work.
Great question Seth. Let me just say on floor, you know we're obviously disappointed. We believe that our offering was the best technology to support the multi-mission requirements at the best value. And while I will acknowledge that the proposal did include aggressive pricing, a significant amount of our offering included efficiencies made possible by the benefits of OneLMX.
And our adoption of 1LMX model-based and digital thread enhancements significantly improved our cost competitiveness and we expect that to continue in the future.
The business case itself was favorable and that's what enabled the pricing that we were able to offer.
As it relates to, I think generally speaking, that's how we evaluate these proposals.
We look at the NPV, we look at IRR, we look at all different metrics, we look at current affordability. And as I mentioned at your conference Seth, I said that in the classified program at MFC, we have to take a little bit of short term pain for some long term gain. But the fact of the matter is the business case does provide that long term gain for us.
And so we go through all of that as part of the management decision making, the technology that we can provide. As you would expect, we have the leverage, we have the capability of wherewithal to provide favorable pricing and outstanding technology offerings to our customer. And we don't do it at the expense of financial returns.
Let me just add, just on the CH53K, we did have something in the press release. That was a small adjustment related to an older development contract. There was no adjustments taken on the forward production agreements that we're working on currently....
Thank you. The next question is from the line of Christine Lee Wong with Morgan Stanley . Please go ahead.
Thanks. Good morning, Jim and Jay. On the F-35, the talk of the performance-based logistics deal has been ongoing for some time, but it seems like it's possible you would reach a deal this year. So could you give us an update in terms of where you stand in transitioning over to a PBL contract in the program?
and then assuming that PBL meets conditions set by the 2022 NDAA, how could this impact the sustainment work and the overall program profile over the coming years?
Thanks Christine, it's an excellent question. We did submit a proposal. We are expecting that to be decided by the end of the year and awarded. We think this is the best solution for the customer, not only over the next five years, but frankly over the right program for the life of the program.
What this offers is really a win-win type of solution. It enables us to utilize our proprietary modeling for material requirements to most efficiently use inventory and provide real-time availability of material to our customer as they need it.
And so we're able to take that responsibility off their shoulders, being able to provide them the requirements when they need to maintain, obviously, the readiness levels that are necessary. And so overall, not just over the next five years, we think it's the right long-term solution for our customer.
And we think again, it's just a win-win proposal for not just the services, but also industry as a whole. And Christine, we think we're on a path to establish a PBL with the F-35 customer enterprise this year. And that's what we're tracking to.
Thank you. The next question is from Rob Styler from Vertical Research. Please go ahead. The next question is from Rob Styler from Vertical Research.
Thanks so much. Good morning. Good morning. Jim or Jay, neither of you actually mentioned supply chain issues or labor shortages or other things in your commentary. So I was wondering if you could give us an update on that situation and whether things have improved.
Yeah, it's a good question. You know, Rob, our visibility is we're going throughout the year and I made a few comments, public comments in the quarter that we were looking at potentially at some shortfalls. Partly that was due to the strong performance that we saw in the fourth quarter. Ultimately, the supply chain delivered, I think for the most part. There are still some pockets that we've seen, particularly where it was impacted the most was at MFC and RMS.
not expecting any type of significant recovery to the end of the year as we go into 2024. So it's essentially more of the same in the first quarter from what we saw previously.
And Robert, we're on the cusp of fully implementing
you know, really best practices in supply chain across this one Lockheed Martin concept that we have now. It used to be that each business unit here, business areas we call it, did its own supply chain management and then within programs, it was even more narrowly managed.
We're now bringing all the aggregate demand together for each supplier across all of Lockheed Martin from space to MFC and everything in between. And then we're also looking at components that programs are using in different parts of the company from mid-tier suppliers and aggregating that demand to and actually synchronizing our requirements.
so that we can have more bulk buys, everything from raw materials up through mid-stage components, etc. So we're implementing those kind of best practices. That will be good for the supply base, too. They'll have more reliable demand from our company in total, and I think we'll lead the way.
the industry into that future where we help strengthen the supply chain by our practices in addition to their improvements.
Thank you. The next question is from Kai Varemer from TD Cowen. Please go ahead.
Yes, thanks so much. So Jay, you had very strong profitability at MFC, 15.8% was up, and yet you talked of this classified missile program hitting, I think, 50 to 100 bps on margins.
Can you update us in terms of, is that still what the number is given the strength in the first quarter and how far out into the future does that extend? And then maybe more broadly, you know, Northrop also mentioned, you know, maybe on B21 that they have some.
fixed price exposure looking out, do you have any other programs where we should be aware of potential L-RIP or fixed price options on programs out in the future?
Okay, thanks, Kai, for the question. Let me just address specifically, MFC, they did have a strong quarter. If you look throughout the year where we go from here, in the quarter, they had essentially the highest profit adjustment quarter they're going to have. And so that's going to step down in the balance of the year. Secondly, we will see more of an impact.
from the diluted margins associated with this classified program in the back half of the year as well. And so I would expect them to step down in the 13% range in Q2. It'll cycle down from there. We're still expecting the full year to be in this 13.5% range. Really due to these two items. The step up with profit adjustments will be lower for the balance of the year.
and the dilutive impact becomes more profound in the back half of the year.
it becomes more profound in the back half of the year.
As far as other fixed-price production programs, that's pretty much the large one that we're tracking. You know, we've had the program at Aeronautics that we took a charge in 2021 on. We continue to monitor that program. It's fixed-price development. We still have multiple years of development on.
in terms of the outlook, you know, we're going to be pressured on margins probably for the next four to five years on predominantly from this program. It'll step up, it'll probably peak out in 2025 and then stabilize from there. The question, other question I've been asked on, you know, MFC is whether they can grow absolute profit and the answer to that question is yes.
And so while we may see some dilutive impact to margins, we may see profit maybe be flat from one year to another, overall over the next four to five years, we will see profit grow at MFC. And so those are pretty much the answers to your questions. Thank you, Kai.
Thank you. And the next question is from Ron Epstein from Bank of America Securities. Please go ahead. Hey, good morning, guys. Good morning. Question for you, maybe a bigger picture question. Yep. Secretary Kendall was out talking about NGAD and kind of restructuring that program so that more of the IP is owned by.
the DOD and having this constant recompetition of contractors and so on and so forth. How does that factor into how you think about that business model? Does that really change anything? I don't know if you could speak about that.
Ron, it's Jim. We're constantly and have over the years, the company's history, worked with government on intellectual property.
It's Jim. We're constantly and have over the years, the company's history worked with government on intellectual property, management rights.
We'll continue to do that. NGAD itself is a concept in progress, I'll call it. The government is a concept in progress, I'll call it.
services, DOD, etc. They are formalizing and crafting what NGAD is going to look like. What NGAD stands for is Next Generation Air Dominance Aircraft. So think F-15, F-22, that kind of class airplane that's meant to...
win air combat. And so there'll be a mix of accrued and uncrewed vehicles in that concept. That's still being formulated. We're working with government through our Skunk Works operation on what the options are there. We'll sort out the intellectual property rules as we go forward.
But frankly, we're driving and advocating strongly for a more open architecture approach to the entire industry and less proprietary standards and protocols and architectures. And we just demonstrated one of those.
with a docking mechanism for spacecraft, which can be basically implemented on any range, a wide range of spacecraft to do future replenishment of either data fees or fuel, etc., to satellites in flight.
So those are the kinds of things we're advocating for, and we will always guard and protect our intellectual property rights for the IP that we develop, and we'll work with customers to create the open architecture so that we can continue to compete effectively. Thank you. The next question is from Pete.
and your Hawk variant. Obviously CPS looks good. I don't know how big that could be, but can you walk us through maybe where you're at today in hypersonics and with the program changes where things could go, how big it could get. Thanks.
Sure, I'll take the construct and offer Jay the opportunity to kind of give you some scoping of where the business side of it could go, revenue, growth, etc. But hypersonics is a complex endeavor. You can kind of build a matrix in your mind, right? There's two different kinds of propulsion technologies, right? One is air breathing. So think a cruise missile type of...
vehicle where there is atmospheric provision of oxygen going through an inlet duct and it is aiding the propulsion system to continue forward. The other technology for propulsion is called boost glide.
It's more like a space rocket almost, and the fact that it's got either solid fuel rocket or equivalent to that, it gets a big boost off the launch vehicle or the launch pad, and then the vehicle ultimately separates the glide body, it's called.
with the warhead from the rocket and on it goes by its basically momentum that's already been provided from the boost. So air breathing is one, boost glides another. Those are the two propulsion technologies. And then there are notions about air breathing. Air breathing is a very important part of the
the source of the launch, right? So you could have ship-based, which is CPS. You could have land-based off of you know...............
a tail vehicle, a transporter, a reactor, a launcher vehicle that the Army calls a long range hypersonic weapon. Or you could launch this off an aircraft. And that's the matrix you have to build in your head. What propulsion are we talking about and what launch...
a transport-erector-launcher vehicle that the Army calls a long-range hypersonic weapon. Or you could launch this off an aircraft. And that's the matrix you have to build in your head. What propulsion are we talking about and what launch platform are we speaking about?
So let's just go really quickly through each of those. So ground-based..................
Right now, there's essentially the long-range hypersonic weapon is the game in town. It's very similar to the CPS, which is the ship-based vehicle. It's boost glide, and it can be surface launch, sea or ground.
That is where the government is placing its bet is on that joint program, CPS and long range hypersonic weapon. For more information, visit www.fema.gov
You've pointed out that we have that contract right now. We're executing on that for both services.
that we have that contract right now, we're executing on that for both services. Then when you get to Air Launch..................
vehicles have a size concern that you have to take into account. So what airplanes can carry such a product or such a weapon? The Boost Glide is a heavier, larger vehicle which we have been testing through the ARROW program. It's going to be a matter of what aircraft the Air Force.
and ultimately the Navy, want to use to bring the hypersonic weapons that they will have into the battle. And that's the debate and discussion that's going on in the services. That's the way to frame all this. Those are all government decisions. We're supporting really all the matrix if you will at this point.
with either a development program like Arrow or a production program like CPS. So I'll stop there and give Jay a chance to kind of give you some scope on what the growth for the company could mean. Sure. Today it's about a $1.5 billion business force in the aggregate, all of those programs that Jim mentioned. We expect that to continue to grow and be a contributor. It's one of our four growth pillars.
It's not the largest because it's smaller than some of the other contributors, but it still provides healthy growth. And there's upside to that related to hypersonic defense. And so when I talk about 1.4 or 1.5 going to with solid growth that's embedded in our growth projection, it's really these weapon systems that Jim just mentioned.
The next question is from the line of Rich Saffron from Seaport Global Securities. Go ahead.
Thank you. Jim, Jay, Maria, good morning. Good morning. So, you know, I want to know if you could just expand on your opening remarks about international demand. Wanted to know if you could maybe discuss some of the timing of international award opportunities, where you're seeing the most demand, for what types of equipment, and finally, here,
Are you seeing any more interest in direct commercial versus FMS in the international orders that you're signing up now? Thanks Rich a good question on international for us, you know over the next five years or so. We expect international to be a A significant contributor to our growth. It's embedded amongst each of our four pillars
But when you strip out international alone, you're talking high single-digit growth there. As far as contracting, most of that, particularly as you're dealing with munitions, is FMS, including as well as F-35 program. So most of that right now that we've got embedded in our forecast, particularly on the growth side, is FMS-related. You know, as Jim mentioned in his prepared remarks, we're very excited about the growth in the FMS.
the Australian Military Satellite Communication Program. That's a multi-billion dollar opportunity, and that really expands the international footprint of our space business, which has historically been predominantly a domestic U.S.-based business. So these opportunities continue to present themselves. There is a lot more opportunity in front of us, and that is absolutely a growth driver for us over the next five years.
I could add some more background to Jay's remarks there. You mentioned space, there's an incredible amount of upside. The notion of independent data is a very important part of the data collection.
background to Jay's remarks there. You mentioned space. There's an incredible amount of upside. The notion of independent, sort of, sovereign questions or, safety, aside from the word differential.
Satellite communication for military and national defense is catching on, if you will. The UK already has...
a system like this, but they want to replace and upgrade that. Australia is getting into that game as well. And I think there will be countries in the Middle East and elsewhere that will look into these options for space. On the Arrow side, the F-35's been incredibly popular. I think it won every competition, meaningful competition over the last few years.
as far as fifth generation fighter aircraft go. In addition to that, F-16, we can't build them fast enough. Additional orders coming in. We're going to compete in India to try to get that order as well. And it's a matter of us being able to get to the production rate that the international is demanding and requesting of us there. RMS is having a lot of success with the Seahawk helicopter, for example, and various versions of the Blackhawk, as we mentioned, Australia is part of that. Also, their radar systems are...
becoming more exportable as we go forward. And both in Europe and Asia there's demand for those. And then at MFC, you know, obviously, PAC3, Javelin, Gimmler's...
ultimately, potentially, JASM and LORASM for some or closer allies are going to be in the mix. So there's a wide and broad range across all of our business areas of significant international demand that we'll be seeing over the next few years. Contracting that through the MFS process does take some time. On the other hand, there are a few DCFs.
programs and projects, but a lot of this is going to be continue to be export controlled by the US government and they'll be largely FMS. But it's a broad range. It's going to last for many years and we'll continue to be updating you on other programs that start getting more international traction. audience voices
The next question is from Miles Walton from Wolf Research. Please go ahead. Thanks, morning. Maybe on RMS, could you talk about the driver to the expansion in the margin implied in the guidance? I guess a couple hundred basis points implied run rate for the rest of the year is that
Something programmatic, was there extra R&D associated with FLARA? And also on FLARA, now that that decision has been made, anything you anticipate needing to do, it's of course key to maintain competitiveness. Thanks.
So, Miles, on your first question on RMS margins, again, the first quarter was 10. We've got a guide of nearly 12% for the year. What happens is a little bit of the opposite of MFC. This was their lowest profit adjustment quarter of the year. We expect that to grow based on the program schedules and the risk retirements that we've received for the balance of the year. So that'll step up. I'll give you just a frame of reference.
The first quarter, they're step-ups for about 20% of their profit for the full year. We're expecting that to be closer to 30% for profit adjustment for the full year for RMS. So that'll be a big contributor to the increase in profitability. The second element is that we have just some sales mix. We have some passes of higher margin sales up in the second half of the year, which will also give a boost to their margins.
And so that's fundamentally what's happening at RMS. As far as FLARA, you know, we had, and any impacts related to Sikorsky, you know, part of, we had announced a cost-production program in the fourth quarter, had taken a few charges, about $100 million.
of charges at ARD mess in the fourth quarter. About maybe half of that was related to Sikorsky in cost reduction and cost competitiveness. And so we have just an interesting dynamic there that while we've got production, particularly in the Black Hawk stepping down here in 2023, it actually steps up slightly again in 2023, I'm sorry, in 2024.
and then we have significant growth on the CH-53 program in 24 where we're expecting to double our deliveries on that program. And so we're just dealing with a one-year type of trough, I would say. I think the team, Stephanie Hill and her team, have done a nice job of right-sizing the cost structure for where we are today.
while at the same time maintaining the capability to provide this growth in the future. The next question is from the line of Matt Acres.
From Wells Fargo Securities, please go ahead. Yeah, hey good morning guys. Thanks for the question. I wanted to ask about you know missiles and fire control. You made some comments in the opening remarks about some of the multi-year procurement programs going on now. When should we think about sort of transitioning from kind of flattish sales this year to I think you talked about mid single-digit.
growth and then also is there any investment needed to support that in terms of capacity you know scaling up your your business there? Yes, so you know when you look again over the next five years at MFC. They're certainly our strongest grower We'll lay out you know a little bit more specifics as we go through our strategic planning process in the summer.
and we give you kind of a first look on 2024 and maybe beyond when we do that in the October call. But they certainly are our strongest grower. Yes, there are capacity investments. Jim mentioned some of the funding that is being proposed in the presidential budget request for facilitation investments. We have also invested our own monies.
And Capability Pack 3 is a good example, and a few other programs where we've gotten in front of funding to make sure that we can deliver to the requirements for capacity and deliver requirements that our customers are asking for. And so, again, I think we've got a good beat there. We've talked about different capacity levels over the next few years.
We reached some of these levels in 25, 26, and 27. And that investment really between now and over the next few years is going to help enable that capacity increase in growth as well. Yeah, and it's Jim, and I can give you some details on exactly what we're talking about here. So for PAC 3...
capacity in 2022 was 450 and we're planning to make the investments and working with government to
coordinate with us on this to 550 by 2026. So just three years from now, you know, we'll go from 450 to 550. And then similar with the Javelin, which has been pretty widely discussed in the past, you know, our 2022 capacity was about 2,000 a year. And by 2026, we'll have it to 3,500 plus.
and ultimately we're going to get to 4,000. When it comes to gimlers, which is the HIMARS munition, the original capacity last year was 10,000. We're taking that to 14,000 by 2026.
So these are meaningful step-ups, I guess you could call them, in capacity. And we're doing those because we think we have really strong demand for that capacity to fill it. And we're now programming which customers go where and what point in time and working with the U.S. government to do that along with their own priorities. So...
We've got a significant plan to grow the business at MFC. There's investment either through our own rates and our CapEx plan plus funds committed by the government. Because we are making a pretty strong case, I think, with them to drive an anti-fragility program into munitions and other cyberpl expansion and there's better security infrastats and Herbert O Theme. This is Ben Jan Buol with Industry shades R&H
high importance production facilities and production systems. We got asked to double or triple production of certain munitions. And the answer came back, as you see, it's going to take three years to do a lot of that. We want to get the fragility out of the system so if this ever happens again...
you know, it's six months instead of three years to get a meaningful improvement in capacity. And that's how you see the government acting now with the long lead time parts and the fidicilidization and the multi years that they're now implementing. It is closer to the state and is closer to Goal YouTube.
Thank you. Your next question is from the line of Jason Gerstke with Citigroup. Please go ahead.
Bookkeeping question for you and then Jim, a more strategic one. Bookkeeping question, Jay, what kind of booked ability do you need to have this year to support the commentary about return to growth in 24? Is the timing of those awards important? And then for Jim, I'm going to just have you double click a little bit on the Evolve initiative and the announcement.
over time. So let me just start with the book to bill question, Jason. Essentially it's one. Last year we ended the book, the backlog at $150 billion.
This year we're planning for that to be around the case, maybe it's down a billion or up a billion. But effectively a one book to bill sets us up for the growth to resume in 2024. So we don't need to necessarily see the backlog. There is opportunity for it to grow from where we are and where we landed or ended in 2022. But right now we're planning for that to be generally flat.
and that's where we need to be to drive the growth resumption in 2024. And Jason, let me put the whole notion of Evolve and Crescent into the overall strategy of the company for you and provide context that way. We've got three main strategic initiatives at the company that we're driving. One I just mentioned,
is to just take the fragility out of the production system, not just for Lockheed Martin, but for US government and our industry. And we just described some of the ways that we're endeavoring to do that with government. And so that's the first strategy. The second one is, you've heard us talk about before, 21st century security, and that is working beyond the five defense primes in our supply chains to bring the latest indigenousering to the station in gear. And the third one is the carbonangersic standpoint Pete and Senator latest.
and most advanced Newtonian and digital technologies into national defense. And that means we have to work at Lockheed Martin with a wider variety of companies. From the tech sector to laser-guided weapons supply chain, companies that we may not be doing current business with and they can be startups to
Microsoft-sized corporations. So we are structuring our company to be able to participate and cooperate and collaborate with that much broader range. Microsoft Mechanics
of partners to deliver this 21st century security concept.
And so Evolve is meant to complement what we already had. We have a ventures group, Lockheed Martin Ventures, that deals with startups that have technologies that are promising for our core business.
On the other side, we have partnerships and agreements and arrangements with our Big Five Defense Primes, so to speak. So Northrop Grumman and us and BAE, for example, worked together on the F-35 aircraft. And there are many, many of those. But what we needed in the middle was something...
to work with mid-sized companies and companies in the technology sector to work with us in ways that really don't...
have a traditional history with companies like Lockheed Martin and our peer group.
And so Evolve is now meant to be able to do joint ventures, co-investments, commercial arrangements with mid-sized to large companies outside of our normal sphere, so to speak, and deliver on new capabilities for space exploration and also for national defense.
So Evolve is now meant to be able to do joint ventures, co-investments, commercial arrangements with mid-sized to large companies outside of our normal sphere, so to speak, and deliver on new capabilities for space exploration and also for national defense. So Crescent... our new outlet is Summoner hardware.
is the business that will work with others outside of Lockheed Martin to figure out how to finance and then how to implement and how to sustain lunar services, right? Everything from transportation on the surface.
to basically the Uber for the moon if you will at the end of the day, to the communications and positioning and navigation systems that you need to have on orbit around the moon so that you can actually operate on the lunar surface with either robotics or with humans.
So, Presto is designed to do that. The capital that we will deploy to build that type of business will be more creatively sourced. It will not come out of...
the disclosure statement that goes back to the DoD or NASA and to our rates. It's going to be independently sourced. We may contribute, our partners may contribute directly, but they will be outside the rate structure and the Federal Acquisition Regulations so that we can get the full benefit of those investments over time and also more creatively finance them.
and partner with others to do that. So that's the concept. That's why we're doing it. And we intend to grow it without necessarily burdening the CAPEX disclosure statement and ramifications of that to the company.
And by breaking it out of the business area, business structure, it enables these ideas and these pursuits to really operate at a speed and agility level. It probably wouldn't otherwise be available to them working within the bureaucratic structure that we have in our business areas with all the policies and procedures that we have. And so we give them a little bit more flexibility.
to operate with some speed and, as Jim mentioned, the ability to pursue co-investment by others as well. The next question is from the line of Scott Duschel from Credit Suisse. Please go ahead. Hey, good morning. Jay, if I were to model Q2 through Q4 space system sales based off of Q1, what would you do if you were to model Q2?
and just adjust for an increased number of weeks in those future reporting periods. I think it would get to around $12.8 billion in space segment sales for the year.
versus the guidance midpoint of 11.6. So basically 10% higher than what you've guided.
So curious if you comment on what prevents that type of upside case from happening or to ask another way what the volume headwinds are in the remainder of the year relative to the first quarter. Thank you.
You know, it's a good question, Scott. And, you know, as I mentioned in my remarks, they had excellent growth from next-gen interceptor classified programs and national security space areas that you would expect. But they also had some growth, and I mentioned that there was boosted, you know, some protected comms programs, Orion, fleet ballistic missiles. Those are programs we're expecting to be a little bit more steady state.
And so they just benefited from some program timing here in the quarter. And just to give you an example, you know, protected comms was up 50% in the quarter. We're expecting that to generally be flat for the year. Orion was up 20% in the quarter. We're expecting that to generally be flat for the year. FBM was up about 20% in the quarter, and that was pretty much the full year's worth of growth.
see some growth on some of these other programs. I will acknowledge there probably is some upside to their sales, but it's not a billion dollars. You're talking anywhere between 100 to 200 million dollars of probably upside to where we are today.
The next question is from the line of George Shapiro. Shapiro Research, please go ahead.
The next question is from the line of George Shapiro with Shapiro Research. Please go ahead. Wait!
Yes, Jay, I wanted to pursue some of these other income numbers because they were actually a big part of the large beat this quarter relative to my expectation anyway. So if you look at the other net that's in operating income, it was 2 million. You kept a guide at minus 325 for the...
for the year. So what happens in the subsequent quarters? It's all negative 100 plus or is there a some quarter that's abnormally high? And then somewhat less but other non-operating income was 49 million. You disclose 29 of that.
was the venture stuff. What was the other $20 million? And I left out the $29 million in the other net number, which was for deferred compensation adjustment.
Okay, let me, so George, fair question. Just to tackle the big question, the big picture question in terms of what happens for the balance of the year. Just on the investment gains, you know, obviously we saw that in the quarter. We talked about that being 18 cents. Implied because we're not changing it, implies that we're reversing the balance of the year. So we'll see, we'll give that an update in the.
in the second quarter, update when we're halfway through the year and make a call on that. The other element we just were speaking about a little bit in terms of our investment in LM Evolve. We have some of those investments increasing in the balance of the year as well. And then there's just residual corporate costs that we have flowing through. And so all those things are allocated. We'll monitor those throughout the rest of the year and see whether or not, again, I think we'll just make an assessment halfway through the year on where we are.
three and the F-35 program. Specifically, it seems like that programs, you know, faced an, you know, ongoing delays and other headwinds in terms of adoption and implementation. But how is that impacting delivery this year? And how do you see that timing of that getting back on track? Yeah, Candace, Jim, in the round, you know, we're
in the very late innings of it fully implementing this TechRefresh 3, the point of it is really critical and that is.
very late innings of it fully implementing this TechRefresh 3. The point of it is really critical and that is it gives us...............
much, much greater capability to really make the F-35 a true edge compute node in an open architecture, Internet of Things constructed system. And so the three elements of an edge compute node in a 5G system are data storage on board the vehicle, data processing on board the vehicle, multipath ability to get back to the cloud.
defining the clouds to whatever your enterprise is. And the TR3 upgrade provides all that.
the aerospace industry to accomplish and it's being done. So there have been some delays in some of the hardware and software, but we're really in the very late innings of getting this all together. We're literally in flight test right now and will we wrap all that up by October or December et cetera.
we've got to see what the test results are and work with the government to define exactly when everybody's ready to go and implement in our production system, in the factory, those software loads. And that's where we're at now. So I would consider this extremely high degree of difficulty dive. And we're going to make sure that it's done right. And we can produce that rate, you know, in...
in our Block 15. So that's what we're up to and we're working closely with the Joint Program Office to define that and make that successful. And we are seeing the demand for the aircraft both from the US and international customers really kind of blossom here lately. So I think we're in good shape on the program. Alright, Lois this is Maria. I think we've come to the top of the hour. So
I'm just going to quickly turn it back to Jim for any final thoughts. Thanks Maria. As we conclude, I'd like to say thank you to our 116,000 employees here at Lockheed Martin for their commitment to providing our customers the 21st century digital and physical technologies that will help them deter conflict and win if they have to.
So, thank you all again for joining us today. We look forward to speaking with you on our next earnings call in July . And Lois, that concludes our call today. Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect. Goodnight.
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Good day and welcome everyone to the Lockheed Martin first quarter 2023 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Maria Richard-on-Lee, vice president of investor relations.
Thank you, Lois, and good morning. I'd like to welcome everyone to Lockheed Martin's first quarter 2023 earnings conference call. Joining me today on the call are Jim Takelet, our Chairman, President, and Chief Executive Officer, and Jay Malave, our Chief Financial Officer. 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 FCC 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.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. Thanks, Maria. Good morning, everyone, and thank you for joining us on our first quarter 2023 earnings call.
I'd like to begin today with a few highlights from the quarter, as well as an overview of the Presidential Budget Request, and then Jay will discuss our financial results in full year 2023 outlook in detail.
We had a solid start to the year with first quarter sales of $15.1 billion.
led by 16% year-over-year growth at Space. Segment operating margin was 11.1%, led by MFC at 15.8%. Free cash flow grew 11% to $1.3 billion.
and combined with a lower share count, contributed to a strong free cash flow for share growth year over year. We remain on track to meet our financial expectations for the full year and return to growth in 2024 as we laid out in January . In terms of capital deployment,
We returned $1.3 billion or 101% of our free cash flow to shareholders in the corridor.
We remain focused on our long-term strategy of growing free cash flow per share and continue to plan to deliver approximately 110% of our free cash flow to stockholders in 2023 through dividends and buybacks. Turning to the budget, the administration released preliminary details of the FY24 President's
3% over the FY23 enacted funding. The near peer threats posed by China and the Russian invasion of Ukraine is driving the National Defence Strategy.
and has created added demand for Lockheed Martin's advanced effective solutions. Key highlights include the procurement of 83 F-35 aircraft, continued expansion in classified programs,
and an increase in requested funding for munitions. The PBR also includes facilidization investment and advanced funding for long lead time parts in support of multi-year procurement of JASM and LORASM.
We're also engaged with DOD on multi-year procurement proposals for PAC-3 MSE and guided multiple launch rocket systems. These proposals are subject to congressional approval during the course of the FY24 defense authorization and appropriations process. The PBR also includes continued investments in key technology development efforts.
engage with DOD on multi-year procurement proposals for PAC 3 MSC and guided multiple launch rocket systems. These proposals are subject to congressional approval during the course of the FY24 defense authorization and appropriations process. The PBR also includes continued investments in key technology development efforts, such as conventional prompt strike techniques and great
long-range hypersonic weapon, next-generation interceptor, hypersonic defense, WAN defense system, and other space programs. Furthermore, key technology areas aligned with Lockheed Martin investment priorities received increased funding to include microelectronics, 5G technologies, and joint all-domain operations. We are encouraged by this initial request.
and look forward to its progression through the authorization and appropriations process. We also anticipate heightened emphasis on national security prioritization from Congress, supplemental spending requests including Ukraine, and elevated demand from allies and partners. Turning to the F-35 program, the 83 F-35 Lightning II aircraft included in the PBR signal strong support from the services and the administration.
Moreover, the Canadian government's January announcement that it will procure 88 F-35s marks another milestone in continued international demand for the aircraft.
As to production, deliveries of F-35 engines, which are government furnished equipment, resumed in February . And then flight operations and deliveries resumed in March.
However, we do expect a fraction of total expected 2023 deliveries to be impacted later this year due to both software maturation related to Technology Refresh 3, or TR3, and Some.
However, we do expect a fraction of total expected 2023 deliveries to be impacted later this year due to both software maturation related to Technology Refresh 3, or TR3, and hardware delivery timing.
However, we anticipate little to no revenue impact from any potential delivery delay, and therefore no material adverse effect on our 2023 P&L.
Jay will provide some more color on this in a moment. Also at Aeronautics, the first Greenville-built F-16 Block 70 took flight and was delivered to Bahrain. In addition to the Bahrain customer, six countries have selected Block 70 or 72 aircraft and Jordan and Bulgaria have signed letters of agreement for additional jets. For more information, visit our website at www.aeronautics.com
Jay will provide some more color on this in a moment. Also at Aeronautics, the first Greenville built F-16 Block 70 took flight and was delivered to Bahrain. In addition to the Bahrain customer, six countries have selected Block 70 or 72 aircraft and Jordan and Bulgaria have signed letters of agreement for additional jets. Further related to the F-16 in the quarter,
While I was at the US India CEO forum in March, I had the privilege to announce the memorandum of understanding with the Tata Lockheed Martin Aerostructures Limited joint venture to produce F-16 wing structures in India, demonstrating our commitment to India as an industry partner and customer while bolstering our supply chain. According to Hypersonics, the F-16 is a fully-fungible, fully-fungible, fully-fungible, fully-fungible
It is encouraging to see the continued investment outlined in the PBR for the Conventional Prompt Strike Weapon System, or CPS, as it begins integration and testing for Zumwalt-class ships, recognizing our advancements in this critical technology.
In February , the US Navy awarded Lockheed Martin an initial contract for CPS, the first sea-based hypersonic strike capability for the United States, enabling long-range missile flight at speeds greater than Mach 5.
First delivery is expected by the mid-2020s. Regarding our Air Launch Rapid Response Weapon, also known as ARROW, we are continuing testing of the system at hypersonic speeds.
in order to advance technical maturation of the missile and the glide body, and to ensure the final product is safe, reliable, and supportive of our customers' missions and future plans. In January , we also completed the second flight test of Hypersonic Airbreathing Weapons Concept, also known as HAWC, in partnership with DARPA and the Air Force Research Lab. We accomplished all the test objectives during the second flight test with the Bruceiman Florida Air Force in mid- infinitely advanced technical maturation.
including affordable rapid development and performance requirements. And in late March, the U.S. Navy announced its support of the Hypersonic Air-Launched Offensive Anti-Surface Strike Weapon, or HALO. Lockheed Martin was down selected and awarded a contract for the first step to fielding a critical capability over the next decade.
and begin the design and development of a carrier-based, air-breathing, hypersonic strike capability for the Navy's fleet. As a company, we remain fully committed to developing hypersonic technology on accelerated timelines to meet this critical national security need and establish a solid deterrent posture in this area for the U.S. and its allies. But hypersonic solutions are just one element in our vision of 21st century...
resilient joint all-domain operations. This mission-aware dynamic routing shifts the movement of data and communications in real time.
across a mix of military and commercial infrastructure according to evolving conditions. Our solutions give customers the flexibility to rapidly adapt to maintain the flow of crucial data and information as their assets operate in contested environments. We also led simulations of technologies
to the U.S. Army, Air Force, and Navy to demonstrate the impacts of 5G communications and advanced analytics to significantly improve operations and maintenance performance for a variety of aircraft.
as well as for unmanned platforms and operationally challenging environments.
And at the Mobile World Congress in Barcelona, I had the opportunity to deliver a keynote address and meet with CEOs across the digital technology, mobile, and networking industries to encourage us working together to promote innovative solutions to protect our countries and advance our space exploration capabilities. Another example of our leadership in accelerating advanced 21st century technology
to improve national defense and deterrence to conflict is in the arena of directed energy. Recently, our RMS unit achieved success in our initial test of our DEMOS high energy laser which verifies that the laser's optical performance meets the system's targeted design parameters. This 50 kilowatt class laser weapon system is a