Q2 2023 Lockheed Martin Corp Earnings Call

Speaker 2: earnings results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would now like to turn the call over to Maria Richard-Onley, Vice President of Investor Relations. Please go ahead.

Speaker 1: Thank you, Lois, and good morning. I'd like to welcome everyone to our second quarter 2023 earnings conference call. Joining me today on the call are Jim Taglet, our Chairman, President, and Chief Executive Officer, and Jay Malave, our Chief Financial Officer.

Speaker 1: 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 facts

Speaker 1: that may be used in today's call. Please access our website at www.lockheedmartin.com and click on the investor relations link to view and follow the charts. With that, I'd like to turn the call over to Jim.

Speaker 3: Thanks Maria. Good morning everyone and thank you for joining us on our second quarter of 2023 earnings call.

Speaker 3: I'll begin today with a few key strategic and operational highlights, and then Jay will discuss our quarterly financial results and full year 2023 outlook.

Speaker 3: Starting on page three of the slides, our Q2 financial results were strong.

Speaker 3: with sales of $16.7 billion of 8% year over year and double digit growth at both aeronautics and space.

Speaker 3: Backlog reached a record level of $158 billion, up $8 billion from year-end, resulting from a book-to-bill of $1.7 in the quarter.

Speaker 3: Orders included an approximately $8 billion option award for the 126 F-35s for Production Lot 17, as well as significant awards to ramp up munitions at MFC.

Speaker 3: This highest ever backlog gives us visibility into multi-year sales of our key programs and enables our suppliers to be better positioned to meet growing demand.

Speaker 3: Segment operating profit of $1.9 billion in the quarter reflected an operating margin of 11.1%.

Speaker 3: Free cash flow with $771 million.

Speaker 3: and we remain committed to advancing technology and expanding production capacity.

Speaker 3: So in Q2 we invested $356 million of company funded R&D and $329 million of capital expenditures to address our customers' needs and requirements.

Speaker 3: Given the strong results in the first half of this year, we are raising and narrowing our full year 2023 financial outlook.

Speaker 3: For sales, we are raising the midpoint of our range by $1 billion.

Speaker 3: to a revised expectation of between $66.25 billion to $66.75 billion.

Speaker 3: And for EPS, we are raising the midpoint of our range by 35 cents.

Speaker 3: to a revised expectation of between $27 to $27.20 per share.

Speaker 3: We are confident in our ability to achieve these higher expectations.

Speaker 3: and return to growth sooner than previously anticipated.

Speaker 3: Turning to the state of the defense budget, the outcome of the debt ceiling negotiations preserved top line defense spending at the President's budget request for FY24. It also stipulated defense budget growth in FY25 while allowing for additional support through supplemental funding.

Speaker 3: The embedded 3% growth in the proposed FY24 defense budget included funding for 83 F-35 aircraft.

Speaker 3: with supplemental funding to support munitions investment that will enable us to ramp up production rates under new multi-year contracting authorities.

Speaker 3: While there are still numerous steps to reach final approval and funding for the FY 2024 budget, we are encouraged by the strong support for our program so far and we look forward to the completion of committee reviews and the full appropriations process. In the F-35 program, we continue to see strengthening customer demand both domestically and internationally.

Speaker 3: you refresh to or TR2 configuration.

Speaker 3: During the first quarter earnings call, we indicated that an anticipated reduction to 2023 deliveries from what we initially thought last year.

Speaker 3: due to software maturation, acceptance and certification related to the technology refresh 3, or TR3 configuration, and hardware delivery timing.

Speaker 3: Our current view is we expect to deliver 100 to 120 F-35 aircraft in 2023.

Importantly, there is no change to our longer-term delivery outlook of 156 aircraft in 2025 in the foreseeable future.

And the supply chain and production system continues to execute at a rate to support these future year delivery targets.

Our team remains fully dedicated to delivering the first TR-3 aircraft in 2023.

We have completed 58 flight tests on four different aircraft in the TR-3 configuration.

including a successful flight test for the most recent software release that happened in May.

That software update brought in the next set of critical capabilities, such as upgraded data links,

the new electro-optical targeting system, and radar. In the coming weeks and months, we will begin testing multi-ship missions, sensor fusion, and additional weapons, among other capabilities, as part of the next software release.

TR3 significantly updates core processing power and memory capacity.

as well as modernizes the computational core of the F-35 to enable Block IV capabilities.

It is a significant hardware and software upgrade that will greatly enhance the mission capability of the aircraft, which is on track to be the free world's predominant fighter for many decades into the future.

Meanwhile, we are continuing the long tradition of leading the development of the next generation of military aviation, and this time with both piloted and unpiloted aircraft at our Skunk Works operation in California's high desert.

Skunk Works just celebrated its 83 year anniversary in June .

That's 80 years of pushing the innovation envelope from the U-2 in the 1950s that continues to fly today to the Mach 3 Plus SR-71 to pioneering stealth aircraft and beyond by advancing hypersonic, artificial intelligence, and other revolutionary technologies.

Skunk Works continues to create exciting feats of engineering and goes beyond the edge of known science for our customers.

A prime example today that we can discuss is our partnership with NASA to develop and build the X-59, the prototype that will quiet the supersonic boom and lead someday perhaps to supersonic commercial flights over land. This elegant and amazing airplane is advancing a pace towards its first test flight.

And our company's pioneering spirit has lived even longer in the world of rotorcraft and helicopters.

At the Paris Air Show, Sikorsky celebrated its 100th anniversary. Yes, 100 years ago, Igor founded Sikorsky Aero Engineering Company on a chicken farm in Long Island, New York with a small team of engineers and craftsmen, many of whom are immigrants, like himself, who fled the Russian Revolution.

In 1939, he brought his dream to reality when he piloted the first practical helicopter, the VS-300, as it left the ground for all of 10 seconds.

His passion for innovation and perseverance to achieve his vision carry on in the Sikorsky culture today and throughout Lockheed Martin.

Sikorsky's signature product line, the H60 Blackhawk family of military helicopters, also perseveres around the world.

The U.S. State Department has approved a possible foreign military sale to Norway for six MH60 Romeo multi-mission helicopters and related equipment.

And Spain signed a letter of offer and acceptance for eight MH-60R Seahawk aircraft as well. We achieved several milestones in the quarter in support of other NATO allies as well. The German Air Force successfully launched a PAC-3 Missile Segment Enhancement, or MSC, interceptor in the first quarter of the year.

from a German modified launcher. This flight test was the last step before delivering PAC-3 MSE to Germany later this year. We also entered into an agreement with Rheinmetall Defense to collaborate on a unique rocket artillery system to be produced in Germany.

And earlier in July , Rheinmetall selected a site in Germany to build a factory to manufacture F-35A center fuselages.

This partnership, which was first announced in February between Lockheed Martin, Northrop Grumman and Ryan Mattel, expands supply chain capacity for the F-35.

Production is expected to start with our new German partner in 2025.

In addition, our relationship with Poland continues to progress.

with the first F-35 Lightning II for the Polish Air Force formally entering production and the initial shipment of high Mars launchers to Poland.

The U.S. State Department also approved a multi-billion dollar potential foreign military sale to Poland for PAC 3 with modernized sensors and components.

On top of that, our partnership with Australia continues to advance as well. In April , as mentioned on our last earnings call, the Commonwealth of Australia selected Lockheed Martin as a preferred bidder for Project 9102.

the sovereign military satellite communication system for the Australian Defence Force.

We're excited at the prospect of deepening our relationship with a diverse team of Australian companies and helping establish Victoria as the engineering and technical hub for Australian defence.

Also in space, Lockheed Martin will be taking on a major role in Blue Origin's national team to develop and demonstrate a human lunar landing system for the Artemis program.

Our space operations will be building humanity's first cislunar transporter, which will enable recurring astronaut expeditions to the moon's surface and back from NASA's Gateway Space Station.

Finally, we continue to advance our integrated 21st century security digital technology architecture during the quarter.

In May, as part of the US Indo-Pacific Command's Joint Fires Network, we successfully demonstrated Digital Command and Control, or C2, to synchronize joint all-domain operations during the Northern Edge exercise near Alaska.

The exercise demonstrated the ability to successfully integrate with both Lockheed Martin and third-party platforms and aircraft, including F-35s. The system performs C2 functions across all the military services.

all levels of operation, and across multiple domains from space to air to surface.

This is the first time Joint Force Synchronization has been demonstrated at this scale. It was a major milestone for all Joint All-Domain Command and Control interoperability and our company's vision for 21st century security.

The results of this demonstration will help shape future JADC2 capabilities and continue Igor Sikorsky's and Skunk Works pioneering legacy into the digital world.

Also, as part of the Northern Edge exercise, the Lockheed Martin Aeronautics and RMS teams

demonstrated the first use of artificial intelligence capabilities on a stalker unmanned aircraft system for recognition and tracking of ships at sea.

This capability showcased the value of using relatively cheap drones to greatly enhance the capability of and improve the survivability of much more valuable manned aircraft and ships. All these types of digital technology enhancements require reliable access to advanced semiconductors. In support of this crucial priority, I recently had the opportunity to join Global Foundry CEO Tom Caulfield.

Congress, and the administration, we remain strongly supportive of the bipartisan Science Act signed into law last year.

The Lockheed Martin team will work closely with global foundries as we expand our critical manufacturing line in New York and with our other semiconductor and tech industry partners across the country to ensure access to made in America microelectronics for our platforms and systems. With that, I'll turn the call over to Jay and join you later for questions.

web charts we have posted with our earnings released today.

Beginning on chart four, let's take a closer look at second quarter results with consolidated sales and segment operating profit.

Second quarter sales increased 8% year over year driven by aeronautics and space.

both with double-digit growth in the quarter. This growth partly benefited from last year's $325 million impact from unrecognized F-35 sales.

Excluding that benefit, sales were up 6% year over year, with Arrow still up 12%.

Segment operating profit was up 5% year over year, driven by the sales growth, which more than offset lower net favorable profit adjustments aligned to risk retirement timing.

As expected, segment margins were 11.1%.

Moving to earnings per share on chart 5, on an adjusted basis EPS was up six and a half percent.

driven by higher profit and a lower share count, partially offset by increased interest expense.

profit and a lower share count partially offset by increased interest expense. Moving to cash flow on chart 6.

We generated $771 million of free cash flow in the quarter with nearly $330 million of capital expenditures.

On a year-over-year basis, a free cash flow included $330 million of higher tax payments from the R&D capitalization legislation. Once again, this is a free cash flow included $330 million of higher tax payments from the R&D capitalization legislation.

Dividends in share repurchases exceeded free cash flow in the quarter, demonstrating our commitment to shareholder returns.

For the first half of 2023, we have returned almost $2.8 billion, or 137% of free cash flow through dividends and share repurchases.

In the quarter, we issued $2 billion of debt across three tranches for a weighted coupon of 4.8%.

We had intended to raise the debt early in 2024 to support share repurchases.

but accelerated the issuance to give us flexibility and coverage going into the debt ceiling negotiations.

Okay, let's turn over to the segment results, and starting with Aeronautics on chart seven. Second quarter sales at Arrow increased a billion dollars.

driven by higher volume on the F-35, C-130, and classified programs.

On F-35, we saw strong year-over-year growth in production and sustainment, with some of the favorability due to the previously mentioned impact in the second quarter of 2022 due to the Lot 15 to 17 funding timing. Excluding that benefit, aeronautics was up 12%.

Operating profit increased 17% over the prior year based on the higher sales.

As Jim mentioned, we were pleased that the Joint Program Office exercised the next option, lot 17, on the F-35 contract in the quarter. F-35 backlog now stands at 421 aircraft at the end of the quarter. It offers longer-term clarity for our production operations and provides stability to our supply chain partners. For more information, visit www.f-35.gov

Looking at missiles in fire control on page 8.

Sales were comparable to last year, as higher sales volume on tactical strike missile programs were offset by lower volume with an integrated air and missile defense.

As expected, segment operating profit and margins were down year over year, driven by lower net profit adjustments. MFC increased the backlog by $6.5 billion in the second quarter, reflecting a record $9 billion of orders in the quarter and a 3.3 book-to-bill ratio.

The orders were, increases were broad-based across several of our key programs, including PAC 3.

The orders were, increases were broad-based across several of our key programs, including PAC 3, GMLRS,

High Mars, JASM and LORASM, and Javelin. At Rotary and Mission Systems on page 9, sales declined 3% in the quarter driven by lower volume on Blackhawk as the program continues to transition from multi-year 9 to multi-year 10.

This decline was partially offset by favorable volume across several radar programs within integrated warfare systems and sensors.

Operating profit decreased slightly due to lower sales volume and net profit adjustments, partially offset by higher equity earnings.

There were a few significant offsetting items that drove net profit adjustments down $40 million year over year. misery.

We recorded an unfavorable adjustment of $100 million in the Canadian Maritime Helicopter Program due to updated forecasts.

partially offset by a $65 million benefit on an international airborne surveillance program. Turning to chart 10 in our space business area, sales were up 12% year over year.

driven by continued development activity on the NextGen Interceptor and classified programs.

youth development activity on the Next Gen Interceptor and classified programs, with additional upside coming from Orion.

Operating profit increased 15% and margins were up 30 basis points, driven by the increased volume and higher equity earnings from United Launch Alliance year over year. Now shifting to the outlook for 2023 on page 11.

For the full year, we've increased our sales, segment operating profit, and earnings per share outlook.

while also tightening the ranges based on our strong year-to-date performance. At a consolidated levels sales are up a billion dollars at the midpoint to 66.5 billion dollars.

allowing us to return to growth in 2023 earlier than previously anticipated. Segment operating profit is up $45 million at the midpoint to $7.35 billion.

At the business area level, we've increased Arrow's outlook for sales by $250 million, with profit up $25 million.

based on higher volume on F-35 sustainment and classified work at Skunk Works.

As we mentioned previously, we expect minimal impact to our cost throughput in 2023 as a result of the lower F-35 aircraft deliveries. And while we expect there to be some pressure on cash collections, we are driving offset opportunities to make up any shortfalls.

At Space, we're raising the sales midpoint by $750 million on higher development volume.

and the profit midpoint by $20 million as the benefit from higher sales is partially offset by a lower ULA earnings outlook. Lastly, we are maintaining our free cash flow guidance at or above $6.2 billion and remain committed to the growth of our economy.

to $4 billion of share repurchases, with $2.7 billion in the back half of the year. We continue to expect that these repurchases, along with dividends, will generate a return more than 100% of our free cash flow to shareholders for the year.

Looking at the 2023 earnings per share expectation changes on page 12, we've increased the EPS midpoint by 35 cents, with the largest portion of 18 cents, coming from improved business area profit.

We expect 11 cents benefit from a lower share count, and we also expect a 6 cent benefit from a lower tax rate to 15% or about 20 basis points.

The remaining four cents comes from a mix of miscellaneous offsetting items. Finally, on page 13, to summarize and close out our comments.

Our first task results were strong, driving our return to growth a year earlier than anticipated and leading to the increased outlook for sales, profit, and EPS.

Our backlog gives us confidence in our expected growth acceleration in 2024 and beyond.

In addition, we remain committed to reward shareholders through industry-leading dividends and robust share repurchases. And finally, we continue to focus on our strategic initiatives, 21st Century Security and 1LMX, in order to transform our business and extend our industry leadership.

while delivering consistent and reliable shareholder returns. With that Lois, let's open up the call for Q&A.

Thank you and ladies and gentlemen, if you wish to ask a question, please press 1 then 0 on your touchtone phone. You will hear an acknowledgement tone that you've been placed in the queue and you may remove yourself in queue at any time by repeating the 1-0 command. If you're on a speakerphone, please pick up your handset before pressing the number.

At the request of the host, please limit yourself to one question and re-enter the queue for any additional questions. Once again, if you have a question, please press 1 then 0. And one moment for our first question.

And that first question comes from Robert Spindarn from Milius Research.

And that first question comes from Robert Spindarn from Milius Research. Please go ahead. Hi, good morning.

Good morning. So, Jim and Jay, you both talked a bit about the strong backlog expansion at MFC and how that helps the second half of this year, perhaps a bit earlier than expected. Wanted to see if you could get into a little more color on how that drives 24 and beyond and how sustainable this is.

And then lastly, Jay, can the rising volumes on some of these legacy programs mitigate that margin pressure from the classified work at MFC?

Sure. You know, if you look at where we are, and I'll go maybe take us back to, I think it was the fourth quarter call in January . You know, I was asked about our outlook for 2024 growth, and at the time, what I said was to expect a low single digit growth.

And I think that that's just, right now we're gonna park there, although that'll be on a higher base here in 2023, because 2023 is better. But we still need to go through and get a feel for what the supply chain performance clearly with the backlog, it's not a question of demand, it'll be a question of supply. We need to go through that analysis over the next...

The demand signal itself would indicate a higher rate than those single digit, but we need to wait and watch the supplies part of it to make sure that that can catch up to that demand. As far as the margin profile at MFC, we do expect there to be continued pressure over the next number of years. I would agree that some of this upside that we've seen in this incremental demand are from higher margin products and should provide some level of mitigation. But...

We won't really get a feel for exactly what that means until, again, as we go through this over the next few months, as we understand specifically what type, what contribution each of these different programs will have in 24 and beyond and what their timing will be and what that mixed benefit may be.

And Rob, I can give you some long term context here. So first, from a process perspective with the US government, there's multi-year procurement authority now for a whole set of Lockheed Martin products. And I'll just run through them really quick.

Joint Air Ground Missile, HIMARS, ATACMS, which is the longer range gimlers for the HIMARS, PAC-3 MSE, the gimlers itself, which is the HIMARS primary ammunition, Javelin, and Lorazim and JASM. So all of those programs have multi-year procurement authorities and so far,

The GIMLRS, PAC 3, LORASM, and JASM are in pursuit of multi-year contracts with us currently already. And then if you look at the corpus of the Ukraine supplementals and what they're targeted for, the overall amount has been $62 billion.

four bills the DoD regarding a Ukraine support

About two-thirds of that, or $44 billion, is for the purpose of restoring the presidential drawdown.

for the Ukraine's Security Assistance Initiative, essentially meaning the restocking of U.S. munitions. Now, a lot of those munitions are going to be upgraded from what was in the stockpile to the capability that we can produce today. So that's another motivation for the U.S. to go through with that. And we've kind of derived at about $7 billion of those funds with recommendations from Russia, Iran, faith that what we're now doing is more Knox and aw actual greater opportunities for victory altogether. So listen carefully about what you're seeing and we'll talk about the bestaneously

could be allocated to some of the Lockheed Martin programs that I just talked about.

So there are significant long-term upside opportunities for our MFC business. As Jay said, they're fairly high margin and there's increasing international demand for a lot of those products too. So I think it's a really good long-term foundation for growth for the company. Thanks very much.

Thank you. The next question is from Matt Akers from Fargo. Please go ahead. Yeah, hey, good morning guys. Thanks for the question. I wanted to follow up on the commentary on Tech Refresh 3. Can you just touch on the cash impact of that? How big was that? You know, how were you able to offset that and kind of hold this year's guidance and then I guess is it fair to assume?

sort of, you know, additional deliveries above the 150 level for 2024 and sort of cash benefit associated with that next year? Yeah, Matt. So, you know the impact on a per aircraft basis is around seven million dollars per aircraft. So if you go to, you know, when we came into the year, we were expecting between our range of 147 to 153. So you go for the midpoint there off of 150.

tailwinds elsewhere in the portfolio. And to your point, to the extent that that does slip into next year, it's really a matter of timing. So, yeah, it would, as we deliver aircraft, for those that slip into next year, we'll recover those remaining payments that are upon acceptance of the aircraft in 2024. Yeah, and just as a kind of, again, put it all in context.

we could actually deliver more than 156 aircraft in 2024 because the factory is going to be producing at the rate of 156. So if there's some carryover, we might actually deliver more in 2024 than what the ongoing run rate will be because the factory will still be performing while those aircraft are waiting to be accepted.

I just want to make sure that everybody knows what we're applying to this problem to make sure that we minimize it. And this is the same conversation that I'm having with the senior, you know, seniors in military and civilian roles in government. So first of all, we and our suppliers are applying all the needed resources to this. It's a top priority for our company and a few others as well.

We're running extra shifts and we're deploying subject matter experts into other companies or suppliers' operations to make sure this stays on track.

flight test programs on schedule and we've got the sufficient pilots both in the company and in the Department of Defense for acceptance as we move forward on all that. And then finally, the purpose of the flight test program is to continuously narrow the funnel of testing and the

of all the aircraft functions and mission capabilities in a really methodical fashion, a sort of narrowing of funnel. And so we're just moving through that in a methodical way. Our latest estimate is that will all be completed by the end of the fourth quarter this year. Could it move a little bit into early 2024? Yeah, it could, but...

we think we're on track to really get all the dimensions of resources, commitment, and schedule to give that option for the December delivery everything we can.

Great, thank you. Thank you. And the next question is from Peter from Baird. Please go ahead. Give us your questions.

Yes, good morning, Jim and Jay. Hey, Jay, thanks for all the color on the F-35. I was wondering just regarding like when we think about all the backlog growth that you have now, you've got a pretty big step up in CapEx this year, mid-teens growth. How are we thinking about just kind of supporting the backlog? Are you expecting kind of the CapEx profile to kind of level off here, or do you expect that to increase and maybe also related to the F-35?

in capacity and production capability, as Jim mentioned in his prepared remarks. And so we expect that to kind of remain fairly level. On the working capital side, you know that for us is a source of opportunity. We expect that to, you know, really, what we're trying to do is take it back down to what we performed.

from a day's perspective over the past, say, 2020, 2021, and some period of 2022. And so, while with increasing volumes, you would expect working capital to increase as well, we believe there's efficiency opportunities to perform at levels we've been able to perform in the past and make that, at a minimum, not a use of cash.

And if we're fully successful, make it a source of cash in despite of growth. So that's our view, particularly in the back half of the year as well as over the next few years.

I appreciate that. Thanks, Jay. Thank you. Our next question is from the line of Sheila from Jeffries. Please go ahead.

Good morning, Jim and Jay. Thank you. So maybe just on space, given it drove your guidance raise, you know, what drove the improved outlook? You called out 700 million of higher revenues related to development in space. Can you just give us a little bit of color there? Was it competitive wins or any more detail on what was driving that? Yeah, it's just in many cases, Sheila, it's earlier than anticipated.

within space. We've also had a little bit of growth in the NextGen GEO or the OPIR program. And so all of those together really drove the increase versus where we were coming into the year. Much of that we've really realized in the first half of the year with a little bit to come in the back half, but we had already planned ramping up those programs.

Morning. So there's been a lot of pressure on the F-35 and an engine upgrade, both during and after Paris. I just want to know if you could clarify your remarks a bit discuss where you stand on the new engine program. But also I'd like to know what this kind of means for Lockheed and for the F-35.

aircraft and what modernization program goes along with that engine.

So, Lockheed Martin's role and responsibility in this...

is simply to receive the engine performance data from the manufacturers and their anticipated performance improvements, whether it's a modernization or a replacement option for the future. And then we translate that data to aircraft performance data and information.

that we then supply to our US government customers and then we are available to answer questions for their decision making process. So we were not involved in that decision making process.

and therefore Lockheed Martin does not have a formal company position on engine selection or modernization.

We implement the US government decision and that's what we're doing now. So that is very clearly our role and responsibility and anything outside of that is not an official company position.

Thanks.

Thanks. Thanks.

Thank you. The next question is from Noah Papinec from Goldman Sachs. Please go ahead. Hi, good morning everyone. Good morning.

outlay's finally grew a decent amount. Your revenue then grew at the fastest rate in a while, organically year over year.

I know in the back half you have tougher comps, but the updated guidance and the revenue would have to be down in the back half organically.

I guess I'm curious to hear you talk about is the outlay to authorization gap going to keep closing? Is supply chain or whatever else was impacting that resolved?

And are you building guidance, assuming that continues to close, or would that create upside if it were to play out that way?

Well I think, no, the outlays will continue to increase. It's just a function of us. We always have a back half that's still higher than the first half. And that's still the case here. When you look at our overall sales in the back half, the back half sequentially versus the first half is about a billion dollars higher.

And a lot of that is in aeronautics, is going to be driving that. And so I would expect the outlays to continue to increase on an absolute basis over that period of time. The compares, you know, it's a function where this year's sales are more level loaded than they were last year. So yes, we will have a step up in sales, but it won't be as significant as it was a year later, or sorry, to last year..

And part of that is, if you recall last year, we had the $325 million in the second quarter that slipped into the third quarter in 22. We also had a late award on the F-35 program.

that we weren't anticipating in the fourth quarter. We were expecting that in the first quarter, and we were able to convert pre-contract inventory to sales immediately in the quarter. And so when you combine those, that in and of itself last year was about $500 million. So when you normalize those for those things, on much more of a level load.

year in 23 versus 2022, it drives you to this. The compare is just going to be more difficult because on a year-over-year basis, last year in the fourth quarter, partly for these reasons, we had 7% growth in the fourth quarter. So we won't see that. We will see the back half of the year organically decline relative to the, from a year-over-year perspective.

But again, still putting us in a position to deliver growth a year earlier than we expected. It's also just a function of our program timing. Yes, it's still higher, but just not at the ramp-up rate that we had in 22. Got it. And Jay, henchman on the cash flow statement, I think it's been a bit since you've updated the Beyond 23 contribution in CAS recovery.

Could you give us updated numbers for that? Sure. For cash contributions, right now we're anticipating that we would have a required cash contribution in 2025, anywhere between $500 million to $1 billion. As I noted earlier in the call,

Our objective is to really offset that really through three things. More net income, cash based net income contribution. We're going to see a tailwind in terms of dissipation of the R&D capitalization headwinds that we've seen. And it will also be driving working capital performance to a higher productivity level.

so that we can offset that. Our goal over this period of time is to continue to deliver a low single digit free cash flow growth on an absolute basis. And that combined with our share repurchase program should result in a mid single digit free cash flow for shared growth. So that's our objective, not over the next few years, really over a longer period of time as well. But, you know, that's really where we stand right now on pension.

above 156 per year. So with Rhinmetall now signed up for fuselages starting in 25.

Can you talk about the upside towards the end of the decade above the 156 level as Ryan Natal steps up to maybe a 10% capacity? Well, that's one important element Miles, of being able to expand past 156, but there are a lot of other elements that would have to be essentially funded between our suppliers, ourselves, and the US government to

build the rate in the entire supply chain above the 156 level that we've all agreed on so far with the government. So if the demand continues for the aircraft, which it seems to be begoining continuously, and the US authorizes export of the aircraft to either more countries or more...

clarification, despite the lower deliveries, you haven't slowed the production system on the F-35 on this.

TR3 issue, correct? No, we haven't. So the whole production system, especially the long lead time parts, are tracking through the supply chain as if we're, you know, going on our ramp up of, you know, between 100, mid-140s and ultimately to 156. The deliveries will be that if there are delays of aircraft will be...

fully completed aircraft on the ramp waiting for not just, not even the software load, but the confirmation that the software load they have for TR-3 asked all the flight test points. And that's really what they'll be waiting for. There won't be a production lag, there'll be just a delivery lag based on the...

the completion of the software integration testing that has to be done in the air, not only on the aircraft, but among numerous aircraft flying together at the same time. That's what they'll be waiting for. Thank you. Thank you. Our next question is from the line of Ken Herbert from RBC Capital Markets. Please go ahead. Yeah, hi. Good morning, Jim and Jay. A two-part question if I could.

And then as part of the long-term agreements you have in place on munitions and around a lot of this, how should we think about the potential positive margin impact from these longer-term agreements? Let me go through a little bit with the backlog. Much of the backlog, particularly here what we saw in the second quarter, is the backlog

for essentially 23 contracting requirements.

There was also GIMLERS, which also included some 24 requirements. But as Jim mentioned, we're working towards multi-year contracting, but are not yet under any multi-year contracting.

agreements yet. And so what we've put into the backlog is pretty high confidence it's going to convert to sales. And so we're continuing to, as Jim mentioned, having a dialogue with the customer in terms of drawing multi-year requirements beyond that.

As far as the margin in terms of long-term agreements, you know, we essentially in many cases will enter into agreements with our supply chain with over that period of time of these requirements. So we'll go back to back with our customer. So as we enter into agreements with our customer,

that will cover multi-years. We will also get into contracts with our suppliers for those same multi-years. So any benefits that we get from that probably is going to drop through to our customer in favorable terms in pricing. So I wouldn't expect there to be any type of margin upside from where we are today. So I would expect consistent margins.

from those, but you know again those are pretty solid. Great, thanks Jay. Thank you. Thank you. Our next question is from the line of Jason Gursky from Citigroup. Please go ahead.

Hey, good morning everybody. Jim, I'd like to give you an opportunity to maybe offer up some comments on the other segments. Jay, you talked a little bit about low single digits expectation and MFC. You can walk through the other segments as we move out into 24 and beyond and kind of your baseline assumptions for those.

at this point and then also maybe talk a little bit about margins, you made some comments during the quarter about the 1LMX initiative that you have going on, particularly around supply chain and consolidating your purchasing and maybe getting some better purchasing power and pricing and just kind of how that's informing your outlook for margins in the future.

Okay, so just on a, I'll start with the growth rates in 24 and beyond. You know, just to make sure I was clear, when I said low single digit, I meant for the entire company total consolidated sales. MFC should be significantly better than that, and we would expect them to be our highest growth segment. And I'll go from there.

The others will see some growth from the remainders, but really the driver will be MFC over the next few years, given this demand, incremental demand that we've seen.

On 1LMX, on the margins, you know, we've been, this is an initiative for us which is very significant. It's more than an ERP upgrade. It's our engineering tools, product life cycle tools, it's our manufacturing execution system tools, it's our customer relationship management tools.

our HR system tools, and it's intended to make us a more competitive company. Many of those benefits that we are going to obtain, we will pass those through in pricing and our forward pricing rates to our customer. And so we won't necessarily see more or margin benefit from it.

but it will make us more competitive to capture more business and stay in front of the industry and maintain our leadership. And so that's the way we're approaching OneLMX and really more of a financial view of it.

So fair to say then that margin outcomes will depend largely on mix going forward between

you know, development work and fixed-pipe work. Sure. Yeah, I would say that's accurate. The mix will definitely be a factor in future margins.

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

Okay, thanks. Thank you. Thank you. Our next question is from David Strauss from Barclays. Please go ahead. Thanks, Warren.

Good morning, David. I wanted to get an update on your position on Section 174, see if anything's changed there based on feedback you might have gotten from any of the tax authorities. And then the second one, Aerojet.

Lockheed or L3's potential acquisition there of Aerojet. I think recently you've been out with some comments around that. Just reviewing whether LHX has been able to, or where they are in terms of being able to satisfy your concerns around that deal. Thanks.

Sure, I'll take the Section 174 question. You know, over the past, I'd say, probably six months, the IRS has acknowledged that this is an issue they need to provide guidance to. We're hopeful that we'll see some guidance by the end of the year from them.

related to our position. There's been no change in our position there. And so, you know, we eagerly await any type of guidance that they may have. We still feel confident in the position that we've taken, and I've laid out in the past why we've taken our position that we have today.

There has been some legislation proposed that could defer the implementation of Section 174 to 2026. It would be retroactive to 2022. So we're optimistic. Of course, we believe that it should be repealed, but at least a deferral would be a good start. And so we'll monitor that legislation. Obviously, we're supportive of that, and we'll see how it works through Congress.

some legislation proposed that could defer the implementation of Section 174 to 2026. It would be retroactive to 2022. So we're optimistic. Of course, we believe that it should be repealed, but at least a deferral would be a good start. And so we'll monitor that legislation. Obviously, we're supportive of that, and we'll see how it works through Congress. And then when it comes to Aerojet Rocketdyne...

We have two interests and only two. And those are the reliable access to propulsion, especially solid rocket motors, is of critical importance to the entire aerospace and defense industry. And so, the two-sided benefit that we need to preserve of AirJet Rocketdyne's current structure is that it's a merchant supplier of propulsion to the industry. And that means it treats all of the, I'll call them prime contractors for the end products, the OEMs.

equally. And that's what we feel we need to preserve even if AJRD goes into the ownership hands of another company. Secondly, the performance of AJRD has been improving but it needs to get significantly better nonetheless. And so whether it's on its own or part of another company it's really important that resources be applied to AJRD.

received any commitments from L3Harris at this time, that would assure us that they are going to keep AJRD as a merchant supplier. And that's the one thing we really are looking for. Thank you for watching!

Great, thank you, that's very helpful. You're welcome. Thank you. Our next question is from Ron Epstein from Bank of America Securities. Please go ahead. Yeah, hey, good morning, Grace. Morning, Ron. Maybe a broader big picture question here.

As we look out to the fiscal 24 budget and what was in fiscal 23 and the trajectory maybe even to fiscal 25, in 24 it looks like there's going to be maybe $6 billion or so of spending on classified aircraft programs, everything from NGAD, FAXX. There's been chatter about replacing U2 with a hypersonic platform.

I know you're limited in what you can say, but can you just give us a feel for what that means for

Lockheed Martin, how you think about it, and as outsiders trying to model this and think about it, how would you guide us to think about it?

What I'd start with there Ron is that we've got, and are experiencing significant growth in our classified portfolio already. It's a bright spot for the company. I think recently we've been, when we aggregate all of our classified programs together, sort of a 7% growth rate.

So it is a place where because of Skunk Works, our space operations, some segments of RMS and MFC even, where we have significant talent and capability to work in those kind of really advanced spaces. I basically said it in the prepared remarks, there are areas of this company where we are endeavoring to...

move into areas beyond known science to address what our customers you know kind of challenges are that they are facing.

And so we have the capability to take advantage of a larger classified program growth rate on the part of government spending if that's what happens. So we're in good shape to do that. There are missions that you need to differentiate though when it comes to aircraft, right? There's the…

reconnaissance and surveillance mission, right? Which a lot of it can be done with unmanned systems and that's one of the strengths of Skunk Works, for example. So that mission, we have a real strength in unmanned surveillance, ISR systems are called. Then you've got the air superiority type of aircraft, right? So,

You can think about F-15, for example, F-22, NGAD is the next generation air dominance aircraft. That is classified. The Air Force recently said that there is competition now beginning for that or entrained for that air dominance aircraft, that air superiority aircraft. And then there's the kind of all purpose strike aircraft, right? So that's F-16, F-35, those kind of airplanes. Again, where we have the advantage in F-35 is volume, right?

aircraft. So the capacity for the strike mission can and will be pursued through the F-35 in large part for the near future.

So those are the ways to think about aircraft. So the classified programs are going to be largely in air superiority and ISR for the most part. And then there is the bomber mission which is largely going to be carried out by the B-21.

going forward. So hopefully that's a bit helpful to your question there. And just running overall over the entire portfolio, the classified business for us is around $8 billion. And if you recall, we talked about it being one of the four pillars of our growth projection all the way through 2027.......

And our highest probably will be our programs of record, given what we've seen particularly with MFC. But that'll be our second highest grower, anywhere between mid to high single digit growth through 2027.

Got it. All right. Thank you. You're welcome. And the next question comes from the line of Pete Skibitsky from Olympic Global Advisors. Please go ahead.

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

Yeah, so we've actually over the past six months our labor availability has improved significantly. We have closed a lot of our key critical skill gaps over this period of time. And that partly has enabled the sales growth, the incremental sales growth that we've seen here in our change outlook because part of that is just our own internal labor.

And so we're in a much better position than we were even six months ago. We've seen some lower attrition rates as well as better hiring rates as well. And so we're fairly confident that that will stick, and that also bodes well for the rest of the industry, particularly our supply chain. So we're encouraged by that.

Okay, that's great. Appreciate the color. Thank you. Our next question is from Doug Harned from Bernstein. Please go ahead. Good morning. Thank you.

I want to go back to missiles and fire control in Ukraine for a minute because if we think back to the early days of the Russia-Ukraine conflict, there were things like Javelin for you, there was of course, stingers. Something looked like it would be kind of a short-term need.

potentially building out some capacity for replenishment of weapons. And so now we are more than a year later into this, and you've gotten some very big awards in this last quarter that appear to be related to Ukraine, either directly or other European needs. We're seeing NATO spending go up.

Can you talk about how you view the opportunity in missiles and fire control for revenue and backlog ahead depending on how things may play out in Ukraine?

from if we saw the conflict come to a resolution, or if we had increasing NATO involvement. How do you think about that in your planning?

I would say qualitatively, and maybe turn it over to Jay for some quantification around it, is that...

the tragedy of Ukraine has unveiled some issues and weaknesses for our national defense enterprise more broadly, right? And so, I'm not convinced, Doug, that...

The duration of the Ukraine war which we hope is very short

will affect our long-term prospects for MFC. But the lessons from this conflict will remain for many years and that's what I think is most important. The lessons are that great power conflict first and foremost unfortunately is not gone from the world at this point in history.

Russia's decision to invoke a major power land war on the European continent was pretty risky and demonstrates that they may take other risks in the future to sustain its regime or to expand its power, whatever the case.

the motivation may be. So NATO then and when you talk to the defense ministers of countries like Poland and Lithuania they are taking this extremely seriously not for the short term but for the long term and so they are expanding their defense budgets not because of what's going on necessarily in the ground in Ukraine right now.

it's for the elevated risk that they perceive to their own countries for some foreseeable future, sadly. When it comes to the United States, the lesson, among others, of this situation in Ukraine, unfortunately, is that the expenditure rates of munitions is much higher than most of our existing war gaming models would imply.

and therefore there's a replenishment need for what's been used and what's been shipped to Ukraine. But beyond that is the planning and hopefully deterrence of future conflicts where the US and its allies are going to need to first of all demonstrate to a potential adversary that they have the stockpiles.

to defend themselves for a long period of time if need be. And that the rates of munitions usage will be supportable from their stockpiles and from their industries. So we think this is a longer term...

essentially see change in national defense strategy for the U.S. and for our Western allies, including Japan and the Philippines and others. So we hope the conflict in Ukraine ends quickly, but the lessons and the future demand for ourh

these kind of products is going to stay elevated for a very long time, we think. And that appears consistent with the nature of these recent orders you've gotten that are large quantities extend over a longer period of time than we might have thought.

Right. Great. This is Maria. I think we've come to the top of the hour here. So I'll turn it back to Jim for some final thoughts. Just a couple things. I wanted to make sure everybody understands that, you know, we're off to what I now think is a great start after three years of launching our 21st century security.

We've got a great set of partnerships with tech companies large and small to help us do that. And the customer is starting to adopt it. And as I talked about in the prepared remarks, we're showing it in major exercises and we're getting some actual revenue and program awards around that.

And then the other dimension is to make international production and sustainment operations a part of at least Lockheed Martin's future. And you see you hear us talk about investments in Australia, the UK, potentially Poland, Germany is new in this for us. So we're going to continue to expand internationally to make sure we have resilient supply chain.

and we have sustainment operations where our customers can use them to deter future conflict around the world. So those are some of the things I think is really important for you all to understand where we're headed. But before concluding the call, I really would like to thank all my Lockheed Martin teammates for their many important contributions to strengthening our national security and increasing deterrence. And the strong financial and operational performance that we've brought.

we've been experiencing this quarter was a result of their dedication and hard work. And look, whether it's on the factory floor, a classified engineering facility, or a customer's flight line, our people showed up every day during the pandemic to do the job, and they continue to show up every day to do the job to provide for national security. So I want to thank them and also thank you all for joining us on our call today. We look forward to speaking with you on our next call in October .

quarter was a result of their dedication and hard work. And look, whether it's on the factory floor, classified engineering facility, or a customer's flight line, our people showed up every day during the pandemic to do the job, and they continue to show up every day to do the job to provide for national security. So I want to thank them, and also thank you all for joining us on our call today. We look forward to speaking with you on our next call in October . Lois, that concludes the call.

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.