Q3 2024 Lockheed Martin Corp Earnings Call
Yeah.
Speaker Change: Good day and welcome everyone to the Lockheed Martin third quarter 2024 earnings results Conference call. Today's call is being recorded if you would like to ask a question. Please press one then zero.
Speaker Change: We ask that you please limit yourself to one question and re queue for a follow up time permitting.
At this time for opening remarks, and introductions I would like to turn the call over to Maria Richard All Vice President Treasurer and Investor Relations. Please go ahead.
Speaker Change: Thank you, Steve and good morning.
Speaker Change: Youre welcome everyone to our third quarter 2024 earnings Conference call. Joining me today on the call are Jim <unk>, Our chairman, President and Chief Executive Officer, and Jay Malave, Our Chief Financial Officer.
Speaker Change: 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.
Speaker Change: Actual results may differ materially from those projected in the forward looking statements. Please see today's press release and our SEC filings for a description of some of the factors that may cause actual results to differ materially from those in the forward looking statements. We have posted charts on our website today that we plan to address during the call to supplement our comments.
Speaker Change: 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.
Speaker Change: With that I'll turn the call over to Jim. Thanks, Maria Good morning, everyone and thank you for joining us on our third quarter 2024 earnings call.
Jim: Demand for Lockheed Martin systems, and services remains robust across all four of our business areas.
Jim: We ended Q3 with record backlog of more than 165 billion, reflecting a book to bill ratio of one three in the quarter.
Precision and air Defense munitions drove the increase.
Jim: Including large orders for javelin guided multiple launch launch rockets.
Jim: And joint air to surface standoff and long range anti ship missiles.
Jim: Compared with last year's third quarter sales increased and segment operating margins expanded 20 points to 10, nine led by missiles and fire control, reflecting increased production volumes.
Jim: Free cash flow was $2 1 billion in the quarter as we continue to implement working capital efficiencies and optimization.
Jim: High confidence in our future cash generation prospects supported our board's recent decision to raise the quarterly dividend by 5% to $3 30.
Jim: The 20, <unk> consecutive year of increases and to extend our share repurchase authorization.
Jim: Turning to the F 35, we delivered 48 F 35 aircraft in the quarter, we expect to deliver 90 to 110 aircrafts in 2024 and the remaining balance of the last 15 to 17 aircrafts thereafter.
In addition, tier three flight testing continues with 95% of combat capabilities validated and additional capabilities progressing.
Jim: With over 1040 aircraft delivered in growing the F. 35 fleet has become an essential component of the collective security of the U S and our global allies.
For example by the 2000 Thirty's over 600 F 35 will be in operation across more than 10 European Nations and in July <unk> announced that it will be the 19th nation to fly the F 35, and we will acquire 20 aircrafts.
Jim: Plus the rollout of the initial F 35 for Poland in August marked a significant milestone in our 20 plus year partnership with that country.
Jim: The F 35 superior sensors stealth and data sharing capabilities are setting new standards for interoperability and joint operations with our allies, serving as the cornerstone for Nato's deterrence and defense posture.
Jim: To further augment the capabilities of the F 35, and our other major platforms. We are investing heavily in autonomy in AI as well as other enabling digital technologies.
Jim: As an example, our Lockheed Martin AI Center, and our RMS business area conducted realistic teaming scenarios with unproved aerial systems or drones and unproved ground vehicles at the U S Army and their recent experimental demonstration event.
Jim: The successful demonstrations exhibited our abilities for using AI by launching an autonomous drone to provide guidance and navigation instructions to a ground base robot to help us navigate a dangerous urban environment and enable greater safety for our soldiers than any current approaches can do.
Jim: The rapid integration of digital technologies and capabilities is one element of our twenty-first century security strategy. Another example of this in the third quarter was Lockheed Martin Skunk works team partnered with the U S Air Force Ted Pot Test pilot school to conduct full scale live flight test of an adaptive technology that.
Jim: Real time adjustments to flight control algorithms, resulting in substantial time and cost savings and we do these kind of tech insertions on real scalable combat platforms. Those that when implemented on mass can have theater level effects on combat capability and thereby the turns from great power armed conflict.
Jim: The second element of 20, <unk> century securities designing resilience and anti fragility into the defense industrial base to this and we just we signed a teaming agreement with our partner General dynamics in the third quarter for the production of solid rocket Motors. The initial work will focus on producing <unk> for the gamblers rock.
Jim: And we will start in 2025, it get's facility in Camden, Arkansas.
Jim: This third source of solid rocket motors will enable us to move more quickly to ramp production for critical defense capabilities and strengthen the defense supply chain.
Jim: The third element of 20, <unk> century security as the implementation of a global and regional approach to production and Sustainment with our allies and partners. We've expanded international collaborations to enable indigenous military capability development in countries, including Australia, Germany, Poland and India.
Jim: I recently had the opportunity to discuss the expansion of Lockheed Martin Sustainment and production operations in India with Prime Minister Modi in July, including growing the capacity and the capabilities of our joint ventures with Tata that already manufacturers C 130, <unk> F 16 wings and helicopter cabins in Hyderabad.
Jim: Turning to the U S defense budget. We are currently in a continuing resolution that funds U S government operations through December 20 of 2024 for our part our teammates across all Lockheed Martin will thereby be able to continue to work diligently to deliver on our customer commitments.
Jim: I'll also be dedicated to delivering strong financial performance through the remaining months of 2024 and to carry that momentum into the coming year as well. So now I'll turn it over to Jay.
Jay Malave: Thanks, Jim and good morning, everyone. Today, I'll provide an overview of our consolidated financials and operational highlights in the quarter before handing off to Maria who will cover business area results.
I'll come back to discuss the 2020 for outlook and some longer term trending.
Jay Malave: Starting on chart for.
Jay Malave: Sales of $17 1 billion were up 1% year over year led by MFC and Rms.
Jay Malave: As expected Aeronautics was down primarily due to delayed revenue recognition of approximately $700 million associated with the lapse in F 35 program funding.
Jay Malave: As we continue to work through lot 18 negotiations.
Jay Malave: Normalizing for that impact consolidated sales would be up 5% year over year.
Jay Malave: Segment operating profit of $1 9 billion was up 3% year over year with consolidated margins at a respectable 10, 9%.
Jay Malave: Net profit adjustments in the quarter were higher than prior year and amounted to 20% of segment operating profit.
Jay Malave: GAAP earnings per share of $6 80 increased 1% year over year.
Jay Malave: Driven by higher profit and lower share count, partially offset by higher interest expense, a higher tax rate and lower pension income.
Jay Malave: Turning to new business, we recorded over $22 billion of orders in the third quarter.
Jay Malave: For a book to Bill ratio of approximately $1 three led by MFC with orders exceeding $8 billion and driving overall backlog to over $165 billion.
Jay Malave: Free cash flow was $2 1 billion in the quarter aided by strong collections, including International program advances.
Jay Malave: This brings our year to date total free cash flow to just over $4 8 billion.
Jay Malave: Enabling another $700 million of independent research and development and capital expenditures in the quarter.
Jay Malave: Further enhancing our leadership position in 20, <unk> century security in <unk>.
Jay Malave: Integrated deterrence.
Jay Malave: Finally, we returned $1 7 billion of our free cash flow to shareholders via share repurchases and dividends.
Jay Malave: Turning to some key operational milestones and program highlights in the quarter.
Jay Malave: At Aeronautics through the third quarter, we delivered 48 F 30 fives in.
Jay Malave: In addition, the team continues to make progress towards tech refresh three combat capability with incremental milestones on track for completion in the fourth quarter.
Beyond the 35 to <unk> 30 franchise had a very successful quarter.
Jay Malave: The worldwide fleet of over 550, <unk> hundred 30, Jay Super Hercules surpassed 3 million flight hours.
Jay Malave: Constraining the platforms unmatched global reach and multi mission versatility.
Jay Malave: We also delivered the first eight.
Jay Malave: C 130, Jay Dash 30 tactical Air lift there's to the Ohio Youngstown are reserved station in July and delivered the first Jay variant aircraft to longtime C 130 customer New Zealand.
Jay Malave: At RMS the U S. Marine Corps formally accepted the 23rd and final next generation VH 92 presidential helicopter built by Sikorsky.
Marking a significant milestone for the company, whose aircrafts have flown every U S president since $19 57.
Speaker Change: This is this highly tailored solution based on the proven S 92 helicopter meets their marine Corps' unique and critical mission of supporting the commander in chief around the World.
Speaker Change: And that space in September NASA awarded Lockheed Martin a contract to design and build the next generation Lightning Mapper instruments for the national Oceanic and atmospheric administration or NOAA.
Speaker Change: <unk> XR program.
Speaker Change: The baseline contract is valued at approximately $300 million for two instruments with options for an additional two.
Speaker Change: This award follows on the <unk> Award, we received in June to design and build the core Noah spacecraft constellation.
Speaker Change: This continues our long tradition of designing and building, whether an environmental spacecraft, including many earth observation instruments.
Speaker Change: I'll stop here and hand, it over to Maria to talk more about the business area of financials.
Maria: Thanks, Jay today, I'll discuss third quarter year over year results for the business areas.
Maria: Starting with Aeronautics on chart five.
Maria: Third quarter sales at Arrow declined 3% year over year, primarily driven by lower F 35 volume due to delays in the lot 18, 19 contract negotiation that Jim previously mentioned.
Partially offsetting that headwind with higher volume at <unk> and the continued production ramp on the F 16 program.
Maria: Segment operating profit decreased 2% with lower volume and unfavorable mix being partially offset by higher profit booking rate adjustments, mainly due to a favorable adjustment related to a legacy claim.
Maria: With the F 35, surpassing 1000 aircraft deliveries this quarter I'd like to highlight a few other notable items from the other major platforms.
Maria: More than 2600, <unk> hundred 30 aircraft have been delivered to 63 nation with more than 550, <unk> delivered $2 22 countries and Egypt set to become the 23rd.
Maria: And the F 16 has delivered more than 4600 aircrafts to 27 countries over the past 50 years.
Maria: Turning to missiles and fire control on chart six.
Speaker Change: MFC had another solid quarter with sales up 8% year over year, driven by production ramps on precision fires programs within the tactical and strike missile segment, primarily guided multiple launch rocket system G. M. M. R S and long range anti ship missiles.
Maria:
Maria: Segment operating profit increased 15% year over year due to the higher volume and the higher bookings.
Maria: <unk> profit adjustments, primarily a pac three while margins were again solid at 14, 4%.
Maria: And this six book to Bill ratio in the quarter with a strong Q seven.
Maria: Leading to another record backlog now over $40 billion driven by continued global demand.
Maria: In the quarter the U S Army awarded the largest single year production contract for javelin and related equipment worth $1 $3 billion to the javelin joint venture as well as a 4 billion dollar contract for GNL RF.
Maria: The Air force awarded and over $3 billion multiyear large lot procurement contract for jazz and La RASM, providing a key anti fragility measure to increase industry resilience and ensure operations can be ramped more quickly going forward.
Maria: Shifting to rotary and mission systems on chart seven.
Maria: Sales increased 6% in the quarter to $4 $4 billion, primarily driven by higher volume at integrated warfare systems and sensors on radar programs as well as the Canadian surface combatant program.
Maria: So of course key programs also saw higher volume led by CH 53, K Black Hawk and seahawk.
Operating profit was comparable to the prior year with higher volume being offset by lower profit booking rate adjustments.
Maria: Finally at speeds on chart eight.
Maria: Sales decreased slightly year over year, the reduction was driven by lower volume at commercial civil space, primarily on the Orion program.
Maria: Partially offset by higher volume at strategic and missile defense on our strategic reentry programs.
Maria: Operating profit increased 5% compared to Q3 2023, driven by favorable mix, partially offset by lower equity earnings from United launch Alliance ULE.
Maria: Recently <unk> was awarded a contract continue nearly 70 years of partnership between the U S Navy and Lockheed Martin through the fleet ballistic missile SPM program, a key component of our nation's strategic deterrent.
Maria: Under the contract we will provide trident missile production support and reentry system hardware as well as operations and maintenance to support the readiness and reliability of the missile systems.
Maria: F. P. M. We will continue to be a growth driver for space for years to come.
Speaker Change: Now I'll turn it back over to Jay to wrap up our prepared remarks.
Jay Malave: Thanks, Maria Alright, turning to chart nine and our outlook for 2024.
Jay Malave: With one quarter remaining we have shifted to approximate point estimates that reflect the increased expectations for sales segment operating profit earnings per share and free cash flow.
We have slightly reduced our share repurchase target for the year to approximately $3 7 billion, primarily due to the redeployment of capital to the Taryn orbital acquisition.
Jay Malave: All told we still expect to return greater than 100% of free cash flow to shareholders in 2024 via repurchases and dividends.
Jay Malave: Quickly stepping through the other metrics, we estimate sales of approximately $71 $2 5 billion.
Jay Malave: Reflecting reflecting growth of 5% over 2023, as our backlog continues to convert across the portfolio.
Jay Malave: We're also increasing our segment operating profit expectation driven by the higher sales volume to approximately $7 $4 $75 billion.
Jay Malave: We continue to anticipate consolidated segment operating profit margins of approximately 10, 5%.
Jay Malave: Moving to earnings per share, we're increasing our forecast by <unk> 32 from the prior midpoint to.
Jay Malave: Approximately $26 65.
Jay Malave: Primary drivers of the change our incremental profit of about 17.
Jay Malave: With other below the line items and taxes, bringing an additional 13.
Jay Malave: And lastly on free cash flow.
Jay Malave: We now estimate approximately $6 2 billion for the year up slightly from the prior midpoint, while absorbing the unfavorable impact of the recent F 35 lot, 15% to 17 aircraft delivery settlement with.
Jay Malave: We estimate will be approximately $600 million in 2024 with expected recovery over the next few years.
Jay Malave: Before I talk about trending I'd like to reiterate a few key assumptions regarding our 2020 for outlook.
Jay Malave: First we expect F 35 lot 18, 19 to be awarded this year maintaining program funding and continuity.
Jay Malave: We continue to make progress in negotiations towards a contract. This secures our mutual goals of delivering advanced fifth generation fighter capability to our services.
Should a negotiation timeline.
Jay Malave: Extend beyond year end, the financial impact would be one of timing.
Jay Malave: We could see about 3% or $2 billion of our sales shift into 2025, along with associated impact to profit and about $1 billion of free cash flow.
Jay Malave: The second key assumption is that we continue to anticipate $325 million of full year losses on the MSC classified program.
Jay Malave: That said, we will continue to assess facts and circumstances that could lead to the recognition of additional losses in the year.
Jay Malave: And third this outlook does not assume any pension contribution in 2024.
So let's shift now to the outlook beyond 2024, and I'll provide a multiyear framework on chart 10.
Jay Malave: To start with our record backlog position provides a strong foundation for sustained top line growth over the coming years.
Jay Malave: Looking at sales through the 2027 timeline, our baseline assumption still reflects a low single digit compound annual growth rate off of the higher than expected sales expectation for 2024.
Jay Malave: As I stated previously the demand signals point to mid single digit growth through 2027.
Jay Malave: But the outlook remains tempered by our current assessment of the pace at which the value chain can meet the demand.
Jay Malave: Our confidence in a mid single digit growth rate will grow as clarity increases on new business campaigns funding stability and capacity acceleration of the production systems.
Jay Malave: On segment margins, we have to say anticipate improvement of 10 to 20 basis points per year based on our continued focus on operational excellence and program performance combined with program de risking.
Jay Malave: So in other words steady improvement to a more normal range of around 11% Roes by 2027.
Jay Malave: Thinking about EPS trends over the three year horizon.
Jay Malave: While we anticipate year over year benefits from higher segment operating profit and a lower share count. These.
Jay Malave: These benefits will be diluted by continued fast cash pension headwinds, particularly in 2025 and.
Jay Malave: And higher effective tax rates from a change in certain deductions based on current law.
For free cash flow, we continue to target a low single digit CAGR through 2027 base.
Based on delivering cumulative working capital reductions that partially offset known pension contribution headwinds.
While offsetting the pension contributions dollar for dollar in each each year with working capital reductions alone is a challenge we have confidence that we could fully offset the headwinds and improve the growth rate to mid single digits through the combination of organic and inorganic cash generation initiatives.
Jay Malave: We will provide more details in January as we share our plans with better visibility to 2020 for pension asset returns post election policy and interest rates.
Jay Malave: Overall this baseline multiyear framework remains consistent to the investment thesis we have discussed previously.
Jay Malave: We still expect single digit low single digit free cash flow growth over the next three years supplemented by share repurchases to deliver mid single digit free cash flow per share return over the same horizon with upside potential.
Jay Malave: So in summary on chart 11.
Jay Malave: Performance year to date gives us confidence to raise the full year outlook for 2024 and.
Jay Malave: And in our ability to deliver solid sales and free cash flow growth over the next few years.
Jay Malave: At the same time, we continue to invest in digital transformation capabilities and innovative technologies that will help differentiate our mission solutions for customers.
Jay Malave: And we remain focused on operational execution to deliver on our commitments and long term value for our customers and shareholders alike.
Speaker Change: With that Steve, Let's open up the call for Q&A.
Speaker Change: We will now begin the question and answer session of today's conference.
Speaker Change: If you have not pressed the one zero and you wish to ask a question. Please press. One then zero now on your Touchtone phone you will hear and announce the eight are indicating you have placed yourself in queue and you may remove yourself from queue at any time by depressing the one zero again.
Speaker Change: You are using a speaker phone or Bluetooth please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one thing zero at this time.
Speaker Change: Our first question will come from the line of Ron Epstein of Bank of America. Please go ahead.
Ron Epstein: Yes. Thank you good morning, Tim and Jay good.
Speaker Change: Good morning, Ron.
Ron Epstein: Maybe circling back on some of your prepared comments Jim.
Speaker Change: When we think about the current situation.
Ron Epstein: Tactical fighter World.
Speaker Change: It seemed the air force's, giving everything to end that.
Speaker Change: The system, what it should be.
Speaker Change: You mentioned some of the work you guys are doing on AI and drones.
A look at how increment one of TCA was awarded.
Speaker Change: Two maybe.
Speaker Change: Not unusual companies right.
Speaker Change: Players.
Speaker Change: How are you thinking about increment to and what the interplay between manned and unmanned systems Tactical fighters drones, I mean does it change how you think about going forward.
Speaker Change: And that could be what it means for Lockheed.
Jay Malave: Sure Ron we're preserving our optionality based on what the U S government and services determined to be their strategy for tactical fighter deployment over the next 2030 years and so part of that strategy is.
Jay Malave: Having our skunk works continue to develop technologies that could be implemented for a generation six generation tactical aircraft. It's a step function above what you have 22 and F. 35 can do today. So we are investing.
Jay Malave: <unk> talent and energy into that and Skunk works, which is in this setting all we can really say about that.
Jay Malave: Piece of it though is the crude on crude teaming element of whether it's and get our F 35, plus.
Our CCA, if you will or multiple ccas.
Jay Malave: We're already working that out too we've developed a pod that will enable the F 35 to control.
Jay Malave: Even today Ccas, if you will and we have a flight control system.
Jay Malave: Communication system in development that will enable that as well and that could be converted I think the F. 'twenty two as well. So we are working both of those elements, but the key part of it is you still got to have volume.
Speaker Change: I'm, an ex Air force pilot myself.
Speaker Change: We have to be able to meet the <unk>, which is the Chinese combat tactical aircraft fifth generation as well.
Speaker Change: With enough numbers in the Pacific or at least field enough numbers.
Speaker Change: It's F 35, and F 22, now is the only really competitive jets against the J 'twenty.
Speaker Change: One to one we have to field enough of those aircraft in a short enough timeframe to to maintain an effective deterrent in the Pacific and the Russians are also developing.
Speaker Change: Fifth generation aircraft as well so the threat will emerge in Europe too. So we got to have volume to start with on fifth Gen. We need to be able to bring autonomy in the CCA concept into fifth Gen and fixed Jenn. If there is one so we are keeping all of those avenues open and we're investing really in all three.
Speaker Change: Again to preserve the Optionality for the defense industrial base, and our partners to be able to deliver on which of those strategies or what combination that the U S government decides to pursue.
Speaker Change: And I'll just add Ryan just.
Speaker Change: Outlook, the multi year outlook that I gave you that.
Speaker Change: <unk> four and assumes that we will have incremental significantly incremental investment in areas such as autonomy AI crude on crude teaming and came out and control systems. So we feel that our investment is going into the right places as these platform from systems evolve.
Speaker Change: As far as increments to on the CCA Ron.
The way its been described to us as increment one was proof of concept more of an experimental.
Speaker Change: Kind of approach increments, who is going to be targeted to be fielded will combat ready scalable.
Speaker Change: Design and production of the <unk>.
Speaker Change: <unk> teaming half of the system so.
Speaker Change: We are fully dedicated to that like I said, we have a skunk works working on both.
Speaker Change: Parent and the child, if you will.
Speaker Change: When it comes it all CCA concepts and increment two is going to be really where where I think most competitive because we can show that we can control. These vehicles with today's technology already at scale. So.
We're going to be eager to compete for that.
Speaker Change: Our next question comes from the line of Sheila <unk> yellow of Jefferies. Please go ahead.
Sheila: Good morning, Jim and Jeff.
Sheila Yellow: So maybe one for you maybe if we could go to slide 10.
Sheila Yellow: I appreciate you, giving the long term.
Sheila Yellow: Medium term targets for low single digit revenue growth can you maybe rank order the segment.
Sheila Yellow: And Thats, the beta and I think you've talked about.
Sheila Yellow: $750 million Darrin, what other segment follow what campaigns that you get that opportunity.
Sheila Yellow: Background.
Speaker Change: Yes, sure. Thank you Sheila and good morning.
Speaker Change: You kind of nailed it in your in your question the leader of growth will be MFC over the over this time period through 2027, and I would put them at the high single digit clip very comfortably based on the backlog that they have today and the visibility we have.
Speaker Change: Two incremental orders the other three business areas in this framework at least starting off with this low single digit the rest of them will be in this low single digit frame.
Speaker Change: <unk> framework pretty pretty consistently now how do we go from from a low single digit to a high single digit quite frankly, a lot of that opportunity is already sitting in the backlog if the system can convert and I'd say the entire enterprise. So its not just supply chain as our operations as well can convert on that backlog quicker.
Speaker Change: We did see this in 2024, if you recall, we came into the year thinking that we would grow low single digit and we converted that and changed it to 5% growth here in 2024. So under the same framework. It is a step change from where we are in 2024, but we demonstrated that we can improve throughout the year. So is that visibility gets better that would enable us to.
To go from a low single digit.
Speaker Change: To a mid single digit yes, there are.
Speaker Change: Other campaigns and some of those are classified if you go back a few years, we talked about the four pillars of growth.
Speaker Change: New awards was with an element of that as well as classified growth New awards, we got one of those which is the next generation interceptor, So thats already.
Speaker Change: When the other one would be in our <unk>.
Really our classified portfolio and those are campaigns that will happen over the next I would say six to 18 months.
Speaker Change: As I mentioned and I mentioned in my prepared remarks, the foundation for the growth to mid single digit is pretty solid.
Speaker Change: At least in the short term is more of a conversion issue.
Speaker Change: Our next question comes from the line of Noah <unk>.
Goldman Sachs. Please go ahead.
Speaker Change: Hey, good morning, everyone.
Speaker Change: Morning.
Speaker Change: Jay I was hoping to.
Speaker Change: Get some more help from you on the MFC margin.
Speaker Change: Do the last two quarters suggest.
Speaker Change: <unk> operating performance is better or is it just that the.
Speaker Change: The loss accrual is loaded into the fourth quarter and I guess remind me why the accounting is that way as opposed to taking it all when you when you know your habits.
Speaker Change: And.
Speaker Change: I don't know if you could talk about how you expect that to progress through 25, but I guess just fundamentally we like it.
Speaker Change: As the new classified program or the overall operating performance in the segment is it improving.
Speaker Change: Or worsening.
Speaker Change: Or is it just the.
Speaker Change: The volatility is accounting.
Speaker Change: Yes, I would say the volatility to kind of I would say this year to date their performance is better than prior year, we've seen an improvement when you put aside the losses related to the classified program.
Speaker Change: There are profit adjustments year to date have shown growth and they're performing I think pretty pretty well in the base. So this was a good quarter. As an example, we didn't really record any losses related to the classified program and we delivered 14, 4% margins in the quarter and Thats essentially where they're operating this year ex the losses, you got it right as far as <unk>.
Speaker Change: <unk>, we would expect.
Speaker Change: We recorded $100 million in the first quarter.
Speaker Change: So that would say that about $225 million were record.
Speaker Change: Or what's included in our guidance for the fourth quarter.
Speaker Change: As far as your question on the accounting it's a good question.
Speaker Change: It really depends on the facts and circumstances and the probability we have to make an assessment in a probability of the exercise of certain options and so the visibility is clear as things are more short term and the visibility gets a little bit more murkier as you go out a little bit further.
So you have to make assessments of similar facts facts such as.
Customer interactions that we have their intentions.
Speaker Change: <unk> ability to funding over a longer period of time the performance of the system.
Speaker Change: Is one and how we're doing from a testing perspective. So all of these factors taken together.
To have to go into the <unk> assessment to determine.
If and when we record a forward loss. So that's that's where we are as far as 2025 baseline assumption would be that you go from $3 25 to anywhere between say $2 $50 million to $300 million in losses in 2025, assuming a one per year type of framework as I mentioned in my.
Speaker Change: Prepared remarks, we have to take another look at whether or not there will be additional losses that has to be recognized early onto your question and again thats, a really quarter to quarter assessment that we have to make.
Speaker Change: Our next question comes from the line of Myles Walton of Wolfe Research. Please go ahead.
Thanks, Good morning, Hey, Jim just a follow up first on CCA.
Myles Walton: Are you currently competing on the autonomy portion of increments, one and is that what gives you.
Myles Walton: A better feeling for where increment to Lockheed could be and then Jay could you just update us on the Aero classified contract I think you booked another charge in the quarter I'm just curious if there is any.
Myles Walton: Line of sight to win.
Myles Walton: You are sort of back on the right size of that program.
Myles Walton: So based.
Myles Walton: Based on the classification of the CCA program, especially longer term.
Speaker Change: I can't refer to us directly as far as who is competing for what element of it but what I can tell you.
Speaker Change: And echoing Jay we are investing heavily in autonomy AI <unk> connectivity distributed.
Speaker Change: Remote node cloud those kinds of things that enable our CCA type device to be effective now.
Speaker Change: We're testing an open air I'll call. It these kind of technologies with existing platforms, which is another use case, but it's one we can talk about so you've already seen potentially that we've got an autonomous blackhawk up and running full.
Speaker Change: Capability helicopter that can do missions with you sitting on your couch in your living room programming to Michigan and changing it into flight on your iPad right. This is this is scalable big hardware big effect.
Platforms that can be elevated in their capability with autonomy AI et cetera, but we've also done the same thing with an F 16 with the Air Force.
Speaker Change: It shows that we can actually dogfight in F 16, without a pilot in it and be effective so these technologies.
Speaker Change: One could probably surmise if you can apply them to a legacy hardware at that level of scale that you can certainly apply them to hardware.
Speaker Change: It is a smaller scale.
Speaker Change: On crude as well.
Speaker Change: On the on your question on the classified program at Aeronautics.
Speaker Change: Did realize incremental risk in the quarter.
Press release, we had about $80 million there year to date were about 145.
Speaker Change: So we have obviously realized some incremental learnings that have converted to incremental losses.
Speaker Change: It's a classified program so can't really talk too much about what it is but.
Speaker Change: What I can tell you is that we.
We are essentially meeting our schedule objectives, albeit at a higher cost and I would say the cost is really a function of the aggressive pricing that.
Speaker Change: We bid originally and so as we recalibrate, we're kind of keeping an eye on our costs will do continuous reviews. As you would expect us to do and we'll have another review here in November with the team. So we can go back and understand and pressure test the risk management plan, but it's not just an oversight function.
Speaker Change: I think it's incumbent upon us as a leadership team to not only provide oversight, but also make sure that we're providing the tools and the resources to make sure they are successful.
Speaker Change: Program will be managed as a whole team and we're all in it together.
Speaker Change: As I mentioned in the costs.
Speaker Change: Again, it was been aggressively.
Speaker Change: Jim and I have been pretty firm over the past few years that we're really reigning in those practices and we really haven't seen any of those since that time and so we've got a contractual commitment that we've got to meet and we will meet and and we'll manage this program as best as we possibly can and I think part of what we're trying to do is change the trajectory drive tour.
Speaker Change: Better outcomes, while at the same time delivering to deliver the mission capability that we've contracted to give our customer.
And miles I can speak to one command and control system that we have demonstrated again in open space.
Speaker Change: The Air Force put on aerospace.
Speaker Change: Aerospace for us put on its sort of annual gathering if you will outside of Washington D C.
And Ed.
Speaker Change: It's a bit of a trade show setup. So it was public we were demonstrating to our customers there and open space again, not classified our ability to use that iPad technology to control a ccas offer an F 35 <unk>.
Speaker Change: Flight control and comp system. So we've already shown that out in the open.
Speaker Change: But again Thats technology, we've been working on for literally a decade or two at a skunk works.
Our next question comes from the line of Doug Harter of Bernstein. Please go ahead.
Speaker Change: Good morning, Thank you.
Speaker Change: Good morning.
Speaker Change: On F 35.
And you said that you expect a lot.
Speaker Change: No for sure but.
Speaker Change: 2018, and 19 negotiations hopefully it will be completed in Q4.
Speaker Change: Tech refresh 395% through.
Speaker Change: What I'm trying to understand are really two things.
Speaker Change: No a lot of times you can have 5% left on something we've this has been going on a long time.
Speaker Change: Getting tech refresh three done.
Speaker Change: How do we get confident that.
Speaker Change: Youre going to get there in Q4 and does this have an interplay with the lot 18, and 19 negotiations because if I can just ask separately we're.
So we're trying to understand what the cash implications are in 2025, if you get all this done or perhaps if it slips.
Speaker Change: So Doug it's Jim I'll start off I wanted to lay out the fundamental framework of the F 35 program.
Speaker Change: And then I will turn it over to Jay for some of the cash flow impacts and expectations in the financial.
Speaker Change: Results of that so first of all just to reiterate there is a very important distinction between the F 35 production system and how we book revenue.
Speaker Change: And profit on the production system versus the event a final aircraft delivery, which is.
Speaker Change: Actually fairly small proportion of the revenue and profit in aircraft F 35 aircraft generates for industry Alright. So that's important distinction now theres two current program conditions that you touched on that affect both of these outcomes right. So what I want to also emphasize.
Speaker Change: As both of the outcomes are not necessarily economic value outcomes. They are timing related outcomes.
Speaker Change: So there's a time value of money aspect of it but the economic value of an F. 35, that's delivered out of the system.
Speaker Change: Is is not much affected if you will.
Speaker Change: By these two issues, but the timing is affected so let me just start with tier III software Finalization. So that's one of the conditions that were that were managing through with the F 35 program and how that affects the delivery schedule.
Speaker Change: So about a year and a half ago, we had conversations and I did personally.
Speaker Change: Our release, one and have released two concept the government calls that truncation, but thats really what the concept is like we would do in tech our telecom, we're going to do.
Speaker Change: Released one of software, we're going to work through that.
Speaker Change: Discovery of that and then when that is ready we will be able to have an initial product and the initial product is tier three.
Speaker Change: Which is capable of doing unit standup facing operations and training at operating Air Force and Navy and marine basis.
Speaker Change: As well as our allies with the tier three I'll call again released one software in it you can fly to jet you can practice.
Speaker Change: Basic and advanced fighter maneuvers, you can deal with developed tactics in your squadron.
Speaker Change: And you can train your maintain or is on how to do this new aircrafts. So if you're swapping out.
Speaker Change: F 15 squadron two F 35 squad in the maintain or is actually need to get their hands on the planes just as much as the pilot scale and then make sure all the tooling and everything is working for them.
Speaker Change: We released one is what's being delivered now that was the <unk>.
Speaker Change: <unk> 48 in the third quarter. They all have released one you can fly the jet what what it doesn't have some of those incremental software validation.
Speaker Change: Show that all combat systems and all weapons.
Speaker Change: We'll be able to be effectively deployed because the testing program in flight test and bench test has been completed and we'd get a certification of reliability for that weapon. For example, there are a lot of test points, there and those test points are going to be developed not just in the fourth quarter, but theyre going to be developed over the course of 2025 as well.
Speaker Change: Because when I say a weapon is it an amorim is at 89, what weapon are we talking about.
Speaker Change: Literally dozens of weapons and there are multiple test points on things like the student.
Speaker Change: After system et cetera. So this is a complex.
Speaker Change: Path to what I'll call released two that's the full up combat capability and as we work through those capability certifications individually there'll be diminishing cath withholds along the way as those flight tests are completed and the certifications happened Jason kind of aggregate that for you in a minute, but thats how this part of.
Speaker Change: The program works on a fundamental basis, so we feel that.
Speaker Change: Projection of 2024, 90 to 110 deliveries out of that process and to release, one and 2025 and beyond 180 deliveries a year of F. 35, now, though is going to be a mix of those coming off the line.
Speaker Change: Brand, new and those that are part so the $1 <unk> will be a mix of those we're working on a weekly basis right now to prioritize specific aircraft deliveries literally one at a time, there's one go to the Dutch Air Force, one and the Marine second and whenever we re prioritize which we're doing.
The weak based on the needs of the customer base, we need to change a bill of materials will do other things.
Speaker Change: And parked aircraft may remain when a new aircraft may come right out to the fleet. So the complexity of this tier three software definitive nation and release is going to take some time, but we will be able to deliver a mix of aircraft above the 156 production rate for the next few years.
Speaker Change: <unk> will be mixing based on what the customers looking for.
Speaker Change: So that's one of the issues that you talked about the other issue is actually I would considered completely unrelated from this.
Speaker Change: And that issue is is any lot negotiation for our programs such as this and at the scale of this program.
Speaker Change: Is that so.
Speaker Change: We are on a lot contractual negotiation with U S government and by we I mean, our major suppliers with us and all the way down to our smaller suppliers. Now currently that lot negotiation is 18, and 19 and it's not completed yet and.
Speaker Change: Under the federal acquisition requisite regulation, if the government does not have a formal agreement with the supplier completed the government cannot.
Speaker Change: Pay for either work being done under that.
Speaker Change: <unk> contract.
Speaker Change: In fact, it's not completed contract to be clear or.
Speaker Change: Pay for product that is actually completed either so that is where we as industry then have to prioritize keeping our production system on pace, while the government by law cannot pay us.
Speaker Change: It's essential for the health of the lower tier suppliers that we do that we all kind of step up and do it as an industry, but the prime and majors subs cannot book, our revenue and profit, even though we're spending cost and thats, where the cash impact of the negotiation comes and we're not going to stop the production line because it would be.
Speaker Change: Unwise I'll say until the formal agreement is signed we are going to keep it going until the formal agreement is signed at which time. These cat these cash.
Speaker Change: Payments will be released support so those are the two issues, we're facing I want to say one other thing.
Speaker Change: Doug.
While you have asked about this top of F. 35. This isn't just a Lockheed Martin commitment to make this program a success, it's an industry wide commitment and I would also add a government commitment to make it a success.
Speaker Change: I'll just give you a few of the things that we've been part of an led over the last.
Speaker Change: I'd say two to three months.
Speaker Change: At the CEO summit of the top five industry partners in Fort worth at the factory, where we took an entire day.
Speaker Change: Determining how we can integrate our systems.
Speaker Change: Systems test systems, our processes, how we develop sub assemblies and other items that go on the jet and integrate them with the jet those processes and personnel moving more people between companies on either a temporary or almost semi permanent basis to make sure. We've got the best talent working on every problem. So that's one.
Speaker Change: One thing that we've done that same CEO level team followed up with the government and the meeting there was chaired by the Chief of staff for the Air Force. The Joint program Office leader was their general Schmidt The U S. Navy and Marines had there are losses, there and that wasn't in the Pentagon to lay out a similar integration framework.
Speaker Change: With U S government systems processes and personnel, that's appropriate under law and regulation and then we add another CEO update with US senior government officials and this was just two weeks ago and seven partner nation customer officials in Washington.
Speaker Change: To trade status of what we were all doing together and then two more weeks on bringing my executive team.
Speaker Change: Lockheed Martin across all the businesses and functions, we're going to gather in fort worth to make sure that every resource every operational practice every supply chain.
Speaker Change: Element that we can bring from across the company and certainly all the technical talent is devoted to this program that is what we are doing to make sure. This is success.
And the last thing I'll say there is that the.
Speaker Change: Customers need and want this aircraft.
Speaker Change: That was the opinion of the U S government and our meeting with the Chief there are six customers. Since the 2020 I think these are all the competitions that were in actually.
Speaker Change: That chose the F 35 that werent in the original partner group for the original order team There'll, Switzerland, Finland, Germany, Canada, the Czech Republic in Greece, and then follow ons from.
Partners that already have the aircraft in operation also were added Japan, Netherlands Republic of Korea in Israel, So that.
Speaker Change: The demand for the aircraft and actually essential need for the aircraft as their industry is getting together with government and I think in ways that we haven't done before.
Speaker Change: To really make this a success and we got to work our way through the lot negotiation, which is again, it's a timing issue as far as payments and we got to work our way through tier three integration, which is a technical issue, but literally it's an all hands on deck not just an industry, but I'd say in government to get this get.
This all done Jay any yes, let me just I'll, just add Doug and I.
Jay Malave: I tried to say give you a little bit of color on the cash impact to your question. It's.
Jay Malave: As Jim mentioned, we're looking at here is an output estimate of about 180 aircraft deliveries per year over the next three plus years, so effectively what will happen as cash collections will smooth out over this period of time.
Jay Malave: This is important to point out that that remains consistent with the low single digit free cash flow growth framework that we've articulated today and previously.
Maybe a little bit on 2024 as I mentioned in my prepared remarks, we estimated the impact this year of unfavorable impact of about $600 million that consists of two factors number one less deliveries than the than the $1 56, right. So we'll deliver in that range of 100 aircraft or so.
Jay Malave: So theres going to be less aircraft delivered and so there is an impact for cash flow from that.
<unk> impact is the impact of the withholds, while we will.
Jay Malave: We leased some of those with holes. This year based on completion of milestones that will still be some carryover into next year and a little bit into 2026.
Jay Malave: Now in 2024, that's unfavorable impact was $600 million that was entirely offset by other working capital efficiencies and the rest of the portfolio of about $600 million, mostly through advances that we've seen there and so the net impact and then what enabled us to deliver the same free cash flow and in fact better than the <unk>.
Mid point that we'd originally guided to was that offset as you go to 2025, we will deliver more aircraft and so we will see the benefit of having delivered more aircraft and we will also see the benefit of having incremental withholds released I would quantify that today at around $3 million to $400 million.
Jay Malave: And then that will that will then continue to flow in 2006 and beyond and hopefully that helps.
Speaker Change: Our next question will come from the line of Rich Safran of Seaport Research partners. Please go ahead.
Speaker Change: Jim Jaye Maria Good morning, how are you good morning, Tom.
Speaker Change: Okay.
Rich Safran: On your opening remarks on pension.
Rich Safran: I think in the past you made some comments about possibly reducing some pension headwinds. So I want to know if you could maybe update us on what your thinking is there if you still intend to reduce the headwinds after 2025 using debt or cash and if so what the what's the timing of that might be thanks.
Speaker Change: Yes, thanks rich.
Speaker Change: Essentially in my prepared remarks, I talked about the inorganic inorganic means of.
Rich Safran: Managing this pension headwind.
Rich Safran: Inorganic would essentially be the issuance of debt.
Rich Safran: As a primary enabler to be able to do that that's still on the table as I said on my prepared remarks that we're going to go through between here and the end of the year and finalize our plans based on various factors and as you would expect we're trying to exhaust all of the opportunities on an organic basis. So what can we bring out in working cap.
Rich Safran: <unk> over this period of time to be able to offset as much as possible to the extent that we can't we do have the ability to go on financing to take out I think the key takeaway. There is that I remain confident that we'll be able to do that through the combination of organic working capital reduction as well as some levels.
Rich Safran: Inorganic mostly on the debt side.
Speaker Change: Our next question will come from the line of David Strauss of Barclays. Please go ahead.
Good morning, Thanks for taking my question.
Speaker Change: Yes.
David Strauss: Just wanted to wanted to clarify on the longer term, bringing more relative to what you had said previously on 2025 I think.
David Strauss: Talked about a 2025 growth in line with 2024, which was at 5%. So is that still the case or not I know this isn't this is out through 2027, if you could just touch on that in.
Speaker Change: Maybe Jim if you could touch on progress on the solid rocket motor side of things in terms of.
Speaker Change: How thats going obviously, you you announced the partnership with with general dynamics during the quarter as well thanks.
Speaker Change: Okay, just on the framework as it relates to 2025 and 2025 is very consistent with the multiyear framework that's on that chart.
Speaker Change: Which is our starting point here is a low single digit growth framework off off of the 2024 number and again, it's we're looking at MFC being the driver there kind of starting off at a high single digit rate in the other business areas being either flat slightly flat or on the loss up and is low.
Single digits so.
Speaker Change: That's really our starting point again, we'll give a lot more color in January as we finalize these plans, but I'd say 25 is consistent what we're seeing in the multi year framework and I guess, just a reminder, David.
I think it applies a 25% as it does in the three year framework. When you went into 'twenty four we started at low single digit we upgraded it to mid single digit I think as our visibility improves as I mentioned in my prepared remarks, there is still the case, where we could be mid single digits in 2025, but we need to see it come through we need to see the production and operator.
Speaker Change: Systems be able to consistently grow at a mid single digit CAGR.
Speaker Change: Is a lot easier said than done in the environment that we've been living under over the past few years.
Speaker Change: And David as far as the solid rocket motor Industrial base I think this is a really positive example of how industry does come together in the service of National Security right. So.
Speaker Change: First of all.
I just.
Speaker Change: Re circulating.
Circulated to his question with our Chief operating Officer, Frank John He is outstanding.
Speaker Change: On Northrop Grumman and Aerojet Rocketdyne, which is now managed by <unk> Harris.
Speaker Change: My question to Frank is are these companies, putting all the resources that we think they could be putting into their solid rocket motor operations quality delivery schedule.
Speaker Change: Personnel et cetera.
Speaker Change: And opened to us collaborating with them to make sure those deliveries happen and his answer to me was yes. So our industry existing industry partners are stepping up to try to meet the elevated demand and investing to do that so thats great.
While we still need a third source from.
Speaker Change: I think our anti fragility perspective, as we call it and that is.
Speaker Change: Partnership with general dynamics and that started off at the CEO level and and we figured out there was complementary capabilities between general dynamics and Lockheed Martin, where we could actually have the design done at Lockheed Martin for the SRM and general dynamics had the ability the facilities and the kind of.
Speaker Change: Production operations and personnel that can actually produce it.
Speaker Change: So we are working together on that.
Speaker Change: We'll have to get that new solid rocket motor certified it'll be again Lockheed Martin.
Speaker Change: IP design, if you will and general dynamics is standing up simultaneously the ability to produce them at rate we have to do a few test articles next year in 2025.
Speaker Change: There'll be further testing.
Speaker Change: It's done by the services to get their certification in the military services in 2026 and should be producing at rate. We hope by 2027 and that will add a third supplier for the national defense Industrial base, not just for Lockheed Martin, but for others as well and really strengthen our ability to produce these.
Speaker Change: These systems.
Speaker Change: Our next question comes from the line of Jason Gursky of Citi. Please go ahead.
Jason Gursky: Hey, good morning, everybody. Thanks for taking the question.
Hey, I just wanted to.
Jason Gursky: Really really pound the table and I apologize to beat a dead horse here I should say.
Jason Gursky: And make sure I fully fully understand the multiyear outlook here, so what youre, saying is low single digits the baseline.
Jason Gursky: You can outperform that into the mid single digits, so long as the supply chain and the production system.
Jason Gursky: Kind of maybe performs as well as it did this year relative to expectations.
Jason Gursky: <unk>.
Speaker Change: What's the Blue Sky scenario here, let's say that the supply chain all stamps back into place the production systems working well you are then.
Speaker Change: In this context, producing mid single digit growth, but I would imagine that you have got a pipeline of additional opportunities out there is there a blue sky scenario, where youre actually doing better than mid single digit.
Speaker Change: Yeah.
Speaker Change: It's a great question, Jason Let me just first say terms into the framework I mean, obviously over 2025, there is better visibility than it would be for 2027, so the outlook.
Speaker Change: Feels good and so my comment in terms of confidence as.
Speaker Change: As far as the demand signal being able to drive to a mid single digit.
Speaker Change: Growth rate in 'twenty five is heightened by the better visibility.
Speaker Change: If you think about what we've seen in over it and I will take 24 as an example in answer to your question.
Speaker Change: Given what we've seen a demand cycle would have also enabled a higher growth rates and 5% in 2024. So I think the answer to your question in the short term is yes, I don't know that I can sit there and say that.
Speaker Change: A multiyear framework would be a high single digit number, but I think that given all the right circumstances, you could definitely see a year that could deliver.
Speaker Change: <unk> high single digit, but again, we're starting from low we got to get to mid we get to mid and then we can talk about anything beyond that first things first.
Speaker Change: Okay.
Speaker Change: Our next question will come from the line of Rob Stolid.
Speaker Change: Vertical research. Please go ahead.
Speaker Change: Thanks, so much good morning.
Speaker Change: A brief.
Rob Stolid: Jay a question on the cash situation could.
Rob Stolid: Can you give us an idea of just how much working capital benefit you have to get through in the next couple of years to offset pension and just have risky predictions.
Rob Stolid: Well.
Jay Malave: Rob the way I would characterize it as just quick math, one day equates to about $200 million of free cash flow and I would say through 25 and 26.
Rob Stolid: We would have to do.
Rob Stolid: At least two days of working capital improvement. So is it possible yes in both years, so you'd have to do cumulatively four days to $25 26, it's possible, but it's.
Rob Stolid: <unk>.
Rob Stolid: It's a stretch and Thats why I believe kind of a better higher confidence plan would be to combined combined the initiatives on working capital with some of potential inorganic capabilities or cash generation with the ability to really drive that back down over <unk>.
Rob Stolid: At a time.
Rob Stolid: Continued cash flow growth and so I think it is.
Rob Stolid: It's what I would say next year is that we've probably got.
Rob Stolid: Two days that are not yet solution between now and the end of the year do we got to go figure out and to the extent that we can and that relates to 2025.
Rob Stolid: That becomes the inorganic becomes the gap filler.
Rob Stolid: Alright, Steve This is Maria I think we've come to the top of the hour. So I'll turn it back over to Jim for some final thoughts sure. Thanks Maria.
Jim Jaye: I just wanted to recognize the employees across Lockheed Martin.
Rob Stolid: Their dedication there.
Rob Stolid: Zillions and they consistently are innovating now in ways I think we've never have and cooperated across businesses and functions before like we never have so I wanted to really make sure that they are recognized as this afternoon.
Rob Stolid: Want to make sure that our allies and our country can defend itself and therefore deter any aggression against us and that's what they think they are doing and what they are doing every day. So I want to thank them and thank you for joining us all I look forward to connecting again for our Q4 call.
Speaker Change: January so we will see you then Steve that concludes call for today. Thanks, everybody.
Speaker Change: Ladies and gentlemen that does conclude our conference call for today on behalf of today's conference call, we'd like to thank you for your participation and thank you for using AT&T you have a wonderful day you may now disconnect.
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