Q3 2023 Lockheed Martin Corp Earnings Call

Okay.

Yeah.

Okay.

Good day, and welcome everyone to the Lockheed Martin third 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. Please go ahead.

Thank you Louis and good morning, I'd like to welcome everyone to our third quarter 2023 earnings Conference call. Joining me today on the call are Jim <unk>, Our chairman, President and Chief Executive Officer, and James <unk>, Our Chief Financial Officer.

Statements made in today's call that are not historical fact are considered forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law actual results may differ materially from those projected in the forward looking statements.

Please see today's press release, and our SEC filings for a description of some other factors that may cause actual results to differ materially from those in the forward looking statements.

We posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www Dot Lockheed Martin Dot com and click on the Investor Relations link to view and follow the charts with that I'd.

Like to turn the call over to Jim.

Thanks, Maria and good morning, everyone. Thank you all for joining us on our third quarter 2023 earnings call.

All of US on the line today are well aware that since our last call the <unk>.

World is now seeing yet another terrible conflict.

Everyone in our company remains dedicated to fully supporting the United States government's policy efforts to deter aggression <unk>.

Restore security and achieve peace.

Today I will first highlight our third quarter results as we pursue our vision of 20 <unk> century security designed to support the U S Department of defense strategy of integrated Deterrence, and then I'll turn it over to Jay to provide additional detail before taking your questions.

Starting on page three of the slides sales increased 2% year over year to $16 9 billion and backlog remains at historically high levels at 156 billion.

EPS of $6.73 exceeded prior year and free cash flow was a strong $2 $5 billion.

We returned approximately a 100% of free cash flow to you the shareholders through dividends and share repurchases during the quarter.

Earlier in October , we announced a 15% increase in our dividend.

Which reflects 5% growth.

The 20 <unk> consecutive year of dividend increases for Lockheed Martin.

At the same time, our board also approved a $6 billion increase in our share repurchase authorization.

Bringing our total authorization to $13 billion Reconfirming, our continued commitment to returning capital to shareholders.

We are also reaffirming our full year 2023 financial outlook for sales profit EPS and free cash flow.

Given the current status of the 2020 for U S defense budget.

Global geopolitical tensions and the macroeconomic environment, we will provide our expectations for our 2024 financial outlook during our full year 2023 earnings call in January .

On the U S budget.

The specific trajectory of the future U S defense budget is still in process between the administration and Congress the global threat landscape is increasingly elevated.

Our robust backlog reflects the relevance and importance of the Lockheed Martin portfolio and elevating the turns to great power conflict involving the United States and its allies and the solid positioning of our business to serve our domestic and international customers.

From a process standpoint in government the current continuing resolution or CR is in place through November 17.

At that 0.1 of the following could occur.

FY 'twenty four appropriations bills will be enacted.

Unknown Executive: Good day and welcome everyone to the Lockheed Martin 3rd quarter, 2023 earnings results conference call. Today's call is being recorded.

Congress will enact another partial or whole CR.

Or there could be a partial or full government shutdown.

And any of these scenarios there continues to be the option also for supplemental requests related to the support Ukraine, Israel and potentially Taiwan.

Maria Ricciardone Lee: At this time for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone Lee, vice president of Investor Relations. Please go ahead. Thank you, Lois and good morning. I'd like to welcome everyone to our third quarter, 2023 earnings conference call.

As Congress continues to work through the FY 'twenty four appropriations bills. We are optimistic that there will be consistent support for the national defense strategy and funding for its priorities.

Maria Ricciardone Lee: Joining me today on the call are Jim Taiclet or 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 made differ materially from those projected in the forward-looking statements. Please see today's press release in our SEC filing for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements.

In the meantime, we will continue to work with our customers and suppliers to minimize any potential disruptions due to the process.

And we will press on with executing our 20 <unk> century security strategy of building capacity efficiency and resilience into our production operations driving advanced digital technologies to enhance the integrated deterrence and.

And expanding our international business and operations.

Turning to the F 35 program, we delivered 30 F 35 aircraft in the third quarter.

Maria Ricciardone Lee: We 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.lockheedmart.com and click on the Investor Relations link. To view and follow the charts.

The year to date total to 80 jets.

Consistent with our announcement in September we continue to expect to deliver a total of 97 aircraft. This year all in the technology refresh II or tier two configuration.

James Taiclet: With that, I'd like to turn the call over Jim. Thanks, Maria. Good morning, everyone.

We are producing F 30, fives at a rate of 156 per year and expect to continue at that pace, while simultaneously working to finalize tier three software development and testing.

James Taiclet: Thank you all for joining us on our third quarter, 2023 earnings call. All of us on the line today are well aware that since our last call, the world is now seeing yet another terrible conflict. Everyone in our company remains dedicated to fully supporting the United States government's policy and efforts to deter aggression, restore security, and achieve peace. Today, I will first highlight our third quarter results as we pursue our vision of 21st century security designed to support the U.S. Department of Defense strategy of integrated deterrence and then I'll turn it over to Jay to provide additional detail before taking your questions.

And we recently began flight test evaluations of the next software release that encompasses major systems upgrades, such as improved radar nextgen distributed aperture system and weapons capability.

As previously announced we continue to expect to deliver the first tier III configured aircraft between April and June of 2024.

The superior technological capabilities of the F 35 continues to generate strong interest both domestically and internationally.

James Taiclet: Starting on page three of the slides, sales increased 2% year-over-year to $16.9 billion and backlog remains at historically high levels at $156 billion. EPS has $6.7360 prior year and free cash flow is a strong $2.5 billion. We return to approximately 100% of free cash flow to you, the shareholders, through dividends and share of purchases during the quarter. Earlier in October, we announced a 15-cent increase in our dividend, which reflects 5% growth and is the 21st consecutive year of dividend increases for Lockheed Martin.

In September Denmark first for locally based F 35 aircraft arrived on their home soil.

Denmark, a program of record calls for 27 F 35 aircraft.

Also in September the Czech Republic chose to become part of the global F 35 Lightning II program.

In the U S State Department approved the possible $5 billion.

Foreign military sale to South Korea for up to 25 F 35 joint strike fighters.

Earlier in the quarter, Israel announced it will by an additional 25 F 30, fives, which will add a third squadron.

And increased its F 35 fleet to 75 aircraft.

Additionally in August Lockheed Martin was selected by the Australian Department of Defense.

James Taiclet: At the same time, our board also approved a $6 billion increase in our share of purchase authorization, bringing our total authorization to $13 billion, reconfirming our continued commitment to returning capital to shareholders. We are also reaffirming our full-year 2023 financial outlook for sales, profit, EPS and free cash flow. Low, given the current status of the 2024 US defense budget, global geopolitical tensions, and the macroeconomic environment, we will provide our expectations for our 2024 financial outlook during our full year 2023 earnings call in January.

Their strategic partner for their air 6500 program Phase one.

This transformational Pathfinder program will deliver the broadest scope of joint all domain operations are jato, and the free world and will completely revolutionized the way the Australian Defense Force operates.

By connecting Australian systems, and platforms and operate across air space land Sea and cyber domains.

We expect that are 6500 will set the blueprint for future military operations worldwide.

This proven technology will provide greater situational awareness and defense against increasingly advanced air and missile threats and enabled significantly greater interoperability between Australia and Allied nations.

James Taiclet: On the US budget, though the specific trajectory of the future US defense budget is still in process between the administration and Congress, the global threat landscape is increasingly elevated. Our robust backlog reflects the relevance and importance of the Lockheed Martin portfolio, and elevating deterrence to great power conflict involving the United States and its allies, and the solid positioning of our business to serve our domestic and international customers. From a process standpoint in government, the current continuing resolution or CR is in place through November 17th.

Lockheed Martin will lead this first phase.

Which will provide the core architecture and multi domain integration for the program.

This is just one recent win that demonstrates the business success of our 20 <unk> century security cornerstone.

Trusted and reliable Battle management, and command and control systems that integrate across multiple domains military services and Allied forces.

James Taiclet: At that point, one of the following could occur, FY 24 appropriations bills will be enacted, Congress will enact another partial or whole CR, or there could be a partial or full government shutdown. In any of these scenarios, there continues to be the option also for supplemental requests related to support you praying, Israel, and potentially Taiwan. As Congress continues to work through the FY 24 appropriations bills, we are optimistic that there will be consistent support for the national defense strategy and funding for its priorities.

Late last year Lockheed Martin also won the $500 million defensive Glum Award.

And in late September we were also awarded a potential seven year over $1 billion contract for systems Engineering and software integration to the integrated combat system across the surface <unk> portfolio of the U S Navy and coast Guard.

This is the linked together systems and software across the services and the <unk> construct and it not only enables faster decision, making and better capabilities.

But also serves as a much more effective global deterrent strategy.

Beyond These awards, we continue to develop 20, <unk> century security technologies to advance interoperability between Lockheed Martin product lines.

James Taiclet: In the meantime, we will continue to work with our customers and suppliers to minimize any potential disruptions due to the process, and we will press on with executing our 21st century security strategy of building capacity efficiency and resilience into our production operations, driving advanced digital technologies to enhance the integrated deterrence, and expanding our international business and operations. Turning to the F-35 program, we delivered 30 F-35 aircraft in the third quarter, bringing the year-to-day total to 80 jets.

The <unk> mill hybrid base station that our engineers invented is a one L. M initiatives that includes teams at MFC in Aeronautics.

We recently transferred data from a sniper targeting pod that was set up in Orlando, Florida to the tactical missile stimulation lab in Grand Prairie, Texas to provide real time updates to a simulated missile in flight.

This event significantly advanced efforts towards upcoming live fire demonstrations of cross domain platforms operating in a joint environment.

James Taiclet: Consistent with our announcement in September, we continue to expect to deliver a total of 97 aircraft this year, all in the technology refresh 2 or TR-2 configuration. We are producing F-35 at a rate of 156 per year, and expect to continue at that pace while simultaneously working to finalize TR-3 software development and testing. We recently began flight test evaluations of the next software release that encompasses major systems upgrades such as improved radar, next-gen distributed aperture system, and weapons capability.

To use data from multiple sources across an open architecture.

Also a skunk works partnered with the University of Iowa, Operator performance Laboratory.

To demonstrate an AI commanded jamming capabilities.

And this we successfully used artificial intelligence on to air systems to.

To provide jamming support to a simulated strike against enemy air defenses.

This demonstration showed how AI agents with high performance and reliable behavior can operate in close coordination with and be controlled by human crude aircraft.

James Taiclet: As previously announced, we continue to expect to deliver the first TR-3 configured aircraft between April and June of 2024. The superior technological capabilities of the F-35 continue to generate strong interest both domestically and internationally. In September, Denmark's first four locally-based F-35 aircraft arrived on their home soil. Denmark's program of record calls for 27 F-35A aircraft. Also in September, the Czech Republic chose to become part of the Global F-35 Lightning II program, and the US State Department approved a possible $5 billion more foreign military sale to South Korea for up to 25 F-35 Joint Strike Fighters.

We also conducted a successful test of the prototype radio for the Pac three MSE missiles.

Will enable communications with the spy one radar the key sensor in the aegis weapon system.

This test performed by our <unk> team across MSC in RMS Paves the way for the design of our multi frequency radio Dave data link for Pac three MSE.

Turn that will enable the U S. Navy for the first time, they have the ability to integrate the state of the art Pac three missile onto its warships and open up another opportunity for Lockheed Martin in the future.

International interest impacted also remains strong as demonstrated by our deepening partnership with Poland, which signed a letter of offer and acceptance for 644 Pac three MSE and related equipment in the quarter.

James Taiclet: Earlier in the quarter, Israel announced it will buy an additional 25 F-35s. Which will add a third squadron, and increase its F-35 fleet to 75 aircraft. Additionally in August, Lockheed Martin was selected by the Australian Department of Defense, as their strategic partner for their Air 6500 program Phase 1. This transformational Pathfinder program will deliver the broadest scope of Joint All-Demain Operations, or Jato, in the free world, and will completely revolutionize the ways the Australian Defense Force operates.

In our RMS business of course is CH 53 helicopter is expected to grow meaningfully also over the coming years in August we won a $2 7 billion contract to build and deliver 35 additional CH 50, <unk> helicopters and Thats the largest procurement to date for.

This multi mission aircraft.

Another long standing major Lockheed Martin program. This one its space is also poised for significant growth ramp in.

In late September the fleet ballistic missile program $101 $2 billion contract for the Navy's Trident two D five life extension.

James Taiclet: By connecting Australian systems and platforms that operate across Air, Space, Land, Sea, and Cyber domains, we expect that Air 6500 will set the blueprint for future military operations worldwide. This proven technology will provide greater situational awareness and defense against increasingly advanced Air and Missile threats, and enable significantly greater interoperability between Australia's and allied nations. Lockheed Martin will lead this first phase, which will provide the core architecture and multi-domain integration for the program.

For nearly seven decades, Lockheed Martin has supported the U S Navy as a critical partner for its mission to provide fee based strategic determines.

The Trident <unk> missile will be in service through the 20 <unk>.

Maintaining the proven performance of the <unk> system for significantly less cost to the government that are designing a new missile.

Also in our space business.

Martin's next generation interceptor, our NCI program.

James Taiclet: This is just one recent win that demonstrates the business success of our 21st century security cornerstone, trusted and reliable battle management and command control systems that integrate across multiple domains, military services, and allied forces. Late last year, Lockheed Martin also won the $500 million defensive Glam Award, and in late September, we were also awarded a potential seven-year, over $1 billion contract for systems engineering and software integration to the Integrated Combat System across the Surface Force portfolio of the U.S. Navy and Coast Guard.

We executed its digital preliminary design review in partnership with the missile Defense agency customer.

That happened on September 29.

During this review the MBA assessed the NCI program's readiness and maturity continues to continue into the detailed design phase.

Confirming that our solution continues to meet the requirements for this crucial and demanding mission.

Finally, the Cyrus wrecked sample return capsule touched down in the Utah Desert on September 24.

Returning Nasa's first ever sample from an asteroid.

James Taiclet: This will link together systems and software across the services and a Jado construct, and it not only enables faster decision-making and better capabilities, but also serves as a much more effective global deterrent strategy. Beyond these awards, we continue to develop 21st century security technologies to advance interoperability between Lockheed Martin product lines. The 5G.mill hybrid base station that our engineers invented is a one LM initiative that includes teams at MFC and aeronautics.

After a seven year mission traveling approximately believe this 4 billion miles in space.

The capsule whole its material from venue.

Carbon rich asteroid and scientists hope it will teach us more about the origins of organics that led to life on Earth plus.

Plus the mechanics behind overall plan at formation.

After release of the capsule. The spacecraft was set on a new course to investigate the asteroid apophis under the mission name Cyrus apex.

So with that interesting and exciting news I will turn it over the call to Jay.

James Taiclet: We recently transferred data from a sniper targeting pod that was set up in Orlando, Florida to the Tactical Missile Simulation Lab in Granfari, Texas to provide real-time updates to a simulated missile in flight. This event significantly advanced efforts towards upcoming fly-fire demonstrations across the main platforms operating in a joint environment that will fuse data from multiple sources across an open arch, at the University of Iowa. Also, Skunk Works partnered with the University of Iowa's Operator Performance Laboratory to demonstrate an AI-commanded jamming capability.

And join you later for questions Jay.

Thanks, Jim and good morning, everyone. Today, I will walk you through our third quarter 2023 financial results I'll also provide an update to our full year 2023 guidance.

And offer a few comments on 2024 as I describe our results. Please follow along with the web charts, we've posted with our earnings release today.

Starting on chart four with consolidated sales and segment operating profit third quarter sales increased 2% year over year with three of the four business areas delivering growth.

Segment operating profit was down 6% year over year due to lower net favorable profit adjustments and lower equity earnings resulting in segment margins of 10, 7%.

James Taiclet: In this, we successfully used artificial intelligence on two air systems to provide jamming support to a simulated strike against enemy air defenses. This demonstration showed how AI agents with high performance and reliable behavior can operate in close coordination with and be controlled by human crude aircraft. We also conducted a successful test of the prototype radio for the PAC-3 MSV missile that will enable communications with the Spy-1 radar, the key sensor in the Aegis weapon system.

Moving to earnings per share on chart five GAAP EPS was comparable year over year with lower segment profit and higher net interest expense offset by favorable below the line items, including lower share count lower tax rate and fewer mark to market losses on.

On an adjusted basis EPS was down <unk> 10 year over year, primarily due to the lower profit.

Moving to cash flow on chart six.

Free cash flow was strong at over $2 5 billion in the quarter or 150% of net income helped in part by our focus on working capital primarily due to better collections at the end of the government fiscal year.

James Taiclet: This test performed by a 1LM team across MSC and RMS paves the way for the design of a multi-frequency radio data length. In turn, that will enable the US Navy for the first time to have the ability to integrate the state-of-the-art PAC-3 missile onto its warships and open up another opportunity for Lockheed Martin in the future. International interest in PAC-3 also remains strong as demonstrated by our deepening partnership with Poland, which signed a letter of offer and acceptance for 644 PAC-3 MSVs and related equipment in the quarter.

Once again, we demonstrated our commitment to shareholders by returning 99% of our free cash flow through dividends and share repurchases this quarter on.

On a year to date basis, we've returned almost $5 3 billion.

Or 116% of free cash flow.

As Jim mentioned, our board approved a 5% increase to the quarterly dividend and an additional $6 billion share repurchase authorization.

Tools remain a key part of our total shareholder return strategy.

Okay moving to segment results and starting with Aeronautics on chart seven.

James Taiclet: In our RMS business, the course he's CH-53K helicopter is expected to grow meaningfully also over the coming years. In August, we won a $2.7 billion contract to build and deliver 35 additional CH-53K helicopters, and it's the largest procurement to date for this multi-mission aircraft. Another long-standing major Lockheed Martin program, this one at space, is also poised for significant growth ramp. In late September, the fleet ballistic missile program won a $1.2 billion contract for the Navy's Trident to D-5 life extension.

Third quarter sales at Arrow decreased 5% driven by lower volume on F 35, partially offset by higher volume is skunk works.

F 35 production was down due to the previously mentioned lot 15 through 17 sales catch up in the third quarter of 2022.

And an overall more linear throughput this year.

Both development Sustainment saw solid year over year growth in the quarter.

Operating profit decreased 12% from the prior year due to the lower volume and lower net profit adjustments.

On the F 16 program International interest remains strong we delivered the second block 70 aircraft to Bahrain in July and in September . The first block 70 aircraft for the Slovak Republic was unveiled at our facility in Greenville, South Carolina.

James Taiclet: For nearly seven decades Lockheed Martin supported the US Navy as a critical partner for its mission to provide sea-based strategic determinants. The Trident to D-5 Ellie missile will be in service through the 2040s, maintaining the proven performance of the D-5 system for significantly less cost to the government than of designing a new missile. Also in our space business, Lockheed Martin's next-generation interceptor, or NGI program, executed its digital preliminary design review in partnership with the missile defense agency customer.

The Slovak Republic will be the first European country to receive this newest and most capable version of the fighting Falcon.

Today's latest version, but blocks 70, 72, we've flown by six countries and counting.

With a backlog of 126 aircrafts as of the third quarter. The F. 16 program continues to play a crucial role in 20 <unk> century security missions for international Allies. It will be a key contributor to growth over the coming years.

James Taiclet: That happened on September 29. During this review, the MBA assessed the NGI program's readiness and maturity to continue into the detailed design phase. Confirming that our solution continues to meet the requirements for this crucial and demanding mission. Finally, the Osiris Rec sample, return capsule, touched down in the Utah Desert on September 24. Returning NASA's first-ever sample from Astero, after a seven-year mission traveling approximately 4 billion miles in space. The capsule holds material from Bennu, a carbon-rich asteroid, and scientists hope it will teach us more about the origins of organics that led to life on Earth, plus the mechanics behind overall planet formation. After release of the capsule, the spacecraft was set on a new course to investigate the asteroid apophis under the mission name, the Cyrus Apex.

Shifting the missiles and fire control on page eight sales.

Sales increased 4% year over year, driven by higher sales volumes and munitions programs within tactical strike missiles.

Partially offset by lower volume within integrated air and missile defense.

Segment operating profit also increased 4% year over year due to the higher net profit adjustments.

Margins were comparable at 13, 5%.

MFC has built a strong backlog and we continue to see strong demand for missiles and munitions with Allied nations seeking to improve their security posture amidst todays complex threat environment.

This backlog provides a foundation for growth over the coming years across several several of our product lines, including Pac three <unk>.

Rs <unk> javelin Jasmine will RASM.

Turning to rotary and mission systems on page nine sales were up 9% in the quarter driven by higher volume across a handful of programs within our within our integrated welfare warfare systems, and sensors and see six ISR lines of business.

James Taiclet: So with that, interesting and exciting news, I'll turn it over to the call to Jay and join you later for questions. Okay? Thanks, Jim.

Operating profit.

Increased 2% due to higher sales volume and was partially offset by lower net profit adjustments.

Jesus Malave: Good morning, everyone. Today, I'll walk you through our third quarter of 2023 financial results. I'll also provide an update to our full year 2023 guidance and offer a few comments on 2024. As I describe our results, please follow along with the web charts we have posted with our earnings release today. Starting on chart four, we consolidate sales and segment operating profit. Third quarter sales increased 2% year-over-year, with three of the four business areas delivering growth.

<unk> backlog increased in the quarter, primarily due to the $2 7 billion CH 53, K Award, which is picture for last seven and eight the first full rate production launch as part of the U S. Marine Corps 200 aircraft program of record.

The significant contract bolsters Sikorsky and its partners creates additional production efficiencies and provides the U S Marine Corps with transformative capabilities.

Jesus Malave: Segment operating profit was down 6% year-over-year due to lower net favorable profit adjustments and lower equity earnings, resulting in segment margins of 10.7%. Moving to earnings per share on chart five, GAAP EPS was comparable year-over-year, with lower segment profit and higher net interest expense offset by favorable below-the-line items, including lower share count, lower tax rate, and fewer market market losses. On an adjusted basis, EPS was down 10 cents year-over-year, primarily due to the lower profit.

On chart 10, we continue to see strong growth across our space portfolio with sales, increasing 8% year over year.

Driven by higher volume on and GI fleet ballistic missile GPS and Orion programs.

Operating profit decreased 15% as the benefit from higher sales volume was more than offset by lower net profit adjustments.

And lower equity earnings from United Launch Alliance.

Space backlog grew slightly to over $30 billion at the end of the third quarter helped by the $800 million transport layer tranche Two award for 36 beta satellites.

Jesus Malave: Moving to cash flow on chart six, our free cash flow was strong at over $2.5 billion in the quarter, or 150% of net income. Helped in part by our focus on working capital, primarily due to better collections at the end of the government fiscal year. Once again, we demonstrated our commitment to shareholders by returning 99% of our free cash flow through dividends and Sherry purchases this quarter. On a year-to-day basis, we've returned almost $5.3 billion, or 116% of free cash flow. As Jim mentioned, our board approved a 5% increase to the quarterly dividend, and an additional $6 billion in Sherry purchase authorization. These tools remain a key part of our total shareholder return strategy.

Transport layer as part of the proliferated space architecture, It will strengthen deterrence with more resilient space architectures for beyond line of sight targeting data transport and advanced missile detection and tracking.

With this award we will build and deliver a total of 88 data communication satellites to the space development agency in support of their low Earth orbit constellation.

Okay now shifting to our 2023 expectations on page 11.

For the full year, we're holding the outlook for sales segment operating profit earnings per share and free cash flow.

Jesus Malave: Moving to segment results and starting with aeronautics on chart seven. Third quarter sales at arrow decreased 5%, during by lower volume on F-35, partially offset by higher volume is skunk works. F-35 production was down, due to previously mentioned the last 15-17 sales catch-up in the third quarter of 2022, and an overall more linear throughput this year. Both development and sustainment saw solid year-over-year growth in the quarter. Operating profit decreased 12% from the prior year, due to the lower volume and lower net profit adjustments.

We have successfully driven and delivered more linear results and 2023 than prior years, which enables more efficient use of our capacity, but sets up for a difficult compares to last year's fourth quarter.

In conjunction with our recent announcement of increased share repurchase authorization, we're increasing our share repurchase forecast for 2000 $23 billion to $6 billion.

Provided there is not an extended shutdown scenario.

These repurchases along with dividends are expected to return nearly 100, 150% of our free cash flow to shareholders for the year.

And between 2022 and 2023, we are on track to repurchase nearly 13% of our current market cap.

Jesus Malave: On the F-16 program, international interest remains strong. We delivered the second block 70 aircraft to Bahrain in July, and in September, the first block 70 aircraft for the Slovak Republic was unveiled at our facility in Greenville, South Carolina. The Soulback Republic will be the first European country to receive this newest and most capable version of the fighting Falcon Today's latest version, the Black 70-72, will be flown by six countries and counting With a backlog of 126 aircraft as of the 3rd quarter, the F-60 program continues to play a crucial role in 20% security missions for international allies It will be a key contributor to growth over the coming years Shifting the missiles and fire control on page 8, fails increased 4% year-to-year during by higher sales volumes on munitions programs within tactical strike missiles, partially offset by lower volume within integrated air and missile defense Segment operating profit also increased 4% year-to-year due to the higher net profit adjustments Margins were comparable at 13.5% MSC has built a strong backlog and we continue to see strong demand for our missiles and munitions with allied nations seeking to improve the security posture of Mr. Today's complex threat environment This backlog provides a foundation for growth over the coming years across several of our product lines including PAC-3, GMLRS, HIMARS, JAVELIN and JAZEM and LARASM Turning to rotary emission systems on page 9, fails were up 9% in the quarter during by higher volume across a handful of programs within our integrated warfare systems and sensors and C6 ISR lines of business operating profit increased 2% due to higher sales volume and was partially offset by lower net profit adjustments RMS backlog increased in the quarter primarily due to the $2.7 billion CH-53K award which is pictured for last 7 and 8 the first full rate production lots as part of the US Marine Corps 200 aircraft program of record The significant contract bolster Sikorsky and its partners creates additional production efficiencies and provides the US Marine Corps with transformative capabilities On chart 10 we continue to see strong growth across our space portfolio with sales increasing 8% year-to-year during by higher volume on NGI, fleet ballistic missile, GPS and Orion programs Operating profit decreased 15% as the benefit from higher sales volume was more than offset by lower net profit adjustments and lower equity earnings from United Launch Alliance Space backlog grew slightly to over $30 billion at the end of the third quarter helped by the $800 million Transport Layer Tranche 2 award for 36 beta satellites Transport Layer is part of the proliferated space architecture it will strengthen deterrence with more resilient space architectures for beyond line of site targeting data transport and advanced missile detection and tracking With this award we will build and deliver a total of 88 data communication satellites to the space development agency in support of their low Earth orbit constellations Okay, now shifting to our 2023 expectations on page 11 For the full year, we're holding the outlook for sales, segment operating profit, earnings per share, and free cash flow.

We're also set to deliver mid single digit free cash flow.

For share growth in 2023, and we're positioning the company to continue that level of growth in the future.

Okay few comments on 2024.

Well, we don't have a formal outlook for sure I'll provide a few directional markers as we see them today barring any environmental setbacks.

We still anticipate low single digit sales growth as we convert our strong backlog position.

As I previously mentioned the backlog supports a higher growth rate, but the value chain remains constrained by extended lead times that have yet to compress.

On segment margins, we expect the underlying business to be relatively flat year over year, but anticipate variability caused by the timing of impacts from the MFC classified program.

And our free cash flow, we're following the budget process to determine whether it will have an impact on the timing of our program schedules and milestones, but are continuing to set internal targets that deliver mid single digit growth in free cash flow per share.

Okay, let's wrap it up.

Our results through the first three quarters have been solid with a long term demand environment that is favorable to Lockheed Martin's 20, <unk> century security capabilities.

Our focus on linearity in working capital is helping to drive more consistent sales and improved cash flow.

We're maintaining our full year outlook, while increasing our planned share repurchases further demonstrating our commitment to shareholder returns.

And finally, we're executing our 20 <unk> century security strategy through improving capacity and resilience in the defense enterprise.

Accelerating the adoption and insertion of 20 <unk> century digital technologies.

And collaborating more closely with international partners and allies to improve security solutions.

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 the one zero on a touchtone phone.

Now, let's talk about today have been placed in the queue and you may remove yourself from queue at any time by repeating the ones who will come along if you're on a speakerphone. Please pick up your handset before pressing the Nomura.

Please limit yourself to one question.

Enter the queue for additional questions by pressing 190.

My first question.

Again, if you do have a question. Please press <unk> one zero.

Okay.

Yes.

Our first question.

Will come from the line of Doug Harned from Bernstein. Please go ahead.

Hi, good morning, Thank you.

Morning, Doug.

I wanted to I wanted to see.

Just.

And the F 35 situation a little bit more.

Now the tier three deliveries to the F 35 of those are now expected some point in Q2 next year.

But.

I think it's difficult for us to have like total confidence in that timeframe and what I'm trying to understand is as you continue to produce F 30, fives, which will need software upgrades before delivery.

Are you recognizing revenues on percent completion, so revenues should continue to be solid, but when you look at say a June delivery date.

What's the impact on.

Your production recognition of revenues earnings and cash flow should that day move around how should we think about the timing here.

Jesus Malave: We've successfully driven and delivered more linear results in 2023 than prior years, which enables more efficient use of our capacity but sets up for a difficult compares to last year's fourth quarter. In conjunction with our recent announcement of increased share repurchase authorization, we're increasing our share repurchase forecast for 2023 to $6 billion, provided there is not an extended shutdown scenario. These repurchases, along with dividends, are expected to return nearly 150 percent of our free cash flow to shareholders for the year.

So Doug on the timing on sales and the process associated with the sale of the booking margin.

Sure It really shouldnt expect much variability with that as we've mentioned.

That really doesn't get impacted.

What you could see.

And what we are seeing today is that a risk retirements are obviously dependent upon successful completion of the test program and so that will could limit our ability to take profit adjustments on a lot 15% to 17 program, but as I have said in.

Jesus Malave: In between 2022 and 2023, we are on track to repurchase nearly 13 percent of our current market cap. We're also set to deliver mid-single-digit free cash flow per share growth in 2023, and we're positioning the company to continue that level growth in the future.

In the past, we are performing and expect to continue to perform profitability stronger on lot, 15% to 17 than we did on lot 12 through 14, and so we might see some short term limitations on our ability to take profit rate adjustments, we still expect and have confidence we will drive higher profitability on this.

Jesus Malave: Okay, few comments on 2024. While we don't have a formal outlook to share, I will provide a few directional markers as we see them today, barring any environmental setbacks. We still anticipate low-single-digit sales growth as we convert our strong backlog position. As I previously mentioned, the backlog supports a higher growth rate, but the value chain remains constrained by extended lead times that have yet to compress. At segment margins, we expect the underlying business to be relatively flat year-over-year, but anticipate variability caused by the timing of impacts from the MFC classified program.

Jesus Malave: In a free cash flow, we're following the budget process to determine whether it will have an impact on the timing of our program schedules and milestones, but are continuing to set internal targets that deliver mid-single-digit growth in free cash flow per share.

Contract locked in the prior one.

Thank you and our next question is from the line of.

One woman from P. Cohen. Please go ahead.

Yes, thanks, so much.

So Jamie I think recently you made a comment about gravity on margins.

And you haven't provided a guide for 'twenty, four but I think.

One of the issues that kind of you had mentioned had been classified missile program.

FC will you have some some L rip options coming up could you maybe give us some color in terms of the status of that and how that impacts could impact next year.

Jesus Malave: Okay, let's wrap it up. Results through the first three-quarters have been solid, with a long-term demand environment that is favorable to Lockheed Martin's 21st Century Security Capabilities. Our focus on linearity and working capital is helping to drive more consistent sales and improve cash flow. We're maintaining our full-year outlook while increasing our planned share repurchases, further demonstrating our commitment to shareholder returns. And finally, we're executing our 21st Century Security Strategy through improving capacity and resilience in the defense enterprise, accelerating the adoption and insertion of 21st Century Digital Technologies, and collaborating more closely with international partners and allies to improve security solutions.

The other items, we should be.

We watch all of that Mike.

Our gravity on margins. Thank you.

Sure Cai.

So yes that's.

That's the question we've talked about it's been a headwind it's something that we've talked about for the upcoming number of years, including next year and in fact, we are seeing some of the headwind this year and it really it's dependent upon an analysis.

It's really the timing of recognition of these losses and are there certain things that need to be met from a performance standpoint on the program.

And then it becomes an assessment on the probability.

One option being exercised and so there's just variability in that timing.

Unknown Executive: 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 zero on your touch-tone phone. You will hear an acknowledgement tone that you have been placed in the queue, and you may remove yourself from Q at any time by repeating the 1-0 command. If you want to speak your phone, please pick up your hands that before press the number. Please limit yourself to 1 question and re-enter the Q for additional questions by pressing 1 and 0, and one moment per first question. Again, if you do have a question, please press 1 and 0.

It could be as early as frankly as this this quarter.

Or into next quarter, what we could find ourselves in situations as it were recording multiple lots in 2024, which would put some downward pressure on next year's margin. So we'll have a better feel for that.

Next year and it could be in the range of anywhere between 25 to 50 basis points of headwind from where we are and where we end today or this year from a margin perspective. So hopefully that provides a little bit of color on the impact of that program as far as any others.

Look we if you look at this year, we had lower profit adjustments. This year, we expect there to be in the low twenties.

In 2023, we're evaluating what that means for 2024 in general.

But again I think as I mentioned in my prepared remarks, we're expecting the underlying business to be pretty much flattish, which would include recurring margins as well as profit rate adjustments in 2024.

Douglas Harned: Our first question. We'll come from the line of Doug Harned from Bernstein. Please go ahead. Good morning. Thank you. Morning Doug. I wanted to see if we could understand the F-35 situation a little bit more. Now the TR-3 deliveries of F-35, those are now expected some point in Q-2 next year. But I think it's difficult for us to have total confidence. And that timeframe, and what I'm trying to understand is as you continue to produce F-35s, which will need software upgrades before delivery, you're recognizing revenues on percent completion, so revenues should continue to be solid.

Yeah, and Kai it's Jim just to add on the classified program.

First of all given my.

The Air Force pilot experience I can tell you that this is a really important.

Capability for the country.

It should continue on as an important capability for many many years and even decades.

Assuming the program is successful, which we think we are on track to be.

And it'll be massively NPV positive over that longer timeframe.

So we're working our way through the schedule and the performance in the early phases of the contract but at the end of the day it'll be worth it for the country in the company.

Douglas Harned: But when you look at, say, a June delivery date, what's the impact on your production recognition of revenues, earnings, and cash flow. So should that date move around? How should we think about the timing here? So Doug, timing on sales and the process associated with the sales, the booking margin, I really shouldn't expect much variability with that. As we've mentioned, that really doesn't get impacted. What you could see in what we are seeing today is that our risk retirements are obviously dependent upon successful completion of the test program.

But we will keep you all updated as Jay just did.

On the path to get there.

Yeah.

Thank you and our next.

Is from the line of Deane Li Wang from Morgan Stanley .

Please go ahead.

Hey, good morning, everyone. So maybe around 35 question.

We've seen a lot of new countries Express express interest in the F 35, and current partners like Israel have indicated plans to add to existing orders.

Your thoughts on expanding capacity.

To meet all the international demand and is there.

Is there a demand from the customers to potentially bring forward their deliveries.

Douglas Harned: And so that will could limit our ability to take profit adjustments on a lot 15 to 17 program. But as I've said in the past, we are performing and expect to continue to perform profitability stronger on a lot 15 to 17 than we did on a lot 12 to 14. And so we might see some short-term limitations on our ability to take profit rate adjustments. We still expect to have confidence we'll derive higher profitability on this contract lot than the prior one.

Should you increase capacity what level of investments.

Douglas Harned: Thank you.

So Christine it's Jim I'll start off and Jeremy can maybe speak to the required investment level.

We're in sync with our joint program office customer, which represents the international cohort in.

Indirectly.

F 35 customer base and directly the U S.

Services, we are all settled on the 156 per year rate.

As the joint investment that we're all willing to make given the demand that's out there.

Ky Van Rumor: And the next question is from the line of Ky Van Rumor from TD Cohen. Please go ahead. Yes, thanks so much. So Jay, I think recently you made a comment about gravity on margins. And you haven't provided a guide for 24. But I think one of the issues that kind of you've mentioned had been the classified missile program at MFC, where you have some some L rep options coming up. Could you maybe give us some color in terms of the status of that and how that impacts could impact next year?

There is the annual sort of slotting priorities discussion that happens within the joint program office and the international partners and that will keep the line full for many many years.

Ky Van Rumor: And any other items we should be watchful of might exert gravity on margins. Thank you. Sure, Ky, thanks. So yeah, I mean, that's the question we've talked about. It's been a headwind. It's something that we've talked about for the upcoming number of years, including next year. And in fact, we are seeing some of the headwind this year and it really is dependent upon an analysis, really the timing of recognition of these losses.

If we were to get significantly more international orders that might motivate us jointly and I mean us, meaning the government and industry.

Including our suppliers by the way.

To make an incremental investment, but I think that that would have to be a significant increase in the order book above what we see today, so Jay any other investments.

The investments, it's probably in the low hundreds of millions, it's manageable, but again to Jim's point it needs to be coordinated with the customer.

Thank you. Our next question is from the line of George Shapiro from Shapiro Research. Please go ahead.

Good morning.

Jay on the F 35 can you discuss a little bit where are we in the quarter in terms of sustainment revenue versus production because the decremental margin on the production was pretty with pretty high at 22% now I'll sneak in one other one which isn't RMS. The implication is that you'd have a 14.

Ky Van Rumor: And there are certain things that need to be met from a performance standpoint on the program. And then it becomes an assessment on the probability of an option being exercised. And so there's just variability in that timing. It could be as early as frankly as this quarter or into next quarter. What we could find ourselves in a situation is that we're recording multiple lots in 2024, which would put some downward pressure on next year's margin.

Percent margin in Q4 to meet your guide yet revenues will be relatively flat. So if you can just kind of tell us what's going on to cause that to occur.

Okay I'll start with the second one first on RMS margins can come back on the F 35 on the margins for RMS you're right.

Ky Van Rumor: So we'll have a better feel for that next year. And it could be in the range of anywhere between 25 to 50 basis points aheadwind from where we are, where we end today, or this year from a margin perspective. So hopefully that provides a little bit of color on the impact of that program. As far as any others, you know, look, if you look at this year, we had lower profit adjustments this year.

George we are expecting an increase in profitability. There, it's really twofold, a function of higher profit adjustments and there are and I think I've talked about this in the past we do have some mixed benefits through on some delivery program deliveries here in the fourth quarter, which will give them some lift.

As far as you have 35, you're just really from a sales perspective in the quarter production was down pretty substantially.

Ky Van Rumor: We expect there to be in the little 20s in 2023. We're evaluating what that means for 2024 in general. But again, I think as I mentioned in my prepare remarks, we're expecting the underlying business to be pretty much flatish, which would include recurring margins as well as profit rate adjustments in 2022, for.

Really close to 20% development was up quite substantially and Sustainment was up in the high teens.

Solid solid there are on Sustainment thats been strong all year long, we expect that to grow for the year around 10%.

Ky Van Rumor: Yeah, and Kai, it's Jim, just to add on the classified program. First of all, you know, give my Air Force pilot experience, I can tell you that this is a really important capability for the country. It should continue on as an important capability for many, many years and even decades, assuming the program is successful, which we think we're on track to be, and it will be massively NPV positive over that longer time frame.

Thank you and our next question is from the line of Ron Epstein.

And one moment please.

Ky Van Rumor: So we're working our way through the schedule and the performance in the early phases of the contract, but at the end of the day, it'll be worth it for the country and the company, but we will keep you all updated as Jay just did on the path to get there.

Lois are you still there.

Yes, one moment my open enhance line okay.

Yeah.

Christine Lee White: Thank you, and our next question is from the line of Christine Lee White from Logan Stanley. Please go ahead. Hey, good morning, everyone. So maybe an after 35 question. You know, we've seen a lot of new countries expect expressed interest in the F-35 and current partners like Israel have indicated plans to add to existing orders. What are your thoughts on expanding capacity to meet all the international demand? And is there, is there demand from the customers to potentially bring forward their deliveries? And should you increase capacity? What level of investment?

I'm sorry. The next question that will go to David Strauss from Barclays. Please go ahead.

Thanks, Good morning, everyone.

Morning, David.

Jay I think the IRS came out with some recent updated guidance around section 174, one to see what your interpretation of that was weather supported your position or your peers that are that are taking I think higher levels.

Or a higher hit associated with section 174, and then.

James Taiclet: So Christine, it's Jim. I'll start off and Jamie can maybe speak to the required investment level. We're in sync with our joint program office customer, which represents the international cohort in directly the F-35 customer base and directly the US services. We've all settled on the 156th per year rate as the joint investment that we're all willing to make given the demand that's out there. There is the annual sort of sliding priorities discussion that happens within the joint program office and the international partners, and that will keep the line full for many, many years.

Any updated thoughts on where pension might come out for you guys next year given.

What appears to be much higher discount rates and weak asset returns. Thanks.

Sure. Thanks, David on the first one on the R&D capitalization of draft guidelines that came out we view those as is promising.

We believe that they support our position of continuing to adopt the costs associated with cost plus contracts and just as you remember, we treat that and view it as a cost of sale not really as an R&D activity the.

The risk is really borne by the acquirer of those services the.

The rights are short lived and Theyre also restricted and so we believe that dropped language.

James Taiclet: If we were to get significantly more international orders, that might motivate us jointly. And I mean us, meaning the government and industry, including our suppliers, by the way, to make an incremental investment. But I think that that would have to be a significant increase in the order book above what we see today.

At least thus far appears to be consistent with our approach and so we view it positively as far as pension a couple of things going on with pension I'll go on the P&L.

Fast pension, we'll see a significant reduction next year.

We're going to go from about $375 million of income in 'twenty three to about $50 million of loss in 2024, it's a function of two things.

Jesus Malave: So, Jay, any other? Yeah, I mean, the investment is probably the low hundreds of millions. It's manageable, but again, to Jim's point, it needs to be coordinated with the customer. Thank you.

One is is the returns in a second is.

Essentially the exploration of benefits that were amortizing since from the 2014 Sal.

George Shapiro: Our next question is from the line of George Shapiro from Shapiro Research. Please go ahead. Yes, good morning.

Salary plan freeze so those run out and so we will see significant increase as you know thats pretty much non cash.

Jesus Malave: Jay, on the F-35, can you discuss a little bit where we showed in the quarter in terms of sustainment, revenue versus production? Because the one other one, which is an RMS, the implication is that you'd have a 14% margin in Q4 to meet your guide, yet revenues would be relatively flat. So, you can just kind of tell us what's going on to cause that to occur. Thanks.

But it will affect EPS on the cash side of it we'll see a little bit of a slight reduction anywhere between $25 million to $50 million a reduction, but again the biggest piece there is on fast.

From a cash contributions we've talked about.

Anywhere between 500 to a $1 billion.

Contributions required in starting in 2025, right now given where things are we would expect that to be in the higher range, if not higher for 2025, and if we stay where we are it could trigger some contributions in 2024, but I will say you think about cash country cash contribution to pension.

Ronald Epstein: Okay, I'll start with the second one first on RMS margins and come back on the F-35. On the margins for RMS, you're right. George, we're expecting an increase in profitability there. It's really a twofold function of higher profit adjustments, and there are, and I think I've talked about this in the past. We do have some mixed benefits through some delivery, program deliverers here in the fourth quarter, which will give them some less.

And what that means.

We've got an enviable position in our balance sheet and we've demonstrated that willing to use it and so I wouldn't view that higher pension contributions as limiting otherwise limiting our ability to continue our cash deployment strategies and thats the key point.

Ronald Epstein: As far as the F-35, just really from a sales perspective in the quarter, production was down pretty substantially, really close to 20% development was up quite substantially, and sustainment was up in the high teens, so we'll solid there on sustainment, that's been strong all year long, we expect that to grow for the year around 10% Thank you, and our next question is from the line of Ron Epstein, in one moment please. Lois, are you still there? Yes, one moment we're open in his line.

The next question is from the line of Ken Herbert from RBC Capital markets. Please go ahead.

Yes, hi, good morning, J&J I'm.

Maybe Jay just to follow up on a comment you made in the prepared remarks, I think you made a comment around.

The buyback activity in the fourth quarter sort of dependent upon timing of the fiscal 'twenty for budget and whether or not there is a shutdown potentially.

Potentially can you just talk about how youre thinking about the timing of the 24 budget, but very specifically if theres any sort of shutdown how much does that put at risk.

Sort of the buyback activity expected in the fourth quarter or if it's very sure does that not impacted I mean, maybe you can walk through how you're viewing sort of the risks around that and impact on the on the fourth quarter cash.

Cash deployment sure.

Sure so year to date, we've done $3 billion with this new guide at $6 billion, that's $3 billion in the fourth quarter. We're monitoring the status of the budget discussions and resolution of that if we do find ourselves.

David Strauss: Okay, I'm sorry, the next person that we'll go to is David Strauss from Berkeley, please go ahead. Thanks, morning everyone, morning, David. Jay, I think the IRS came out with some recent updated guidance around section 174, one to see what your interpretation of that was, whether it's supported your position or your peers that are taking, you know, I think higher levels of higher head associated with section 174. And then any updated thoughts on where pension might come out for you guys next year given, you know, what appears to be much higher discount rates than the week asset returns. Thanks. Sure, thank you, David.

In a in a shutdown scenario.

It caused us to take a pause another re look at that share repurchase and what we would probably do is just defer it so.

So it would be more of an issue of timing versus anything else until such time that the budget gets it gets clearer clarified.

History tells us these things are fairly short lived we believe that we'll be able to get through it here in the fourth quarter. If not then it will just push probably into the first quarter and alike, and really won't see a meaningful impact there, but again in a shutdown scenario you just take a look at what does that mean it does.

We can't have new starts it could be disrupted two programs. It could also put us in a situation where we're doing some self funding for key programs on track and to the extent that occurs it could it could be a limiting factor on share repurchase.

Okay.

Yeah.

Okay.

Jesus Malave: And the first one on the RG capillation of draft guidelines that came out, we view those as promising. We believe that they support our position of continuing to deduct the costs associated with cost plus contracts. And just as remember, we treat that and view it as a cost of sale, not really as an R and D activity. The risk is really borne by the acquire of those services, the rights are short lived and they're also restricted. And so we believe the draft language is at least thus far appears to be consistent with our approach. And so we view it positively.

Louise Please go there.

Yes, I'm sorry. The next question will come from the line of Sheila <unk>.

<unk> from Jefferies. Please go ahead.

Okay.

Seamless line did drop from the Q&A, So we'll move to Rob Stallard Martin Moorman.

And he is from vertical research. Please go ahead.

Alright, thanks, so much good morning.

Good morning, Rob.

A question for Jim or John on.

On the balance sheet to the returning more than 100% of free cash flow to shareholders. The moment, but we do have this ongoing U S budget uncertainty and youre going to put more money into the pension plan. So how sustainable do you think it is to be returning more than 100% to shareholders going forward.

Jesus Malave: As far as pension, a couple of things going out with pension, I'll go on the P&L. FAS pension will see a significant reduction next year. We're going to go from about $375 million of income in 23 to about $50 million of loss in 2024 to function of two things. One is the returns. And the second is essentially the expiration of benefits that we're amortizing since from the 2014 fallered plant freeze. And so those run out.

It's a good question and if you look at just the profile with this incremental authorization that we have.

We're looking at it is six.

$6 billion here in 2023 $4 billion in 2024, and essentially $3 billion and $25 3 billion in 2006, which puts us just puts us equal to free cash flow in that ballpark, assuming kind of a $6 billion placeholder offer free cash flow in those given years.

Jesus Malave: And so we'll see a significant increase. As you know, that's pretty much non cash. But it will affect EPS. On the cash side of it, we'll see a little bit of a slight reduction anywhere between $25 to $50 million reduction. But again, the biggest piece there is on FAS, from a cash of contributions.

And so that's the way we're viewing it Rob so over time over the next few years it will revert back to more of a 100% of free cash flow, but again, we will look at it year by year as you've seen the last two years, we did increase it here in the fourth quarter and will continue to evaluate those opportunities as they present themselves to reality.

Jesus Malave: You know, we talked about anywhere between $500 to $1 billion of contributions required in starting in 2025. Right now, given where things are, we would expect that to be in the higher range, if not higher for 2025. And if we stay where we are, it could trigger some contributions in 2024. But I will say, you think about cash contribution, cash contribution to pension and what that means. You know, we've got an enviable position in our balance sheet. We've demonstrated it willing to use it. And so I wouldn't view that higher pension contributions as limiting, otherwise limiting our ability to continue our cash deployment strategies. And that's the key point.

What happens with actual pension funding what progress we make in our working capital reduction initiatives in all of those will go into the mix master in and provide the inform what we what we formerly due in any given year.

Thank you. The next question will come from the line of Richard Safran from Seaport Research Partners. Please go ahead.

Thanks, Jim Jaye Maria Good morning, how are you good morning.

So.

If we take an optimistic scenario here on what happens with the budget outlook.

I wanted to know if you could discuss 2020 for bookings in the opportunity set both classified and unclassified.

Kenneth Herbert: The next question is from the line of Ken Herbert from RBC capital markets, please go ahead. Yeah, hi, good morning, Jay and Jim. Maybe Jay, just to follow up on a comment you made in the prepared remarks, I think you made a comment around the buyback activity in the fourth quarter, or sort of dependent upon timing of the fiscal 24 budget and whether or not there is a shutdown potentially. Can you just talk about how you're thinking about the timing of the 24 budget, but very specifically, if there's any sort of shutdown, how much does that put at risk, sort of the buyback activity expected in the fourth quarter? Or if it's very short, does that not impact it? Maybe you can walk through how you're viewing sort of the risks around that and impact on the on the fourth quarter cash, cash deployment.

Again.

We assume no shutdown and we assume we do get funding I'm interested in what the major competitions are next door.

What was that.

You see backlog growth and a book to bill is better than one.

Richard We've got a pretty decent line of sight to continuing growth in our backlog.

There is a lot activity activity happening in classified which I can't speak to specifics about but we do see some award decisions on next year there.

We'll continue to see orders strength NMFC over this time period.

We've talked about orders between 2023, and 2027 $10 billion, we have not seen.

Excuse me all of those orders come to fruition, yet so we would expect.

Jay Malave: Sure. So, you know, here to date, we've done $3 billion with this new guide at $6 billion, that's $3 billion in the fourth quarter. We're monitoring, you know, the status of the budget discussions and resolution of that. If we do find ourselves in a shutdown scenario, you know, it causes to take a pause and another relook at that chair repurchasing, what we would probably do is just defer it. So, it would be more of an issue of timing versus anything else until such time that the budget gets clarified.

Those to be continued opportunities.

For us.

We will continue to have.

F 35, so lot 18 next year is probably something that we should probably consider.

Coming into the backlog in 2024.

In addition to the performance based logistics program on the F 35 program we've.

We submitted our proposal to the customer continue to have dialogue and we're cautiously optimistic that we can get under contract in the first half of next year. So those are some key some key awards to think about for 2024.

Jay Malave: So, you know, history tells us these things are fairly short lived. We believe that we'll be able to get through it here in the fourth quarter. If not, then it would just push probably into the first quarter and alike and really won't see a meaningful impact there. But, you know, again, in a shutdown scenario, you just take a look at what does that mean? You know, it does, you know, you can't have new starts.

Thanks.

Youre welcome.

The next question is from the line of Sheila <unk>.

Jefferies. Please go ahead.

Jay Malave: It could be disruptive to programs. It could also put us in a situation where we're doing some self-funding to keep programs on track. And to the extent that it occurs, it could be a limiting factor on shared purchase. Okay. Alois, are you still there? Yes, I'm sorry.

Hi, Good morning can you guys hear me.

We can hear you find Sheila good morning. Thank you. Thank you so much.

Thanks for taking the question. So just wanted to ask you.

And Jay you are pretty confident management team just given you think backlog of 150 billion Youre, returning 150% to shareholders, which is a big number.

So you've talked about low single digit growth and 11% margins for some time. So I just kind of wanted to know whats changed given.

The backdrop is seemingly better or is it just the budget uncertainty is it supply chain.

Silo Calle: The next question will come from the line of Silo Kailu from Jeffries. Please go ahead. One second.

Maybe if you could just comment on that.

Well not much has really changed to be honest, we've talked about low single digits for a while now.

Rob Stoward: She was lying dead dropped from the Q&A, so we'll move to Rob Stoward one moment, and he's from Vertical Research, please go ahead. Thanks very much. Good morning. Good morning, Rob. A question for Jim or Jane, she, on the balance sheet, you know, to the returning more than 100% of free cash flow to shareholder at the moment, but we do have this ongoing US budget uncertainty, and you're going to put more money into the pension fund.

I talked about that in my prepared remarks on the margins underlying margins generally flattish.

Because we could be in a situation next year, where we have multiple lots of the classified program that can cause some variability but.

But that doesn't fundamentally alter what we've been really talking about I am.

Same thing with free cash flow, we've been targeting mid single digit free cash flow per share growth.

And we still see a path there we know there are some headwinds whether it's pension and the like but we.

Rob Stoward: But, how sustainable do you think it is to be returning more than 100% to shareholder's going forward? It's a good question. If you look at just the profile with this incremental authorization that we have, the way we're looking at it is, you know, $6 billion here in 2023, $4 billion in 2024, and then essentially $3 billion in $25 and $3 billion in 2006, which puts us equal to free cash flow in that ballpark, you know, assuming kind of a $6 billion placeholder for free cash flow in those given years.

We still believe that we have a line of sight to be able to do that and that's what we're going to be working through on a year by year basis, and starting with 2024 and when the over the next couple of months, we'll work through solidify our plans and will present, a formula to you in January .

And the longer term there are some things that are changing significantly one is the.

The global threat environment, and the geopolitical situations getting more concerning and challenging.

Refocusing the U S and certainly our allies around the world on National Defense.

Rob Stoward: And so that's the way we're viewing it, Rob. So over time, over the next few years, it'll revert back to more of a 100% of free cash flow. But again, we'll look at it year by year. As you've seen the last two years, we did increase it here in the fourth quarter and we'll continue to evaluate those opportunities as they present themselves, the reality of what happens with actual pension funding, what progress we make in our working capital reduction initiative. And all of those will go into the mixed master and provide, you know, the inform what we formally do in any given year. Thank you.

In an increasing manner.

The second big trend Thats going on is.

The continued evolution of both physical and digital technology at a rate never seen before sort of in human history frankly.

So.

The opportunity for our company to take a leadership role in integrating those technologies, whether they're hypersonic hypersonic defense space technologies that are advanced.

<unk>.

And as well as <unk> distributed cloud artificial intelligence, we're investing in all of those technologies to try to drive them in and pull through.

Richard Safran: The next question will come from the line of Richard Safer and from Seaport Research Partners. Please go ahead. Thanks.

Richard Safran: Jim, Jay, Maria, good morning, how are you? So, you know, if we take an optimistic scenario here on what happens with the budget outlook, I want to then know if you could discuss 2024 bookings and the opportunities that both classified and unclassified. Again, you know, if we assume no shutdown and we assume we do get funding, I'm interested in what the major competitions are next year as well as how you see backlog growth and the book to bill is better than one.

Using this 20 <unk> century concept the technology driving concept, we have just to pull through our platforms and enable them quickly on the open architecture that we're advocating for that will be quickly and widely adoptable, making our platforms more compelling as we go forward in <unk>.

And then the third thing is the notion that.

We have in the National Defense strategy, and I think our allies are increasingly embracing as international cooperation, which drives interoperability and also linking command of control systems, all of which can part with our strategy. So I think there is some mega trends that are going on over a longer term that won't necessarily affect us quarter to quarter as jr.

Richard Safran: You know, Richard, we've got a pretty decent line of sight to continuing growth in our backlog. There's a lot of activity activity happening in classified, which I can't speak to specifics about, but we do see some award decisions next year there. We'll continue to see orders, a strength in MFC over this time period. And we've talked about orders between 2023 and 2027, $10 billion. We have not seen, excuse me, all of those orders come to fruition yet, so we would expect those to be continued opportunities for us.

Stating, but will give us opportunities that I think the company is uniquely positioned to take advantage of over the long term.

Yeah.

Thank you and our next question is from the line.

<unk> from Jpmorgan. Please go ahead.

Hey, thanks, very much and good morning, everyone.

Maybe one quick housekeeping question and then one broader question for both of you. The mid single digit growth you talked about for free cash flow per share next year.

Richard Safran: We'll continue to have F-35, so a lot of 18 next year is probably something that we should probably consider coming into the backlog in 2024 is in addition to the performance-based logistics program on the F-35 program. You know, we've been in our proposal to the cost, we're continue to have dialogue, and we're cautiously optimistic that we can get under contract in the first half of next year.

Did that assume any kind of pension contribution next year, and how big might that be or not.

And then just more broadly when you guys talk about seeking out additional suppliers of solid rocket motors is that something for maybe developing hypersonic programs for later in the decade and into the 2000 and <unk> or is that about replacing your suppliers on kind of today's existing programs. Thanks.

Richard Safran: So those are some key awards to think about for 2024.

Hey, I'll talk.

Rocket Motors and Jason can take the free cash flow to share.

Sheila Kahyaoglu: Thanks. Hello. The next question is from the line of Sheila Kahyaoglu from Jeffries, please go ahead. Hi. Good morning. Can you guys hear me? Yeah, okay, fine, Sheila. Good morning. Thank you. Thank you so much. Thanks for taking the question. So just wanted to ask, Jim and Jay, you're a pretty competent management team just given your big backlog, 150 billion. You're returning 150% to shareholders, which is a big number. So you've talked about low single-digit growth and 11% margin.

Part of your question there. So our objective is to is to bring anti for agility into our own supply chain first and Doug broadly apply that to the Dod.

In partnership with them as well and so when it comes to solid rocket Motors I mean, we're actually starting with Gamblers for example, our legacy technology, where we want to augment our existing supplier.

And have a dual source frankly, and then that will extend into other systems large and small and legacy and advanced. So this is not a one time.

Sheila Kahyaoglu: So I just kind of wanted to know what's changed given the backdrop is seemingly better. Is it just a budget uncertainty? Is it supply chain? Is it F-35? Maybe you could just comment on that. Well, you know, not much has really changed to be honest. You know, we've talked about low single digits for a while now. We, you know, I talked about that in my prepare remarks on the margins underlying margins generally flatish.

Our objective this is a broad and await campaign like approach to strengthening our own supply chain and enabling multiple sources really.

For even beyond our company for our industry, which I think is important so I do think that this is not a one shot deal we're in negotiations and discussions with the counterparty. We think we can start us off with on this journey.

Sheila Kahyaoglu: Because we could be in a situation next year where we have multiple lots of the classified program that can cause some variability, but that doesn't fundamentally alter, you know, what we've been really talking about. Same thing with free cash flow. You know, we've been targeting mid single digit free cash flow for sheer growth and we still see a path there. We know there are some headwinds, whether it's pension and the like, but we still believe that we have a line of sight to be able to do that.

But it's going to be a long journey.

We have additional participants and programs as the years.

Even decades rollout.

On the question of the free cash flow per share in 2024.

So what I mentioned is that we're setting up internal targeting internal internal actions to be able to arrive at that incremental.

James Taiclet: And that's what we're going to be working through on a year by year basis and starting with 2024 when the next couple of months will work through solidify our plans and will present a formula to you in January. In the longer term, there are some things that are changing significantly. One is the global threat environment and the geopolitical situations getting more concerning and challenging. That's refocusing the US and certainly are allies around the world on national defense and increasing manner.

Our pension contribution would obviously put pressure on that and we will go through that over the next coming months and determined what the art of what's possible and what our plans would be and we'll kind of we'll present that in January .

Thank you and the next question is from Myles Walton from Wolfe Research. Please go ahead.

Thanks, Good morning, Hey, Jay just want a quick clarification and then a question for Jim the clarification on the margins for next year 25 to 50 basis points of risk I guess is what you're saying on the MFC should we anticipate that theres a way around that or is that the base case and then Jimmy in the press release, you talk about digital services revenue over.

James Taiclet: The second big trend that's going on is, you know, the continued evolution of both physical and digital technology to rate, never seen before sort of in human history, frankly. And so the opportunity for our company to take a leadership role in integrating those technologies, whether they're hypersonics, hypersonic defense, space technologies that are advanced and as well as, you know, 5G distributed cloud, artificial intelligence, we're investing in all those technologies to try to drive them in.

Time, and I'm just curious maybe you could touch on your vision of what digital services revenue is today, and where you want to take it over the next several years.

So digital services will be a wide range, but we're starting with this notion of trusted reliable mission.

Mission.

Systems Engineering for command and control and Battle management systems that that is.

James Taiclet: And pull through using this 21st century concept technology for driving concept we have to pull through our platforms and enable them quickly on the open architecture that we're advocating for and it will be quickly and widely adoptable making our platforms more compelling as we go forward in time. And then the third thing is, you know, the notion that we have an international defense strategy and I think our allies are increasingly embracing international cooperation, which drives interoperability and also linking and command control systems all of which comport with our strategies.

Our business, we're already in actually.

It is largely digital.

Already.

And it's these these kind of programs like <unk>.

Defensive.

We have a program in the UAE. This based on this technology as well.

I'll call. It Diamond Shield, we are using that core technology to then expand into other programs like air 6500. So we're already in that business and I think the mid <unk>.

The low to mid single digit billions at this point.

And we're going to try to ramp that up.

In and of itself.

And other technologies to that for networking and connecting again, our platforms as well as other.

James Taiclet: So I think there are some mega trends that are going on over a longer term that will necessarily affect us quarter to quarter as Jay was stating, but will give us opportunities that I think the company is uniquely positioned to take advantage of over them.

Platforms from other Oems to provide mission solutions for the for the Dod So the digital and the physical technologies will ultimately come together in a way that can can advance mission capability for our customers.

Seth Seifman: Thank you, and our next question is from the line, Seth Seifman from JP Morgan, please go ahead. Thanks very much, and good morning, everyone. Good morning.

Say air to air combat surface warfare et cetera.

Yes.

Air and missile defense integration.

Seth Seifman: Maybe Jay, one quick housekeeping question, and then one broader question for both of you. The mid-single-digit growth you talked about for free cash flow per share next year. Did that assume any kind of pension contribution next year? And how big might that be or not?

Those kinds of emissions, we wanted to advance every three to six months of the combination of digital and physical technologies of our own and from others partners et cetera that we will work with US. So this is again long term broad approach, but we've already got a very very good starting point, that's material and the command and control and Battle management systems that we have.

James Taiclet: And then just more broadly, when you guys talk about seeking out additional suppliers of solid rocket motors, is that something for maybe developing hypersonics programs for late in the decade and into the 2030s? Or is that about replacing your suppliers on kind of today's existing programs? Thanks.

Today, and how we're augmenting them and modernizing those for the future.

Okay going back to the question on margins for next year, just as I mentioned.

Underlying margins for sake of clarity margins, excluding the impact of the MSC program, we expect to be flattish.

James Taiclet: Hey, I'll talk to solid rocket motors, and Jay can take the free cash flow for share part of your question there. So our objective is to bring anti-fragility into our own supply chain first and broadly apply that to the DOD in partnership with them as well. And so when it comes to solid rocket motors, I mean, we're actually starting with, you know, gimlers, for example, you know, a legacy technology where we want to augment our existing supplier, you know, and have a dual source, frankly.

The MFC programs.

We'll provide a drag on the margins next year and it's a question of timing so it could be anywhere between 25% to 50 basis points and again, we'll have a lot more clarity on that as we close out the year.

James Taiclet: And then that will extend into other systems, large and small and legacy in advance. So this is not a one-time objective. This is a broad and a way campaign-like approach to, you know, strengthening our own supply chain. And enabling multiple sources really for, you know, for even beyond our company for our industry, which I think is important. So I do think that this is not a one-shot deal. We're in negotiations and discussions with a counterparty. We think we can start us off with on this journey, but it's going to be a long journey. And we'll probably have additional participants and programs as the years and even decades roll on.

Thank you. The next question is from the line of Noah <unk> from Goldman Sachs. Please go ahead.

Hello, everyone.

Good morning, Hi.

Jay I guess I also wanted to ask about margins and.

You sort of did there, but I don't know if you were just state where you expect the MFC margin to shake out.

For the year next year or what it looks like in the quarters with the more concentrated losses and then I just wondered if you could talk about how a little bit more about how the scout here I know you've talked about having a fixed price all reps were with prices fixed a little while ago.

Is that something thats been going on longer than I realized.

I know you also or my understanding as you also know bid a missile program.

That was awarded recently because of that fixed price development.

As the as the customer shifting the risk a little bit towards the contractor or am I overreaching, what im seeing out there.

Jesus Malave: On the question of the free cash flow per share in 2024, that, you know, what I mentioned is that we're setting up internal targeting internal actions to be able to arrive at that incremental pension contribution. And obviously for pressure on that. And we'll go through that over the next coming months and determine what the order of what's possible and what our plans would be. And we'll, again, we'll present that in January. Thank you.

Well, let me maybe take the second part of it and then circle back.

There are really two different programs.

I think you're referring to the standard attack weapon.

Award and that was a fixed price development program that we decided not to pursue because of the risk posture of there.

Myles Walton: And the next question is from Miles Walton from Wolf Research. Please go ahead. Thanks. Good morning. It's just a quick clarification. And then a question for Jim. The clarification on the margins for next year. 25 to 50 basis points of risk, I guess is what you're saying on the MFC. Should we anticipate that there's a way around that, or is that the base case?

Each program and pursue really stands on its own review those individually in this case, we thought the risk profile is just too much.

So we backed off on this particular program on the classified program that was a cost plus development programs. So there really wasn't much risks associated with development cycle. There are these production low rate initial production lots that were priced pretty aggressively and hence we're starting we're going to start to see the headwinds associated.

James Taiclet: And then Jim, in the press release, you talk about digital services revenue over time and I'm just curious. Maybe you could touch on your vision of what digital services revenue is today and where you want to take it over the next several years. So digital services will be a wide range, but we're starting with this notion of trusted, reliable mission. Systems Engineering for Command and Control and Battle Management Systems. That is a business we're already in, actually.

<unk> with that.

As Jim mentioned these are would be a long term program and we know what it takes to make sure that we provide accretive NPV on these types of programs and so we track that and monitoring that and we're confident over the long term, we'll be able to deliver that so again. These are case by case type of situations that we pursue.

We're probably going to get back to you on a specific MFC margins for next year I think we can back into 25% to 50 on the total company you can back into what that impact is for MFC.

James Taiclet: It is largely digital already. It's the kind of programs like Defense of Guam. We have a program when UAE that's based on this technology as well called Diamond Shield. We're using that core technology to then expand into other programs like Air 6500. We're already in that business. I think the load amidst signal digit billions at this point, and we're going to try to ramp that up in and of itself. Add other technologies to that for networking, connecting, and our platforms as well as other platforms from other OEMs to provide mission solutions for the DOD.

Don't have it in front of me.

Just to give you a context here the approach we're taking.

No matter what the customers.

Initiative is on on risks.

Balancing our in balancing the approach it Jay and I are taking here as we look at programs going forward and opportunities is really a holistic one where we do take the long term total program value into account, but we also take will take into.

Account seriously short and mid term risk management.

And.

Especially when it comes to fixed price either development or initial rate production because if you look at the concept of fixed price initial rate production.

James Taiclet: The digital and the physical technologies will ultimately come together in a way that can advance mission capability for our customers and say air combat, surface warfare, etc, and air and missile defense integration. Those kinds of missions we want to advance every three to six months with the combination of digital and physical technologies of our own and from other partners, etc, that we will work with. This is a long-term, broad approach, but we've already got a very, very good starting point that's material in the command and control and battle management systems that we have today and how we're augmenting them and modernizing those for the future.

On a program as technology has not settled in the first place yet because development hasnt been done.

We would ascribe a higher risk factor to that.

I think going forward here.

Based on both experienced and just our own perspectives on these kinds of things.

Okay, and Louis I think we have time for one more as we approach the top of the hour.

So much. Your next question comes from the line of Jason Gursky from Citi. Please go ahead.

Yes, good morning, everybody.

Jim You mentioned in your prepared remarks.

The idea of a supplemental for Taiwan I'm wondering if you wouldn't do as a favorite just kind of remind us of what you're shipping into Taiwan today.

Jesus Malave: Going back to the question on margins for next year. As I mentioned, underline margins, and we meet for second clarity, margins excluding the impact of the MFC program, we expect to be flatish. The MFC programs, it will provide a drag on the margins next year, and it's a question of timing. So it could be anywhere between 25 to 50 basis points, and again we'll have a lot more clarity on that as we close out the year. Thank you.

And in the context of our supplemental what kinds of things do you think are going to be in high demand and would lead to more revenue for you all and that Jay related to international.

I was wondering if you could just give us a quick update on the margin profile of your international business kind of writ large today outside of the F. 35 program. If international is growing faster is the expectation here that we would all else being equal.

Noah Poponak: The next question is from the line of NOAA, Papinec from Goldman Sachs. Please go ahead. Hello, everyone. Good morning. Hi.

Margin expansion in light of.

Noah Poponak: Jay, I guess I also wanted to ask about margins, and you sort of did there, but I don't know if you would just state where you expect the MFC margin to shake out for the year next year or what it looks like in the quarters with the more concentrated losses. And then I just wondered if you could talk about how a little bit more about how this got here. I know you've talked about having the fixed price L-Rips with prices fixed a little while ago.

Internationally, historically being higher margin domestic business.

So Jason on Taiwan, I think the signature program that everybody's aware of his F 16.

Both production of modernization.

So that's ongoing but we also provided.

It kind of comprehensive defense of Taiwan like a defensive Guam.

Award, we won last year approach to integrating these digital technologies with the aircraft available.

Noah Poponak: Is that something that's been going on longer than I realized? I know you also, or my understanding, is you also no bid a missile program that was awarded recently because it had fixed price development. Is the customer shifting the risk a little bit towards the contractor, or am I overeating what I'm seeing out there? Let me maybe take the second part of it and then circle back. They're really two different programs.

But we provide and others the missile systems that we provide and others and integrate them into sort of this 40 pine approach to defending Taiwan, just like we're designing for guar. So there could be a wide range of digital and physical products that would come with this over time.

The U S government will help define with the Taiwanese government.

What when and if any of those will be procured and release for.

Noah Poponak: I think you're referring to the stand-in attack weapon award. And that was a fixed price development program that we decided not to pursue because of the risk posture of there. Each program and pursue really stands on its own and we review those individually. In this case, we thought the risk profile was just too much and so we backed off. On this particular program, on the classified program, that was a cost plus development program.

Released four.

Sport to Taiwan.

The Fms program in other vehicles, so I can't speak for the government as to what that will look like but I think.

It's again, a possibility that given the rising tensions there could be supplemental for Taiwan edition to as we said Israel in Ukraine.

And on the international margins historically, the margins have been higher than they are for U S government customers, but in this case, it's so what I would expect the base business to continue these is higher margin, but a lot of the incremental opportunities that we've been talking about are really going through foreign military sales contracting with.

Noah Poponak: So there really was not much risk associated with the development cycle. There are these production, low rate initial production and lots that were priced pretty aggressively and hence we're starting, we're going to start to see the headwind associated with that. . You know, as Jim mentioned, these are, this would be a long-term program, and we know what it takes to make sure that we provide a creative NPV on these types of programs. And so we track that in monitoring that, and we're confident over the long-term we'll be able to deliver that. So, again, these are case by case types of situations that we pursue.

Or more like U S. Dod type margins and so while we will see kind of a net blended margin profile, it's probably higher than.

Base U S. Dod.

It it will be limited as we see incremental business is going to be limited because they are fms.

Yeah.

Alright, great. Thanks, everybody.

James Taiclet: You know, we're probably going to have to get back to you on a specific MFC margins for next year, I think we can back into, you know, 25 to 50 on the total company, you can back into what that impact is for MFC, but I just don't have it in front of me. Yeah, and no, just to give you context here, you know, the approach we're taking, you know, no matter what the customers initiative is on risk balancing or imbalancing.

So I think we're at the top of the hour I'll turn the call back over to Jim for some final thoughts sure. Thanks, Maria I think before we conclude today I do want to thank all of our employees around the world and across the country for their continued dedication to supporting our signature programs are going after new pursuits, advancing these digital technologies and all of that.

That together will really enhance determines globally and especially in the more dangerous world We live in.

James Taiclet: The approach that Jay and I are taking here, as we look at programs going forward in opportunities, is, you know, really a holistic one where, you know, we do take the long-term total program value into account, but we also take, we'll take into account seriously short and mid-term risk management, and, you know, especially when it comes to fixed price, either development or initial rate production, because if you look at the concept of fixed price, initial rate production on a, on a program whose technology is not settled in the first place yet, because development hasn't been done. We would, we would ascribe a higher risk factor to that, I think, going forward here based on both experience and just our own perspectives on these kinds of things.

I want to really congratulate and thank our teams for everything they're doing.

We also want to make sure that you the shareholders are reminded yet again that everything we're doing here is designed to deliver a compelling value to you all for many years to come.

Really focus on free cash flow per share along with the dividend to make sure that youre getting a interesting return over time and we're trying to expand the business as we go as well. So thank you again for joining US today, we look forward to speaking with all of you at our next earnings call in January and lowest that concludes the conference for this morning Bye Bye.

Thank you and ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T event.

You may now disconnect.

Jason Gursky: Okay, and Lois, I think we have time for one more as we approach the top of the hour.

Jason Gursky: Thank you so much, and that question to come from the line of Desinger Ski from City, please go ahead. Yeah, good morning, everybody. Jim, you mentioned in your prepared remarks, the idea of a supplemental for Taiwan. I'm wondering if you wouldn't do us a favor, just kind of remind us of, you know, what you're shipping into Taiwan today. And in the context of a supplemental, what kinds of things do you think are going to be in high demand and would lead to the more revenue for you all, and that Jay related to international here.

Jason Gursky: I was wondering if you could just give us a quick update on the margin profile of your international business, kind of writ large today outside the F-35 program. If international is growing faster, is the expectation here that we would all else be equal, see margin expansion in light of international historically being higher margin than domestic business. Thanks. So Jason on Taiwan, I think the signature program that everybody is aware of is F-16 in both production and modernization.

Jason Gursky: So that's ongoing, but we also provided a kind of comprehensive defensive Taiwan, like a defensive bomb award we won last year. I'm an approach to integrating, you know, these digital technologies with the aircraft available that we provide and others, the missile systems that we provide and others, and integrate them into sort of this porcupine approach to defending Taiwan, just like we're designing for Guam. So there could be a wide range of digital and physical products that would come with this over time. The US government will help define what the Taiwanese government, what, when, and if any of those will be procured and released for... Released for export to Taiwan to the FMS program and other vehicles.

We're sorry your conferences ending now please hang up.

James Taiclet: So I can't speak for the government as to what that will look like, but I think it's again a possibility that given the rising tensions there could be supplemental for Taiwan in addition to Israel and Ukraine. And on the international margins, historically the margins have been higher than they are for US government customers. But in this case, it's so what I would expect the base business to continue these this higher margin.

James Taiclet: But a lot of the incremental opportunities that we've been talking about are really going through four military sales contracting, which are more like USDOD type margins. And so while we will see kind of a net blended margin profile that's probably higher than the kind of base USDOD, it will be limited the actually the incremental business is going to be limited because they are FMS. Great. Great.

[music].

[music].

Good day, and welcome everyone to the Lockheed Martin third 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 for CIT, only Vice President of Investor Relations. Please go ahead.

Thank you Louis and good morning, I'd like to welcome everyone to our third quarter 2023 earnings conference call joining.

Joining me today on the call are Jim <unk>, our chairman, President and Chief Executive Officer, and James <unk>, Our Chief Financial Officer.

Statements made in today's call that are not historical fact.

Are considered forward looking statements and are made pursuant to the safe Harbor provisions of Federal Securities Law actual results may differ materially from those projected in the forward looking statements.

Please see today's press release, and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward looking statements.

We posted charts on our website today that we plan to address during the call to supplement our comments. These charts also include information regarding non-GAAP measures that may be used in today's call. Please access our website at www Dot Lockheed Martin Dot com and click on the Investor Relations link to view and follow the charts with that I'd.

Like to turn the call over to Jim.

Thanks, Maria and good morning, everyone. Thank you all for joining us on our third quarter 2023 earnings call.

All of US on the line today are well aware that since our last call. The world has now seen yet another terrible conflict.

Everyone in our company remains dedicated to fully supporting the United States government's policy efforts to deter aggression.

Restore security and achieve peace.

Today I will first highlight our third quarter results as we pursue our vision of 20 <unk> century security designed to support the U S Department of defense strategy of integrated deterrence.

Then I'll turn it over to Jay to provide additional detail before taking your questions.

Starting on page three of the slides sales increased 2% year over year to $16 9 billion and backlog remains at historically high levels at 156 billion.

EPS of $6.73 exceeded prior year and free cash flow was a strong $2 5 billion.

We returned approximately a 100% of free cash flow to you the shareholders through dividends and share repurchases during the quarter.

Earlier in October , we announced a 15% increase in our dividend.

Which reflects 5% growth.

The 20 <unk> consecutive year of dividend increases for Lockheed Martin.

At the same time, our board also approved a $6 billion increase in our share repurchase authorization.

Bringing our total authorization to $13 billion Reconfirming, our continued commitment to returning capital to shareholders.

We are also reaffirming our full year 2023 financial outlook for sales profit EPS and free cash flow.

Given the current status of the 2020 for U S defense budget.

Global geopolitical tensions and the macroeconomic environment, we will provide our expectations for our 2024 financial outlook during our full year 2023 earnings call in January .

On the U S budget.

Though the specific trajectory of the future U S defense budget is still in process between the administration and Congress the global threat landscape is increasingly elevated.

Our robust backlog reflects the relevance and importance of the Lockheed Martin portfolio and elevating the turns to great power conflict involving the United States and its allies and the solid positioning of our business to serve our domestic and international customers.

From a process standpoint in government the current continuing resolution or CR is in place through November 17.

At that 0.1 of the following could occur.

FY 'twenty four appropriations bills will be enacted.

Congress will enact another partial or whole CR.

Or there could be a partial or full government shutdown.

James Taiclet: Thanks, everybody.

James Taiclet: So I think we're at the top of the hour. I'll turn the call back over to Jim for some final thoughts. Sure. Thanks, Maria. Before we conclude today, I do want to thank all of our employees around the world and across the country for their continued dedication to supporting our signature programs are going after new pursuits, advancing these digital technologies. And all that together will really enhance the terms globally. And especially in the more sort of dangerous world we live in, I want to really congratulate and thank our teams for everything they're doing.

And any of these scenarios there continues to be the option also for supplemental requests related the support Ukraine.

Israel and potentially Taiwan.

As Congress continues to work through the FY 'twenty four appropriations bills.

We're optimistic that there will be consistent support for the national defense strategy and funding towards priorities.

In the meantime, we will continue to work with our customers and suppliers to minimize any potential disruptions due to the process.

And we will press on with executing our 20 <unk> century security strategy of building capacity efficiency and resilience into our production operations driving advanced digital technologies to enhance the integrated <unk> and.

And expanding our international business and operations.

Turning to the F 35 program, we delivered 30 F 35 aircraft in the third quarter.

The year to date total to 80 jets.

Consistent with our announcement in September we continue to expect to deliver a total of 97 aircraft. This year all in the technology refresh to our tier two configuration.

We are producing F 30, fives at a rate of 156 per year and expect to continue at that pace, while simultaneously working to finalize tier III software development and testing.

James Taiclet: We also want to make sure that you the shareholders are reminded yet again that everything we're doing here is designed to deliver a compelling value to you all for many years to come. Jay and I really focus on free cash flow for share along with the dividend to make sure that you're getting an interesting return over time and we're trying to expand the business as we go as well. So thank you again for joining us today.

Unknown Executive: We look forward to speak with all of you on our next earnings call in January and lowest that concludes the call for this morning. Bye-bye.

And we recently began flight test evaluations of the next software release that encompasses major systems upgrades, such as improved radar nextgen distributed aperture system and weapons capability.

Unknown Executive: Thank you and ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T event conference. I hope this connects. We're sorry your conference is ending now please hang up.

As previously announced we continue to expect to deliver the first tier III configured aircraft between April and June of 2024.

Unknown Executive: [inaudible] Strauss, David Strauss, David Strauss, David Strauss,[inaudible] Strauss, David Strauss, David Strauss, David Strauss, David Strauss, David Strauss, David Strauss,[inaudible] David Strauss, David Strauss, David Strauss, David Strauss,[inaudible] Strauss, David Strauss, David Strauss,[inaudible] Strauss, David Strauss David Strauss, David Strauss, David Strauss, David Strauss[inaudible] David Strauss, David Strauss, David Strauss, David Strauss,[inaudible] And third quarter, 2023 earnings results conference call.

Maria Ricciardone Lee: Today's call is being recorded. [inaudible] at this time for opening remarks and introductions, I would like to turn the call over to Maria Ricciardone Lee, Vice-President of Investor Relations, please go ahead. Thank you, OS, and good morning.

Maria Ricciardone Lee: I'd like to welcome everyone to our third quarter, 2023 earnings conference call. Joining me today on the call, or Jim Taiclet, or Chairman, President and Chief Executive Officer, and Jay Malave, or 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.

The superior technological capabilities of the F 35 continues to generate strong interest both domestically and internationally.

Maria Ricciardone Lee: Please see today's press release in our SEC filing for a description of some of the factors that may cause actual results to differ materially from those in the forward-looking statements. We 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.lockheedmart.com and click on the Investor Relations link to view and follow the charts.

In September Denmark first for locally based F 35 aircraft arrived on their home soil.

Denmark, a program of record calls for 27 F 35 aircraft.

Also in September the Czech Republic chose to become part of the global F 35 Lightning II program.

In the U S State Department approved the possible $5 billion more foreign military sale to South Korea for up to 25 F 35 joint strike fighters.

Earlier in the quarter, Israel announced it will by an additional 25 F 30, fives, which will add a third squadron.

<unk> increased its F 35 fleet to 75 aircraft.

Additionally in August .

Martin was selected by the Australian Department of Defense.

Their strategic partner for their air 6500 program Phase one.

This transformational Pathfinder program will deliver the broadest scope of joint all domain operations are jato and the free world and we will completely revolutionized the way the Australian Defense Force operates.

By connecting Australian systems, and platforms that operate across air space land Sea and cyber domains. We expect that are 6500 will set the blueprint for future military operations worldwide.

James Taiclet: With that, I'd like to turn the call over to Jim. Thanks, Maria. Good morning, everyone. Thank you all for joining us on our third quarter, 2023 earnings call. All of us on the line today are well aware that since our last call, the world is now seeing yet another terrible conflict. Everyone in our company remains dedicated to fully supporting the United States government's policy and efforts to deter aggression, restore security, and achieve peace.

James Taiclet: Today, I will first highlight our third quarter results as we pursue our vision of 21st century security. Designed to support the U.S. Department of Defense strategy of integrated deterrence, and then I'll turn it over to Jay to provide additional detail before taking your questions. Starting on page three of the slides, sales increased 2% year-over-year to $16.9 billion. And backlog remains at historically high levels, at $156 billion. EPS has $6.73 since he did prior year, and free cash flow is a strong $2.5 billion.

This proven technology will provide greater situational awareness and defense against increasingly advanced air and missile threats and enabled significantly greater interoperability between Australia and Allied nations.

James Taiclet: We returned to approximately 100% of free cash flow to you, the shareholders, through dividends and share of purchases during the quarter. Earlier in October, we announced a 15-cent increase in our dividend, which reflects 5% growth, and is the 21st consecutive year of dividend increases for Lockheed Martin. At the same time, our board also approved a $6 billion increase in our share repurchase authorization, bringing our total authorization to $13 billion, reconfirming our continued commitment to returning capital to shareholders.

Lockheed Martin will lead this first phase.

Which will provide the core architecture and multi domain integration for the program.

James Taiclet: We are also reaffirming our full-year 2023 financial outlook for sales, profit, EPS, and free cash flow. Given the current status of the 2024 U.S. Defense budget, global geopolitical tensions, and the macroeconomic environment, we will provide our expectations for our 2024 financial outlook during our full-year 2023 earnings call in January. On the US budget, though the specific trajectory of the future US defense budget is still in process between the administration and Congress, the global threat landscape is increasingly elevated.

This is just one recent win that demonstrates the business success of our 20 <unk> century security cornerstone.

<unk> and reliable Battle management, and command and control systems that integrate across multiple domains military services and Allied forces.

James Taiclet: Our opus backlog reflects the relevance and importance of the Lockheed Martin portfolio, in elevating deterrence to great power conflict involving the United States and its allies, and the solid positioning of our business to serve our domestic international customers. From a process standpoint in government, the current continuing resolution, or CR, is in place through November 17th. At that point, one of the following could occur, FY 24 appropriations bills will be enacted, Congress will enact another partial or whole CR, or there could be a partial or full government shutdown.

Late last year Lockheed Martin also won the $500 million defense of Glum Award.

And in late September we were also awarded a potential seven year over $1 billion contract for systems Engineering and software integration to the integrated combat system across the surface <unk> portfolio of the U S Navy and coast Guard.

James Taiclet: In any of these scenarios, there continues to be the option also for supplemental requests related to support Ukraine, Israel, and potentially Taiwan. As Congress continues to work through the FY 24 appropriations bills, we are optimistic that there will be consistent support for the national defense strategy and funding for its priorities. In the meantime, we will continue to work with our customers and suppliers to minimize any potential disruptions due to the process.

This is linked together systems and software across the services and the <unk> construct and it not only enables faster decision, making and better capabilities.

But also serves as a much more effective global deterrent strategy.

Beyond These awards, we continue to develop 20, <unk> century security technologies to advance interoperability between Lockheed Martin product lines.

The <unk> Dot mill hybrid base station that our engineers invented as the one <unk> initiative that includes teams at MFC in Aeronautics.

James Taiclet: And we will press on with executing our 21st century security strategy of building capacity efficiency and resilience into our production operations, driving advanced digital technologies to enhance the integrated deterrence, and expanding our international business and operations. Turning to the F-35 program, we delivered 30 F-35 aircraft in the third quarter, bringing the year-to-day total to 80 jets. Consistent with our announcement in September, we continue to expect to deliver a total of 97 aircraft this year, all in the Technology Refresh 2 or TR-2 configuration.

We recently transferred data from a sniper targeting pod that was set up in Orlando, Florida to the tactical missile stimulation lab in Grand Prairie, Texas to provide real time updates to a simulated missile and play.

This event significantly advanced efforts towards upcoming live fire demonstrations of cross domain platforms operating in a joint environment.

Fuse data from multiple sources across an open architecture.

Also a skunk works partnered with University of Iowa, Operator performance Laboratory.

James Taiclet: We are producing F-35 at a rate of 156 per year, and expect to continue at that pace while simultaneously working to finalize TR-3 software development and testing. And we recently began flight test evaluations of the next software release that encompasses major systems upgrades, such as improved radar, next-gen distributed aperture system, and weapons capability. As previously announced, we continue to expect to deliver the first TR-3 configured aircraft between April and June of 2024.

To demonstrate an AI commanded jamming capability.

And this we successfully used artificial intelligence on to air systems to.

To provide jamming support to accumulated strike against enemy air defenses.

This demonstration showed how AI agents with high performance and reliable behavior can operate in close coordination with and be controlled by human crude aircraft.

We also conducted a successful test of the prototype radio for the Pac three MSE missiles.

Will enable communications with the <unk> radar the key sensor in the aegis weapon system.

James Taiclet: The superior technological capabilities of the F-35 continue to generate strong interest both domestically and internationally. In September, Denmark's first four locally based F-35 aircraft arrived on their home soil. Denmark's program of record calls for 27 F-35A aircraft. Also in September, the Czech Republic chose to become part of the Global F-35 Lightning II program, and the US State Department approved a possible $5 billion more foreign military sale to South Korea for up to 25 F-35 Joint Strike Fights, earlier in the quarter, Israel announced it will buy an additional 25 F-35s, which will add a third squadron, and increase the Seth 35 fleet to 75 aircraft.

This test performed by our <unk> team across MSC in RMS Paves the way for the design of our multi frequency radio Dave data link for Pac three MSE.

In turn that will enable the U S. Navy for the first time to have the ability to integrate the state of the art Pac three missile onto its warships and open up another opportunity for Lockheed Martin in the future.

International interest in packaging also remains strong as demonstrated by our deepening partnership with Poland, which signed a letter of offer and acceptance for 644 Pac three MSE and related equipment in the quarter.

And our RMS business of course is CH 50, <unk> helicopter is expected to grow meaningfully also over the coming years in August we won a $2 $7 billion contract to build and deliver 35 additional CH 50, <unk> helicopters and Thats the largest procurement to date for this <unk>.

James Taiclet: Additionally, in August, Lockheed Martin was selected by the Australian Department of Defense as their strategic partner for their Air-6500 Program Phase 1. This transformational Pathfinder Program will deliver the broadest scope of joint all-domain operations, or Jato, in the free world, and will completely revolutionize the way the Australian Defense Force operates. By connecting Australian systems and platforms that operate across air, space, land, sea, and cyber domains, we expect that Air-6500 will set the blueprint for future military operations worldwide.

<unk> mission aircraft.

Another longstanding major Lockheed Martin program. This one its space is also poised for significant growth ramp in.

In late September the fleet ballistic missile program $101 $2 billion contract for the Navy's tried it to <unk> life extension.

For nearly seven decades, Lockheed Martin in support of the U S. Navy as a critical partner for its mission to provide fee based strategic deterrence.

James Taiclet: This proven technology will provide greater situational awareness and defense against increasingly advanced air and missile threats, and enable significantly greater interoperability between Australia and allied nations. Lockheed Martin will lead this first phase, which will provide the core architecture and multi-domain integration for the program. This is just one recent win that demonstrates the business success of our 21st century security cornerstone, trusted and reliable battle management and command and control systems that integrate across multiple domains, military services, and allied forces.

The <unk> two dee <unk> missile will be in service through the 20 <unk>.

Maintaining the proven performance of the <unk> system for significantly less cost to the government that are designing a new missile.

Also in our space business Lockheed Martin's next generation interceptor, our NCI program.

Executed its digital preliminary design review in partnership with the missile Defense agency customer.

That happened on September 29.

During this review the MDA assess the NCI program's readiness and maturity continues to continue into the detailed design phase.

James Taiclet: Late last year, Lockheed Martin also won the $500 million defensive Glam Award, and in late September, we were also awarded a potential 7-year over $1 billion contract for systems engineering and software integration to the integrated combat system across the Surface Force portfolio of the US Navy and Coast Guard. This will link together systems and software across the services and a Jato construct, and it not only enables faster decision-making and better capabilities, but also serves as a much more effective global deterrent strategy.

Confirming that our solution continues to meet the requirements for this crucial and demanding mission.

Finally, the Cyrus wrecked sample return capsule touchdown and the Utah Desert on September 24.

Returning Nasa's first ever sample from an asteroid.

After a seven year emission traveling approximately believe this 4 billion miles in space.

The capsule whole its material from Benno.

Carbon rich asteroids and scientists hope it will teach us more about the origins of organics that led to life on Earth plus.

James Taiclet: Beyond these awards, we continue to develop 21st century security technologies to advance interoperability between Lockheed Martin product lines. The 5G.mill hybrid base station that our engineers invented is a one LM initiative that includes teams and MFC and aeronautics. We recently transferred data from a sniper targeting pod that was set up in Orlando, Florida to the Tactical Missile Simulation Lab in Grand Prairie, Texas to provide real-time updates to a simulated missile inflate.

Plus the mechanics behind overall plan at formation.

After release of the capsule. The spacecraft was set on a new course to investigate the asteroid apophis under the mission name Cyrus apex.

So with that interesting and exciting news I will turn it over the call to Jay.

And join you later for questions.

Ed.

Jim and good morning, everyone. Today, I will walk you through our third quarter 2023 financial results I'll also provide an update to our full year 2023 guidance.

James Taiclet: This event significantly advanced efforts towards upcoming live-fire demonstrations across the main platforms operating in a joint environment that will fuse data from multiple sources across an open architecture. Also, Skunk Works partnered with the University of Iowa's Operator Performance Laboratory to demonstrate an AI-commanded jamming capability. In this, we successfully used artificial intelligence on two air systems to provide jamming support to a simulated strike against enemy air defense. Sessions. This demonstration showed how AI agents with high performance and reliable behavior can operate in close coordination with and be controlled by human crude aircraft.

And offer a few comments on 2024 as I describe our results. Please follow along with the web charts, we've posted with our earnings release today.

Starting on chart four with consolidated sales and segment operating profit third quarter sales increased 2% year over year with three of the four business areas delivering growth.

Segment operating profit was down 6% year over year due to lower net favorable profit adjustments and lower equity earnings resulting in segment margins of 10, 7%.

Moving to earnings per share on chart five GAAP EPS was comparable year over year with lower segment profit and higher net interest expense offset by favorable below the line items, including lower share count lower tax rate and fewer mark to market losses on.

On an adjusted basis EPS was down <unk> 10 year over year, primarily due to the lower profit.

James Taiclet: We also conducted a successful test of the prototype radio for the PAC-3 MSE missile that will enable communications with the Spy-1 radar, the key sensor in the Aegis weapons system. This test performed by a 1LM team across MS-C and RMS, paves the way for the design of a multi-frequency radio data link for PAC-3 MSE. In turn, that will enable the US Navy for the first time to have the ability to integrate the state-of-the-art PAC-3 missile onto its warships and open up another opportunity for Lockheed Martin in the future.

Moving to cash flow on chart six.

Free cash flow was strong at over $2 5 billion in the quarter or 150% of net income helped in part by our focus on working capital primarily due to better collections at the end of the government fiscal year.

Once again, we demonstrated our commitment to shareholders by returning 99% of our free cash flow through dividends and share repurchases this quarter on.

On a year to date basis, we've returned almost $5 3 billion or 116% of free cash flow.

James Taiclet: International interest in PAC-3 also remains strong, as demonstrated by our deepening partnership with Poland, which signed a letter of offer and acceptance for 644 PAC-3 MSEs and related equipment in the quarter. In our RMS business, the Corps PH-53K helicopter is expected to grow meaningfully also over the coming years. In August, we won a $2.7 billion contract to build and deliver 35 additional PH-53K helicopters, and it's the largest procurement to date for this multi-mission aircraft.

As Jim mentioned, our board approved a 5% increase to the quarterly dividend and an additional $6 billion share repurchase authorization. These.

These tools remain a key part of our total shareholder return strategy.

Okay moving to segment results and starting with Aeronautics on chart seven.

Third quarter sales at Arrow decreased 5% driven by lower volume on F 35, partially offset by higher volume is skunk works.

F 35 production was down due to the previously mentioned last 15 through 17 sales catch up in the third quarter of 2022 and.

And an overall more linear throughput this year.

James Taiclet: Another long-standing major Lockheed Martin program, this one in space, is also poised for significant growth ramp. In late September, the Fleet ballistic missile program won a $1.2 billion contract for the Navy's equivalent to D5 life extension. For nearly seven decades, Lockheed Martin supported the US Navy as a critical partner for its mission to provide sea-based strategic determinants. The Trident II-D5-LE missile will be in service through the 2040s, maintaining the proven performance of the D5 system for significantly less cost to the government than of designing a new missile.

Both development Sustainment saw solid year over year growth in the quarter.

Operating profit decreased 12% from the prior year due to the lower volume and lower net profit adjustments.

On the F 16 program International interest remained strong we delivered the second block 70 aircraft to Bahrain in July and in September . The first block 70 aircraft for the Slovak Republic was unveiled at our facility in Greenville, South Carolina.

The Slovak Republic will be the first European country to receive this newest and most capable version of the fighting Falcon.

Today's latest version the block 70, 72, we've flown by six countries and counting.

James Taiclet: Also in our space business, Lockheed Martin's next-generation interceptor, or NGI program, executed its digital preliminary design review in partnership with the missile defense agency customer. That happened on September 29th. During this review, the MBA assessed the NGI program's readiness and maturity to continue into the detailed design phase. Confirming that our solution continues to meet the requirements for this crucial and demanding mission. Finally, the Osiris Rec sample, return capsule, touched down in the Utah Desert on September 24th, returning NASA's first-ever sample from asteroid.

With a backlog of 126 aircraft as of the third quarter. The F. 16 program continues to play a crucial role in 20 <unk> century security missions for international Allies. It will be a key contributor to growth over the coming years.

Shifting the missiles and fire control on page eight.

Sales increased 4% year over year, driven by higher sales volumes and munitions programs within tactical strike missiles.

Partially offset by lower volume within integrated air and missile defense.

Segment operating profit also increased 4% year over year due to the higher net profit adjustments.

Margins were comparable at 13, 5%.

MFC has built a strong backlog and we continue to see strong demand for missiles and munitions with Allied nations seeking to improve their security posture amidst todays complex threat environment.

James Taiclet: After a seven-year mission traveling approximately believe this 4 billion miles in space. The capsule holds material from Bennu, a carbon-rich asteroid, and scientists hope it will teach us more about the origins of organics that led to life on Earth, plus the mechanics behind overall planet formation. After release of the capsule, the spacecraft was set on a new course to investigate the asteroid epophus under the mission name of Cyrus Apex.

This backlog provides a foundation for growth over the coming years across several several of our product lines, including Pac three.

<unk>, Hi, Mars javelin Jasmine lorazepam.

Turning to rotary and mission systems on page nine sales were up 9% in the quarter driven by higher volume across a handful of programs within our within our integrated welfare warfare systems, and sensors and <unk> ISR lines of business.

James Taiclet: So with that interesting and exciting news, I'll turn it over to Jay and join you later for questions. Okay? Thanks, Jim. Good morning, everyone. Today, I will walk you through our third quarter 2023 financial results. I'll also provide an update to our full year 2023 guidance and offer a few comments on 2024. As I describe our results, please follow along with the web charts we have posted with our earnings release today.

Operating profit increase.

<unk> increased 2% due to higher sales volume and was partially offset by lower net profit adjustments.

<unk> backlog increased in the quarter, primarily due to the $2 7 billion CH 53, K Award, which is pictured for last seven and eight the first full rate production launch as part of the U S. Marine Corps 200 aircraft program of record.

James Taiclet: Starting on chart four, we consolidate sales and segment operating profit. Third quarter sales increased 2% year-over-year with three of the four business areas delivering growth. Segment operating profit was down 6% year-over-year due to lower net favorable profit adjustments and lower equity earnings, resulting in segment margins of 10.7%. Moving to earnings per share on chart five, gap EPS was comparable year-over-year with lower segment profit and higher net interest expense offset by favorable below-the-line items, including the lower share count, lower tax rate, and fewer mark-to-market losses.

This significant contract bolster Sikorsky and its partners creates additional production efficiencies and provides the U S Marine Corps with transformative capabilities.

On chart 10, we continue to see strong growth across our space portfolio with sales, increasing 8% year over year.

Driven by higher volume on and GI fleet ballistic missile GPS and Orion programs.

Operating profit decreased 15% as the benefit from higher sales volume was more than offset by lower net profit adjustments and lower equity earnings from United launch Alliance.

James Taiclet: On an adjusted basis, EPS was down 10 cents year-over-year primarily due to the lower profit. Moving to cash flow on chart six, our free cash flow was strong at over $2.5 billion in the quarter or 150% of net income. Helped in part by our focus on working capital, primarily due to better collections at the end of the government fiscal year. Once again, we demonstrated our commitment to shareholders by returning 99% of our free cash flow through dividends and sharey purchases this quarter.

Space backlog grew slightly to over $30 billion at the end of the third quarter helped by the $800 million transport layer tranche Two award for 36 beta satellites.

Transport layer as part of the proliferated space architecture, It will strengthen deterrence with more resilient space architectures for beyond line of sight targeting data transport and advanced missile detection and tracking.

With this award we will build and deliver a total of 88 data communication satellites to the space development agency in support of their low Earth orbit constellation.

James Taiclet: On a year-to-day basis, we've returned almost $5.3 billion or 116% of free cash flow. As Jim mentioned, our board approved a 5% increase to the quarterly dividend and an additional $6 billion in sharey purchase authorization. These tools remain a key part of our total shareholder return strategy.

Okay now shifting to our 2023 expectations on page 11 for.

For the full year, we're holding the outlook for sales segment operating profit earnings per share and free cash flow.

Jesus Malave: Okay, moving to segment results and starting with aeronautics on chart seven. Third quarter sales at aero decreased 5% during by lower volume on F-35, partially offset by higher volume is skunk works. F-35 production was down due to previously mentioned lap 15 through 17 sales catch-up in the third quarter of 2022 and an overall more linear throughput this year. Both development sustainments are solid year-over-year growth in the quarter. Operating profit decreased 12% from the prior year due to the lower volume and lower net profit adjustments.

We have successfully driven and delivered more linear results and 2023 than prior years, which enables more efficient use of our capacity, but sets up for a difficult compares to last year's fourth quarter.

In conjunction with our recent announcement of increased share repurchase authorization, we're increasing our share repurchase forecast for 2000 $23 billion to $6 billion.

Provided there is not an extended shutdown scenario.

These repurchases along with dividends are expected to return nearly 150, 150% of our free cash flow to shareholders for the year.

And between 2022 and 2023, we are on track to repurchase nearly 13% of our current market cap.

Jesus Malave: On the F-16 program, international interest remains strong. We delivered the second block 70 aircraft to Bahrain in July and in September, the first block 70 aircraft for the Slovak Republic was unveiled at our facility in Greenville, South Carolina. The Slovak Republic will be the first European country to receive this newest and most capable version of the fighting Falcon. Today's latest version, the block 7072, we've flown by six countries and counties, with a backlog of 126 aircraft as of the third quarter, the F-6P program continues to play a crucial role in 20% security missions for international allies. It will be a key contributor to growth over the coming years.

We're also set to deliver mid single digit free cash flow.

For share growth in 2023, and we're positioning the company to continue that level of growth in the future.

Okay few comments on 2024.

We don't have a formal outlook to share I'll provide a few directional markers as we see them today barring any environmental setbacks.

We still anticipate low single digit sales growth as we convert our strong backlog position.

As I previously mentioned the backlog supports a higher growth rate, but the value chain remains constrained by extended lead times that have yet to compress.

On segment margins, we expect the underlying business to be relatively flat year over year, but anticipate variability caused by the timing of impacts from the MFC classified program.

Jesus Malave: Shifting the missiles and fire control on page 8, sales increased 4% year over year during by higher sales volumes on munitions programs within tactical strike missiles. Partially offset by lower volume with an integrated air and missile defense. Segment operating profit also increased 4% year over year due to the higher net profit adjustments. Margins were comparable at 13.5%. MFC has built a strong backlog and we continue to see strong demand for our missiles and munitions with allied nation seeking to improve the security posture amidst today's complex threat environment. This backlog provides a foundation for growth over the coming years across several, several of our communities. There are our product lines, including PAC-3, GMLRS, High Mars, Javelin, and JASM and Larasm.

And our free cash flow, we're following the budget process to determine whether it will have an impact on the timing of our program schedules and milestones, but are continuing to set internal targets that deliver mid single digit growth in free cash flow per share.

Okay, let's wrap it up.

Results through the first three quarters have been solid with a long term demand environment that is favorable to Lockheed Martin's 20, <unk> century security capabilities.

Our focus on linearity in working capital is helping to drive more consistent sales and improved cash flow.

We're maintaining our full year outlook, while increasing our planned share repurchases further demonstrating our commitment to shareholder returns.

And finally, we are executing our 20 <unk> century security strategy through improving capacity and resilience in the defense enterprise.

Jesus Malave: Turning to rotary admission systems on page 9. Fails were up 9% in the quarter during by higher volume across a handful of programs within our integrated warfare systems and sensors and C-6 ISR lines of business. Operating profit increased 2% due to higher sales volume and was partially offset by lower net profit adjustments. RMS backlog increased in the quarter, primarily due to the $2.7 billion CH-53K award, which is pictured. For latch 7 and 8, the first full rate production lots as part of the US Marine Corps 200 aircraft program of record.

Accelerating the adoption and insertion of 20 <unk> century digital technologies.

And collaborating more closely with international partners and allies to improve security solutions.

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 the one zero I know touched on time.

Now, let's talk about today have been placed in the queue and you may remove yourself from queue at any time by repeating the ones, who will come and if you're on a speakerphone. Please pick up your handset before pressing the Nomura. Please limit yourself to one question.

Jesus Malave: This significant contract bolster Sikorsky and its partners creates additional production efficiencies and provides the US Marine Corps with transformative capabilities. On chart 10, we continue to see strong growth across our space portfolio, with sales increasing 8% year-over-year during by higher volume on NGI, fleet ballistic missile, GPS, and Orion programs. Operating profit decreased 15%, as the benefit from higher sales volume was more than offset by lower net profit adjustments and lower equity earnings from United Launch Alliance.

To the queue for additional questions by pressing one zero am Amit paraphrase the question.

Again, if you do have a question. Please press <unk> one zero.

Our first question.

Will come from the line of Doug Harned from Bernstein. Please go ahead.

Jesus Malave: Space backlog grew slightly to over $30 billion at the end of the third quarter, helped by the $800 million Transport Layer Tranche 2 award for 36 beta satellites. Transport Layer is part of the proliferated space architecture and will strengthen deterrence with more resilient space architectures for beyond line of site targeting, data transport, and advanced missile detection and tracking. With this award, we will build and deliver a total of 88 data communication satellites to the space development agency in support of their low-earth orbit constellations.

Good morning, Thank you good.

Morning, Doug.

I wanted I wanted to.

Steve.

We can understand the F 35 situation a little bit more.

Now the tier three deliveries of F. 35 of those are now expected some point in Q2 next year.

But.

I think it's difficult for us to have like total confidence in that timeframe and what I'm trying to understand is as you continue to produce F 30, fives, which will need software upgrades before delivery.

Are you recognizing revenues on percent completion, so revenues should continue to be solid, but when you look at say a June delivery date.

Jesus Malave: Okay, now shifting to our 2023 expectations on page 11. For the full year, we're holding the outlook for sales, segment operating profit, earnings per share, and free cash flow. We've successfully driven and delivered more linear results in 2023 than prior years, which enables more efficient use of our capacity but sets up for difficult compares to last year's fourth quarter. In conjunction with our recent announcement of increased share repurchase authorization, we're increasing our share repurchase forecast for $20.23 to $6 billion, provided there is not an extended shutdown scenario.

What's the impact on.

Your production recognition of revenues earnings and cash flow should that day move around how should we think about the timing here.

So Doug on the timing on sales and the process associated with the sale of the booking margin.

Jesus Malave: These repurchases, along with dividends, are expected to return nearly 150% of our free castle as shareholders for the year. In between 2022 and 2023, we are track to repurchase nearly 13% of our current market cap. We're also set to deliver mid-single-digit free cash flow for share growth in 2023, and we're positioning the company to continue that level growth in the future.

Sure It really shouldnt expect much variability with that as we've mentioned.

That really doesn't get impacted.

What you could see and what we.

We are seeing today is that a risk retirements are obviously dependent upon successful completion.

The test program and so that will could limit our ability to take profit adjustments on a lot 15% to 17 program, but as I've said.

In the past, we are performing and expect to continue to perform profitability stronger on lot, 15% to 17 than we did on lot 12 through 14, and so we might see some short term limitations on our ability to take profit rate adjustments, we still expect and have confidence we will drive higher profitability on this.

Jesus Malave: Okay, few comments on 2024. While we don't have a formal outlook to share, I will provide a few directional markers as we see them today, barring any environmental setbacks. We still anticipate low-single-digit sales growth as we convert our strong backlog position. As I previously mentioned, the backlog supports a higher growth rate, but the value chain remains constrained by extended lead times that have yet to compress. At segment margins, we expect the underlying business to be relatively flat year-over-year, but anticipate variability caused by the timing of impacts from the MFC classified program.

Contract locked in the prior one.

Thank you and our next question is from the line of.

Van <unk> from Cowen. Please go ahead.

Yes, thanks, so much.

So Jay I think recently you made a comment about gravity on margins.

And we haven't provided a guide for 'twenty, four but I think.

Jesus Malave: In a free cash flow, we're following the budget process to determine whether it will have an impact on the timing of our program schedules and milestones, but are continuing to set internal targets that deliver mid-single-digit growth in free cash flow for share.

One of the issues that kind of you had mentioned has been the classified missile program.

<unk> you have some some L rip options coming up could you maybe give us some color in terms of the status of that and how that impacts could impact next year.

Jesus Malave: Okay, let's wrap it up. Results through the first three quarters have been salooned, with a long-term demand environment that is favorable to Lockheed Martin's 21st Century Security capabilities. Our focus on linearity and working capital is helping to drive more consistent sales and improve cash flow. We're maintaining our full-year outlook while increasing our planned share repurchases, further demonstrating our commitment to shareholder returns. And finally, we're executing our 21st Century Security strategy through improving capacity and resilience in the defense enterprise, accelerating the adoption and insertion of 21st Century digital technologies, and collaborating more closely with international partners and allies to improve security solutions.

The other items, we should.

We watch all of that Mike.

Our gravity on margins. Thank you.

Sure Kai thanks.

So yes. That's the question we've talked about it's been a headwind it's something that we've talked about for the upcoming number of years, including next year and in fact, we are seeing some of the headwind this year and it really it's dependent upon an analysis.

It's really the timing of recognition of these losses and there are certain things that need to be met from a performance standpoint on the program.

And then it becomes an assessment on the probability.

One option being exercised and so there's just variability in that timing it could be as early as frankly as this this quarter.

Unknown Executive: 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 one then zero on your touch-tone phone. You will learn an acknowledgement that you have been placed in the queue, and you may remove yourself from queue at any time by repeating the one through a command. And if you want to speak your phone, please pick up your hands that before press the number. Please limit yourself to one question and re-enter the queue for additional questions by pressing one then zero, and one moment per first question. Again, if you do have a question, please press one then zero.

Or into next quarter, what we could find ourselves in a situation is that we are recording multiple lots in 2024, which would put some downward pressure on next year's margins. So we'll have a better feel for that.

Next year and it could be in the range of anywhere between 25% to 50 basis points of headwind from where we are and where we end today or this year from a margin perspective, so hopefully that provides a little bit of color.

On the impact of that program is that as far as any others.

Look we if you look at this year, we had lower profit adjustments. This year, we expect there to be in the low twenties.

In 2023, we're evaluating what that means for 2024 in general.

But again I think as I mentioned in my prepared remarks, we're expecting the underlying business to be pretty much flattish, which would include recurring margins as well as profit rate adjustments in 2024.

Douglas Harned: Our first question would come from the line of Doug Harnett from Bernstein. Please go ahead. Good morning. Thank you. Morning, Doug. I wanted to see if we could understand the F-35 situation a little bit more. Now, the TR-3 deliveries of F-35, those are now expected, some point in Q-2 next year. But I think it's difficult for us to have total confidence in that time frame. And what I'm trying to understand is, as you continue to produce F-35, which will need software upgrades before delivery.

Yeah, and Kai it's Jim just to add on the classified program.

First of all give Mike.

<unk> pilot experience I can tell you that this is a really important.

Capability for the country.

It should.

Continue on as an important capability for many many years and even decades.

Assuming the program is successful, which we think we're on track to be.

And it'll be massively NPV positive over that longer timeframe.

So we're working our way through the schedule and the performance in the early phases of the contract but at the end of the day it'll be worth it for the country in the company.

Douglas Harned: You're recognizing revenues on percent completion, so revenues should continue to be solid. But when you look at, say, a June delivery date, what's the impact on your production recognition of revenues, earnings, and cash flow? Should that date move around? How should we think about the timing here? So Doug, timing on sales and the process associated with the sales, the booking margin, I really shouldn't expect much variability with that. As we've mentioned, that really doesn't get impacted.

But we will keep you all updated as Jay just did on the path to get there.

Thank you and our next question is from the line of Christine Li Wang from Morgan Stanley .

Please go ahead.

Hey, good morning, everyone. So maybe we're at 35 question.

We've seen a lot of new countries expect express interest in the F 35, and current partners like Israel have indicated plans to add to existing orders, but what are your thoughts on expanding capacity to meet all the international demand and is there.

Douglas Harned: What you could see in what we are seeing today is that our risk retirements are obviously dependent upon successful completion of the test program. And so that will could limit our ability to take profit adjustments on a lot 15 to 17 program. But as I've said in the past, we are performing and expect to continue to perform profitability stronger on a lot 15 to 17 than we did on a lot 12 to 14. And so we might see some short-term limitations on our ability to take profit rate adjustments. We still expect to have confidence, we'll derive higher profitability on this contract lot than the prior one. Thank you.

Is there a demand from the customers to potentially bring forward their deliveries.

Should you increase capacity what level of investments.

So Christine it's Jim I'll start off and Jeremy can maybe speak to the required investment level.

We're in sync with our joint program office customer, which represents the international cohort in.

Indirectly.

F 35 customer base and directly in the U S.

Services, we are all settled on the 156 per year rate.

As the joint investment that we're all willing to make given the demand that's out there.

Ky Van Rumor: And the next question is from the line of Ky Van Rumor from TD Cohen. Please go ahead. Yes, thanks so much. So Jay, I think recently you made a comment about gravity on margins. And you haven't provided a guide for 24. But I think one of the issues that kind of you mentioned had been the classified missile program at MFC, where you have some some L-Rib options coming up. Could you maybe give us some color in terms of the status of that and how that impacts could impact next year and any other items we should be watchful of that might exert gravity on margins.

There is the annual sort of slotting priorities discussion that happens within the joint program office and the international partners and that will keep the line full for many many years.

If we were to get significantly more international orders that might motivate us jointly and I mean us many of the government and industry.

Including our suppliers by the way.

To make an incremental investment, but I think that that would have to be a significant increase in the order book above what we see today, so Jay any other investments.

The investments, it's probably in the low hundreds of millions, it's manageable, but again to Jim's point it needs to be coordinated with the customer.

Ky Van Rumor: Thank you. Sure, Ky, thanks. So, yeah, I mean, that's the question we've talked about. It's been a headwind. It's something that we've talked about for the upcoming number of years including next year. And in fact, we are seeing some of the headwind this year, and it really is dependent upon an analysis, really the timing of recognition of these losses. And there are certain things that need to be met from a performance standpoint on the program.

Thank you. Our next question is from the line of George Shapiro from Shapiro Research. Please go ahead.

Good morning.

Jay on the F 35 can you discuss a little bit where are we in the quarter in terms of sustainment revenue versus production because the decremental margin on the production was pretty with pretty high at 22% now I'll sneak in one other one which isn't RMS. The implication is that you'd have a 14.

Ky Van Rumor: And then it becomes an assessment on the probability of an option being exercised. And so there's just variability in that timing. It could be as early as frankly as this quarter or into next quarter. What we could find ourselves in a situation is that we're recording multiple lots in 2024, which would put some downward pressure on next year's margins. And so we'll have a better feel for that next year. And it could be in the range of anywhere between 25 to 50 basis points ahead when from where we are, where we end today, or this year from a margin perspective.

<unk> percent margin in Q4 to meet your guide yet revenues would be relatively flat. So if you can just kind of tell us what's going on to cause that to occur. Okay. I'll start with the second one first on RMS margins and come back on the F 35 on the margins for RMS Youre right.

George we are expecting an increase in profitability. There. It is really twofold, a function of higher profit adjustments and there are and I think I've talked about this in the past we do have some mix benefits through on some delivery program deliveries here in the fourth quarter, which will give them some lift.

Ky Van Rumor: So hopefully that provides a little bit of color on the impact of that program. As far as any others, you know, look, we, if you look at this year, we had lower profit adjustments this year. We expect there to be in the little 20s in 2023. We're evaluating what that means for 2024 in general. But again, I think as I mentioned in my prepare remarks, we're expecting the underlying business to be pretty much flatish, which would include recurring margins as well as profit rate adjustments in 2020, and so forth.

As far as the F 35, just really from a sales perspective in the quarter production was down pretty substantially.

Really close to 20% development was up quite substantially and Sustainment was up in the high teens.

Solid solid there are on Sustainment thats been strong all year long, we expect that to grow for the year around 10%.

Ky Van Rumor: Yeah, and Kai, it's Jim, just to add on the classified program. First of all, you know, give my Air Force pilot experience. I can tell you that this is a really important capability for the country. It should continue on as an important capability for many, many years and even decades, assuming the program is successful, which we think we're on track to be. And it'll be massively NPV positive over that longer time frame.

Thank you and our next question is from the line of Ron Epstein.

And one moment please.

I'm sorry. The next question that will go to David Strauss from Barclays. Please go ahead.

Thanks, Good morning, everyone.

Ky Van Rumor: So we're working our way through the schedule and the performance in the early phases of the contract. But at the end of the day, it'll be worth it for the country and the company. But we will keep you all updated as Jay just did on the path to get there.

Morning, David.

Jay I think the IRS came out with some recent updated guidance around section 174, one to see what your interpretation of that was weather supported your position or your peers that are that are taking I think higher levels.

Christine Lee White: Thank you, and our next question is from the line of Christine Lee White from Logan Stanley. Please go ahead. Hey, good morning, everyone. So maybe after 35 question, you know, we've seen a lot of new countries expect expressed interest in the F 35 and current partners like Israel have indicated plans to add to existing orders. But what are your thoughts on expanding capacity to meet all the international demand? And is there, is there demand from the customers to potentially bring forward their deliveries?

Or a higher hit associated with section 174, and then.

Any updated thoughts on where pension might come out for you guys next year given.

What appears to be much higher discount rates and weak asset returns. Thanks.

Sure. Thanks, David on the first one on the R&D capitalization of draft guidelines that came out we view those as is promising.

Christine Lee White: And should you increase capacity? What level of investments? So Christine, it's Jim. I'll start off and Jamie can maybe speak to the required investment level. We're in sync with our joint program office customer, which represents the international cohort in directly the F 35 customer base and directly the US services. We've all settled on the 156th for year rate as the joint investment that we're all willing to make given the demand that's out there.

We believe that they support our position of continuing to deduct the costs associated with cost plus contracts and just as you remember, we treat that and view it as cost of sale not really as an R&D activity the.

The risk is really borne by the acquirer of those services the.

The rights are short lived and Theyre also restricted and so we believe the draft language.

At least thus far appears to be consistent with our approach and so we view it positively as far as pension a couple of things going on with pension I'll go on the P&L.

Fast pension, we'll see a significant reduction next year.

We're going to go from about $375 million of income in 'twenty three to about $50 million of loss in 2024, it's a function of two things.

Christine Lee White: There is the annual sort of slotting priorities discussion that happens within the joint program office and the international partners. And that will keep the line full for many, many years. If we were to get significantly more international orders, that might motivate us jointly. And I mean us, meaning the government and industry, including our suppliers, by the way, to make an incremental investment. But I think that that would have to be a significant increase in the order book above what we see today. So Jay, any other. Yeah, I mean, the investments, it's probably the low hundreds of millions. It's manageable. But again, to Jim's point, it needs to be coordinated with the customer. Thank you.

One is is the returns in a second is.

Essentially the exploration of benefits that were amortizing since from the 2014 sat.

Salary plan freeze so those run out and so we will see significant increase as you know thats pretty much non cash.

But it will affect EPS on the cash side of it we'll see a little bit of a slight reduction anywhere between $25 million to $50 million a reduction, but again the biggest piece there is on fast.

From a cash contributions we've talked about.

Anywhere between 500 to a $1 billion.

Contributions required in starting in 2025, right now given where things are we would expect that to be in the higher range, if not higher for 2025, and if we stay where we are it could trigger some contributions in 2024, but I will say you think about cash country with cash contribution to pension.

George Shapiro: Our next question is from the line of George Shapiro from Shapiro Research. Please go ahead. Yes, good morning. Jay, on the F 35, can you discuss a little bit where we stood in the quarter in terms of sustainment revenue versus production because the decremental margin on the production was pretty, was pretty high at 22%. Now, I'll sneak in one other one, which isn't RMS, the implication is that you'd have a 14% margin in Q4 to meet your guy yet revenues will be relatively flat.

And what that means.

We've got an enviable position in our balance sheet and we've demonstrated that willing to use it and so I wouldn't view that higher pension contributions as limiting otherwise limiting our ability to continue our cash deployment strategies and thats the key point.

George Shapiro: So you can just kind of tell us what's going on to cause that to occur. Thanks. Okay, I'll start with the second one first on RMS margins and come back on the F 35. On the margins for RMS, you're right, George, we're expecting an increase in profitability there. It's really a twofold function of higher profit adjustments. And there are, and I think I talked about this in the past, we do have some mixed benefits through some delivery program delivers here in the fourth quarter, which will give them some less, as far as the F-35, just really from a sales perspective and the quarter production was down pretty substantially, really close to 20% development was up quite substantially, and sustainment was up in the high teens. So we've solid there on sustainment, that's been strong all year long. We expect that to grow for the year around 10%.

The next question is from the line of Ken Herbert from RBC Capital markets. Please go ahead.

Yes, hi, good morning, Jay and Jim.

Maybe Jay just to follow up on a comment you made in the prepared remarks, I think you made a comment around.

The buyback activity in the fourth quarter sort of dependent upon timing of the fiscal 'twenty for budget and whether or not there is a shutdown potentially.

Potentially can you just talk about how youre thinking about the timing of the 24 budget, but very specifically if theres any sort of shutdown how much does that put at risk.

Sort of the buyback activity expected in the fourth quarter or if it's very sure does that not impacted I mean, maybe you can walk through how you're viewing sort of the risks around that and impact on the on the fourth quarter cash.

Cash deployment.

So year to date, we've done $3 billion.

This new guide at $6 billion, that's $3 billion in the fourth quarter, we're monitoring the status of the budget discussions and resolution of that if we do find ourselves in a in a shutdown scenario.

Ronald Epstein: Thank you, and our next question is from the line of Ron Epstein, and one moment please. I'm sorry, the next person that we'll go to is David Strauss from Berkeley, please go ahead. Thanks more, everyone. Morning, David. Jay, I think the IRS came out with some recent updated guidance around Section 174. One to see what your interpretation of that was, whether it's supported your position or your peers that are taking, you know, I think higher levels of higher head associated with that.

It would cause us to take a pause another re look at that share repurchase and what we would probably do is just defer it.

So it would be more of an issue of timing versus anything else until such time that the budget gets it gets clearer clarified.

History tells us these things are fairly short lived we believe that we'll be able to get through it here in the fourth quarter. If not then it would just push probably into the first quarter and alike.

It really won't see a meaningful impact there, but again in a shutdown scenario you just take a look at what does that mean.

Does.

We can't have new starts it could be disrupted two programs. It could also put us in a situation where we're doing some self funding for key programs on track and to the extent that occurs it could it could be a limiting factor on share repurchase.

Ronald Epstein: Section 174. And then any updated thoughts on where pension might come out for you guys next year, given what appears to be much higher discount rates in the week after returns. Thanks. Sure, thank you, David. And the first one on the RG capitalization draft guidelines that came out, we view those as promising. We believe that they support our position of continuing to deduct the costs associated with cost plus contracts. Just as a remember, we treat that and view it as a cost of sale, not really as an R&D activity.

Keith Lewis are you still there.

Yes, I'm sorry. The next question will come from the line of Sheila <unk>.

<unk> from Jefferies. Please go ahead.

Okay.

Seamless line did drop from the Q&A, So we'll move to Rob Stallard one moment.

And he is from vertical research. Please go ahead.

Thanks, so much good morning.

Ronald Epstein: The risk is really borne by the acquire of those services. The rights are short lived and they're also restricted. And so we believe the draft language is at least thus far appears to be consistent with our approach. And so we view it positively. As far as pension, a couple things going out with pension, I'll go on the P&L. FAS pension will see a significant reduction next year. We're going to go from about $375 million of income in 23 to about $50 million of loss in 2024.

Good morning, Rob.

A question for Jim <unk> on the balance sheet to the returning more than 100% of free cash flow to shareholders at the moment, but we do have this ongoing U S budget uncertainty and youre going to put.

More money into the pension plan as to how sustainable do you think it is to be returning more than 100% to shareholders going forward.

It's a good question and if you look at just the profile with this incremental authorization that we have.

The way we're looking at it is.

$6 billion here in 2023 $4 billion in 2024, and then essentially 3 billion and $25 3 billion in 2006, which puts us just puts us equal to free cash flow in that ballpark, assuming kind of a $6 billion placeholder offer free cash flow in those given years.

Ronald Epstein: It's a function of two things. One is the returns. And the second is essentially the expiration of benefits that we're amortizing since from the 2014 salary plan freeze. And so those run out. And so we'll see a significant increase. As you know, that's pretty much non-cash. But it will affect EPS. On the cash side of it, we'll see a little bit of a slight reduction anywhere between $25 to $50 million reduction.

And so that's the way we're viewing it Rob so over time over the next few years it will revert back to more of a 100% of free cash flow, but again, we will look at it year by year as you've seen the last two years, we did increase it here in the fourth quarter and will continue to evaluate those opportunities as they present themselves the reality of what happens with.

Ronald Epstein: But again, the biggest piece there is on FAS. From a cash contributions, we talked about anywhere between $500 to $1 billion of contributions required in starting in 2025. Right now, given where things are, we would expect that to be in the higher range if not higher for 2025. And if we say where we are, it could trigger some contributions in 2024. But I will say, you know, you think about cash contribution to pension and what that means.

Actual pension funding what progress we make in our working capital reduction initiatives in all of those will go into the mix Master.

And provide the inform what we what we formerly due in any given year.

Thank you. The next question will come from the line of Richard Safran from Seaport Research Partners. Please go ahead.

Thanks, Jim Jaye Maria Good morning, how are you good morning.

Ronald Epstein: You know, we've got an enviable position in our balance sheet. We've demonstrated it willing to use it. And so I wouldn't view that higher pension contributions as limiting, otherwise limiting our ability to continue our cash deployment strategies. And that's the key point.

Hey.

So.

If we take an optimistic scenario here on what happens with the budget outlook.

I wanted to know if you could discuss 2020 for bookings in the opportunity set both classified and unclassified.

Then if we assume no shutdown and we assume we do get funding I'm interested in what the major competitions are next door.

David Strauss: The next question is from the line of Ken Herbert from RBC Capital Markets, please go ahead. Yeah, hi, good morning, Jay and Jim. Um, maybe Jay, just to follow up on a comment you made in the prepared remarks, I think you made a comment around the buyback activity in the fourth quarter, or sort of dependent upon timing of a system of 24 budget and whether or not there is a shutdown potentially.

What was that.

You see backlog growth and a book to bill was better than one.

Richard We've got a pretty decent line of sight to continuing growth in our backlog.

There's a lot of activity activity happening in classified which I can't speak to specifics about but we do see some award decisions next year there.

David Strauss: Can you just talk about how you're thinking about the timing of the 24 budget, but very specifically, if there's any sort of shutdown, how much does that put at risk, sort of the buyback activity expected in the fourth quarter, or if it's very short, does that not impact it, maybe you can walk through how you're viewing sort of the risks around that and impact on the fourth quarter cash deployment. Sure. So, you know, here to date, we've done $3 billion with this new guy that's $6 billion, that's $3 billion in the fourth quarter.

We'll continue to see orders strength NMFC over this time period.

We've talked about orders between 2023, and 2027 $10 billion, we have not seen.

Excuse me all of those orders come to fruition, yet so we would expect.

To be continued opportunities.

For us.

We will continue to have.

F 35, so lot 18 next.

Next year is probably something that we should probably consider.

David Strauss: We're monitoring, you know, the status of the budget discussions and resolution of that, if we do find ourselves in a shutdown scenario, you know, it causes to take a pause and another relook at that chair repurchasing what we would probably do is just defer it. So it would be more of an issue of timing versus anything else until such time that the budget gets clarified. So, you know, history tells us these things are fairly short lived.

Coming into the backlog in 2024.

In addition to the performance based logistics program on the F 35 program we've.

Submit a proposal to the customer continue to have dialogue and.

We are cautiously optimistic that we can get under contract in the first half of next year. So those are some key some key awards think about for 2024.

David Strauss: We believe that we'll be able to get through it here in the fourth quarter. If not, then it would just push probably into the first quarter and alike. And really won't see a meaningful impact there. But, you know, again, in a shutdown scenario, you just take a look at, what does that mean? You know, it does, you know, you can't have new starts, it could be disruptive to programs. It could also put us in a situation where we're doing some self-funding to keep programs on track. And to the extent that it occurs, it could be a limiting factor on chair repurchase. Okay, a lowest, are you still there? Yes, I'm sorry.

Thanks.

Youre welcome.

The next question is from the line of Sheila <unk>.

Jefferies. Please go ahead.

Hi, Good morning can you guys give me, yes, we can hear you find Sheila good morning. Thank you. Thank you so much.

Thanks for taking the question so just wanted to ask.

Tim and Jay you are pretty confident management team just given your big backlog of 150 billion Youre, returning 150% to shareholders, which is a big number.

You've talked about low single digit growth and 11% margins for some time. So I just kind of wanted to know whats changed given.

The backdrop is seemingly better.

Kenneth Herbert: The next question will come from the line of Silo Calle from Jeffries. Please go ahead. One second. She was lying dead drop from the Q&A, so we'll move to Rob Stoward one moment. And he's from Vertical Research, please go ahead. Thanks so much. Good morning. Good morning, Rob. A question for Jim or Jane. She, on the balance sheet, you know that you're returning more than 100% of free cash flow to shareholder of the moment.

Just the budget uncertainty is it supply chain is an F 35, maybe if you could just comment on that.

Well not much has really changed to be honest, we've talked about low single digits for a while now.

I talked about that in my prepared remarks on the margins underlying margins generally flattish.

Because we could be in a situation next year, where we have multiple lots of the classified program that can cause some variability.

But that doesn't fundamentally alter what we've been really talking about.

Kenneth Herbert: But we do have this ongoing US budget uncertainty and you're going to put more money into the pension fund. So how sustainable do you think it is to be returning more than 100% to shareholder's going forward? It's a good question. You look at just the profile with this incremental authorization that we have. The way we're looking at it is, you know, $6 billion here in 2023, $4 billion in 2024. And then essentially $3 billion in $25 and $3 billion in 2006, which puts us equal to free cash flow in that ballpark, you know, assuming kind of a $6 billion placeholder offer free cash flow in those given years, and so that's the way we're viewing it Rob.

Same thing with free cash flow, we've been targeting mid single digit free cash flow per share growth.

And we still see a path there we know there are some headwinds whether it's pension and the like but we.

We still believe that we have a line of sight to be able to do that and that's what we're going to be working through on a year by year basis, and starting with 2020 for going over the next couple of months, we'll work through solidify our plans and will presented formally to you in January .

And the longer term there are some things that are changing significantly one is the.

The global threat environment, and the geopolitical situations getting more concerning and challenging.

Refocusing the U S and certainly our allies around the world on National Defense.

Kenneth Herbert: So over time, over the next few years it'll revert back to more of a hundred percent of free cash flow. But again, we'll look at it year by year. As you've seen the last two years, we did increase it here in the fourth quarter and we'll continue to evaluate those opportunities as they present themselves the reality of what happens with actual pension funding, what progress we make in our working capital reduction initiatives, and all those will go into the mixed master and provide, you know, to inform what we, what we formally do in any given year. Thank you.

An increasing manner.

The second big trend that's going on is.

The continued evolution of both physical and digital technology at a rate never seen before sort of in human history frankly.

So the the.

The opportunity for our company to take a leadership role in integrating those technologies, whether they're hypersonic hypersonic defense space technologies that are advanced.

<unk>.

And as well as <unk>.

Distributed cloud artificial intelligence, we're investing in all of those technologies to try to drive them in and pull through.

Richard Safran: The next question will come from the line of Richard Safran from Seaport Research Partners. Please go ahead. Thanks. Jim, Jay, Maria, good morning, how are you? So, you know, if we take an optimistic scenario here on what happens with the budget outlook, I want to then know if you could discuss 2024 bookings and the opportunities that both classified and unclassified. Again, you know, if we assume no shutdown and what we assume we do get funding, I'm interested in what the major competitions are next year is, what was how you see backlog growth and the book to bill is better than one.

Using this 20 <unk> century concept of technology driving concept, we have just to pull through our platforms and enable them quickly on the open architecture that we're advocating for it will be quickly and widely adoptable, making our platforms more compelling as we go forward.

Time, and then the third thing is the <unk>.

Ocean debt.

We have in the National Defense strategy, and I think our allies are increasingly embracing as international cooperation, which drives interoperability and also <unk>.

Richard Safran: You know, Richard, we've got a pretty decent line of sight to continuing growth in our backlog. There's a lot of activity activity happening in classified, which I can't speak to specifics about, but we do see some award decisions next year there. We'll continue to see orders, strength in MFC over this time period. And we've talked about orders between 2020, 23 and 20, 27, $10 billion. We have not seen, excuse me, all of those orders come to fruition yet.

<unk> command and control systems, all of which can part with our strategy. So I think there is some mega trends that are going on over a longer term that won't necessarily affect us quarter to quarter as Jay was stating, but will give us opportunities that I think the company is uniquely positioned to take advantage of over that long term.

Thank you and our next question is from the line of SaaS Sackman from Jpmorgan. Please go ahead.

Hey, thanks, very much and good morning, everyone.

Morning.

Richard Safran: So we would expect those to be continued opportunities for us. We'll continue to have F-35, so a lot of 18 next year is probably something that we should probably consider coming into the backlog in 2024, in addition to the performance-based logistics program on the F-35 program. You know, we've been in our proposal to the cost, we're continue to have dialogue, and we're cautiously optimistic that we can get under contract in the first half of next year. So those are some key awards to think about for 2024. Thanks.

Maybe one quick housekeeping question and then one broader question for both of you. The mid single digit growth you talked about for free cash flow per share next year.

Does that assume any kind of pension contribution next year, and how big might that be or not.

And then just more broadly when you guys talk about seeking out additional suppliers of solid rocket motors is that something for maybe developing hypersonic programs for late in the decade and into the 2000 <unk> or is that about replacing your suppliers on kind of today's existing programs. Thanks.

Hey, I'll talk a solid rocket motors and Jason can take the free cash flow per share.

Part of your question there. So our objective is to is to bring anti for agility into our own supply chain.

Sheila Kahyaoglu: You're welcome. The next question is from the line of Sheila Kailu from Jeffries, please go ahead. Hi. Good morning. Can you guys hear me? Yeah, okay, fine. Sheila, good morning. Thank you. Thank you so much. Thanks for taking the question. So just wanted to ask, Jim and Jay, you're a pretty competent management team just given your big backlog, $150 billion. You're returning 150% to shareholders, which is a big number. So you've talked about low single-digit growth and 11% margins for some time.

<unk> broadly apply that to the Dod.

In partnership with them as well and so when it comes to solid rocket Motors I mean, we're actually starting with Gamblers for example, our legacy technology, where we want to augment our existing supplier.

And have a dual source frankly, and then that will extend into other systems large and small and legacy and advanced. So this is not a one time.

Sheila Kahyaoglu: So I just kind of wanted to know what's changed given the backdrop is seemingly better. Is it just a budget uncertainty? Is it supply chain? Is it F-35? Maybe you could just comment on that. Well, you know, not much has really changed, to be honest. You know, we've talked about low single digits for a while now. We, you know, I talked about that in my prepare remarks on the margins underlying margins generally flatish.

Our objective this is a broad and await campaign like approach to strengthening our own supply chain and enabling multiple sources really.

For even beyond our company for our industry, which I think is important so I do think that this is not a one shot deal we're in negotiations and discussions with our counterparty. We think we can start us off with on this journey.

Sheila Kahyaoglu: Because we could be in a situation next year, where we have multiple lots of the classified program, that can cause some variability. But that doesn't fundamentally alter, you know, what we've been really talking about. Same thing with free cash flow. You know, we've been targeting mid single digit free cash flow for share growth. And we still see a path there. We know there are some headwinds, whether it's pension and the like.

But it's going to be a long journey.

We have additional participants.

And programs as the years.

Even decades rollout.

On the question of the free cash flow per share in 2024.

Sheila Kahyaoglu: But we still believe that we have a line of sight to be able to do that. And that's what we're going to be working through on a year by year basis. And starting with 2024, when we'll over the next couple months, we'll work through solidifier plans and we'll present them formally to you in January. In the longer term, there are some things that are changing significantly. One is the global threat environment and the geopolitical situations getting more concerning and challenging.

So what I mentioned is that we're setting up internal targeting internal internal actions to be able to arrive at that incremental.

Pension contribution would obviously put pressure on that and we will go through that over the next coming months and determined what the art of what's possible and what our plans would be and we'll again, we'll present that in January .

Thank you and the next question is from Myles Walton from Wolfe Research. Please go ahead.

Thanks, Good morning, Hey, just one quick clarification and then a question for Jim the clarification on the margins for next year 25 to 50 basis points of risk I guess is what you're saying on the MFC should we anticipate that theres a way around that or is that that the base case and then Jim in the press release, you talk about digital services revenue over.

Sheila Kahyaoglu: That's refocusing the US and certainly are allies around the world on national defense in an increasing manner. The second big trend that's going on is the continued evolution of both physical and digital technology to rate, never seen before, sort of in human history, frankly. And so the opportunity for our company to take a leadership role in integrating those technologies, whether they're hypersonic, hypersonic defense, space technologies that are advanced and as well as, you know, 5G distributed cloud, artificial intelligence, we're investing in all those technologies to try to drive them in and pull through using this 21st century concept, technology driving concept we have, just to pull through our platforms and enable them quickly on the open architecture that we're advocating for and it will be quickly and widely adoptable, making our platforms more compelling as we go forward in time.

Time, and Im just curious maybe you could touch on your vision of what digital services revenue is today, and where you want to take it over the next several years.

So digital services will be a wide range, but we're starting with this notion of trusted reliable mission.

Mission.

Systems Engineering for command and control and Battle management systems that is.

Our business, we're already in actually.

It is largely digital.

Already.

And it's these these.

Kind of programs like.

Defensive.

<unk>.

We have a program in the UAE, that's based on this technology as well.

Call. It Diamond Shield, we are using that core technology to then expand into other programs like <unk> 6500. So we're already in that business, it's and I think the mid <unk>.

Sheila Kahyaoglu: And then the third thing is, you know, the notion that we have an international defense strategy and I think our allies are increasingly embracing international cooperation, which drives interoperability and also linking command control systems all of which comport with our strategies. So I think there are some mega trends that are going on over a longer term that will necessarily affect us quarter to quarter as Jay was stating, but we'll give us opportunities that I think the company is uniquely positioned to take advantage of over that long term.

Low to mid single digit billions at this point.

And we're going to try to ramp that up.

In and of itself.

And other technologies to that for networking and connecting again, our platforms as well as other.

Platforms from other Oems to provide mission solutions for the for the Dod So the digital and the physical technologies will ultimately come together in a way that can can advance mission capability for our customers.

James Taiclet: Thank you. And our next question is from the line of segment from JP Morgan. Please go ahead. Hey, thanks very much and good morning, everyone. Maybe Jay, one quick housekeeping question and then, you know, one broader question for both of you. The mid single digit growth you talked about for free cash flow per share next year. Did that assume any kind of pension contribution next year and, you know, how big might that be or not?

Say air to air combat surface warfare et cetera.

James Taiclet: And then just more broadly, when you guys talk about seeking out additional suppliers of solid rocket motors. Is that something for, you know, maybe developing hypersonics programs for lead in the decade and into the 2030s? Or is that about replacing your suppliers on kind of, you know, today's existing programs? Thanks. Hey, I'll talk to solid rocket motors and Jay can take the free cash flow for share part of your question there.

Air and missile defense integration.

Those kinds of emissions, we want to advance every three to six months of the combination of digital and physical technologies of our own and from others partners et cetera that we will work with so this is again long term broad approach, but we've already got a very very good starting point, it's material and the command and control and Battle management systems that we have.

Today, and how we're augmenting them and modernizing those for the future.

Okay going back to the question on margins for next year, just as I mentioned.

Underlying margins.

For sake of clarity margins, excluding the impact of the MSC program, we expect to be flattish.

The MFC programs it will provide a drag on the margins next year and it's a question of timing. So it could be anywhere between 25 to 50 basis points and again, we'll have a lot more clarity on that as we close out the year.

James Taiclet: So our objective is to bring anti-fragility into our own supply chain first and to broadly apply that to the DOD in partnership with them as well. And so when it comes to solid rocket motors, I mean, we're actually starting with, you know, gimmlers, for example, you know, a legacy technology where we want to augment our existing supplier, you know, and have a dual source, frankly. And then that will extend into other systems, large and small and legacy in advance.

Thank you. The next question is from the line of Noah <unk> from Goldman Sachs. Please go ahead.

Hello, everyone.

Good morning, Hi.

Jay I guess I also wanted to ask you about margins.

You sort of did there, but I don't know if you would just state where you expect the MFC margin to shake out.

James Taiclet: So this is not a one time objective. This is a broad and a way campaign-like approach to, you know, strengthening our own supply chain and enabling multiple sources really for, you know, for even beyond our company for our industry. I think it's important. So I do think that this is not a one shot deal. We're in negotiations and discussions with a counterparty. We think we can start us off with on this journey, but it's going to be a long journey and we'll probably have additional participants and programs as the years and that even decades roll on.

For the year next year or what it looks like in the quarters with the more concentrated losses and then I just wondered if you could talk about how a little bit more about how the scout here I know you've talked about having a fixed price.

Yes.

With prices fixed a little while ago.

Is that something thats been going on longer than than I realized.

I know you also or my understanding as you also know bid a missile program.

That was awarded recently because of that fixed price development.

As the as the customer shifting the risk a little bit towards the contractor.

James Taiclet: On the question of the free cash flow for shared 2024, Seth, you know, what I mentioned is that we're setting up internal targeting internal, internal actions to be able to arrive at that incremental pension contribution would obviously put pressure on that. And we'll go through that over the next coming months and determine what the order of what's possible and what our plans would be and we'll, again, we'll present that in January. Thank you.

Or am I overreaching, what im seeing out there.

Let me maybe take the second part of it and then circle back.

There are really two different programs.

I think you're referring to the standard attack weapon.

Award and that was a fixed price development program that we decided not to pursue because of the risk posture of their <unk> program and.

Seth Seifman: And the next question is from Myles Walton from Wolf Research. Please go ahead. Thanks. Good morning. It's just a quick clarification and then a question for Jim. The clarification on the margins for next year, 25 to 50 basis points of risk, I guess is what you're saying on the MFC. Should we anticipate that there's a way around that or is that that the base case? And then Jim in the press release, you talk about digital services revenue over time.

Pursuit really stands on its own and we review those individually in this case, we thought the risk profile is just too much and so we backed off on this particular program on the classified program that was a cost plus development program. So there really wasn't much risks associated with development cycle. There are these production low rate initial.

Production.

<unk>.

We're priced pretty aggressively and hence we're starting we're going to start to see the headwind associated with that.

Seth Seifman: And I'm just curious, maybe you could touch on your vision of what digital services revenue is today. And where you want to take it over the next several years. So digital services will be a wide range, but we're starting with this notion of trusted, reliable mission systems engineering for command and control and battle management systems. That is a business we're already in, actually. It is largely digital already. And it's the, it's the kind of programs like defensive bomb.

As Jim mentioned these are would be a long term program and we know what it takes to make sure that we provide accretive NPV on these types of programs and so we track that and monitoring that and we're confident over the long term, we'll be able to deliver that so again. These are case by case types of situations that we pursue.

We're probably going to get back to you on a specific MFC margins for next year I think we can back into 25 to 50 on the total company you can back into what that impact is for MFC, but I just don't have it in front of me.

And just to give you a context here the approach we're taking.

Seth Seifman: We have a program when the UAE that's based on this technology as well, called Diamond Shield. We're using that core technology to then expand into other programs like air 6500. So we're already in that business. It's a night. I think the mid, the low to mid signal digit billions at this point. And we're going to try to ramp that up in and of itself. Add other technologies to that for networking, connecting again, our platforms as well as other platforms from other OEMs to provide mission solutions for the, for the DOD.

No matter what the customers.

Initiative is on on risks Bal.

Balancing our in balancing the approach it Jay and I are taking here.

As we look at programs going forward and opportunities.

Is really a holistic one where we do take the long term total program value into account, but we also take will take into.

Account seriously short and mid term risk management.

And.

Especially when it comes to fixed price either development or initial rate production because if you look at the concept of fixed price initial rate production.

Seth Seifman: So the digital and the physical technologies will ultimately come together in a way that can, can advance mission capability for our customers. You know, and say air, air combat, surface warfare, et cetera. And you know, air and missile defense integration. Those kinds of missions, we want to advance every three to six months with the combination of digital and physical technologies of our own and from other partners, et cetera, that we will work with.

On a program as technology has not settled in the first place yet because development hasnt been done we would we would ascribe a higher risk factor to that.

Think going forward here.

Based on both experienced and just our own perspectives on these kinds of things.

Okay, and Louis I think we have time for one more as we approach the top of the hour. Thank you. So much. Your next question comes from the line of Jason Gursky from Citi. Please go ahead.

Seth Seifman: So this is a, you know, again, long term, broad approach, but we've already got a very, very good starting point, this material in the command and control and battle management systems that we, we have today and how we're augmenting them and modernizing those for the future.

Yes, good morning, everybody.

Jim You mentioned in your prepared remarks.

The idea of a supplemental for Taiwan I'm wondering if you wouldn't do as a favorite just kind of remind us of what you're shipping into Taiwan today.

Myles Walton: Okay, going back to the question on margins for next year, just that, you know, as I mentioned, underlie margins and we meet for security margins, excluding the impact of the MFC program, we expect to be flatish. The MFC programs, it will provide a drag on the margins next year, and it's a question of timing. So it could be anywhere between 25 to 50 basis points. And again, we'll have a lot more clarity on that as we close up, of the Year. Thank you.

In the context of a supplement to what kinds of things do you think are going to be in high demand and would lead to more revenue for you all in the J related to international.

Here I was wondering if you could just give us a quick update on the margin profile of your international business kind of writ large today outside of the F. 35 program. If international is growing faster is the expectation here that we would all else being equal see margin expansion in light of.

Noah Poponak: The next question is from the line of Noah Poponak from Goldman Sachs. Please go ahead. Hello, everyone. Good morning. Hi, Jay. I guess I also wanted to ask about margins and you sort of did there, but I don't know if you would just state where you expect the MFC margin to shake out for the year next year or what it looks like in the quarter with the more concentrated losses. And then I just wondered if you could talk about how a little bit more about how this got here.

Internationally, historically being higher margin domestic business.

So Jason on Taiwan, I think the signature program that everybody's aware of his F 16.

Both production of modernization.

So that's ongoing but we also provided.

It kind of comprehensive defense of Taiwan like a defensive Guam.

Noah Poponak: I know you've talked about having the fixed price, L-Rips, where with prices fixed a little while ago, was is that something that's been going on longer than than I realized? I know I know you also are my understanding is you also know bid a missile program that was awarded recently because it had fixed price development. And is the customer shifting the risk a little bit towards the contractor or am I overeating what I'm seeing out there?

Award, we won last year approach to integrating these digital technologies with the aircraft available.

We provide and others the missile systems that we provide and others and integrate them into sort of this 40 pine approach to defending Taiwan, just like we're designing for guar. So there could be a wide range of digital and physical products that would come with this over time.

Yes government will help define the Taiwanese government.

Noah Poponak: Well, let me maybe take the second part of it and then circle back. They're really two different programs. I think you're referring to the standard attack weapon award. And that was a fixed price development program that we decided not to pursue because of the risk posture over there. Each program and pursue really stands on its own. We review those individually. In this case, we thought the risk profile was just too much.

What when and if any of those will be procured and released for.

Released four.

Sport to Taiwan.

The Fms program in other vehicles, so I can't speak for the government as to what that will look like but I think.

It's again, a possibility that given the rising tensions there could be supplemental for Taiwan. In addition to as we said Israel in Ukraine.

Noah Poponak: And so we backed off on this particular program on the classified program. And that was a cost plus development program. So there really was not much risk associated with development cycle. There are these production low rate initial production lots that were priced pretty aggressively and hence we're starting, we're going to start to see the headwind associated with that. As Jim mentioned, this would be a long term program. And we know what it takes to make sure that we provide a creative NPV on these types of programs.

And on the international margins historically, the margins have been higher than they are for U S government customers.

In this case, it's so what I would expect the base business to continue these higher margin, but a lot of the incremental opportunities that we've been talking about are really going through foreign military sales contracting which are more like U S. Dod type margins and so.

While we will see kind of a net blended margin profile, it's probably higher than.

Noah Poponak: And so we track that in monitoring that and we're confident over the long term we'll be able to deliver that. So again, these are case by case types of situations that we pursue. We're probably going to have to get back to you on a specific MFC margins for next year. I think we can back into 25 to 50 on the total company. You can back into what that impact is for MFC.

Kind of base U S. Dod.

It it will be limited.

The incremental business is going to be limited because they are fms.

Alright, great. Thanks, everybody.

We are at the top of the hour I'll turn the call back over to Jim for some final thoughts sure. Thanks, Maria I think before we conclude today I do want to thank all of our employees around the world and across the country for their continued dedication.

Noah Poponak: But I just don't have it in front of me. And no, just to give you context here, the approach we're taking, no matter what the customers initiative is on risk balancing or imbalancing. The approach that Jay and I are taking here is we look at programs going forward and opportunities is really a holistic one where we do take the long term total program value into account, but we also take into account seriously short and mid term risk management.

Supporting our signature programs they are going after new pursuits, advancing these digital technologies and all of that together will really enhance determines globally.

Especially in the more dangerous world we live in.

I want to really congratulate and thank our team for everything they're doing.

We also want to make sure that you the shareholders are reminded yet again everything we're doing here is designed to deliver a compelling value to you all for many years to come.

I really focus on free cash flow per share along with the dividend.

Noah Poponak: And you know, especially when it comes to fixed price either development or initial rate production. Because if you look at the concept of fixed price initial rate production on a program whose technology is not settled in the first place yet because development hasn't been done. And we would we would describe a higher risk factor to that. I think going forward, here, based on both experience and just our own perspectives on these kinds of things. Okay, and Lois, I think we have time for one more as we approach the top of the hour.

Make sure that Youre getting a interesting return over time, and we're trying to expand the business as we go as well. So thank you again for joining US today, we look forward to speaking with all of you in our next earnings call in January and lowest that concludes the conference for this morning Bye Bye.

Thank you and ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T conferencing you may now disconnect.

Jason Gursky: Thank you so much. And I have a question to come from the line up, Jason Gursky from city, please go ahead. Yeah, kid, morning everybody. Jim, you mentioned in your prepared remarks, the idea of a supplemental for Taiwan. I'm wondering if you wouldn't do us a favor, just kind of remind us of what you're shipping into. Taiwan today and in the context of a supplement to what kinds of things do you think are going to be in high demand and would lead to the more revenue for you all and that Jay related to international here.

Jason Gursky: I was wondering if you could just give us a quick update on the margin profile of your international business, kind of writ large today outside the up 35 program. If international is growing faster is the expectation here. That we would all else be equal sea margin expansion in light of international historically being higher margin than domestic business. Thanks. So Jason on Taiwan, I think the signature program and everybody is aware of a death 16 in both production and modernization.

Jason Gursky: So that's ongoing. But we also provided a kind of comprehensive defensive Taiwan like a defensive bomb. Award we won last year approach to integrating, you know, these digital technologies with the aircraft available that we provide and others, the missile systems that we provide and others, and integrate them into sort of this porcupine approach to defending Taiwan just like we're designing for law. So there could be a wide range of digital and physical products that would would come with this over time.

Jason Gursky: The US government will help define what the Taiwanese government what went and if any of those will be procured and released for a sport to Taiwan, the FMS program and other vehicles. So I can't speak for the government as to what that will look like, but I think it's again a possibility that given the rising tensions, there could be supplemental for Taiwan in addition to, as we said, Israel and Ukraine. And on the international margins, historically, the margins have been higher than they are for US government customers.

Jason Gursky: But in this case, it's so what I would expect the base business to continue these this higher margin, but a lot of the incremental opportunities that we've been talking about are really going through four military sales contracting, which are more like USDOD type margins. And so while we will see kind of a net blended margin profile that's probably higher than the kind of base USDOD, it will be limited the actually the incremental business is going to be limited because they're FMS. Great.

Jason Gursky: Great. Thanks, everybody.

James Taiclet: So I think we're at the top of the hour. I'll turn the call back over to Jim for some final thoughts. Sure. Thanks, Maria. Before we conclude today, I do want to thank all of our employees around the world and across the country for their continued dedication to supporting our signature programs are going after new pursuits, advancing these digital technologies. And all that together will really enhance the terms globally. And especially in the more sort of dangerous world we live in, I want to really congratulate and thank our teams for everything they're doing.

James Taiclet: We also want to make sure that you, the shareholders are reminded yet again that everything we're doing here is designed to deliver a compelling value to you all for many years to come, you know, J and I really focus on free cash flow for share, along with the dividend, to make sure that you're getting an interesting return over time, and we're trying to expand the business as we go as well.

Unknown Executive: So thank you again for joining us today. We look forward to speaking with all of you, and our next earnings call in January.

Unknown Executive: And Lois, that concludes the call for this morning. Bye-bye. Thank you, and ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T event conference. And you may now just...